<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1998
---------------------------------------------------
Commission File Number 1-7654
--------------------------------------------------------
XTRA CORPORATION
--------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-0954158
------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 State Street, Boston, Massachusetts 02109
-----------------------------------------------------------------------------
(Address of principal executive offices)
(617) 367-5000
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- --------------------------------------- ----------------------------
Common Stock, Par Value 15,372,903
$.50 Per Share
<PAGE>
XTRA CORPORATION AND SUBSIDIARIES
---------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
---------------------
Management Representation............................ 3
Consolidated Balance Sheets June 30, 1998 and
September 30, 1997 ................................. 4
Consolidated Income Statements For the Three Months
and Nine Months Ended June 30, 1998 and 1997........ 5
Consolidated Statements of Cash Flows For the Nine
Months Ended June 30, 1998 and 1997................. 6
Consolidated Statements of Stockholders' Equity
For the Period September 30, 1996
Through June 30, 1998............................... 7
Notes to Consolidated Financial Statements........... 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 12
Part II. Other Information
-----------------
Item 5. Other Matters.............................. 19
Item 6. Exhibits and Reports on Form 8-K........... 21
Signatures.......................................... 22
Exhibit Index....................................... 23
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
------------------------------
XTRA CORPORATION AND SUBSIDIARIES
---------------------------------
MANAGEMENT REPRESENTATION
-------------------------
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that the disclosures are adequate
to make the information presented not misleading.
The Board of Directors carries out its responsibility for the financial
statements included herein through its Audit Committee, composed of non-employee
Directors. During the year, the Committee meets periodically with both
management and the independent public accountants to ensure that each is
carrying out its responsibilities. The independent public accountants have full
and free access to the Audit Committee and meet with its members, with and
without management being present, to discuss auditing and financial reporting
matters.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual Report
on Form 10-K.
This financial information reflects, in the opinion of management, all
adjustments necessary to present fairly the results for the interim periods.
Such adjustments consist of only normal recurring adjustments. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
3
<PAGE>
XTRA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30,
1998 September 30,
(Unaudited) 1997(1)
----------- -------------
<S> <C> <C>
ASSETS
Property and equipment $ 2,163 $ 2,112
Accumulated depreciation (732) (658)
------- -------
Net property and equipment 1,431 1,454
Lease contracts receivable 44 43
Trade receivables, net 60 65
Other assets 16 19
Cash 7 4
------- -------
$ 1,558 $ 1,585
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt $ 818 $ 892
Deferred income taxes 276 252
Accounts payable and accrued expenses 72 81
------- -------
Total liabilities 1,166 1,225
------- -------
Commitments and contingencies:
Stockholders' equity:
Common stock, par value $.50 per share; authorized:
30,000,000 shares; issued and outstanding;
15,372,903 shares at June 30, 1998
and 15,276,600 at September 30, 1997 8 8
Capital in excess of par value 57 52
Retained earnings 335 304
Cumulative translation adjustment (8) (4)
------- -------
Total stockholders' equity 392 360
------- -------
$ 1,558 $ 1,585
======= =======
</TABLE>
/(1)/ Derived from XTRA Corporation's audited September 1997 financial
statements.
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
XTRA CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues $ 112 $ 105 $ 342 $ 318
Operating Expenses
Depreciation on rental equipment 38 37 113 110
Rental equipment operating expenses 29 27 83 80
Selling and administrative expense 11 11 33 32
-------- -------- ------- --------
78 75 229 222
-------- -------- ------- --------
Operating income 34 30 113 96
Interest expense 14 16 44 47
-------- -------- ------- --------
Pretax income 20 14 69 49
Provision for income taxes 8 5 28 20
-------- -------- ------- --------
Net income $ 12 $ 9 $ 41 $ 29
======== ======== ======= ========
Basic earnings per common share $0.80 $0.56 $2.69 $1.90
Basic common shares outstanding (in millions) 15.3 15.3 15.3 15.3
Diluted earnings per common share $0.80 $0.56 $2.68 $1.90
Diluted common shares outstanding (in millions) 15.4 15.3 15.4 15.3
Cash dividends declared per share $0.22 $0.20 $0.64 $0.58
</TABLE>
The accompanying notes are in integral part of these consolidated financial
statements.
