SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarter Ended
January 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission File Number 1-9549
THERMO TERRATECH INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-2925807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02254-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
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 January 30, 1998
---------------------------- -------------------------------
Common Stock, $.10 par value 19,532,585
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO TERRATECH INC.
Consolidated Balance Sheet
(Unaudited)
Assets
January 3, March 29,
(In thousands) 1998 1997
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 25,887 $ 63,172
Short-term available-for-sale investments, at
quoted market value (amortized cost of $6,076
and $18,380) 6,065 18,391
Short-term held-to-maturity investments, at
amortized cost (quoted market value of
$27,623 and $13,238) 27,501 12,971
Accounts receivable, less allowances of $3,721
and $3,838 64,615 49,191
Unbilled contract costs and fees 18,766 29,053
Inventories 1,259 3,021
Prepaid and refundable income taxes 7,748 7,369
Prepaid expenses 4,804 3,870
-------- --------
156,645 187,038
-------- --------
Property, Plant, and Equipment, at Cost 136,068 132,332
Less: Accumulated depreciation and amortization 48,142 48,766
-------- --------
87,926 83,566
-------- --------
Long-term Held-to-maturity Investments, at
Amortized Cost (quoted market value of $13,142
in fiscal 1997) - 13,086
-------- --------
Other Assets (Note 3) 19,621 17,308
-------- --------
Cost in Excess of Net Assets of Acquired Companies
(Note 2) 105,183 92,786
-------- --------
$369,375 $393,784
======== ========
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THERMO TERRATECH INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
January 3, March 29,
(In thousands except share amounts) 1998 1997
----------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturities of
long-term obligations (includes $38,000
due to parent company in fiscal 1997) $ 33,473 $ 67,495
Accounts payable 19,846 12,292
Accrued payroll and employee benefits 10,906 12,182
Billings in excess of revenues earned 1,518 4,319
Other accrued expenses 11,707 10,509
Due to parent company 1,554 2,926
-------- --------
79,004 109,723
-------- --------
Deferred Income Taxes 5,297 5,297
-------- --------
Other Deferred Items 895 893
-------- --------
Long-term Obligations:
Subordinated convertible debentures 149,800 149,800
Other 2,753 15,386
-------- --------
152,553 165,186
-------- --------
Minority Interest 33,564 29,159
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 75,000,000 shares
authorized; 19,583,773 and 18,304,424 shares
issued 1,958 1,830
Capital in excess of par value 69,849 62,610
Retained earnings 28,601 24,046
Treasury stock at cost, 54,688 and 417,696 shares (515) (3,941)
Cumulative translation adjustment (1,824) (1,026)
Net unrealized gain (loss) on available-for-sale
investments (7) 7
-------- --------
98,062 83,526
-------- --------
$369,375 $393,784
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO TERRATECH INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
---------------------------
January 3, December 28,
(In thousands except per share amounts) 1998 1996
----------------------------------------------------------------------
Revenues:
Service revenues $73,875 $68,417
Product revenues (Note 3) - 7,281
------- -------
73,875 75,698
------- -------
Costs and Operating Expenses:
Cost of service revenues 59,874 55,968
Cost of product revenues - 6,217
Selling, general, and administrative
expenses 10,865 9,956
Product and new business development
expenses 209 239
------- -------
70,948 72,380
------- -------
Operating Income 2,927 3,318
Interest Income 999 1,795
Interest Expense (includes $554 to parent
company in fiscal 1997) (2,672) (3,090)
Gain on Sale of Businesses, Net (Note 3) 2,975 -
Equity in Earnings of Unconsolidated
Subsidiary - 118
Gain on Sale of Investments, Net - 31
Other Income - 159
------- -------
Income Before Provision for Income Taxes
and Minority Interest 4,229 2,331
Provision for Income Taxes 2,004 1,321
Minority Interest Expense 569 108
------- -------
Net Income $ 1,656 $ 902
======= =======
Earnings per Share (Note 4):
Basic $ .09 $ .05
======= =======
Diluted $ .08 $ .05
======= =======
Weighted Average Shares (Note 4):
Basic 19,218 18,231
======= =======
Diluted 19,268 18,716
