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 December 31, 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 February 3, 1999 - ----------------------- ------------------------------- Common Stock, Par Value 13,848,177 $.50 Per Share XTRA CORPORATION AND SUBSIDIARIES --------------------------------- INDEX ----- Page No. -------- Part I. Financial Information --------------------- Management Representation............................................................. 3 Consolidated Balance Sheets December 31, 1998 and September 30, 1998............................................ 4 Consolidated Income Statements For the Three Months Ended December 31, 1998 and 1997.......................................................... 5 Consolidated Statements of Cash Flows For the Three Months Ended December 31, 1998 and 1997.......................................................... 6 Consolidated Statements of Stockholders' Equity For the Period September 30, 1997 Through December 31, 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......................................................... 17 Item 6. Exhibits and Reports on Form 8-K...................................... 19 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............ 20 Signatures ...................................................................... 21 Exhibit Index ...................................................................... 22 2 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 consisting of only normal recurring adjustments necessary to present fairly the results for the interim periods. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. 3 XTRA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Millions of dollars, except per share amounts) December 31, 1998 September 30, (unaudited) 1998 (1) ------------------ ------------------ Assets - ------ Property and equipment $ 2,236 $ $ 2,200 Accumulated depreciation (772) (748) ------------------ ------------------ Net property and equipment 1,464 1,452 Lease contracts receivable 42 42 Trade receivables, net 66 64 Other assets 20 14 Cash - 3 ------------------ ------------------ $ 1,592 $ 1,575 ================== ================== Liabilities and Stockholders' Equity - ------------------------------------ Liabilities: Debt $ 801 $ 802 Deferred income taxes 298 287 Accounts payable and accrued expenses 63 78 ------------------ ------------------ Total liabilities 1,162 1,167 ------------------ ------------------ Commitments and contingencies: Stockholders' equity: Common stock, par value $.50 per share; authorized: 30,000,000 shares; issued and outstanding; 15,457,403 shares at December 31, 1998 and 15,372,903 shares at September 30, 1998 8 8 Capital in excess of par value 61 57 Retained earnings 372 354 Cumulative translation adjustment (11) (11) ------------------ ------------------ Total stockholders' equity 430 408 ------------------ ------------------ $ 1,592 $ 1,575 ================== ================== (1) Derived from XTRA Corporation's audited September 30, 1998 financial statements. The accompanying notes are an integral part of these consolidated financial statements. 4 XTRA CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS ------------------------------ (Millions of dollars, except per share amounts) (Unaudited) Three Months Ended December 31, 1998 1997 -------------- ------------- Revenues $ 123 $ 121 Operating expenses Depreciation on rental equipment 38 38 Rental equipment operating expenses 29 27 Selling and administrative expense 11 11 -------------- ------------- 78 76 -------------- ------------- Operating income 45 45 Interest expense 14 15 -------------- ------------- Income from operations before provision for income taxes and unusual item 31 30 Unusual item: costs related to terminated merger 1 - -------------- ------------- Pretax income 30 30 Provision for income taxes 12 12 -------------- ------------- Net income $ 18 $ 18 ============== ============= Earnings per basic common share $ 1.18 $ 1.18 Basic shares outstanding (in millions) 15.4 15.3 Earnings per diluted common share $ 1.18 $ 1.17 Diluted shares outstanding (in millions) 15.4 15.4 Cash dividends declared per share $ - $ 0.20 The accompanying notes are an integral part of these consolidated financial statements. 5 XTRA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (Millions of dollars, except per share amounts) (Unaudited) Three Months Ended December 31, 1998 1997 ------------- ------------- Cash flows from operations: Net income $ 18 $ 18 Add non-cash income and expense items: Depreciation and amortization, net 38 38 Deferred income taxes, net 11 10 Bad debt expense 1 1 Add other cash items: Net change in receivables, other assets, payable and accrued expenses (21) (18) Cash receipts from lease contracts receivable 6 6 Recovery of property and equipment net book value 4 6 ------------- ------------- Total cash provided from operations 57 61 ------------- ------------- Cash used for investment activities: Additions to property and equipment (59) (19) ------------- ------------- Total cash used for investing activities (59) (19) ------------- ------------- Cash flows from financing activities: Payments of debt (1) (39) Dividends paid - (3) ------------- ------------- Total cash used for financing activities (1) (42) ------------- ------------- Net decrease in cash (3) - Cash at beginning of period 3 4 ------------- ------------- Cash at end of period $ - $ 4 ============= ============= Total interest paid $ 23 $ 25 Total net income taxes paid $ - $ 1 The accompanying notes are integral part of these consolidated financial statements. 