5
<PAGE>
XTRA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operations:
Net income $ 41 $ 29
Add non-cash income and expense items:
Depreciation and amortization, net 113 110
Deferred income taxes 24 18
Bad debt expense 4 4
Add other cash items:
Net change in receivables, other assets,
accounts payable and accrued expenses (10) (20)
Cash receipts from lease contracts
receivable 19 15
Recovery of property and equipment net
book value 20 25
----- -----
Total cash provided from operations 211 181
----- -----
Cash used for investment activities:
Additions to property and equipment (129) (182)
----- -----
Total cash used for investing activities (129) (182)
----- -----
Cash flows from financing activities:
Borrowings of long-term debt - 72
Payments of long-term debt (74) (51)
Options exercised, net of related tax benefits 5 -
Repurchase of common stock, net - (12)
Dividends paid (10) (9)
----- -----
Total cash used for financing activities (79) -
----- -----
Net increase (decrease) in cash 3 (1)
Cash at beginning of period 4 8
----- -----
Cash at end of period $ 7 $ 7
===== =====
Total interest paid $ 53 $ 55
Total income taxes paid $ 3 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
XTRA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(MILLIONS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common
Stock Capital in Cumulative
$0.50 Excess of Retained Translation
Par Value Par Value Earnings Adjustment
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 $ 8 $ 64 $ 273 $ (3)
Net income -- -- 43 --
Common stock cash dividends
declared at $.78 per share -- -- (12) --
Options exercised and related tax benefits -- 1 -- --
Common stock repurchased -- (13) -- --
Translation adjustment -- -- -- (1)
----- ----- ----- -----
Balance at September 30, 1997 8 52 304 (4)
Net income -- -- 41 --
Common stock cash dividends
declared at $.64 per share -- -- (10) --
Options exercised and related tax benefits -- 5 -- --
Translation adjustment -- -- -- (4)
----- ----- ----- -----
Balance at June 30, 1998 $ 8 $ 57 $ 335 $ (8)
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consoliated financial
statements.
7
<PAGE>
XTRA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(1) The consolidated financial statements include the accounts of XTRA
Corporation and its wholly-owned subsidiaries (the "Company"). All
material intercompany accounts and transactions have been eliminated.
Certain amounts in prior period financial statements have been reclassified
to be consistent with the current period's presentation.
(2) The effective income tax rates used in the interim financial statements are
estimates of the fiscal years' rates. The effective income tax rate for
fiscal 1997 was 40%. For the nine months ended June 30, 1998, the Company
recorded a provision for income taxes using an estimated effective income
tax rate of 40%. The Company's effective income tax rate for fiscal 1997
and its estimated effective income tax rate for fiscal 1998 are higher than
the statutory U.S. Federal income tax rate due primarily to state income
taxes.
(3) The Company's long-term debt includes a current portion of $51 million at
June 30, 1998 and $57 million at September 30, 1997.
(4) XTRA Corporation's assets consist substantially of the aggregate assets,
liabilities, earnings and equity of XTRA, Inc., a wholly-owned direct
subsidiary. In addition, XTRA Corporation generally guarantees the debt of
XTRA, Inc.
The condensed consolidated financial data for XTRA, Inc. included in the
consolidated financial information of the Company is summarized below:
<TABLE>
<CAPTION>
Selected Balance Sheet Data: June 30, September 30,
- --------------------------- 1998 1997
(Millions of dollars) -------- -------------
<S> <C> <C>
Net property and equipment $1,431 $1,454
Receivables, net 104 108
Other assets 23 23
------ ------
Total assets $1,558 $1,585
====== ======
Debt $ 818 $ 892
Deferred income taxes 276 252
Other liabilities 77 86
------ ------
Total liabilities 1,171 1,230
------ ------
Stockholders' equity 387 355
------ ------
Total liabilities and stockholders' equity $1,558 $1,585
====== ======
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Selected Income Statement Data:
- -------------------------------
(Millions of dollars)
For the three months ended June 30, 1998 1997
------ ------
<S> <C> <C>
Revenues $112 $105
Pretax income 20 14
Net income 12 9
<CAPTION>
For the nine months ended June 30, 1998 1997
------ ------
<S> <C> <C>
Revenues $342 $318
Pretax income 68 49
Net income 41 29
</TABLE>
(5) In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 supersedes
Accounting Principles Board Opinion No. 15 (APB 15) and establishes new
standards for the presentation of earnings per share. Under SFAS 128,
"Basic Earnings Per Share" excludes dilution and is computed by dividing
income available to common stockholders by weighted average shares
outstanding. "Diluted Earnings Per Share" reflects the effect of all other
dilutive outstanding common stock equivalents and is computed similarly to
primary earnings per share according to APB 15.