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO TERRATECH INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
----------------------------
January 3, December 28,
(In thousands except per share amounts) 1998 1996
------------------------------------------------------------------------
Revenues:
Service revenues $210,225 $191,404
Product revenues (Note 3) 17,330 19,181
-------- --------
227,555 210,585
-------- --------
Costs and Operating Expenses:
Cost of service revenues 168,766 155,440
Cost of product revenues 14,735 15,837
Selling, general, and administrative
expenses 31,109 29,561
Product and new business development
expenses 644 813
-------- --------
215,254 201,651
-------- --------
Operating Income 12,301 8,934
Interest Income 3,195 5,442
Interest Expense (includes $447 and $1,936 to
parent company) (8,371) (9,660)
Gain on Sale of Businesses, Net (Note 3) 2,975 -
Equity in Earnings of Unconsolidated
Subsidiary (Note 3) 174 677
Gain on Issuance of Stock by Subsidiary - 1,475
Gain on Sale of Investments, Net - 197
Other Income 204 206
-------- --------
Income Before Provision for Income Taxes
and Minority Interest 10,478 7,271
Provision for Income Taxes 4,915 3,042
Minority Interest Expense 1,008 419
-------- --------
Net Income $ 4,555 $ 3,810
======== ========
Earnings per Share (Note 4):
Basic $ .25 $ .21
======== ========
Diluted $ .24 $ .20
======== ========
Weighted Average Shares (Note 4):
Basic 18,423 18,112
======== ========
Diluted 18,791 18,798
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO TERRATECH INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
----------------------------
January 3, December 28,
(In thousands) 1998 1996
------------------------------------------------------------------------
Operating Activities:
Net income $ 4,555 $ 3,810
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,094 9,749
Equity in earnings of unconsolidated
subsidiary (Note 3) (174) (677)
Minority interest expense 1,008 419
Provision for losses on accounts
receivable 381 490
Decrease in deferred income taxes - (32)
Gain on issuance of stock by
subsidiary - (1,475)
Gain on sale of businesses, net (Note 3) (2,975) -
Gain on sale of property, plant,
and equipment (204) -
Gain on sale of investments, net - (197)
Other noncash (income) expense (38) 330
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (16,129) (8,361)
Inventories and unbilled contract
costs and fees (1,418) (5,475)
Other current assets (852) (91)
Current liabilities 4,910 4,080
-------- --------
Net cash provided by operating activities 158 2,570
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 2) (8,419) (4,191)
Purchases of available-for-sale investments - (38,799)
Proceeds from sale and maturities of
available-for-sale investments 12,304 24,821
Purchases of property, plant, and equipment (13,578) (12,323)
Proceeds from sale of property, plant, and
equipment 1,844 426
Purchase of other assets (1,136) (456)
Proceeds from sale of businesses (Note 3) 19,722 -
-------- --------
Net cash provided by (used in) investing
activities $ 10,737 $(30,522)
-------- --------
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THERMO TERRATECH INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-----------------------
January 3, December 28,
(In thousands) 1998 1996
----------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of subordinated
convertible debentures $ - $112,398
Repayment of notes payable to parent
company (38,000) (50,000)
Proceeds from issuance of Company and
subsidiary common stock 1,140 5,095
Repurchase of Company and subsidiaries'
common stock (7,197) (6,606)
Repurchase of subordinated convertible
debentures (150) (2,878)
Advances to subcontractor (2,600) -
Issuance of long-term notes receivable (453) -
Issuance of short-term obligations - 803
Repayment of debt (546) (909)
Dividends paid by subsidiary to minority
shareholders (354) (450)
Other - (266)
-------- --------
Net cash provided by (used in) financing
activities (48,160) 57,187
-------- --------
Exchange Rate Effect on Cash (20) (67)
-------- --------
Increase (Decrease) in Cash and Cash
Equivalents (37,285) 29,168
Cash and Cash Equivalents at Beginning
of Period 63,172 31,182
-------- --------
Cash and Cash Equivalents at End of Period $ 25,887 $ 60,350
======== ========
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THERMO TERRATECH INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-----------------------
January 3, December 28,
(In thousands) 1998 1996
----------------------------------------------------------------------
Noncash Activities:
