UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 1-4364

RYDER SYSTEM, INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes þ         No o

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold at June 30, 2004 was $2,527,190,520. The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at January 31, 2005 was 64,091,863.

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

Securities registered pursuant to Section 12(g) of the Act:         None

RYDER SYSTEM, INC.

Form 10-K Annual Report

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

OVERVIEW

      Ryder System, Inc., a Florida corporation organized in 1955, is a leader in transportation and supply chain management solutions. Our business is divided into three business segments: Fleet Management Solutions (FMS), which provides leasing, commercial rental and programmed maintenance of commercial trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting and lead logistics management solutions throughout North America and in Latin America, Europe and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in North America.

      Financial information relating to each of our business segments is included in the notes to consolidated financial statements as part of Item 8 of this report.

INDUSTRY AND OPERATIONS

      Over the last several years, many key trends have been reshaping the transportation industry, particularly the $56 billion private commercial fleet market and the $25 billion U.S. commercial fleet lease and rental market. Commercial vehicles have become more complicated requiring companies to spend a significant amount of time and money to keep up with new technology, diagnostics, retooling and training. Because of increased demand for convenience, speed and reliability, companies that own and manage their own fleet of vehicles have put greater emphasis on the quality of their preventive maintenance and safety programs. Finally, new regulatory requirements such as regulations covering diesel emissions and the number of off-duty rest hours a driver must take (hours of service regulations) have placed additional administrative burdens on private fleet owners.

      Through our FMS business, we provide our customers with flexible fleet solutions that are designed to improve their competitive position by allowing them to focus on their core business and to redirect their capital to other parts of their business. Our FMS product offering includes a wide-range of full service leasing, commercial rental and programmed maintenance solutions as well as additional value-added fleet support services such as insurance, vehicle administration and fuel services. In addition, we provide our leasing customers with access to a large selection of used trucks, tractors and trailers through our used vehicle sales program.

      For the fiscal year ended December 31, 2004, our global FMS business accounted for 64% of our third-party revenues. Our FMS customers in the U.S. range from small businesses to large national enterprises. These customers operate in a wide variety of industries, the most significant of which include beverage, newspaper, grocery, lumber and wood products, home furnishings and metal. At December 31, 2004, we had a U.S. fleet of approximately 137,800 commercial trucks, tractors and trailers leased or rented through 719 locations in 48 states and Puerto Rico.

      Our domestic FMS business is divided into 7 regions: Northeast, Mid-South, Gulf States, East Central, Midwest, Southwest and West. Each region is divided into 7 to 12 customer business units (CBU) and each CBU contains 7 to 15 branch offices. A branch office typically consists of a maintenance facility or “shop,” offices for sales and other personnel, and in many cases, a commercial rental counter. Our maintenance facilities typically include a service island for refueling, safety inspections and preliminary maintenance checks as well as a shop for preventive maintenance and repairs.

      Full Service Leasing. We target leasing customers that would benefit from outsourcing their fleet management function or upgrading their fleet without having to dedicate a significant amount of their own capital. Under a typical full service lease, we provide the vehicles, programmed maintenance, supplies and related equipment necessary for operation of the vehicles while our customers furnish and supervise their own drivers and dispatch and exercise control over the vehicles. However, our leasing experts will assess a customer’s situation and, after considering the size of the customer, residual risk, balance sheet treatment

and other factors, will tailor a leasing program that best suits the customer’s needs. Once we have agreed on a leasing program, we acquire vehicles and components that are custom engineered to the customer’s requirements and lease the vehicles to the customers for periods generally ranging from three to seven years. Because we purchase a large number of vehicles from a limited number of manufacturers, we are able to leverage our buying power as well as provide a cost effective alternative to maintaining their own fleet of vehicles. We also offer our leasing customers the additional fleet support services described below. At December 31, 2004, we leased approximately 101,800 vehicles under full service leases in the U.S. At December 31, 2004, we had more than 11,300 full service lease customer accounts in the U.S.

      Commercial Rental. We target rental customers that have a need to supplement their private fleet of vehicles on a short-term basis (typically from less than one month up to one year in length) either because of seasonal increases in their business or discrete projects that require additional transportation resources. Our rental representatives assist our customers in selecting a vehicle that satisfies the customer’s needs and supervise the rental process, which includes execution of a rental agreement and a vehicle inspection. In addition to vehicle rental, we offer our rental customers liability insurance coverage under our existing policies and the benefits of our comprehensive fuel services program. Our commercial rental fleet also provides additional vehicles to our full service lease customers to handle their peak or seasonal business needs. At December 31, 2004 a fleet of approximately 36,000 vehicles, ranging from heavy-duty tractors and trailers to light-duty trucks, was available for commercial short-term rental in the U.S. The rental fleet’s average age was 4.3 years. The utilization rate of the rental fleet during fiscal year 2004 was approximately 77%.

      Programmed Maintenance. Our programmed maintenance customers typically include our full service lease customers as well as customers that want to utilize our extensive network of maintenance facilities and trained technicians to maintain the vehicles they own or lease from third parties, usually a bank or other financial institution. The Ryder Programmed Maintenance service offering is designed to reduce vehicle downtime through preventive/predictive maintenance based on vehicle type and driving habits, vehicle repair including parts and labor, 24-hour emergency roadside service and replacement vehicles for vehicles that are temporarily out of service. These vehicles are typically serviced at our own facilities. However, based on the size and complexity of a customer’s fleet, we may operate an on-site maintenance facility, or captive shop, at the customer’s location. At December 31, 2004, we had 1,400 programmed maintenance customer accounts in the U.S.

      Fleet Support Services. In order to capitalize on our large base of lease customers, we are continuously expanding our fleet support service offerings. Currently we offer the following fleet support services:

      Used Vehicles. We typically sell our used vehicles at one of our 49 sales centers throughout North America, at Ryder branch locations or through our website at www.Usedtrucks.Ryder.com. Before we offer any used vehicle for sale, our technicians assure that it is Road Ready, which means that the vehicle has passed a 43-point performance inspection based on specifications formulated through the Ryder Programmed Maintenance program. Although we typically sell our used vehicles for prices in excess of book value, the extent to which we are able to realize a gain on the sale of used vehicles is dependent upon various factors including the general state of the used vehicle market, the age and condition of the vehicle at the time of its disposal and depreciation rates with respect to the vehicle.

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

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

      The global supply chain logistics market is estimated to be $200 billion. Several key trends are affecting the market for third party logistics services. Logistics customers are increasingly focused on logistic solutions that leverage information to enhance operating and financial performance demanding more costly IT-based services, including warehouse and transportation management systems, shipment tracking and web-enabled communications systems. Because increased customer expectations, expansion into advanced service offerings and globalization require a more productive and meaningful relationship between logistics providers and their customers, there is an increased emphasis on effective management and relationship processes. Finally, the importance of creating value for logistics customers through operating performance, cost management and service delivery has created a need for innovative broad-based solutions that include a network of service providers.

      Through our SCS business, we offer a complete range of innovative lead logistics management services that are designed to optimize a customer’s global supply chain and address the needs and concerns reflected by the trends previously mentioned. The term supply chain refers to a strategically designed process that directs the movement of materials, funds and related information from the acquisition of raw materials to delivery of finished products to the end-user. Our SCS product offerings are organized into three categories: professional services, distribution operations and transportation solutions. We also offer our SCS customers a variety of information technology solutions, referred to as e-fulfillment, which are an integral part of our other SCS services.

      For the fiscal year ended December 31, 2004, our SCS business accounted for 26% of our revenues. At December 31, 2004, we had 135 SCS customer accounts in the U.S., most of which are large enterprises that maintain large, complex supply chains. These customers operate in a variety of industries

including automotive, electronics, high-tech, telecommunications, industrial, aerospace, consumer goods, paper and paper products, office equipment, food and beverage, and general retail industries.

      Unlike our FMS operations, which are managed through a network of regional offices, CBUs and branch offices, most of our core SCS business operations in the U.S. revolve around our customers’ supply chain and are strategically located to maximize efficiencies and reduce costs. These SCS facilities are typically leased. Along with those core customer specific locations, we also concentrate certain logistics expertise in locations not associated with specific customer sites. For example, Ryder’s carrier procurement, contract management and freight bill audit and payment services groups operate out of our carrier management center in Ann Arbor, Michigan and our transportation optimization and execution groups operate out of our logistics centers in Farmington Hills, Michigan and Ft. Worth, Texas, respectively.

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

      Professional Services. Our SCS business offers a variety of consulting services that support every aspect of a customer’s supply chain. Our SCS experts are available to evaluate a customer’s existing supply chain to identify inefficiencies, as well as opportunities for integration and improvement. Once the assessment is complete, we work with the customer to develop a supply chain strategy that will create the most value for the customer and their target clients. Once a customer has adopted a supply chain strategy, a team of SCS logistics experts and representatives from our information technology, real estate, finance and transportation management groups work together to design a strategically focused supply chain solution. The solution may include both a distribution plan that sets forth the number, location and function of each distribution facility and a transportation solution that sets forth the mode or modes of transportation and route selection. In addition to providing the distribution and transportation expertise necessary to implement the supply chain solution, our SCS representatives can coordinate and manage all aspects of the customer’s supply chain provider network to assure consistency, efficiency and flexibility. We also provide transportation consulting services to our SCS customers, which allow us to leverage the expertise and resources of our FMS business.