9
<PAGE>
The following tables provide a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations, as
required by SFAS 128:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (in millions)(numerator) $ 12 $ 9 $ 41 $ 29
====== ====== ====== ======
Computation of Basic Shares Outstanding (in
- -------------------------------------------
thousands, except per share amounts)
- ------------------------------------
Weighted average number of basic common
shares outstanding (denominator) 15,321 15,259 15,301 15,270
====== ====== ====== ======
Basic earnings per common share $ 0.80 $ 0.56 $ 2.69 $ 1.90
====== ====== ====== ======
Computation of Diluted Shares Outstanding
- -----------------------------------------
(in thousands, except per share amounts)
- ----------------------------------------
Weighted average common shares outstanding 15,321 15,259 15,301 15,270
Common stock equivalents for diluted
common shares outstanding: 65 18 71 15
------ ------ ------ ------
Weighted average number of diluted common
shares outstanding (denominator) 15,386 15,277 15,372 15,285
====== ====== ====== ======
Diluted earnings per share $ 0.80 $ 0.56 $ 2.68 $ 1.90
====== ====== ====== ======
</TABLE>
(6) On June 19, 1998, XTRA Corporation (the "Company") entered into an
Agreement and Plan of Merger and Recapitalization, dated as of June 18,
1998(the "Recapitalization Merger Agreement"), between the Company and
Wheels MergerCo LLC, a newly organized Delaware limited liability company
("MergerCo") formed solely for the purpose of consummating the transactions
contemplated by the Recapitalization Merger Agreement by (i) Apollo
Management IV, L.P., on behalf of its managed funds ("Apollo"), and (ii)
Atlas Capital Partners LLC ("Atlas"), an affiliate of Interpool, Inc.
("Interpool") (collectively, together with Apollo, the "Investors").
10
<PAGE>
The Recapitalization Merger Agreement provides, among other things, that
MergerCo will be merged with and into the Company (the "Merger"), with the
Company as the surviving corporation, and that the owner of each share of
common stock, par value $.50 per share, of the Company (the "Company Common
Stock") issued and outstanding immediately prior to the effective time of
the Merger (other than shares of Company Common Stock owned by the Company
or any subsidiary of the Company, which will be canceled and retired, and
other than shares of Company Common Stock subject to appraisal rights) can
elect either to receive $65.00 in cash for that share or to retain that
share, with cash to be paid in lieu of fractional shares of Company Common
Stock. This election is subject to proration so that upon consummation of
the Merger, the existing holders of the Company Common Stock will retain
500,000 shares of the Company Common Stock (constituting approximately 3%
of shares of Company Common Stock currently outstanding and 10% of the
Company Common Stock outstanding after the Merger) and will receive $65.00
per share in cash for the balance of the Company Common Stock
(approximately 97% of shares of Company Common Stock currently
outstanding). Pursuant to the Merger, the interests in MergerCo, all of
which are owned by the Investors, will be converted into 4,500,000 shares
of Company Common Stock, which will represent 90% of the outstanding
Company Common Stock after the Merger.
The Recapitalization Merger Agreement has been approved by the respective
boards of the Company and MergerCo, and is subject to certain conditions,
including the approval of the Company's shareholders, the expiration of
antitrust regulatory waiting periods, qualification of the transaction as a
recapitalization for financial reporting purposes, and the completion of
financing arrangements. The Recapitalization Merger Agreement was filed
with XTRA Corporation's report on Form 8-K dated June 26, 1998.
(7) The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income in general purpose financial
statements. Statement 130 is effective for fiscal years beginning after
December 15, 1997. Adoption of this standard will not impact the Company's
consolidated financial position, results of operations, or cash flows, and
any effect will be limited to the form and content of the Company's
disclosures.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which requires companies to present segment information based upon the way
that management organizes the segments within a company. Statement 131 is
effective for periods beginning after December 15, 1997. In the initial
year of its application, this statement need not be applied to interim
financial statements. Adoption of this standard will not impact the
Company's consolidated financial position, results of operations, or cash
flows, and any effect will be limited to the form and content of the
Company's disclosures.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The discussion below contains certain forward-looking statements, including
estimates of economic and industry conditions, equipment utilization, and
capital expenditures. Actual results may vary from those contained in such
forward-looking statements. See "Cautionary Statements for Purposes of the
`Safe Harbor' Provisions of the Private Securities Litigation Act of 1995"
contained in Part II, Item 5.
XTRA leases, primarily on an operating basis, freight transportation
equipment including over-the-road trailers, marine containers, intermodal
trailers, chassis, and domestic containers. XTRA's equipment utilization, lease
rates, and therefore, profitability, are impacted by the supply of and demand
for available equipment, the level of economic activity in North America, world
trade activity, the actions of its competitors, and other factors in the freight
transportation industry. Utilization and profitability are usually seasonally
lower in the second and third fiscal quarters than in the first and fourth
fiscal quarters. In general, the Company's receivable collection experience has
been good. However industry downturns tend to lengthen the collection period of
certain receivables. The discussion and data below are presented on a
consolidated basis.
The Company's pretax profits have been cyclical, principally due to the
variability of the Company's revenues and the high percentage of fixed costs.
To moderate this cyclicality, the Company attempts to maintain a balance between
the amount of equipment leased on a per diem and term basis and maintains a mix
of various types of freight transportation equipment available for lease. The
Company has historically maintained a high proportion of its debt at fixed rates
to reduce the impact of fluctuations in interest rates.