Fair value of assets of acquired companies $ 21,412 $ 13,000
Cash paid for acquired companies (10,365) (4,500)
Issuance of subsidiary common stock for
acquired companies (2,850) (2,006)
Issuance of short- and long-term
obligations for acquired company - (2,265)
-------- --------
Liabilities assumed of acquired companies $ 8,197 $ 4,229
======== ========
Conversions of subordinated convertible
debentures $ 13,894 $ 4,812
======== ========
Sale of real estate in exchange for note
receivable $ 1,894 $ -
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
8PAGE
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THERMO TERRATECH INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Thermo TerraTech Inc. (the Company) without audit and, in the
opinion of management, reflect all adjustments of a normal recurring
nature necessary for a fair statement of the financial position at
January 3, 1998, and the results of operations for the three- and
nine-month periods ended January 3, 1998, and December 28, 1996, and the
cash flows for the nine-month periods ended January 3, 1998, and December
28, 1996. The Company's results of operations for the three-month periods
ended January 3, 1998, and December 28, 1996, include 14 weeks and 13
weeks, respectively, and its results of operations for the nine-month
periods ended January 3, 1998, and December 28, 1996, include 40 weeks
and 39 weeks, respectively. Interim results are not necessarily
indicative of results for a full year.
The consolidated balance sheet presented as of March 29, 1997, has
been derived from the consolidated financial statements that have been
audited by the Company's independent public accountants. The consolidated
financial statements and notes are presented as permitted by Form 10-Q
and do not contain certain information included in the annual financial
statements and notes of the Company. The consolidated financial
statements and notes included herein should be read in conjunction with
the financial statements and notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 29, 1997, filed with
the Securities and Exchange Commission.
2. Acquisitions
In May 1997, the Company purchased a controlling interest in The
Randers Group Incorporated (Randers), a provider of design, engineering,
project management, and construction services for industrial clients in
the manufacturing, pharmaceutical, and chemical-processing industries.
The Company purchased 7,100,000 shares of Randers common stock from
certain members of Randers' management, and 420,000 shares from Thermo
Power Corporation, an affiliate of the Company, at a price of $0.625 per
share, for an aggregate cost of $4,700,000. Following these transactions,
the Company owns approximately 53.3% of Randers' outstanding common
stock. In addition, Thermo Electron Corporation (Thermo Electron) owns
approximately 8.9% of Randers' outstanding common stock. Randers had
revenues of $12,401,000 in calendar 1996.
In addition, in September 1997, the Company entered into a definitive
agreement to transfer The Killam Group, Inc. (The Killam Group), its
wholly owned engineering and consulting businesses, to Randers in
exchange for newly issued shares of Randers' common stock. The exact
price for these businesses will be equal to the net book value of the
transferred businesses as of the closing date of the transfer. The number
of new shares of Randers common stock to be issued to the Company will
equal such book value divided by $0.625. Based on the unaudited net book
9PAGE
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THERMO TERRATECH INC.
2. Acquisitions (continued)
value of The Killam Group as of September 27, 1997, which was
$67,150,000, Randers would issue 107,439,213 new shares of its common
stock to the Company. Upon such issuance, the Company and Thermo Electron
would own approximately 94.6% and 1.03%, respectively, of Randers'
outstanding common stock.
The transfer is subject to approval of the transaction by Randers'
shareholders and continued listing of Randers' common stock on the
American Stock Exchange following the transaction. However, because the
Company currently owns approximately 53.3% of Randers' outstanding common
stock, approval by Randers' shareholders is assured.
In addition, during the first nine months of fiscal 1998, the
Company's Thermo Remediation Inc. (Thermo Remediation) subsidiary made
acquisitions for an aggregate purchase price of $5,665,000 in cash and
459,613 shares of Thermo Remediation's common stock, valued at
$2,850,000.