      Distribution Operations. Our SCS business offers a wide range of services relating to a customer’s distribution operations such as designing a customer’s distribution or warehouse facility, managing the customer’s existing distribution facilities or a facility we acquire in order to provide the agreed-upon services, managing the flow of goods directly from the receiving function to the shipping function (cross-docking), coordinating warehousing and transportation for inbound material flows, handling import/export for international shipments, coordinating just-in-time replenishment of component parts to manufacturing and final assembly, monitoring shipment and inventory status through web-enabled tracking solutions, providing logistics services in connection with the return of products to our customers after delivery to a target client (reverse logistics) and providing additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment.

      Transportation Solutions. Our SCS business offers services relating to all aspects of a customer’s transportation network. Our team of transportation experts provides shipment planning and execution, which include shipment consolidation, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants, in conjunction with our Ryder freight brokerage department, focus on carrier procurement of all modes of transportation, rate negotiation and freight bill audit and payment services. In addition, our SCS business provides customers as well as our FMS and DCC businesses with capacity management services that are designed to create load-building opportunities and minimize excess capacity.

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

      The U.S. dedicated contract carriage market is estimated to be $8 billion. This market is affected by many of the trends that impact our FMS business such as the increased cost associated with purchasing and maintaining a fleet of vehicles. The administrative burden relating to regulations issued by the Department of Transportation (DOT) regarding driver screening, training and testing as well as record keeping and other costs associated with the new hours of service requirements make our DCC product an attractive alternative to private fleet management. In addition, market demand for just-in-time delivery creates a need for well-defined routing and scheduling plans that are based on comprehensive asset utilization analysis and fleet rationalization studies.

      Through our DCC business segment, we combine the equipment, maintenance and administrative services of a full service lease with additional services to provide a customer with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include driver hiring and training, routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support including on-board computers, and other technical support. These additional services allow us to address on behalf of our customers the labor issues associated with maintaining a private fleet of vehicles, such as driver turnover, government regulation, including hours of service regulations, DOT audits and workers compensation.

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

      To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DCC experts, in conjunction with our SCS transportation specialists, select appropriate transportation modes and carriers, place the freight, monitor carrier performance and audit billing. In addition, through our SCS business, we can reduce costs and add value to a customer’s distribution system by aggregating orders into loads, looking for shipment consolidation opportunities and organizing loads for vehicles that are returning from their destination point back to their point of origin (backhaul).

      Because it is highly customized, our DCC product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, such as newspapers and refrigerated products, as well as to companies whose distribution system involves multiple stops within a closed loop highway route.

      For the fiscal year ended December 31, 2004, our DCC business accounted for 10% of our revenues. At December 31, 2004, we had 227 DCC customer accounts in the U.S. Although a significant portion of our DCC operations are located at customer facilities, our DCC business utilizes and benefits from our extensive network of FMS facilities.

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

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

      Canada. We have been operating in Canada for over 40 years. Our FMS operations in Canada include full service leasing, commercial rental and programmed maintenance. We also offer fleet support services such as insurance, fuel services and compliance services. At December 31, 2004, we had a fleet of approximately 10,700 commercial trucks, tractors and trailers leased or rented through 42 locations throughout 8 Canadian provinces. At December 31, 2004, we leased vehicles to over 1,200 full service lease customer accounts in Canada.

      Our Canadian SCS operations also include a full range of services including lead logistics management services and distribution and transportation solutions. Given the proximity of this market to our U.S. operations, the Canadian operations are highly coordinated with their U.S. counterparts, managing cross-border transportation and freight movements. At December 31, 2004, we had 55 SCS customer accounts in Canada.

      Europe. We began operating in the U.K. in 1971 and since then have expanded into other parts of Europe including Ireland, Germany and Poland by leveraging our operations in the U.S. and the U.K. Our FMS operations in Europe include full service leasing, commercial rental and programmed maintenance. We also offer fleet support services such as insurance, fuel services, compliance services, driver capability and on-board technology.

      At December 31, 2004, we had a fleet of approximately 12,500 commercial trucks, tractors and trailers leased or rented through 36 locations throughout the U.K. and Germany. We also manage a network of over 450 independent maintenance facilities in the U.K. to serve our customers where we are unable to provide service in a Ryder managed location. In addition to our typical FMS operations, we also supply and manage vehicles, equipment and personnel for military organizations in the U.K. and Germany. At December 31, 2004, we leased vehicles to over 1,100 full service lease customer accounts in the U.K. and Germany.

      Our European operations include a complete range of service offerings including lead logistics management services, distribution and transportation solutions, and logistics consulting and design services. In addition, we operate a comprehensive shipment, planning and execution system through our European transportation management services center located in Düsseldorf, Germany. At December 31, 2004, we had 23 SCS customer accounts in Europe.

      Latin America. We began operating in Mexico, Brazil and Argentina in the mid-1990s. In all of these markets we offer a full range of SCS services, including managing distribution operations and cross-docking terminals, and designing and managing customer specific transportation solutions. In our Argentina and Brazil operations, we also offer international transportation services for freight moving between these markets, including transportation, backhaul and customs procedure management. Our Mexican operations also manage more than 2,700 border crossings each week between Mexico and the U.S., often highly integrated with our domestic distribution and transportation operations. At December 31, 2004, we had 113 SCS customer accounts in Latin America.

      Asia. We began operating in Asia in 2000 through our acquisition of Ascent Logistics. Although our Asian operations are headquartered in Singapore, we also provide logistics and consulting services in China via our Shanghai office and coordinate logistics activities in countries such as Thailand, India, Malaysia, Australia and New Zealand. We offer a wide range of SCS services to customers in the region, including management of distribution operations, domestic transportation management, coordination, scheduling and management of international freight movement, postponement, bundling and other customization activities, and procurement. At December 31, 2004, we had 79 SCS customer accounts in Asia.

      As part of the services provided by our FMS, SCS and DCC business segments, we have developed the following e-commerce solutions:

      We have consolidated most of our financial administrative functions for the U.S. and Canada, including credit, billing and collections, into our Shared Services Center, a centralized processing center located in Alpharetta, Georgia. This centralization results in more efficient and consistent centralized processing of selected administrative operations. The Shared Services Center’s main objectives are to reduce on-going annual administrative costs, enhance customer service through process standardization, create an organizational structure that will improve market flexibility and allow future reengineering efforts to be more easily attained at lower implementation costs.

      Our business is subject to regulation by various federal, state and foreign governmental entities. The DOT and various state agencies exercise broad powers over certain aspects of our business, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting. We are also subject to a variety of requirements of national, state/provincial and local governments, including the Environmental Protection Agency and the Occupational Safety and Health Administration, that regulate safety, the management of hazardous materials, water discharges and air emissions, solid waste disposal and the release and cleanup of regulated substances. We may also be

subject to licensing and other requirements imposed by the U.S. Department of Homeland Security and U.S. Customs Service as a result of increased focus on homeland security and air C-TPAT certification. We may also become subject to new or more restrictive regulations imposed by these agencies, or other authorities relating to engine exhaust emissions, drivers’ hours of service, security and ergonomics.

      The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from diesel engines from 2007 through 2010. Beginning in October 2002, new diesel engines were required to meet new emissions limits. Some of these regulations require subsequent reductions in the sulfur content of diesel fuel beginning in June 2006 and the introduction of emissions after-treatment devices on newly manufactured engines and vehicles beginning with the model year 2007.

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

      Our safety department focuses on (i) recruiting and maintaining qualified drivers; (ii) improving driver and management safety training; (iii) implementing periodic reviews of driver records; (iv) creating incentives for drivers with good safety records; and (v) raising awareness of safety-related issues on a company-wide basis.

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

      The nature of our business exposes us to risk of liability for damages arising primarily out of cargo loss and damage, customer-managed inventory shrinkage, vehicle liability, property damage and workers compensation. We are responsible for a deductible for auto liability, physical damage, cargo and workers compensation claims. We maintain insurance with independent insurance carriers that provide coverage for claims in excess of deductible amounts. Management believes that our insurance coverage is adequate.

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

      Our FMS and DCC business segments compete with companies providing similar services on a national, regional and local level. Regional and local competitors may sometimes provide services on a national level through their participation in various cooperative programs. Competitive factors include price, equipment, maintenance, service and geographical coverage and, with respect to DCC, driver and operations expertise. We compete with other finance lessors and also to an extent, particularly in the U.K., with a number of truck and trailer manufacturers who provide truck and trailer leasing, extended warranty maintenance, rental and other transportation services. Value-added differentiation of the full service truck leasing, truck rental and contract truck maintenance service and DCC offerings has been, and will continue to be, our emphasis.

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

      At December 31, 2004, we had approximately 26,300 full-time employees worldwide, of which 22,000 were employed in North America, 2,300 in Latin America, 1,650 in Europe and 350 in Asia. We have approximately 19,900 hourly employees in the United States, approximately 3,200 of which are organized by labor unions. These employees are principally represented by the International Brotherhood of Teamsters, the International Association of Machinists and Aerospace Workers and the United Auto Workers, and their wages and benefits are governed by 97 labor agreements that are renegotiated periodically. None of the businesses in which we currently engage have experienced a material work stoppage, slowdown or strike and we consider that our relationship with our employees is good.