Revenues are a function of lease rates and working units; the latter
depends on fleet size and equipment utilization. Utilization, the ratio of
revenue-earning units to the total fleet, is derived from billing information,
usage reports and other information from customers, assumptions based on
historical experience, and equipment inventories taken at Company depots, and is
an approximation. Utilization is impacted by the supply of and demand for
available equipment, the level of economic, activity in North America, and world
trade activity.
12
<PAGE>
The Three Months Ended June 30, 1998
- -------------------------------------
Versus the Three Months Ended June 30, 1997:
- --------------------------------------------
Revenues
- --------
The following table sets forth the Company's average equipment utilization
(dollar-weighted by net investment in equipment), average fleet size in units,
and average net investment in revenue equipment for the three months ended June
30, 1998 and 1997. The Company's fleet size and average net investment include
equipment owned by the Company, equipment leased-in from third parties under
operating and capital leases, and equipment leased to third parties under
finance leases.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1998 1997
------ ------
<S> <C> <C>
North America:
- --------------
Utilization 86% 84%
Units 132,000 130,000
Net investment in equipment (in millions) $ 1,016 $ 1,001
International:
- --------------
Utilization 82% 79%
Units 165,000 159,000
Net investment in equipment (in millions) $ 402 $ 418
Consolidated:
- -------------
Utilization 84% 83%
Units 297,000 289,000
Net investment in equipment (in millions) $ 1,418 $ 1,419
</TABLE>
Revenues increased by 7% or $7 million for the three months ended June 30,
1998 over the same period a year ago. The Company's average equipment
utilization improved from 83% in the third quarter of fiscal year 1997 to 84% in
the third quarter of fiscal 1998. Average net investment in equipment decreased
slightly by $1 million from the same quarter of the prior year due primarily to
a decline in the net investment in the marine container fleet. For the full
fiscal year 1998, average equipment utilization is expected to be higher than
the 1997 average of 84%.
The Company's North American revenues increased $6 million from the same
quarter a year ago due to strong levels of domestic freight leading to more
working units, as well as an improvement in over-the-road lease rates. The
Company's North American utilization averaged 86% in the third quarter of fiscal
1998, as compared to 84% in the comparable prior year period. Increasing demand
for equipment was reflected in increased truck tonnage, which is an indicator of
domestic freight levels in the U.S.
13
<PAGE>
The Company's North American over-the-road trailer fleet averaged 76,000
units, or 51% of average net investment in equipment in the third quarter of
fiscal year 1998, compared to 74,000 units, or 47% of average net investment in
equipment, in the comparable prior year period. The Company continues to review
its North American intermodal trailer fleet as the railroads shift toward more
domestic container usage. Given the reduced demand for intermodal trailers and
the expected continued trend toward domestic containers from trailers, XTRA
believes its fleet is appropriately sized. XTRA's intermodal trailer fleet
averaged 23,000 units, or 11% of average net investment in equipment in the
third quarter of 1998, versus 23,000 units, or 13% of average net investment in
equipment, in the comparable prior year period.
International revenues increased $1 million from the same quarter of the
prior year, due primarily to more working units. Equipment utilization improved
to 82% from 79% in the comparable prior year period. Marine container lease
rates, which had been experiencing a steady decline since fiscal year 1996 or
earlier, remained relatively flat during the most recent twelve month period.
Lease rates in the current quarter remain relatively unchanged compared to the
comparable prior year period. The Company's average international fleet size
increased to 165,000 units in the third quarter of fiscal 1998 from 159,000
units in the comparable prior year period.
Operating Expenses
- ------------------
Total operating expenses increased by 4% or $3 million for the three months
ended June 30, 1998 from the same period of fiscal 1997. Depreciation expense
increased by 3% or $1 million due to a larger fleet size. Rental equipment
operating expense increased by 7% or $2 million from the comparable prior year
period due primarily to higher tire and facilities expenses associated with
increased working units.
Interest Expense
- ----------------
For the three months ended June 30, 1998, interest expense decreased by 13%
or $2 million from the same period of fiscal 1997, due primarily to a decrease
in average debt outstanding.
Pretax Income
- -------------
Pretax earnings increased 43% or $6 million for the three months ended June
30, 1998 over the same period a year ago primarily due to higher equipment
utilization.
Provision for Income Taxes
- --------------------------
The effective income tax rates used in the interim financial statements are
estimates of the fiscal years' rates. The effective income tax rate for fiscal
1997 was 40%. For the three months ended June 30, 1998, the Company has
recorded a provision for income taxes using an estimated effective income tax
rate of 40%. The Company's effective income tax rate for fiscal 1997 and its
estimated effective income tax rate for fiscal 1998 are higher than the
statutory U.S. Federal income tax rate due primarily to state income taxes.