6 XTRA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ----------------------------------------------- Three months ended December 31, 1997 and 1998 --------------------------------------------- (Millions of dollars) (Unaudited) Common Stock Capital in Cumulative $ 0.50 Excess of Retained Translation Comprehensive Par Value Par Value Earnings Adjustment Income ------------ -------------- ----------- ----------- -------------- Balance at September 30, 1997 $ 8 $ 52 $ 304 $ (4) Net income - - 18 - $ 18 Foreign currency translation adjustment - - - (3) (3) Common stock cash dividends declared at $.64 per share - - (3) - ------------ -------------- ----------- ----------- -------------- Balance at December 31, 1997 8 $ 52 $ 319 $ (7) $ 15 ============ ============== =========== =========== ============== Balance at September 30, 1998 8 $ 57 $ 354 $ (11) Net income - - 18 - $ 18 Foreign currency translation adjustment - - - - - Shares granted under restricted stock plan, forfeitures, options exercised, and related tax benefits - 4 - - ------------ -------------- ----------- ----------- -------------- Balance at December 31, 1998 $ 8 $ 61 $ 372 $ (11) $ 18 ============ ============== =========== =========== ============== The accompanying notes are an integral part of these consolidated financial statements. 7 XTRA CORPORATION AND SUBSIDIARIES NOTES TO 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 1998 was 40%. For the three months ended December 31, 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 1998 and its estimated effective income tax rate for fiscal 1999 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 $80 million at December 31, 1998 and $72 million at September 30, 1998. (4) During the first quarter, the Company terminated its proposed merger with Wheels MergerCo. As a result, XTRA recorded approximately $1 million in the first quarter of 1999 as an unusual item on the income statement. These costs represent the balance of expenses related to the terminated merger. XTRA incurred a total of $1.4 million of costs of which approximately half were recorded during the fourth quarter of fiscal 1998. Excluding the one-time unusual charge of $1 million related to the terminated merger, net income and earnings per share would have been $19 million and $1.20 respectively for the three months ended December 31, 1998. (5) In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS 130), which requires companies to report all non-owner changes in equity during a period in a financial statement for the period in which they are recognized. The Company has chosen to disclose Comprehensive Income, which encompasses net income and foreign currency translation adjustments, in the Consolidated Statements of Stockholders' Equity. (6) 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. 8 The condensed consolidated financial data for XTRA, Inc. included in the consolidated financial information of the Company is summarized below: Selected Income Statement Data: - ------------------------------ (Millions of dollars) For the three months ended December 31, 1998 1997 -------------------- -------------------- Revenues $ 123 $ 121 Pretax income 31 30 Net income 19 18 Selected Balance Sheet Data: - ---------------------------- December 31, September 30, (Millions of dollars) 1998 1998 --------------------- --------------------- Net property and equipment $ 1,464 $ 1,452 Receivables, net 108 106 Other assets 15 17 --------------------- --------------------- Total assets $ 1,587 1,575 ===================== ===================== Debt $ 801 $ 802 Deferred income taxes 298 287 Other liabilities 67 84 --------------------- --------------------- Total liabilities 1,166 1,173 --------------------- --------------------- Stockholders' equity 421 402 --------------------- --------------------- Total liabilities and stockholders' equity $ 1,587 $ 1,575 ===================== ===================== 9 (7) The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations: Three Months Ended December 31, 1998 1997 ---------------- ------------- Net income (numerator) $ 18 $ 18 ================ ============= Computation of Basic Shares Outstanding (in - -------------------------------------------- thousands, except per share amounts) - ----------------------------------- Weighted average number of basic shares outstanding (denominator) 15,373 15,283 ================ ============= Basic earnings per common share $ 1.18 $ 1.18 ================ ============= Computation of Diluted Shares Outstanding - ----------------------------------------- (in thousands, except per share amounts) - ----------------------------------------- Weighted average number of basic shares outstanding 15,373 15,283 Common stock equivalents for diluted shares outstanding: 7 84 ---------------- ------------- Weighted average number of diluted shares outstanding (denominator) 15,380 15,367 ================ ============= Diluted earnings per common share $ 1.18 $ 1.17 ================ ============= (8) On January 25, 1999, XTRA announced that it had repurchased $65 million