EXECUTIVE OFFICERS OF THE REGISTRANT

      All of the executive officers of Ryder were elected or re-elected to their present offices either at or subsequent to the meeting of the Board of Directors held on May 7, 2004 in conjunction with Ryder’s 2004 Annual Shareholders’ Meeting. They all hold such offices, at the discretion of the Board of Directors, until their removal, replacement or retirement.

      Gregory T. Swienton has been Chairman since May 2002, President since June 1999 and Chief Executive Officer since November 2000. Before joining Ryder, Mr. Swienton was Senior Vice President of Growth Initiatives of Burlington Northern Santa Fe Corporation (BNSF) and before that Mr. Swienton was BNSF’s Senior Vice President, Coal and Agricultural Commodities Business Unit.

      Robert D. Fatovic has served as Executive Vice President, General Counsel and Corporate Secretary since May 2004. He previously served as Senior Vice President, U.S. Supply Chain Operations, High-Tech and Consumer Industries from December 2002 to May 2004. Mr. Fatovic joined Ryder’s law department in 1994 as assistant division counsel and has held various positions within the law department including Vice President and Deputy General Counsel.

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

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

      Bobby J. Griffin has been Executive Vice President, International Operations since January 2003. Previously, Mr. Griffin served as Executive Vice President, Global Supply Chain Operations since March 2001. Prior to this appointment, Mr. Griffin was Senior Vice President, Field Management West from January 2000 to March 2001. Mr. Griffin was Vice President, Operations of Ryder Transportation Services from 1997 to December 1999. Mr. Griffin also served Ryder as Vice President and General Manager of ATE Management and Service Company, Inc. and of Managed Logistics Systems, Inc. operating units of the former Ryder Public Transportation Services, positions he held from 1993 to 1997. Mr. Griffin was Executive Vice President, Western Operations of Ryder/ ATE from 1987 to 1993. He joined Ryder as Executive Vice President, Consulting of ATE in 1986 after Ryder acquired ATE Management and Service Company.

      Gregory E. Hyland has served as Executive Vice President, U.S. Fleet Management Solutions since October 2004. He previously served as President of the Industrial Products Segment for Textron, Inc. from February 2002 to August 2003 and as Chairman and Chief Executive Officer of Textron Golf, Turf and Specialty Products from January 2001 to January 2002. From September 1997 to December 2000, Mr. Hyland served as President of the Engineered Products Group, Flow Control Division of Tyco International.

      Tracy A. Leinbach has been Executive Vice President and Chief Financial Officer since March 2003. Ms. Leinbach served as Executive Vice President, Fleet Management Solutions, from March 2001 to March 2003; Senior Vice President, Sales and Marketing from September 2000 to March 2001; and she was Senior Vice President Field Management from July 2000 to September 2000. Ms. Leinbach also served as Managing Director-Europe of Ryder Transportation Services from January 1999 to July 2000 and previously she had served Ryder Transportation Services as Senior Vice President and Chief Financial Officer from 1998 to January 1999, Senior Vice President, Business Services from 1997 to 1998, and Senior Vice President, Purchasing and Asset Management for six months during 1996. From 1985 to 1996, Ms. Leinbach held various financial positions in Ryder subsidiaries.

      Vicki A. O’Meara has been Executive Vice President and Chief of Corporate Operations since May 2004. Prior to that, Ms. O’Meara served as Executive Vice President and General Counsel from June 1997 and as Corporate Secretary from February 1998. Prior to joining Ryder, Ms. O’Meara was a partner with the Chicago office of the law firm Jones Day. Previously, she held a variety of positions with the federal government including service as Assistant Attorney General for the Environmental and Natural Resources Division of the Department of Justice, Deputy General Counsel of the Environmental Protection Agency and in the Office of White House Counsel.

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

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

      Anthony G. Tegnelia has served as Executive Vice President, U.S. Supply Chain Solutions since December 2002. Previously, he was Senior Vice President, Global Business Value Management. Mr. Tegnelia joined Ryder in 1977 and has held a variety of other positions with Ryder including Senior Vice President and Chief Financial Officer of Ryder’s integrated logistics business segment and Senior Vice President, Field Finance.

      Jennifer E. Thomas has served as Senior Vice President and Chief Human Resources Officer, since November 2004. She previously served as Senior Vice President of Operations and practice leader for Organizational Counseling with Right Management Consultants. From 2000 to 2002 she served as the Senior Vice President of Human Resources for Burger King Corporation. Prior to Burger King, Ms. Thomas served as Vice President of Human Resources for Republic Industries, Inc. from 1998 to 2000.

FURTHER INFORMATION

      For further discussion concerning our business, see the information included in Items 7 and 8 of this report. Industry and market data used throughout Item 1 was obtained through a compilation of surveys and studies conducted by industry sources, consultants and analysts.

      We make available free of charge through our website at www.ryder.com our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

      In addition, our Corporate Governance Guidelines, Principles of Business Conduct (including our Finance Code of Conduct), and Board committee charters are posted on the Corporate Governance page of our website at www.ryder.com.

ITEM 2. PROPERTIES

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

      We maintain 953 FMS locations in the United States, Puerto Rico and Canada; we own approximately 450 of these facilities and lease the remaining facilities. Our FMS locations generally include a repair shop, fuel service island and administrative offices.

      We also maintain 156 locations in the United States and Canada in connection with our domestic SCS and DCC businesses. Almost all of our SCS locations are leased and generally include a warehouse and administrative offices.

      We maintain 72 international locations (locations outside of the United States and Canada) for our international businesses. These locations are in the U.K., Ireland, Germany, Poland, Mexico, Argentina, Brazil, China, Malaysia and Singapore. The majority of these locations are leased and generally include a repair shop, warehouse and administrative offices.

      On May 18, 2004, we sold our 400,000 square-foot corporate headquarters facility located on a 46.5-acre site. Ryder is currently leasing the property from the purchaser until our new headquarters facility is available in April 2005. We will lease our new 250,000 square-foot headquarters building located within a few miles of Ryder’s existing facility in Miami, Florida. Our decision to sell our current headquarters facility and relocate to a smaller headquarters building arose from the need for a more cost-effective and efficient office space that reflects the business requirements of Ryder today and in the future.

ITEM 3. LEGAL PROCEEDINGS

      Our subsidiaries are involved in various claims, lawsuits and administrative actions arising in the course of our businesses. Some involve claims for substantial amounts of money and/or claims for punitive damages. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material impact on our consolidated financial condition, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      There were no matters submitted to a vote of our security holders during the quarter ended December 31, 2004.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

      Our common shares are listed on the New York Stock Exchange. At January  31, 2005, there were 11,906 common stockholders of record and our stock price on the New York Stock Exchange was $45.55.

      The following table provides information with respect to purchases we made of our common stock during the three months ended December 31, 2004 and total repurchases:

ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our consolidated financial statements and related notes contained in Item 8 of this report on Form 10-K.

OVERVIEW

      Our business is divided into three business segments: our Fleet Management Solutions (FMS) business segment provides leasing, commercial rental and programmed maintenance of commercial trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; our Supply Chain Solutions (SCS) business segment provides comprehensive supply chain consulting and lead logistics management solutions throughout North America and in Latin America, Europe and Asia; and our Dedicated Contract Carriage (DCC) business segment provides vehicles and drivers as part of a dedicated transportation solution in North America. We operate in extremely competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may also choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes governments and enterprises operating in a variety of industries including automotive, electronics, high-tech, telecommunications, manufacturing, aerospace, consumer goods, paper and paper products, office equipment, food and beverage, and general retail industries.

      Over the past several years we have made significant transformations in our business, addressing many of the fundamental business processes throughout the organization. From 2000 to 2003, we reduced our cost structure and strengthened our balance sheet in order to deliver long-term results to our shareholders and also to make Ryder more competitive in the marketplace. In 2004, we continued this transformation by demonstrating earnings leverage through profitable growth. During 2004, we were successful in growing revenue in our transaction businesses and through strategic acquisitions in our FMS business.

      As discussed in more detail throughout our MD&A, during 2004:

ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS

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

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

CONSOLIDATED RESULTS

     Earnings before income taxes and the cumulative effect of changes in accounting principles increased 56% to $331 million in 2004 compared with 2003. Earnings before income taxes in 2004 benefited from gains on the sale of our headquarters complex of $24 million. Net earnings in 2004 benefited from after-tax gains on the sale of our headquarters complex of $15 million, or $0.23 per diluted common share, and a net income tax benefit of $9 million, or $0.14 per diluted common share, associated with developments in various tax matters. Excluding these items, the earnings improvement in 2004 was driven by the positive impact of FMS acquisitions, increased FMS rental pricing and utilization, higher gains on FMS used vehicle sales, lower pension costs, and reductions in operating expenses stemming from cost management and process improvement actions. The earnings growth rate in 2004 exceeded the related earnings per share growth rate because the average number of shares outstanding increased 3% over prior year reflecting the impact of stock issuances under employee stock option and stock purchase plans.