14
<PAGE>
The Nine Months Ended June 30, 1998
- ------------------------------------
Versus the Nine Months Ended June 30, 1997:
- -------------------------------------------
Revenues
- ---------
The following table sets forth the Company's average equipment utilization
(dollar-weighted by net investment in equipment), average fleet size in units,
and average net investment in revenue equipment for the nine months ended June
30, 1998 and 1997. The Company's fleet size and average net investment include
equipment owned by the Company, equipment leased-in from third parties under
operating and capital leases, and equipment leased to third parties under
finance leases.
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1998 1997
------ ------
<S> <C> <C>
North America:
- --------------
Utilization 88% 85%
Units 132,000 130,000
Net investment in equipment (in millions) $ 1,020 $ 986
International:
- --------------
Utilization 83% 78%
Units 164,000 156,000
Net investment in equipment (in millions) $ 407 $ 418
Consolidated:
- -------------
Utilization 86% 83%
Units 296,000 286,000
Net investment in equipment (in millions) $ 1,427 $ 1,404
</TABLE>
Revenues increased by 8% or $24 million for the nine months ended June 30,
1998 over the same period a year ago. The Company's average equipment
utilization improved from 83% in the first nine months of fiscal year 1997 to
86% in the first nine months of fiscal 1998. Average net investment in
equipment increased by $23 million from the same period of the prior year due
primarily to an increase in the net investment in over-the-road trailers, which
was partially offset by a decline in the net investment in the intermodal
equipment and marine container fleets. For the full fiscal year 1998, average
equipment utilization is expected to be higher than the 1997 average of 84%.
The Company's North American revenues increased $20 million from the same
period a year ago due to strong levels of domestic freight leading to more
working units, as well as an improvement in lease rates. The Company's North
American utilization averaged 88% in the first nine months of fiscal 1998, as
compared to 85% in the comparable prior year period. Increasing demand for
equipment was reflected in increased truck tonnage, an indicator of domestic
freight levels in the U.S.
15
<PAGE>
The Company's North American over-the-road trailer fleet averaged 76,000
units, or 50% of average net investment in equipment in the first nine months of
fiscal year 1998, compared to 74,000 units, or 46% of average net investment in
equipment, in the comparable prior year period. The Company continues to review
its North American intermodal trailer fleet as the railroads shift toward more
domestic container usage. Given the reduced demand for intermodal trailers and
the expected continued trend toward domestic containers from trailers, XTRA
believes its fleet is appropriately sized. XTRA's intermodal trailer fleet
averaged 23,000 units, or 11% of average net investment in equipment in the
first nine months of 1998, versus 23,000 units, or 13% of average net investment
in equipment, in the comparable prior year period.
International revenues increased $4 million from the same period of the
prior year. An increase in revenues attributable to more working units was
partially offset by lower average effective lease rates. Equipment utilization
improved to 83% from 78% in the comparable prior year period. Marine container
lease rates, which had been experiencing a steady decline since fiscal year 1996
or earlier, remained relatively flat during the most recent twelve month period.
Lease rates in the first nine months of fiscal year 1998 have declined compared
to the comparable prior year period. The Company's average international fleet
size increased to 164,000 units in the first nine months of fiscal 1998 from
156,000 units in the comparable prior year period.
Operating Expenses
- ------------------
Total operating expenses increased by 3% or $7 million for the nine months
ended June 30, 1998 from the same period of fiscal 1997. Depreciation expense
increased by 3% or $3 million due to a larger fleet investment. Rental
equipment operating expense increased by 4% or $3 million due primarily to
higher tire and facilities expenses associated with increased working unts.
Selling and administrative expenses increased by 3% or $1 million with no one
factor contributing significantly to the increase.
Interest Expense
- ----------------
Interest expense decreased by 6% or $3 million for the nine months ended
June 30, 1998 from the same period of fiscal 1997, due primarily to lower
average debt outstanding.
Pretax Income
- -------------
Pretax earnings increased 41% or $20 million for the nine months ended June
30, 1998 over the same period a year ago primarily due to higher equipment
utilization.
Provision for Income Taxes
- --------------------------
The effective income tax rates used in the interim financial statements are
estimates of the fiscal years' rates. The effective income tax rate for fiscal
1997 was 40%. For the nine months ended June 30, 1998, the Company has recorded
a provision for income taxes using an estimated effective income tax rate of
40%. The Company's effective income tax rate for fiscal 1997 and its estimated
effective income tax rate for fiscal 1998 are higher than the statutory U.S.
Federal income tax rate primarily due to state income taxes.