of its common stock as part of a $90 million current year stock repurchase plan. As of February 8, 1999, an additional $2 million of common stock has been repurchased, leaving $23 million remaining of its $90 million repurchase plan. The Company has repurchased 1.6 million shares of its common stock for $67 million thus far in fiscal 1999, representing approximately 10% of the total shares outstanding at the beginning of the year. (9) XTRA announced a plan to centralize Company-wide administrative functions into a Shared Service Center located in St. Louis, Missouri. The Company will consolidate its financial, accounting, human resources, and information technology operations into one location to achieve cost savings and gain efficiencies. These functions are decentralized 10 currently and are located in XTRA's divisional and corporate offices. The new structure will also position the Company to support growth with minimal incremental administrative costs. The Company anticipates that the transition to the Shared Service Center will be completed by the end of fiscal 1999. XTRA expects to record a one-time charge of approximately $4 million, or $2 million after tax, in its second fiscal quarter principally related to severance costs associated with the restructuring. 11 XTRA CORPORATION AND SUBSIDIARIES --------------------------------- 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 Corporation 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 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. XTRA's marine container leasing operation reduces XTRA's dependence on the North American transportation industry. Although the marine container business is international, substantially all transactions are denominated in U.S. dollars. The Three Months Ended December 31, 1998 - ---------------------------------------- Versus the Three Months Ended December 31, 1997: - ------------------------------------------------ Revenues and Changes in Business Conditions - ------------------------------------------- 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 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 December 31, 1998 and 1997. The Company's average fleet size and 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. Three Months Ended December 31, 1998 1997 -------------- -------------- XTRA Lease - ---------- Utilization 92% 95% Units 82,000 79,000 Net investment in equipment (in millions) $ 794 $ 723 XTRA Intermodal: - ---------------- Utilization 86% 85% Units 53,000 53,000 Net investment in equipment (in millions) $ 277 $ 301 Total North America: - -------------------- Utilization 90% 91% Units 135,000 132,000 Net investment in equipment (in millions) $ 1,071 $ 1,024 International: - ----------- Utilization 74% 84% Units 165,000 163,000 Net investment in equipment (in millions) $ 384 $ 413 Consolidated: - ------------- Utilization 86% 90% Units 300,000 295,000 Net investment in equipment (in millions) $ 1,455 $ 1,437 Revenues increased by 2% or $2 million for the three months ended December 31, 1998 over the same period a year ago. The Company's average equipment utilization declined from 90% in the first quarter of fiscal year 1998 to 86% in the first quarter of fiscal 1999. Average net investment in equipment increased by $18 million from the same quarter 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 intermodal trailers and marine containers. 13 The Company's North American revenues increased $5 million from the same quarter a year ago due to an improvement in lease rates, partially offset by a slight decline in working units. The Company's North American utilization averaged 90% in the first quarter of fiscal 1999, as compared to 91% in the comparable prior year period. XTRA Lease's revenues increased $5 million from the comparable prior year quarter due to an improvement in lease rates as well as strong levels of domestic freight leading to more over-the-road trailer working units. XTRA Lease's utilization averaged 92% on a larger total fleet size in the current quarter, compared to 95% in the comparable prior quarter. XTRA Intermodal's revenues remained unchanged from the first quarter of fiscal 1998 due to improved lease rates, offset by a slight decline in intermodal trailer working units. XTRA Intermodal's utilization averaged 86% in the first quarter of fiscal 1999, compared to 85% in the same period of fiscal 1998. The Company's North American over-the-road trailer fleet averaged 80,000 units, or 54% of average net investment in equipment in the first quarter of fiscal year 1999, compared to 76,000 units, or 49% of average net investment in equipment, in the comparable prior year period. The Company continues to downsize its North American intermodal trailer fleet as the railroads shift toward more domestic container usage. XTRA's intermodal trailer fleet averaged 22,000 units, or 10% of average net investment in equipment in the first quarter of 1999, versus 23,000 units, or 12% of average net investment in equipment, in the comparable prior year period. International revenues decreased $3 million from the same quarter of the prior year, primarily due to a decrease in working units. Although XTRA International's lease rates remained stable as compared to the first quarter of 1998, they continue to be at low levels for the Company and the industry as a