      Earnings before income taxes and the cumulative effect of changes in accounting principles increased 21% to $212 million in 2003 compared with 2002. The increase in earnings was due to reductions in operating expenses stemming from cost management and process improving actions, improved SCS operating performance, better FMS rental pricing, and the impact of favorable exchange rate fluctuations. These earnings increases were partially offset by an increase in annual pension expense that principally impacted our FMS business segment, which employs the majority of the employees that participate in our

primary U.S. pension plan. See “Operating Results by Business Segment” for further discussion of operating results for the past three years.

      Total revenue increased 7% to $5.2 billion in 2004 compared with 2003. During 2004, FMS revenue was positively impacted by acquisitions and higher rental revenue resulting from a larger fleet, better pricing and increased activity. FMS acquisitions contributed approximately $177 million for the year ended December 31, 2004. Revenue comparisons were also impacted by increased FMS fuel services revenue primarily as a result of higher average fuel prices, and favorable movements in foreign currency exchange rates related to our international operations. Our businesses realize minimal changes in profitability as a result of higher fuel services revenue as these generally reflect costs that are passed through to our customers. Total revenue included a favorable foreign currency exchange impact of 1.6% due to the strengthening of the British pound and the Canadian dollar. These increases were partially offset by reduced FMS full service lease revenue on our U.S. base business (excluding acquisitions) and the non-renewal of certain customer contracts in our SCS and DCC business segments.

      Total revenue increased 1% to $4.8 billion in 2003 compared with 2002. Comparisons were impacted by increased FMS fuel services revenue as a result of higher average fuel prices. During 2003, FMS was negatively impacted by continued softness in the U.S. economy resulting in reduced full service lease and programmed maintenance demand, as well as the impact of some ancillary business not renewed. These decreases were partially offset by improved commercial rental revenue due to higher pricing. SCS revenue decreased in 2003 compared with 2002 as a result of volume reductions combined with the non-renewal of certain customer contracts. Revenue comparisons were favorably impacted by changes in foreign currency exchange rates and expanded business in Canada, Latin America and Asia. Total revenue included a favorable foreign currency exchange impact of 1.1% due to the strengthening of the British pound and the Canadian dollar offset partially by the weakness of certain Latin American currencies.

      Operating expense increased 13% to $2.3 billion in 2004 compared with 2003. The increase was principally a result of increases in fuel costs due to higher average fuel prices in 2004. Operating expense was also impacted by higher maintenance costs resulting from a larger and older vehicle fleet and added operating costs attributed to the FMS acquisitions. Operating expense increased 5% to $2.0 billion in 2003 compared with 2002. The increase was principally a result of increases in fuel costs due to higher average fuel prices in 2003. Operating expense was also impacted by higher maintenance costs as a result of an older fleet, offset by a reduction in overhead spending from ongoing cost management actions.

      Salaries and employee-related costs decreased 1% to $1.2 billion in 2004 compared with 2003. The decrease was primarily a result of lower pension expense and lower headcount in our SCS and DCC business segments caused by the non-renewal of certain contracts, offset in part by higher performance-based incentive compensation. Average headcount decreased 3% in 2004 compared with 2003. The number of employees at December 31, 2004 decreased 1% to approximately 26,300, compared with 26,700 at December 31, 2003.

      Pension expense decreased $19 million in 2004 to $63 million compared with 2003 and principally impacted FMS. The decrease in pension expense is primarily attributable to the U.S. pension plan and reflects the positive impact of higher actual pension asset returns in 2003. We expect pension expense on a pre-tax basis to decrease to approximately $58 million in 2005. Our 2005 pension expense estimates are subject to change based upon the completion of actuarial analysis for all pension plans. See “Critical Accounting Estimates” for further discussion on pension accounting estimates. The anticipated decrease in pension expense would primarily impact our FMS business segment.

      Salaries and employee-related costs decreased 2% to $1.2 billion in 2003 compared with 2002. The decrease was a result of headcount reductions, which offset higher pension expense. Average headcount decreased 6% in 2003 compared with 2002 reflecting the non-renewal of certain customer contracts, the impact of cost management actions and reduced volumes across all business segments.

      Freight under management (FUM) expense represents subcontracted freight costs on logistics contracts for which Ryder purchases transportation. FUM expense increased 3% to $427 million in 2004 compared with 2003. During 2004, FUM expense in our SCS business segment increased due to the impact of added transportation management-based business and higher average pricing on subcontracted freight costs resulting from increased fuel costs. The volume declines experienced in our SCS business during 2004 were principally attributed to non-transportation based activities. FUM expense was flat in 2003 compared with 2002 as the net volume declines experienced in our SCS business during 2003 was principally attributed to non-transportation management activity.

      Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased 13% to $706 million in 2004 compared with 2003. The growth in depreciation expense during 2004 reflected the consolidation of VIEs effective July 1, 2003 (approximately $40 million), the impact of vehicles added as part of the recent FMS acquisitions, the conversion of leased units to owned status as a result of lease extensions and the replacement of expiring leased units with owned units. See discussion on FMS in “Operating Results by Business Segment” for further detail on vehicle counts. Depreciation expense increased 13% to $625 million in 2003 compared with 2002. Although the overall fleet size (owned and leased) declined 3% during 2003, depreciation expense grew because of an increase in the average number of owned (compared with leased) revenue earning equipment units as a result of the

consolidation of VIEs effective July 1, 2003 (approximately $40 million), the conversion of leased units to owned status on lease extensions and the replacement of expiring leased units with owned units.

      Gains on vehicle sales, net increased 119% to $35 million in 2004 compared with 2003 and 11% to $16 million in 2003 compared with 2002. The increases in gains on vehicle sales were due to increases in the number of FMS unit sales of owned vehicles and improvements in the average pricing on vehicles sold over the preceding periods.

      We periodically review and adjust residual values, reserves for guaranteed lease termination values and useful lives of revenue earning equipment based on current and expected operating trends and projected realizable values. See “Critical Accounting Estimates” for further discussion on depreciation and residual value guarantees. While we believe that the carrying values and estimated sales proceeds for revenue earning equipment are appropriate, there can be no assurance that a deterioration in economic conditions or adverse changes to expectations of future sales proceeds will not occur, resulting in losses on disposal.

      Equipment rental primarily consists of rental costs on revenue earning equipment in FMS. Equipment rental costs decreased 46% to $108 million in 2004 compared with 2003. The significant decrease in 2004 was due to a reduction in the average number of leased vehicles (compared with owned) resulting from the consolidation of VIEs effective July 1, 2003 (approximately $50 million), the conversion of leased units to owned status as a result of lease extensions and the replacement of expiring lease units with owned units. Equipment rental costs decreased 42% to $201 million in 2003 compared with 2002. The decrease was due to a reduction in the average number of leased vehicles (compared with owned) resulting from the consolidation of VIEs effective July 1, 2003 (approximately $50 million), term extensions and an overall decline in fleet size, which principally impacted equipment under lease.

      Interest expense increased 4% to $100 million in 2004 compared with 2003. The increase in interest expense reflects higher average debt levels, including debt of consolidated VIEs. Excluding interest expense from consolidated VIEs, comparisons for 2004 were favorably impacted by overall lower market interest rates and reduced effective interest rates as a result of hedging transactions, which principally benefited FMS. Interest expense increased 5% to $96 million in 2003 compared with 2002. The increase in interest expense reflects the impact of interest expense of approximately $10 million on debt of VIEs consolidated effective July 1, 2003, partially offset by overall lower market interest rates and reduced effective interest rates as a result of hedging transactions, which principally benefited FMS.

      Miscellaneous income, net decreased to $9 million in 2004 compared with 2003. Miscellaneous income, net decreased because of the elimination of servicing fee income related to certain VIEs. Prior to the consolidation of VIEs effective July 1, 2003, miscellaneous income, net included fee income related to administrative services provided to vehicle lease trusts in connection with vehicle securitization transactions. As a result of consolidating the vehicle securitization trusts, we no longer recognize service fee income.

      Miscellaneous income, net increased to $12 million in 2003 compared with 2002. During 2003, miscellaneous income, net was favorably impacted from a $2 million gain on sale of a facility in our European FMS operations, better market performance of investments classified as trading securities used to fund certain benefit plans and lower losses on the sale of trade receivables related to the decreased use

of our revolving receivables financing program. These positive factors were partially offset by the elimination of servicing fee income related to the vehicle lease trusts.

      Restructuring and other (recoveries) charges, net in 2004 relate primarily to $24 million in gains from properties sold in connection with the relocation of our headquarters complex. During 2004 we also recorded other charges related to the termination of certain services covered by an information technology contract. In accordance with the terms of the services agreement, Ryder notified the information technology services provider of its intent to terminate certain services and recorded charges totaling $8 million for contract termination ($6 million) and transition costs incurred since termination ($2 million). By December 31, 2004, all transition activities were completed and we expect future cost reductions associated with the termination of these services to benefit our results starting in 2005.

      Restructuring and other (recoveries) charges, net were $(0.2) million in 2003. During 2003, Ryder approved a plan to eliminate approximately 140 positions as a result of on-going cost management and process improvement actions in Ryder’s FMS and SCS business segments and Central Support Services (CSS). The charge related to these actions included severance and employee-related costs totaling $6 million. These charges were offset by the settlement of a commercial dispute pertaining to prior billings with an information technology vendor, gains on sales of owned facilities identified for closure in prior restructuring charges, and reversals of severance and employee-related costs associated with prior restructuring charges.