16
<PAGE>
Liquidity and Capital Resources
- -------------------------------
During the nine months ended June 30, 1998, the Company generated cash
flows from operations of $211 million. During the same period, XTRA invested
$129 million in property and equipment and paid dividends of $10 million. Net
debt outstanding (debt less cash) decreased $77 million.
As of August 4, 1998, committed capital expenditures for fiscal 1998
amounted to $204 million. Any additional capital expenditures for the remainder
of fiscal year 1998 will likely be modest. The Company has also committed
capital spending for fiscal year 1999 amounting to $41 million, reflecting
expected continued strong demand for over-the-road trailers.
As of July 31, 1998, XTRA Inc. had $532 million available for future
issuance under its $604 million Shelf Registration. As of July 31, 1998, the
Company had $191 million of unused credit available under its $300 million
Revolving Credit Agreement. However, as a result of the proposed Merger
announcement in June, the Company does not expect to be able to access the
public debt market. The Company expects its internally generated cash flow to
be sufficient to satisfy its capital needs pending closing or termination of the
Merger.
Recapitalization Merger
- -----------------------
On June 19, 1998, XTRA Corporation (the "Company") entered into an
Agreement and Plan of Merger and Recapitalization, dated as of June 18, 1998
(the "Recapitalization Merger Agreement"), between the Company and Wheels
MergerCo LLC, a newly organized Delaware limited liability company ("MergerCo")
formed solely for the purpose of consummating the transactions contemplated by
the Recapitalization Merger Agreement by (i) Apollo Management IV, L.P., on
behalf of its managed funds ("Apollo"), and (ii) Atlas Capital Partners LLC
("Atlas"), an affiliate of Interpool, Inc. ("Interpool") (collectively, together
with Apollo, the "Investors").
The Recapitalization Merger Agreement provides, among other things, that
MergerCo will be merged with and into the Company (the "Merger"), with the
Company as the surviving corporation, and that the owner of each share of common
stock, par value $.50 per share, of the Company (the "Company Common Stock")
issued and outstanding immediately prior to the effective time of the Merger
(other than shares of Company Common Stock owned by the Company or any
subsidiary of the Company, which will be canceled and retired, and other than
shares of Company Common Stock subject to appraisal rights) can elect either to
receive $65.00 in cash for that share or to retain that share, with cash to be
paid in lieu of fractional shares of Company Common Stock. This election is
subject to proration so that upon consummation of the Merger, the existing
holders of the Company Common Stock will retain 500,000 shares of the Company
Common Stock (constituting approximately 3% of shares of Company Common Stock
currently outstanding and 10% of the Company Common Stock outstanding after the
Merger) and will receive $65.00 per share in cash for the balance of the Company
Common Stock
17
<PAGE>
(approximately 97% of shares of Company Common Stock currently outstanding).
Pursuant to the Merger, the interests in MergerCo, all of which are owned by the
Investors, will be converted into 4,500,000 shares of Company Common Stock,
which will represent 90% of the outstanding Company Common Stock after the
Merger.
The Recapitalization Merger Agreement has been approved by the respective
boards of the Company and MergerCo, and is subject to certain conditions,
including the approval of the Company's shareholders, the expiration of
antitrust regulatory waiting periods, qualification of the transaction as a
recapitalization for financial reporting purposes, and the completion of
financing arrangements. The Recapitalization Merger Agreement was filed with
XTRA Corporation's report on Form 8-K dated June 26, 1998.
Year 2000
- ---------
The Company does not expect to incur significant costs during the next two
years to address the impact of the "Year 2000 problem" on its information
systems. The "Year 2000 problem," which is common to most corporations, concerns
the inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information as the year 2000
approaches. The Company has completed an assessment of the majority of its
systems and has developed specific workplans to address the issues. The Company
currently believes it will be able to modify or replace its affected systems in
time to minimize any detrimental effects on operations. The Company expects that
the costs it will incur to ensure its systems are Year 2000 compliant will not
be material to the Company's results of operations, liquidity, or consolidated
financial position. However, there can be no assurance that the systems of
other companies on which the Company's systems rely also will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's systems.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," which establishes standards for the reporting
and display of comprehensive income in general-purpose financial statements.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
Adoption of this standard will not impact the Company's consolidated financial
position, results of operations, or cash flows, and any effect will be limited
to the form and content of the Company's disclosures.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires companies to present segment information based upon the way that
management organizes the segments within a company. Statement 131 is effective
for periods beginning after December 15, 1997. In the initial year of its
application, this statement need not be applied to interim financial statements.
Adoption of this standard will not impact the Company's consolidated financial
position, results of operations, or cash flows, and any effect will be limited
to the form and content of the Company's disclosures.