These acquisitions have been accounted for using the purchase method
of accounting and their results have been included in the accompanying
financial statements from their respective dates of acquisition. The
aggregate cost of these acquisitions exceeded the estimated fair value of
the acquired net assets by $11,245,000, which is being amortized over
lives ranging from 20 to 40 years. Allocation of the purchase price for
these acquisitions was based on estimates of the fair value of the net
assets acquired and is subject to adjustment upon finalization of the
purchase price allocation. The Company has gathered no information that
indicates that the final allocation of the purchase price will differ
materially from the preliminary estimate. Pro forma data is not presented
since these acquisitions were not material to the Company's results of
operations.
3. Sale of Businesses
On October 6, 1997, Thermo Remediation sold its 50% limited-liability
interest in RETEC/TETRA L.C. to TETRA Thermal, Inc. for $8,825,000 in
cash, subject to post-closing adjustments. The Company realized a pre-tax
gain of $3,012,000 on the sale.
On October 10, 1997, the Company sold substantially all of the assets
of its Holcroft Division, its thermal-processing equipment business,
excluding certain accounts receivable, to Holcroft L.L.C., an affiliate
of Madison Capital Partners. The sale price for the transferred assets
consisted of $10,897,000 in cash, two promissory notes for principal
amounts aggregating $2,881,000, and the assumption by Holcroft L.L.C. of
certain liabilities of the Holcroft Division. After recording a
post-closing purchase price adjustment, the Company incurred a nominal
loss on the sale.
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THERMO TERRATECH INC.
4. Earnings per Share
During the quarter ended January 3, 1998, the Company adopted Statement
of Financial Accounting Standard No. 128, "Earnings per Share." As a
result, all previously reported earnings per share have been restated and
the Company is required to report diluted earnings per share. Basic
earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the periods. Diluted
earnings per share have been computed assuming the conversion of
convertible obligations and the elimination of the related interest
expense, and the exercise of stock options, as well as their related income
tax effects. Basic and diluted earnings per share were calculated as
follows:
Three Months Ended Nine Months Ended
-------------------- -------------------
(In thousands except Jan. 3, Dec. 28, Jan. 3, Dec. 28,
per share amounts) 1998 1996 1998 1996
-------------------------------------------------------------------------
Basic
Net income $ 1,656 $ 902 $ 4,555 $ 3,810
-------- -------- -------- --------
Weighted average shares 19,218 18,231 18,423 18,112
-------- -------- -------- --------
Basic earnings per share $ .09 $ .05 $ .25 $ .21
======== ======== ======== ========
Diluted
Net income $ 1,656 $ 902 $ 4,555 $ 3,810
Effect of majority-owned
subsidiaries' dilutive
securities (23) (9) (22) (46)
-------- -------- -------- --------
Income available to common
shareholders, as adjusted $ 1,633 $ 893 $ 4,533 $ 3,764
-------- -------- -------- --------
Weighted average shares 19,218 18,231 18,423 18,112
Effect of stock options 50 485 368 686
-------- -------- -------- --------
Weighted average shares,
as adjusted 19,268 18,716 18,791 18,798
-------- -------- -------- --------
Diluted earnings per share $ .08 $ .05 $ .24 $ .20
======== ======== ======== ========
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain of the Company's outstanding stock options
and warrants because the effect would be antidilutive. As of January 3,
1998, there were 1,533,700 of such options and warrants outstanding, with
exercise prices ranging from $9.03 to $14.58 per share.
11PAGE
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THERMO TERRATECH INC.
4. Earnings per Share (continued)
In addition, the computation of diluted earnings per share excludes
the effect of assuming the conversion of certain of the Company's
convertible obligations, because the effect would be antidilutive. As of
January 3, 1998, the Company had outstanding $111,850,000 principal
amount of 4 5/8% convertible debentures, convertible at $15.90 per share,
that were excluded from the calculation of diluted earnings per share.