      Restructuring and other (recoveries) charges, net were $4 million in 2002. During the fourth quarter of 2002, Ryder approved a plan to eliminate approximately 140 positions as a result of cost management actions principally in our SCS business segment and CSS, which were substantially finalized at December 31, 2002. The charge related to these actions included severance and employee-related costs totaling $7 million. These charges were offset by net gains on sales of owned facilities identified for closure in prior restructuring charges, reversals of severance and employee-related costs associated with prior restructuring charges and the final settlement of insurance reserves attributed to a previously sold business.

      See Note 4, “Restructuring and Other (Recoveries) Charges,” in Notes to Consolidated Financial Statements for further discussion.

      The 2004 effective tax rate reflects the completion of the audit of our federal income tax returns for the 1995 to 1997 period, partially offset by provisions made for loss contingencies related to recent developments in the audit of our federal income tax returns for the 1998 through 2000 period. The net effect of these items was an increase in net earnings of $9 million.

OPERATING RESULTS BY BUSINESS SEGMENT

      We define the primary measurement of our segment financial performance as “Net Before Tax” (NBT) which includes an allocation of CSS and excludes restructuring and other recoveries (charges), net. CSS represents those costs incurred to support all of our business segments, including sales and marketing, human resources, finance, corporate services, shared management information systems, customer solutions, health and safety, legal and communications. The objective of the NBT measurement is to provide clarity on the profitability of each of our business segments and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. In 2004, we changed our methodology of allocating sales support costs between FMS and DCC segments and allocating insurance related costs between FMS, SCS and DCC segments. Accordingly, 2003 and 2002 segment NBT measures have been adjusted to provide the retroactive effect of these changes.

      Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation. See Note 22, “Segment Reporting,” in the Notes to Consolidated Financial Statements for a description of how the remainder of CSS costs is allocated to the business segments.

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

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

      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.

      FMS total revenue increased 11% to $3.6 billion in 2004 compared with 2003. Fuel services revenue increased 25% to $802 million primarily as a result of higher average fuel prices and higher volumes attributed to recent acquisitions. Dry revenue (revenue excluding fuel) increased 8% to $2.8 billion in 2004 compared with 2003. FMS acquisitions contributed approximately $177 million of revenue in 2004. FMS total revenue and dry revenue comparisons for 2004 also benefited from favorable foreign currency exchange rates. FMS total revenue included a favorable foreign currency exchange impact of 1.6%.

      Full service lease and programmed maintenance revenue increased 6% to $1.9 billion in 2004 compared with 2003 primarily from acquisitions that added approximately 7,000 vehicles to our lease fleet. Comparisons were also favorably impacted by higher revenue in Canada and the U.K. as a result of favorable foreign currency exchange rates and higher volumes. These increases were partially offset by reduced full service lease revenue on our base U.S. business (excluding acquisitions) as a result of weak leasing demand in 2003 and flat net sales in 2004. In 2005, we expect growth in full service lease and programmed maintenance revenue due to recent sales activity and continued emphasis on initiatives aimed at generating new sales.

      Commercial rental revenue increased 20% to $591 million in 2004 compared with 2003. Commercial rental revenue increased as a result of higher rental pricing and utilization in each of our markets and a

larger fleet size. Commercial rental revenue in 2004 also benefited from revenue contributions attributed to the recent acquisitions. U.S. rental fleet utilization increased to 77% in 2004 compared with 72% in 2003. In the U.S., pure rental revenue (total revenue less rental revenue related to units provided to full service lease customers), which accounts for over half of the U.S. commercial rental business, increased 14% to $269 million in 2004 compared with $235 million in 2003 due to stronger pricing and increased rental activity. Lease customer revenue primarily represents rental vehicles provided to our existing full service lease customers, generally during peak periods in their operations. In the U.S., lease customer revenue increased 29% to $224 million in 2004 compared with the prior year. Rental statistics presented are for the U.S. fleet, which generates more than 80% of total commercial rental revenue. We expect commercial rental revenue comparisons to continue to improve in 2005 based on the increases in rental transactions, improved pricing discipline and an overall larger commercial rental fleet.

      Other FMS revenue, which consists of trailer rentals, other maintenance and repairs services and ancillary revenue to support product lines, increased 2% to $314 million in 2004 compared with 2003. Other revenue increased due primarily to higher trailer utilization and higher overall volumes. We expect modest improvements in 2005 due to recent increases in U.S. activity.

      FMS NBT increased 60% to $313 million in 2004 compared with 2003. The increase was driven by the acquisitions that allowed us to leverage our existing infrastructure, improved commercial rental results from higher rental pricing and utilization, higher gains on disposal of used revenue earning equipment from stronger pricing and volume, and lower pension costs. The impact of these items was partially offset by lower full service lease and programmed maintenance revenue on our base business (excluding acquired contracts).

      FMS total revenue increased 2% to $3.2 billion in 2003 compared with 2002. Revenue in 2003 was impacted by increases in fuel services revenue as a result of higher average fuel prices, particularly during the first half of 2003. Dry revenue totaling $2.6 billion remained unchanged in 2003 compared with 2002. In 2003, FMS total revenue and dry revenue also benefited from favorable foreign currency exchange rates. FMS total revenue included a favorable foreign currency exchange impact of 1.4%.

      Full service lease and programmed maintenance revenue remained unchanged in 2003 as compared to 2002 due to the effects of weak leasing demand in the U.S., a reduction in fleet size and fewer total miles run by leased vehicles, which resulted in decreased variable billings. The impact of these negative factors was partially offset by higher revenue in Canada and the U.K. as a result of favorable exchange rates and higher volumes.

      Commercial rental revenue increased 7% to $491 million in 2003 compared with 2002 primarily as a result of stronger pricing throughout 2003. U.S. rental fleet utilization for 2003 of 72% was unchanged from 2002. Other FMS revenue decreased 11% to $309 million in 2003 compared with 2002 due primarily to the non-renewal of a customer contract to provide ancillary fleet services that expired at the end of the first quarter of 2003.

      FMS NBT decreased 9% to $195 million in 2003 compared with 2002. The decrease was due primarily to higher pension expense of $48 million in 2003 as compared with 2002. NBT comparisons were also adversely impacted by lower lease revenue and the non-renewal of a contract to provide ancillary fleet services. The impact of these items was partially offset by higher commercial rental pricing, improved asset management performance resulting from lower vehicle counts and carrying costs, reduced operating expenses as a result of our cost management and process improvement actions and the impact of favorable exchange rate fluctuations.

      Our fleet of owned and leased revenue earning equipment is summarized as follows (number of units rounded to the nearest hundred):

     The totals in the table above include the following non-revenue earning equipment (number of units rounded to the nearest hundred):

     NYE units represent new vehicles on hand that are being prepared for deployment to a lease customer or into the rental fleet. Preparations include activities such as adding lift gates, paint, decals, cargo area and refrigeration equipment. NLE units represent vehicles held for sale, as well as vehicles for which no revenue has been earned in the previous 30 days. These vehicles may be temporarily out of service, being prepared for sale or awaiting redeployment. The number of NYE units increased during the year consistent with the anticipated higher level of new vehicles coming into the fleet for replacement lease equipment and new lease sales. We would expect this number to grow in 2005 as the volume of lease activity increases. In 2004, the number of other NLE units declined as a result of improved rental utilization.

      SCS total revenue remained flat at $1.4 billion in 2004 compared with 2003. SCS total revenue included a favorable foreign currency exchange impact of 2%. Operating revenue (which excludes FUM) decreased 2% to $937 million in 2004 compared with 2003. U.S. and international operating revenue comparisons were negatively impacted by the non-renewal of certain customer contracts. Additionally, international operating revenue in 2003 included $21 million associated with an inventory procurement contract, the terms of which were favorably renegotiated in the first quarter of 2004 to eliminate inventory risk and required net revenue reporting on a prospective basis. The unfavorable operating revenue comparisons were partially offset by new contract start-ups and expansions in the U.S., Canada and Latin America and favorable foreign currency exchange rates. SCS operating revenue included a favorable foreign currency exchange impact of 1.6%. We are encouraged by recent sales activity and expect to convert more sales proposals into new contracts in 2005 by expanding sales efforts. As we enter 2005, we are watchful of economic indicators in the U.S. automotive sector, which currently suggest weaker volumes in the first half of 2005.

      SCS NBT decreased 7% to $37 million in 2004 compared with 2003. The decrease in SCS NBT for 2004 was due primarily to lower operating revenue. The impact of revenue declines during 2004 was partially offset by reduced overhead spending through continued profit improvement actions.

      SCS total revenue decreased 2% to $1.4 billion in 2003 compared with 2002. Operating revenue decreased 3% to $953 million in 2003 compared with 2002. U.S. operating revenue decreased 9% in 2003 compared with 2002 as a result of reduced volume levels in some of our customer segments and the non-renewal of certain contracts. The revenue reductions in the U.S. were partially offset by increased volumes and expanded business in Canada, Latin America and Asia, as well as the favorable impact of exchange rates. SCS total and operating revenue included a favorable foreign currency exchange impact of 0.6% due

to the strengthening of the British pound and the Canadian dollar offset partially by the weakness of certain Latin American currencies. International revenue comparisons were also favorably impacted by revenue from an inventory procurement contract that generated $21 million in revenue in 2003. In the first quarter of 2004, the terms of this contract were favorably renegotiated to eliminate inventory risk and required net revenue reporting on a prospective basis.