18
<PAGE>
Part II - OTHER INFORMATION
-----------------------------
Item 5 - Other Matters
- ----------------------
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
- -------------------------------------------------------------------------
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- ------------------------------------------------
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements, including
estimates of economic and industry conditions, equipment utilization, and
capital expenditures, and such forward-looking statements do not take into
account the effects of the Merger. In addition, the Company may occasionally
make forward-looking statements and estimates such as forecasts and projections
of the Company's future performance or statements of management's plans and
objectives. These forward-looking statements may be contained in, among other
things, SEC filings and press releases made by the Company and in oral
statements made by the officers of the Company. Actual results could differ
materially from those contained in such forward-looking statements. Therefore,
no assurances can be given that the results in such forward-looking statements
will be achieved. Important factors that could cause the Company's actual
results (without taking into account the effects of the Merger) to differ from
those contained in such forward-looking statements include, among others, the
factors mentioned below. An additional risk factor is the Company's ability to
address the "Year 2000 problem" in a timely and efficient manner.
Variable Revenues and Operating Results
- ---------------------------------------
The Company's revenues may vary significantly from period to period while a high
percentage of its operating costs are fixed. As a result of the variability of
the Company's revenues and the Company's limited ability to reduce its fixed
operating costs, the Company's profitability may be cyclical and subject to
significant fluctuation from period-to-period. The Company's revenues are a
function of lease rates and working units; the latter depends on fleet size and
equipment utilization (the ratio of revenue earning equipment to the total
fleet). Some of the factors which affect lease rates and working units are
competition, economic conditions and world trade activity, the supply and demand
for available equipment, aggressive purchasing of equipment by the Company's
customers and competitors leading to an excess supply of equipment and reduced
lease rates and utilization, shifting traffic trends in the industry, severe
adverse weather conditions, strikes by transportation unions and other factors
in the freight transportation industry. The Company's fixed costs include
depreciation, a portion of rental equipment operating expenses and selling and
administrative expenses.
Availability of New Equipment
- -----------------------------
New equipment is built to the Company's specifications and reflects industry
standards and customer needs. The Company obtains new equipment from a number
of manufacturers. Certain of these manufacturers have consolidated and, in the
process, eliminated manufacturing
19
<PAGE>
facilities. These manufacturers are, in turn dependent on the prompt delivery
and supply of the components required to assemble the trailers, chassis and
containers. Although the Company has not recently experienced any significant
delay in delivery of equipment, historically delivery times have varied from
three to fifteen months from when the order is placed, and there can be no
assurance that equipment will be available at the times or of the types needed
by the Company. In addition, it is difficult to accurately predict demand for
the Company's equipment in future periods. As a result, the Company's
performance in a given period may be adversely affected because of its inability
to quickly increase fleet size because of extended back orders to take advantage
of unexpectedly strong demand.
Competition
- -----------
Leasing transportation equipment is a highly competitive business and is
affected by factors related to the transportation market. Lease terms and lease
rates, as well as availability, condition and size of equipment and customer
service are all important factors to the lessee. The Company has many
competitors, some of which have leasing fleets that are larger in size than the
Company's leasing fleet and some of which have greater resources. Various types
of transportation equipment compete for freight movement. Over-the-road
trailers, intermodal trailers, marine and domestic containers and railroad
rolling stock are all potential vehicles for the movement of freight.
Customer Consolidation
- ----------------------
Certain industries in which the Company competes, including trucking and
shipping, are in the process of consolidation. As a result of this
consolidation, the Company's customers may be better able to manage their
equipment requirements and may seek increased efficiencies through direct
ownership of equipment. In such event, the ratio of leased equipment to owned
equipment may decrease, which could reduce the overall market for the Company's
services.
Availability of Capital
- -----------------------
The acquisition of new equipment, both for growth as well as replacement of
older equipment, requires significant capital. In addition, over the past
several years, the Company has grown its fleet through acquisitions of other
companies such as Strick Lease, Inc. and Matson Leasing Company, Inc., requiring
additional capital. The Company plans to continue to pursue acquisition
opportunities. Historically, the Company generally has had available a variety
of sources to finance such expenditures and acquisitions at favorable rates and
terms. However, the availability of such capital depends heavily upon
prevailing market conditions, the Company's capital structure, and its credit
ratings. No assurances can be given that the Company will be able to obtain
sufficient financing on terms that are acceptable to it to fund its operations
and capital expenditures or to enable the Company to take advantage of favorable
acquisition opportunities.
20
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
- --- --------
Exhibit No. Description
- ----------- -----------
12.1 Statement of the calculation of earnings to fixed charges
for the nine months ended June 30, 1998 and 1997 for
XTRA Corporation
12.2 Statement of the calculation of earnings to fixed charges
for the nine months ended June 30, 1998 and 1997 for
XTRA, Inc.