5. Presentation
Certain amounts in fiscal 1997 have been reclassified to conform to
the presentation in the fiscal 1998 financial statements.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed under the heading "Forward-looking Statements"
in Exhibit 13 in the Company's Annual Report on Form 10-K for the fiscal
year ended March 29, 1997, filed with the Securities and Exchange
Commission.
Overview
The Company provides industrial services and manufacturing support
encompassing a broad range of specializations, including infrastructure
engineering, design and construction, environmental compliance,
laboratory testing, and metal treating.
Remediation and Recycling - The Company's majority-owned Thermo
Remediation Inc. (Thermo Remediation) subsidiary, through its Remediation
Technologies, Inc. (ReTec) subsidiary, provides integrated environmental
services such as remediation of industrial sites contaminated with
organic wastes and residues. ReTec's TriTechnics subsidiary, acquired in
May 1997, provides comprehensive consulting and remedial services at
refinery and chemical-plant sites. ReTec's RPM Systems subsidiary,
acquired in September 1997, provides consulting services in the areas of
environmental-management, planning, and information-technology. In
September 1996, Thermo Remediation acquired IEM Sealand Corporation (IEM
Sealand), a provider of construction services for the remediation of
hazardous wastes under contracts with federal and state governments and
other public- and private-sector clients. Through its Thermo Nutech
subsidiary, Thermo Remediation provides services to remove radioactive
12PAGE
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THERMO TERRATECH INC.
Overview (continued)
contaminants from sand, gravel, and soil, as well as health physics,
radiochemistry laboratory, and radiation dosimetry services. Thermo
NuTech's Benchmark Environmental Corporation subsidiary, acquired in
November 1997, is a provider of nuclear-remediation and waste-management
services to government agencies and private industry. Through its TPS
Technologies Inc. subsidiary, Thermo Remediation also designs and
operates a network of facilities for the remediation of nonhazardous
soil. In addition, Thermo Remediation's Thermo Fluids subsidiary
collects, tests, processes, and recycles used motor oil and other
industrial fluids. The Company's majority-owned Thermo EuroTech N.V.
(Thermo EuroTech) subsidiary, located in the Netherlands, specializes in
converting "off-spec" and contaminated petroleum fluids into usable oil
products.
Consulting and Design - In May 1997, the Company purchased a
controlling interest in The Randers Group Incorporated (Randers; Note 2),
a provider of design, engineering, project management, and construction
services for industrial clients in the manufacturing, pharmaceutical, and
chemical-processing industries. In September 1997, the Company
transferred The Killam Group, Inc., its wholly owned engineering and
consulting businesses, to Randers, in exchange for newly issued shares of
Randers' common stock (Note 2). The Company's Killam Associates
subsidiary provides environmental consulting and engineering services and
specializes in wastewater treatment and water resources management. The
Company's Bettigole Andrews Clark & Killam Inc. subsidiary provides both
private- and public-sector clients with a range of consulting services
that address transportation planning and design. In November 1996, the
Company acquired Carlan Consulting Group, Inc. (Carlan), a provider of
transportation and environmental consulting and professional engineering
and architectural services. The Company's wholly owned Normandeau
Associates Inc. subsidiary provides consulting services that address
natural resource management issues.
Laboratory Testing - The Company's wholly owned Thermo Analytical
Inc. subsidiary operates analytical laboratories that provide
environmental-, pharmaceutical-, and food-testing services, primarily to
commercial clients throughout the U.S.
Metal Treating - The Company performs metallurgical processing
services using thermal-treatment equipment at locations in California,
Minnesota, and Wisconsin. The Company also designed, manufactured, and
installed advanced custom-engineered, thermal-processing systems through
its equipment division located in Michigan, until the sale of this
business in October 1997 (Note 3).
Results of Operations
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
Total revenues in the third quarter of fiscal 1998 were $73.9
million, compared with $75.7 million in the third quarter of fiscal 1997.
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THERMO TERRATECH INC.