      SCS NBT improved to $40 million in 2003 compared with a deficit of $7 million in 2002. Despite lower operating revenue in 2003, SCS improved results were driven by numerous profit improvement actions implemented by management, which reduced overhead costs and improved global operating performance.

      DCC revenue decreased 2% to $506 million in 2004 compared with 2003. DCC operating revenue decreased 3% to $496 million in 2004 compared with 2003. The revenue decrease was due to the non-renewal of certain customer contracts, partially offset by the pass-through of higher average fuel prices. NBT decreased 16% to $29 million in 2004 compared with 2003. The decrease in NBT for 2004 reflects the impact of lower revenue, increased driver costs and higher safety and insurance expenses partially offset by lower overhead spending. In 2005, we expect to complete the operational integration of our DCC business with our SCS organization. We expect this action along with the projected expansion of our SCS/ DCC sales organizations to accelerate revenue growth in 2005.

      DCC total revenue decreased 1% to $515 million in 2003 compared with 2002. DCC operating revenue decreased 1% to $510 million in 2003 compared with 2002. Reduced volumes associated with customer contracts not renewed were partially offset by the pass-through of higher average fuel prices in 2003. NBT increased 10% to $35 million in 2003 compared with 2002. The increase in NBT for 2003 reflects decreased overhead spending and improved operating performance. These improvements were partially offset by the impact of customer contracts not renewed. Lower salaries and employee-related costs, sales and marketing costs, and insurance costs contributed to the lower overhead spending.

      CSS expenses were as follows:

      Total CSS increased 1% to $215 million in 2004 compared with 2003. The increase in total CSS expenses during 2004 compared with 2003 was due to higher performance-based incentive compensation costs attributed to the improved overall performance. This increase was partially offset by on-going cost containment and process improvement actions, most notably in information technology (IT). Technology costs were lower in 2004 due primarily to reduced pricing on purchased IT services. Unallocated CSS expenses for 2004 were up largely due to Sarbanes-Oxley compliance costs that were not allocated to the business segments and higher performance-based incentive compensation. We expect reductions in CSS spending levels over the near term based on continuing cost containment and process improvement actions.

      Total CSS decreased 9% to $213 million in 2003 compared with 2002. The decrease in total CSS expense was due to cost reductions across substantially all functional areas as a result of our continued cost management and process improvement actions, most notably in IT. Technology costs were lower in 2003 as a result of reduced pricing on purchased IT services and the impact of insourcing certain IT services during the first quarter of 2002.

FINANCIAL RESOURCES AND LIQUIDITY

      The following is a summary of our cash flows from operating, financing and investing activities:

      A detail of the individual items contributing to the cash flow changes is included in the Consolidated Statements of Cash Flows.

      Cash provided by operating activities increased in 2004 compared with 2003 due primarily to improved operating performance and the add-back of depreciation expense attributed to VIEs that were

consolidated effective July 1, 2003. The increase in cash from operating activities in 2003 compared with 2002 was primarily attributable to changes in the aggregate balance of trade receivables sold, improved operating performance and reduced working capital needs. This increase was partially offset by higher discretionary cash contributions to our defined benefit pension plans.

      Cash used in financing activities decreased in 2004 compared with 2003 as higher debt borrowings and proceeds from stock option exercises were partially offset by increased stock repurchases. Cash used in financing activities decreased in 2003 compared to 2002 due to lower debt payments and increased proceeds from stock option exercises. Debt levels in 2003 compared with 2002 were also impacted by the conversion of off-balance sheet obligations to debt attributed to VIEs consolidated effective July 1, 2003. Principal payments on consolidated VIE debt totaled $119 million in 2003.

      Cash used in investing activities increased in 2004 compared with 2003 due to higher capital expenditures and payments made in connection with FMS acquisitions. Capital expenditures increased in 2004 due to planned higher levels of vehicle replacements for equipment under lease to our customers and new lease sales. The increase in capital spending was partially offset by higher proceeds from the sale of used vehicles, the sale of our corporate headquarters complex and sale-leaseback transactions completed during the third quarter of 2004. Cash used in investing activities increased in 2003 compared with 2002 due to higher capital expenditures, primarily to refresh our commercial rental fleet. Additionally, 2003 investing activities reflect payments made in connection with FMS acquisitions.

      We manage our business to maximize operating cash flows and proceeds from the sale of revenue earning equipment as the principal sources of liquidity. We refer to the net amount of cash generated from operating activities (excluding changes in the aggregate balance of trade receivables sold) and investing activities as “free cash flow.” Although free cash flow is a non-GAAP financial measure, we consider it to be an important measure of comparative operating performance. We believe free cash flow provides investors with an important perspective on the cash available for debt service and for shareholders after making capital investments required to support ongoing business operations. Our calculation of free cash flow may be different from the calculation used by other companies and therefore comparability may be limited.

      The following table shows the sources of our free cash flow computation:

      Free cash flow decreased in 2004 compared with 2003 as higher capital spending and payments made in connection with FMS acquisitions offset better operating performance, higher proceeds from sales of used vehicles, the sale of our corporate headquarters complex and sale-leaseback transactions. Net cash provided by operating activities and free cash flow comparisons in the first half of 2004 were also positively impacted by the add-back of depreciation expense of approximately $40 million attributed to VIEs that were consolidated as a result of the adoption of FIN 46 on July 1, 2003. Free cash flow decreased in 2003 compared with 2002 as higher capital spending, including acquisitions, offset better operating performance and higher proceeds from sale of used vehicles. We expect free cash flow levels to decline in 2005 as a result of the increased capital spending requirements and increased income tax payments, including the

payment made in connection with the audit of our federal income tax returns for the 1998 to 2000 tax period.

      Our FMS operations are capital intensive, characterized by significant investments primarily in vehicles (revenue earning equipment). Operating property and equipment expenditures primarily relate to FMS and SCS spending on items such as vehicle maintenance facilities and equipment, computer and telecommunications equipment, and warehouse facilities and equipment. The following is a summary of capital expenditures:

     Capital expenditures increased in 2004 compared with 2003 due primarily to increased activity in our full service lease business for both new and replacement vehicles. Capital expenditures increased in 2003 compared with 2002 due to higher levels of vehicle replacements, primarily for the commercial rental fleet. Vehicle capital spending levels were relatively low in 2003 and 2002 as we focused efforts on extending leases with existing customers, redeploying surplus assets and right-sizing our fleet. As a result of our fleet age and anticipated higher levels of new sales activity, total capital expenditures are anticipated to increase to approximately $1.4 billion in 2005, including vehicle replacements of approximately $1.0 billion and spending for anticipated incremental growth of approximately $300 million. We expect to fund 2005 capital expenditures with both internally generated funds and additional financing.

      In March 2004, Ryder completed one acquisition related to the FMS segment. In the fourth quarter of 2003, Ryder completed two acquisitions related to the FMS segment. Total consideration paid for these acquisitions was $149 million in 2004 and $97 million in 2003. Approximately $13 million is due to the sellers at December 31, 2004 and will be paid, subject to holdback provisions set forth in the purchase agreements. No acquisitions were completed in 2002. We will continue to evaluate selective acquisitions in FMS, SCS and DCC in 2005.

      We utilize external capital to support growth in our asset-based product lines. The variety of financing alternatives available to fund our capital needs include long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements, bank credit facilities and commercial paper.

      The following table shows the movements in our debt balance:

      Our funding philosophy generally attempts to match the average remaining repricing life of our debt with the average remaining life of our assets. We utilize both fixed and variable rate debt to achieve this match and generally target a mix of 25-45% variable rate debt. The variable rate portion of our total obligations (including notional value of swap agreements) was 37% at December 31, 2004, compared with 32% at December 31, 2003.

      Ryder’s leverage ratios and a reconciliation of balance sheet debt to total obligations were as follows:

     Debt to equity consists of balance sheet debt for the period divided by total equity. Total obligations to equity represents debt plus the present value of minimum lease payments and guaranteed residual values under operating leases for vehicles, discounted based on our incremental borrowing rate at lease inception, all divided by total equity. Although total obligations is a non-GAAP financial measure, we believe that total obligations is useful as it is a more complete measure of our existing financial obligations and helps better assess Ryder’s overall leverage position.

      The decrease in total obligations to equity ratio in 2004 was driven by our reduced funding needs as a result of improved operating performance and higher proceeds from sales of property and revenue earning equipment. Leverage ratios in 2004 were also impacted by the net increase in shareholders’ equity of $166 million resulting primarily from earnings net of common stock repurchases. We anticipate these ratios will increase in 2005 as a result of the expected increase in capital expenditures and higher income tax payments.

      Our ability to access unsecured debt in the capital markets is linked to both our short and long-term debt ratings. These ratings are intended to provide guidance to investors in determining the credit risk

associated with particular Ryder securities based on current information obtained by the rating agencies from us or from other sources that such agencies consider to be reliable. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. A downgrade of Ryder’s debt rating below investment grade level would limit our ability to issue commercial paper. As a result, we would have to rely on other established funding sources described below.