27 Financial Data Schedule
27.1 Amended Financial Data Schedule for June 30, 1997
(b) Reports on Form 8-K
- --- -------------------
On June 26, 1998, a Current Report on Form 8-K was filed by the Company to
disclose information under Item 5, "Other Events", and providing copies of the
Agreement and Plan of Merger and Recapitalization dated as of June 18, 1998
between XTRA Corporation and Wheels MergerCo LLC, a newly organized Delaware
limited liability company newly formed by (i) Apollo Management IV, L.P., on
behalf of its managed funds, and (ii) Atlas Capital Partners LLC, an affiliate
of Interpool, Inc; various voting agreements between certain Stockholders of the
Company and Wheels MergerCo; and the press release of XTRA Corporation dated
June 19, 1998.
On August 6, 1998, a Current Report on Form 8-K was filed by the Company to
disclose certain financial information under Item 5, "Other Events", for the
fiscal third quarter ended June 30, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XTRA CORPORATION
---------------------------------
(Registrant)
Date: August 7, 1998 /s/ Michael J. Soja
-------------- ---------------------------------
Michael J. Soja
Vice President and Chief
Financial Officer
Date: August 7, 1998 /s/ Robert B. Blakeley
-------------- ---------------------------------
Robert B. Blakeley
Vice President and Controller
22
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description Page No.
- ----------- ----------- --------
12.1 Statement of the calculation of earnings to
fixed charges for the nine months ended
June 30, 1998 and 1997 for XTRA Corporation 24
12.2 Statement of the calculation of earnings to
fixed charges for the nine months
ended June 30, 1998 and 1997 for XTRA, Inc. 25
27 Financial Data Schedule 26
27.1 Amended Financial Data Schedule for June 30, 1997 27
<PAGE>
EXHIBIT 12.1
XTRA CORPORATION
STATEMENT OF THE CALCULATION OF EARNINGS TO FIXED CHARGES
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(MILLIONS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
EARNINGS
Income from operations before provision for
income taxes $ 69 $ 49
Add: Fixed charges (below) 44 47
---- ----
$113 $ 96
==== ====
FIXED CHARGES $ 44 $ 47
==== ====
Ratio of Earnings to Fixed Charges 2.6 2.0
==== ====
</TABLE>
Note: For purposes of computing the ratio of earnings to fixed charges,
earnings represent income from operations before taxes plus fixed
charges. Fixed charges for operations consist of interest on indebtedness
and the portion of rental expense which respresents interest.
<PAGE>
XTRA, INC.
STATEMENT OF THE CALCULATION OF EARNINGS TO FIXED CHARGES
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(MILLIONS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
EARNINGS
Income from operations before provision for income taxes $ 68 $ 49
Add: Fixed charges (below) 44 47
----- -----
$ 112 $ 96
===== =====
FIXED CHARGES $ 44 $ 47
===== =====
Ratio of Earnings to Fixed Charges 2.5 2.0
===== =====
</TABLE>
Note: For purposes of computing the ratio of earnings to fixed charges,
earnings represent income from operations before taxes plus fixed
charges. Fixed charges for operations consist of interest on
indebtedness and the portion of rental expense which represents
interest.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF XTRA CORPORATION FOR THE PERIOD
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 7,000,000
<SECURITIES> 0
<RECEIVABLES> 75,000,000
<ALLOWANCES> 15,000,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,163,000,000
<DEPRECIATION> 732,000,000
<TOTAL-ASSETS> 1,558,000,000
<CURRENT-LIABILITIES> 0
<BONDS> 818,000,000
0
0
<COMMON> 8,000,000
<OTHER-SE> 384,000,000
<TOTAL-LIABILITY-AND-EQUITY> 1,558,000,000
<SALES> 0
<TOTAL-REVENUES> 342,000,000
<CGS> 0
<TOTAL-COSTS> 229,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,000,000
<INCOME-PRETAX> 69,000,000
<INCOME-TAX> 28,000,000
<INCOME-CONTINUING> 41,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,000,000
<EPS-PRIMARY> 2.69
<EPS-DILUTED> 2.68
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF XTRA CORPORATION FOR THE PERIOD
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 7,000,000
<SECURITIES> 0
<RECEIVABLES> 70,000,000
<ALLOWANCES> 14,000,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,075,000,000
<DEPRECIATION> 636,000,000
<TOTAL-ASSETS> 1,571,000,000
<CURRENT-LIABILITIES> 0
<BONDS> 913,000,000
0
0
<COMMON> 8,000,000
<OTHER-SE> 340,000,000
<TOTAL-LIABILITY-AND-EQUITY> 1,571,000,000
<SALES> 0
<TOTAL-REVENUES> 318,000,000
<CGS> 0
<TOTAL-COSTS> 222,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,000,000
<INCOME-PRETAX> 49,000,000
<INCOME-TAX> 20,000,000
<INCOME-CONTINUING> 29,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,000,000
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
</TABLE>