whole. Equipment utilization declined to 74% from 84% in the comparable prior year period. Excess capacity in the international container leasing industry continues to adversely affect XTRA International's equipment utilization. The Company's average international fleet size increased to 165,000 units in the first quarter of fiscal 1999 from 163,000 units in the comparable prior year period due primarily to capital spending in early fiscal year 1998. XTRA is currently reviewing a number of specific strategic options with regard to the International business. Operating Expenses - ------------------ Total operating expenses increased by 3% or $2 million for the three months ended December 31, 1998 from the same period of fiscal 1998. Depreciation and selling and administrative expenses remained unchanged from the comparable prior year period. Rental equipment operating expense increased by 7% or $2 million due to approximately $1 million in increased storage costs associated with fewer working international containers, as well as approximately $1 million in repair and maintenance costs. Interest Expense - ---------------- Interest expense decreased by 7% or $1 million for the three months ended December 31, 1998 from the same period of fiscal 1998, due primarily to lower average net debt outstanding. 14 Unusual Item: Costs Related to Terminated Merger - ------------------------------------------------- During the first quarter, the Company terminated its proposed merger with Wheels MergerCo. As a result, XTRA recorded approximately $1 million in the first quarter of 1999 as an unusual item on the income statement. These costs represent the balance of expenses related to the terminated merger. XTRA incurred a total of $1.4 million of costs of which the remainder were recorded during the fourth quarter of fiscal 1998. Pretax Income - ------------- Pretax earnings, excluding the impact of the unusual item noted above, increased 3% or $1 million for the three months ended December 31, 1998 over the same period a year ago primarily due to a decline in interest expense. 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 1998 was 40%. For the three months ended December 31, 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 1998 and its estimated effective income tax rate for fiscal 1999 are higher than the statutory U.S. Federal income tax rate due primarily to state income taxes. Share Repurchases - ----------------- On January 25, 1999, XTRA announced that it had repurchased $65 million of its common stock as part of a $90 million current year stock repurchase plan. As of February 3, 1999, an additional $2 million of common stock has been repurchased, leaving $23 million remaining of its $90 million purchase plan. The Company has repurchased 1.6 million shares of its common stock for $67 million thus far in fiscal 1999, representing approximately 10% of the total shares outstanding at the beginning of the year. The repurchases to date will be accretive to earnings and have increased the debt/equity ratio from approximately 1.9:1.0 to 2.3:1.0, which remains below the Company's target leverage range of 2.5 - 3.0:1.0. Liquidity and Capital Resources - ------------------------------- During the three months ended December 31, 1998, the Company generated cash flows from operations of $57 million. During the same period, XTRA invested $59 million in property and equipment. Net debt outstanding (debt less cash) increased $2 million. As of February 3, 1999, committed capital expenditures for revenue equipment for fiscal 1999 amounted to approximately $214 million. This amount could increase if business conditions warrant. As of February 3, 1999, and after including the $67 million of common stock repurchases in fiscal 1999, XTRA Inc. had $532 million available for future issuance under its $604 million 15 Shelf Registration. As of February 3, 1999, the Company had $109 million of unused credit available under its $300 million Revolving Credit Agreement. Year 2000 - --------- The Company has completed an assessment of the majority of its systems and has developed a specific workplan to address the year 2000 issue. The Company's assessment resulted in the identification of certain applications and information systems that needed to be replaced or modified. The applications consisted of certain purchased software packages used on the Company's personal computers and the information systems are primarily those used by the Company's XTRA Intermodal business. With respect to the purchased software packages, work plans were created and new applications were installed to replace each of the purchased software packages with applications that are year 2000 compliant. The Company has completed modification and testing of its systems applications used by the Intermodal business. The Company expects that the total costs to fix its year 2000 issues Company-wide will amount to approximately $1 million. The Company is in the process of completing an assessment of the potential risks associated with business disruption as a result of year 2000 issues experienced by the Company's vendors, suppliers and customers. Upon completion of this assessment, the Company will determine whether certain contingency plans should be put in place and what the cost of those plans will be. At this point, the Company has not identified