      Our debt ratings at December 31, 2004 were as follows:

      During May 2004, Ryder refinanced its $860 million credit facility with a new five-year $870 million global revolving credit agreement with a syndicate of lenders. The credit facility is used to finance working capital and provide support for the issuance of commercial paper. The credit facility can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at December 31, 2004). Foreign borrowings of $24 million were outstanding under the facility at December 31, 2004. At Ryder’s option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility’s current annual facility fee is 15.0 basis points, which applies to the total facility of $870 million, and is based on Ryder’s current credit ratings. The credit facility contains no provisions restricting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions, and certain affirmative and negative covenants. In order to maintain availability of funding, Ryder must maintain a ratio of debt to consolidated tangible net worth, as defined in the agreement, of less than or equal to 300%. The ratio at December 31, 2004 was 99%.

      During 2003, Ryder filed a universal shelf registration statement with the Securities and Exchange Commission to issue up to $800 million of available securities. Proceeds from debt issuances under the universal shelf registration statement are expected to be used for capital expenditures, debt refinancing and general corporate purposes.

      At December 31, 2004 Ryder had the following amounts available to fund operations under the aforementioned facilities:

      As of February 22, 2005, the amount available under the global revolving credit facility decreased to $408 million, primarily as a result of the payment made in connection with the resolution of our federal income tax audit for the 1998 to 2000 period. See Note 11, “Income Taxes” in the Notes to Consolidated Financial Statements for further discussion. We believe such facilities, along with other funding sources, will be sufficient to fund operations in 2005.

      We periodically enter into sale and leaseback transactions in order to lower the total cost of funding our operations, to diversify our funding among different classes of investors (e.g., regional banks, pension plans and insurance companies) and to diversify our funding among different types of funding instruments. These sale-leaseback transactions are often executed with third-party financial institutions that are not deemed to be VIEs. In general, these sale-leaseback transactions result in a reduction in revenue earning equipment and debt on the balance sheet, as proceeds from the sale of revenue earning equipment are primarily used to repay debt. Accordingly, sale-leaseback transactions will result in reduced depreciation and interest expense and increased equipment rental expense.

      During 2004, we completed two sale-leaseback transactions of revenue earning equipment with third-party financial institutions not deemed to be VIEs. Proceeds from the sale-leaseback transactions totaled $97 million. These leases contain limited guarantees by us of the residual values of the leased vehicles

(residual value guarantees) that are conditioned upon disposal of the leased vehicles prior to the end of their lease term. We did not enter into any sale-leaseback or vehicle securitization transactions during the years ended December 31, 2003 and 2002. See Note 12, “Leases,” in the Notes to Consolidated Financial Statements for additional information.

      Ryder participated in an agreement to sell with limited recourse trade receivables on a revolving and uncommitted basis. This agreement expired in December 2004. Under the program, Ryder sold receivables from time to time in order to fund operations, particularly when the cost of such sales was cost effective compared with other means of funding, notably, commercial paper. Losses on receivable sales and related costs associated with this program were $0.5 million, $0.5 million and $2 million in 2004, 2003 and 2002, respectively, and were included in “Miscellaneous income, net.”

      As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as debt agreements, lease agreements and unconditional purchase obligations. The following table summarizes our expected future contractual cash obligations and commitments at December 31, 2004:

      In the ordinary course of business, Ryder provides certain guarantees or indemnifications to third parties as part of certain lease, financing and sales agreements. Certain guarantees and indemnifications, whereby Ryder may be contingently required to make a payment to a third-party, are required to be disclosed even if the likelihood of payment is considered remote. At December 31, 2004, our maximum exposure under these guarantees was $26 million of which $3 million was recognized as a liability. See Note 15, “Guarantees,” in the Notes to Consolidated Financial Statements for additional information.

      At December 31, 2004, we have an accumulated net pension equity charge of $189 million (after-tax) in connection with the accrual of an additional minimum pension liability, up slightly as compared with $187 million (after-tax) at December 31, 2003 as discount rates and updates to our mortality estimates offset the appreciation in value of pension plan assets during the year. Total asset returns for our U.S. qualified pension plan (our primary plan) were 11% in 2004.

      The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. While we are not legally required to make a contribution to fund our U.S. pension plan until September 2006, we review pension assumptions regularly and we may from time to time make voluntary contributions to our pension plans. During 2004, total pension contributions, including our international plans, were approximately $70 million. After considering the 2004 contributions, the projected present value of estimated contributions for our U.S. plan that would be required over the next 5 years totals approximately $80 million (pre-tax). Changes in interest rates and the market value of the securities held by the plans during 2005 could materially change, positively or negatively, the underfunded status of the plans and affect the level of pension expense and required contributions in 2006 and beyond.

      In 2003, our Board of Directors authorized a two-year share repurchase program intended to mitigate, in part, the dilutive impact of shares issued under our various employee stock option and employee stock purchase plans. Under the program, shares of common stock were purchased in a dollar amount not to exceed the proceeds generated from the issuance of common stock to employees since January 1, 2003, up to $90 million. During the second quarter of 2004, we completed the share repurchase program. In 2004, we purchased and retired approximately 2.4 million shares at an aggregate cost of $87 million. In 2003, we purchased and retired 117,500 shares at an aggregate cost of $3 million.

      In July 2004, our Board of Directors authorized a new two-year share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock option and stock purchase plans. Under this program, shares of common stock are purchased in an amount not to exceed the number of shares issued to employees since May 1, 2004, which totaled approximately 1.6 million shares at December 31, 2004. The program limits aggregate share repurchases to no more than 3.5 million shares of Ryder common stock. At December 31, 2004, we repurchased and retired approximately 1.4 million shares at an aggregate cost of $62 million. Management was granted the authority to establish a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the repurchase program.

      Cash dividend payments to shareholders of common stock were $39 million in 2004, $38 million in 2003 and $37 million in 2002. In February 2005, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock. The dividend reflects a $0.01 increase from the $0.15 quarterly cash dividend Ryder has paid since 1989.

      In the normal course of business, Ryder is exposed to fluctuations in interest rates, foreign currency exchange rates and fuel prices. We manage these exposures in several ways, including, in certain circumstances, the use of a variety of derivative financial instruments when deemed prudent. We do not

enter into leveraged derivative financial transactions or use derivative financial instruments for trading purposes.

      Exposure to market risk for changes in interest rates relates primarily to debt obligations. Our interest rate risk management program objective is to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. We manage our exposure to interest rate risk through the proportion of fixed-rate and variable-rate debt in the total debt portfolio. From time to time, we also use interest rate swap and cap agreements to manage our fixed rate and variable rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. See Note 14, “Financial Instruments and Risk Management,” in the Notes to Consolidated Financial Statements for further discussion on outstanding interest rate swap and cap agreements at December 31, 2004.

      At December 31, 2004, we had $1.1 billion of fixed-rate debt (excluding capital leases) with a weighted-average interest rate of 6.3% and a fair value of $1.2 billion, including the effects of interest rate swaps. A hypothetical 10% decrease or increase in the December 31, 2004 market interest rates would impact the fair value of our fixed-rate debt by approximately $37 million. At December 31, 2003, we had $1.1 billion of fixed-rate debt (excluding capital leases) with a weighted-average interest rate of 6.6% and a fair value of $1.2 billion, including the effects of interest rate swaps. A hypothetical 10% decrease or increase in the December 31, 2003 market interest rates would impact the fair value of our fixed-rate debt by approximately $48 million. We estimated the fair value of derivatives based on dealer quotations.

      At December 31, 2004, we had $607 million of variable-rate debt, including the effects of interest rate swaps, which effectively changed $285 million of fixed-rate debt instruments with a weighted-average interest rate of 6.7% to LIBOR-based floating rate debt at a current weighted-average interest rate of 4.6%. Changes in the fair value of the interest rate swaps are offset by changes in the fair value of the debt instruments and no net gain or loss is recognized in earnings. At December 31, 2004, the fair value of our interest rate swap agreements totaled $5 million. At December 31, 2003, we had $588 million of variable-rate debt, including the effects of interest rate swaps, which effectively changed $322 million of fixed-rate debt instruments with a weighted-average interest rate of 6.7% to LIBOR-based floating rate debt at a current weighted-average interest rate of 3.0%. The fair value of our interest rate swap agreements at December 31, 2003 totaled $14 million. A hypothetical 10% increase in market interest rates would impact 2005 pre-tax earnings by approximately $2 million.

      Exposure to market risk for changes in foreign currency exchange rates relates primarily to foreign operations’ buying, selling and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. We manage our exposure to foreign currency exchange rate risk related to our foreign operations’ buying, selling and financing in currencies other than local currencies by naturally offsetting assets and liabilities not denominated in local currencies. We also use foreign currency option contracts and forward agreements from time to time to hedge foreign currency transactional exposure. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries, since we generally have no near-term intent to repatriate funds from such subsidiaries. At December 31, 2004 and 2003, we had a $78 million cross-currency swap used to hedge our net investment in a foreign subsidiary and for which we recognized a liability equal to its fair value of $16 million and $9 million, respectively. At December 31, 2004, we also had forward foreign currency exchange contracts with an aggregate fair value of $0.1 million. The potential loss in fair value for such instruments from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $9 million and $7 million at December 31, 2004 and 2003, respectively. We estimated the fair values of derivatives based on dealer quotations.

      Exposure to market risk for fluctuations in fuel prices relates to a small portion of our service contracts for which the cost of fuel is integral to service delivery and the service contract does not have a mechanism to adjust for increases in fuel prices. At December 31, 2004, we had various fuel purchase arrangements in place to ensure delivery of fuel at market rates in the event of fuel shortages. We are exposed to fluctuations in fuel prices in these arrangements since none of the arrangements fix the price of fuel to be purchased. Increases and decreases in the price of fuel are generally passed on to our customers

and have only a minor effect on profitability. We believe the exposure to fuel price fluctuations would not materially impact Ryder’s results of operations, cash flows or financial position.

ENVIRONMENTAL MATTERS

      The operations of Ryder involve storing and dispensing petroleum products, primarily diesel fuel, regulated under environmental protection laws. These laws require us to eliminate or mitigate the effect of such substances on the environment. In response to these requirements, we continually upgrade our operating facilities and implement various programs to detect and minimize contamination.

      Capital expenditures related to these programs totaled approximately $2 million in 2004, $1 million in 2003 and $1 million in 2002. We incurred environmental expenses of $10 million, $12 million and $10 million in 2004, 2003 and 2002, respectively, which included remediation costs as well as normal recurring expenses, such as licensing, testing and waste disposal fees. Based on current circumstances and the present standards imposed by government regulations, environmental expenses and related capitalized costs should not increase materially from 2004 levels in the near term.

      The ultimate cost of our environmental liabilities cannot presently be projected with certainty due to the presence of several unknown factors, primarily the level of contamination, the effectiveness of selected remediation methods, the stage of management’s investigation at individual sites and the recoverability of such costs from third parties. Based upon information presently available, we believe that the ultimate disposition of these matters, although potentially material to the results of operations in any single year, will not have a material adverse effect on Ryder’s financial condition or liquidity. See Note 20, “Environmental Matters” in the Notes to Consolidated Financial Statements for further discussion.

CRITICAL ACCOUNTING ESTIMATES

      The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. Certain of these policies require the application of subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and other factors that we believe to be reasonable under the circumstances. Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely, can result in a material impact on Ryder’s financial condition and operating results in the current and future periods. We periodically review the development, selection and disclosure of these critical accounting estimates with Ryder’s Audit Committee.

      The following discussion, which should be read in conjunction with the descriptions in the Notes to Consolidated Financial Statements, is furnished for additional insight into certain accounting estimates that we consider to be critical.

      Depreciation and Residual Value Guarantees: We periodically review and adjust the residual values and useful lives of revenue earning equipment of our FMS business segment as described in Note 1, “Summary of Significant Accounting Policies — Revenue Earning Equipment, Operating Property and Equipment and Depreciation,” and “Summary of Significant Accounting Policies — Residual Value Guarantees” in the Notes to Consolidated Financial Statements. Reductions in residual values (i.e., the price at which we ultimately expect to dispose of revenue earning equipment) or useful lives will result in an increase in depreciation expense over the life of the equipment. We review residual values and useful lives of revenue earning equipment on an annual basis or more often if deemed necessary for specific groups of our revenue earning equipment. Reviews are performed based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage. We consider factors such as current and expected future market price trends on used vehicles, expected life of vehicles included in the fleet and extent of alternative uses for leased vehicles (e.g., rental fleet, and SCS and DCC applications). As a result, future depreciation expense rates are subject to change based upon changes in these factors. Based

on the mix of revenue earning equipment at December 31, 2004, a 10% decrease in expected vehicle residual values would increase depreciation expense in 2005 by approximately $85 million.

      Ryder also leases vehicles under operating lease agreements. Certain of these agreements contain limited guarantees for a portion of the residual values of the equipment. Results of the reviews described above for owned equipment are also applied to equipment under operating lease. The amount of residual value guarantees expected to be paid is recognized as rent expense over the expected remaining term of the lease. At December 31, 2004, total liabilities for residual value guarantees of $6 million were included in “Accrued expenses” (for those payable in less than one year) and in “Other non-current liabilities.” While we believe that the amounts are adequate, changes to management’s estimates of residual value guarantees may occur due to changes in the market for used vehicles, the condition of the vehicles at the end of the lease and inherent limitations in the estimation process. Based on the existing mix of vehicles under operating lease agreements at December 31, 2004, a 10% decrease in expected vehicle residual values would increase rent expense in 2005 by approximately $3 million.

      Pension Plans: We apply actuarial methods to determine the annual net periodic pension expense and pension plan liabilities on an annual basis. Each December, we review actual experience compared with the more significant assumptions used and make adjustments to our assumptions, if warranted. In determining our annual estimate of periodic pension cost, we are required to make an evaluation of critical factors such as discount rate, expected long-term rate of return, expected increase in compensation levels, retirement rate and mortality. Discount rates are based upon a duration analysis of expected benefit payments and the equivalent average yield for high quality corporate fixed income investments as of our December 31 annual measurement date. For 2004, in order to provide a more accurate estimate of the discount rate relevant to our plan, we used models that match projected benefits payments of our primary U.S. plan to coupons and maturities from a hypothetical portfolio of high quality corporate bonds. This method resulted in a discount rate about 0.15% higher than our prior year method. Long-term rate of return assumptions are based on actuarial review of our asset allocation strategy and long-term expected asset returns. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions. The rate of increase in compensation levels is reviewed with the actuaries based upon actual experience. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality.

      Accounting guidance applicable to pension plans does not require immediate recognition of the effects of a deviation between these assumptions and actual experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted. Although this netting occurs outside the basic financial statements, disclosure of the net amount is presented as an unrecognized net actuarial gain or loss in Note 19, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements. We have an unrecognized loss of $371 million at the end of 2004 compared with a loss of $369 million at the end of 2003. The increase in the net actuarial loss in 2004 results from actuarial losses associated with a reduction in discount rates and updates to our mortality estimates, offset in part by assets earning a rate of return above the assumed rates and the amortization of the opening balance. A portion of the unrecognized actuarial loss will be amortized into earnings in 2005. The effect on years beyond 2005 will depend substantially upon the actual experience of our plans.

      Disclosure of the significant assumptions used in arriving at the 2004 net pension expense is presented in Note 19, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements. A sensitivity analysis of projected 2005 net pension expense to changes in key underlying assumptions for our primary plan, the U.S. pension plan, is presented below.

      Self-Insurance Accruals: We use a variety of statistical and actuarial methods that are widely used and accepted in the insurance industry to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as frequency and severity of claims, claim development and payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. On an annual basis, third-party actuaries perform a separate analysis of our self-insurance accruals for reasonableness. Our estimates may be impacted by such factors as increases in the market price for medical services, unpredictability of the size of jury awards and limitations inherent in the estimation process. While we believe that self-insurance accruals are adequate, there can be no assurance that changes to our estimates may not occur. Based on self-insurance accruals at December 31, 2004, a 5% adverse change in actuarial claim loss estimates would increase operating expense in 2005 by approximately $12 million.

      Goodwill Impairment: We assess goodwill for impairment, as described in Note 1, “Summary of Significant Accounting Policies — Goodwill and Other Intangible Assets,” in the Notes to Consolidated Financial Statements, on an annual basis or more often if deemed necessary. To determine whether goodwill impairment indicators exist, we are required to assess the fair value of the reporting unit and compare it to the carrying value. A reporting unit is a component of an operating segment for which discrete financial information is available and management regularly reviews its operating performance. Our valuation of fair value for each reporting unit is determined based on a discounted future cash flow model. Estimates of future cash flows are dependent on our knowledge and experience about past and current events and assumptions about conditions we expect to exist. These assumptions are based on a number of factors including future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS reporting units are dependent on several key customers or industry sectors. While we believe our estimates of future cash flows are reasonable, there can be no assurance that a deterioration in economic conditions, customer relationships or adverse changes to expectations of future performance will not occur, resulting in a goodwill impairment loss.

      In late 2003, a key customer contract of our SCS-U.K. reporting unit was not renewed which caused us to assess whether this event resulted in an impairment indicator. In light of the profitability of the customer account relative to the entire reporting unit, we did not consider it more likely than not that this event would result in a reduction of our SCS-U.K. reporting unit fair value below its carrying amount. Since that time, we have performed our annual impairment test for the SCS-U.K. reporting unit resulting in no goodwill impairment. There can be no assurance that a deterioration in the economic conditions, customer relationships or adverse changes to expectations of future performance of our SCS-U.K. reporting unit or any other reporting unit will not result in a goodwill impairment loss. At December 31, 2004, goodwill totaled $158 million, of which $14 million related to our SCS-U.K. reporting unit.

      Income Taxes: Ryder’s overall tax position is complex and requires careful analysis by management to estimate the expected realization of income tax assets and liabilities.

      Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements is different than that reported in the tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are timing differences, such as depreciation expense. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which we have already recorded the tax benefit in the financial statements. We record a valuation allowance for deferred tax assets to reduce such assets to amounts expected to be realized. At December 31, 2004 and 2003, the deferred tax valuation allowance principally attributed to foreign tax loss carryforwards in the SCS business segment was $12 million and $10 million, respectively. In determining the required level of valuation allowance, we consider whether it is more likely than not that all or some portion of deferred tax assets will not be realized. This assessment is based on management’s expectations as to whether sufficient taxable income of an appropriate character will be realized within tax carryback and carryforward periods. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and