any required contingency plans which would require that material expenditures be made by the Company. While the Company does not believe that the year 2000 matters discussed above will have a material impact on its business, financial conditions, or results of operations, no assurances can be given as to what extent the Company may be affected by such matters. Shared Service Plan - ------------------- XTRA announced a plan to centralize Company-wide administrative functions into a Shared Service Center located in St. Louis, Missouri. The Company will consolidate its financial, accounting, human resources, and information technology operations into one location to achieve cost savings and gain efficiencies. These functions are decentralized currently and are located in XTRA's divisional and corporate offices. The new structure will also position the Company to support growth with minimal incremental administrative costs. The Company anticipates that the transition to the Shared Service Center will be completed by the end of fiscal 1999. XTRA expects to record a one-time charge of approximately $4 million, or $2 million after tax, in its second fiscal quarter principally related to severance costs associated with the restructuring. 16 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. 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 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 facilities. These manufacturers are, in turn dependent on the prompt delivery and supply of the components required to assemble the trailers, chassis and containers. 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 17 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 to take advantage of unexpectedly strong demand due to extended back orders. 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. 18 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 three months ended December 31, 1998 and 1997 for XTRA Corporation 12.2 Statement of the calculation of earnings to fixed charges for the three months ended December 31, 1998 and 1997 for XTRA, Inc. 27 Financial Data Schedule (b) Reports on Form 8-K ------------------- On February 11, 1999, a Current Report on Form 8-K was filed by the Company to disclose certain financial information for the fiscal first quarter ended December 31, 1998. 19 Item 7A - Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------- The Company has financed its operations with a combination of short-term borrowings and longer term financing. The Company borrows on a short-term basis by issuing commercial paper and using several uncommitted lines of credit. The Company's short-term borrowings are principally at variable rates. Short-term borrowings are back-stopped by the unused borrowing capacity under the Revolving Credit Agreement. They have therefore been classified as Revolving Credit Agreement borrowings. At December 31, 1998, there were no material changes in the market rate risks reported in the Company's Form 10-K for the fiscal year ended September 30, 1998. The Company's earnings are affected by fluctuations in the exchange rate of the U.S. dollar as compared to the Mexican Peso and Canadian dollar. These earnings fluctuations are primarily a result of the Company investments in and financing of these operations, as opposed to operating results. 20 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: February 11, 1999 /s/ Michael J. Soja ----------------- ------------------------------------------- Michael J. Soja Vice President and Chief Financial Officer Date: February 11, 1999 /s/ Robert B. Blakeley ----------------- ------------------------------------------- Robert B. Blakeley Vice President and Controller 21 EXHIBIT INDEX ------------- Exhibit No. Description Page No. - ----------- ----------- -------- 12.1 Statement of the calculation of earnings to fixed charges for the three months ended December 31, 1998 and 1997 for XTRA Corporation 23 12.2 Statement of the calculation of earnings to fixed charges for the three months ended December 31, 1998 and 1997 for XTRA, Inc. 24 27 Financial Data Schedule 25 EXHIBIT 12.1 XTRA CORPORATION STATEMENT OF THE CALCULATION OF EARNINGS TO FIXED CHARGES For the three months ended December 31, 1998 and 1997 (Millions of dollars) (Unaudited) 1998 1997 ------------ ----------- EARNINGS Pretax income $ 30 $ 30 Add: Fixed charges (below) 14 15 ------------ ----------- $ 44 $ 45 ============ =========== FIXED CHARGES $ 14 $ 15 ============ =========== Ratio of Earnings to Fixed Charges 3.2 2.9 ============ =========== 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. EXHIBIT 12.2 XTRA, INC. STATEMENT OF THE CALCULATION OF EARNINGS TO FIXED CHARGES For the three months ended December 31, 1998 and 1997 (Millions of dollars) (Unaudited) 1998 1997 ------------- ------------ EARNINGS Pretax income $ 31 $ 30 Add: Fixed charges (below) 14 15 ------------- ------------- $ 45 $ 45 ============= ============= FIXED CHARGES $ 14 $ 15 ============= ============= Ratio of Earnings to Fixed Charges 3.2 2.9 ============= ============= 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. This schedule contains summary financial information extracted from the consolidated condensed financial statements of XTRA Corporation for the period ended December 31, 1998 and is qualified in its entirety by reference to such financial statements.