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
(continued)
Revenues from remediation and recycling services increased to
$38.3 million in fiscal 1998 from $37.7 million in fiscal 1997, primarily
due to increased revenues from construction and consulting engineering
services at ReTec and the inclusion of $2.6 million of revenues from
acquired businesses. These increases were offset by a decrease in
revenues at IEM Sealand resulting from a decline in the number of
contracts in process during the third quarter of fiscal 1998. Revenues
from Thermo EuroTech increased to $3.7 million in fiscal 1998 from $3.4
million in fiscal 1997, primarily due to increased revenues relating to
contracts to process oil-based muds and perform soil-remediation services
overseas, offset in part by a decrease in revenues due to the sale of
Thermo EuroTech's J. Amerika division in the fourth quarter of fiscal
1997. Revenues from consulting and design services increased to $21.3
million in fiscal 1998 from $18.1 million in fiscal 1997. The inclusion
of an aggregate of $3.8 million of revenues from Carlan and Randers,
acquired in November 1996 and May 1997, respectively, was offset in part
by a decrease in revenues due to the completion of a major contract in
fiscal 1997. Revenues from laboratory-testing services, excluding
radiochemistry laboratory services included in remediation and recycling
services, increased to $10.1 million in fiscal 1998 from $9.4 million in
fiscal 1997. Metal-treating revenues decreased to $4.9 million in fiscal
1998 from $11.6 million in fiscal 1997, due to the sale of the Company's
thermal-processing equipment business in October 1997 (Note 3).
The gross profit margin increased slightly to 19% in the third
quarter of fiscal 1998 from 18% in the third quarter of fiscal 1997. This
improvement was primarily due to a greater percentage of soil-remediation
revenues earned at certain of Thermo Remediation's higher-margin
soil-remediation facilities and, to a lesser extent, improved gross
profit margins at Thermo EuroTech due to a shift to higher-margin
contracts in fiscal 1998. These increases were offset in part by lower
margins from losses on certain contracts at IEM Sealand and increased
lower-margin revenues at ReTec.
Selling, general, and administrative expenses as a percentage of
revenues increased to 15% in the third quarter of fiscal 1998 from 13% in
the third quarter of fiscal 1997, primarily due to higher expenses as a
percentage of revenues at Randers, acquired in May 1997.
Interest income decreased to $1.0 million in the third quarter of
fiscal 1998 from $1.8 million in the third quarter of fiscal 1997, as a
result of lower average investment balances following the repayment of a
promissory note to Thermo Electron Corporation (Thermo Electron), the
repurchase of Company and subsidiary common stock, as well as the
acquisition of Randers (Note 2). These decreases were offset in part by
cash received from the sale of the Company's Holcroft Division and Thermo
Remediation's interest in a joint venture (Note 3). Interest expense
decreased to $2.7 million in the third quarter of fiscal 1998 from $3.1
million in the third quarter of fiscal 1997, primarily due to the
repayment of a promissory note to Thermo Electron and the conversion of
the Company's 6 1/2% subordinated convertible debentures during fiscal
1998.
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THERMO TERRATECH INC.
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
(continued)
Equity in earnings of unconsolidated subsidiary represents Thermo
Remediation's proportionate share of income from a joint venture. Gain on
sale of businesses primarily results from Thermo Remediation's sale of
its interest in this joint venture (Note 3).
The effective tax rates were 47% and 57% in the third quarter of
fiscal 1998 and 1997, respectively. The effective tax rates exceeded the
statutory federal income tax rate primarily due to nondeductible
amortization of cost in excess of net assets of acquired companies and
the impact of state income taxes. The higher effective tax rate in fiscal
1997 was due to the larger relative effect of nondeductible amortization
of cost in excess of net assets of acquired companies.
Minority interest expense increased to $0.6 million in the third
quarter of fiscal 1998 from $0.1 million in the third quarter of fiscal
1997, primarily due to higher earnings from the Company's majority-owned
subsidiaries and the inclusion of minority interest expense associated
with Randers (Note 2).
First Nine Months Fiscal 1998 Compared With First Nine Months Fiscal 1997
Total revenues in the first nine months of fiscal 1998 increased 8%
to $227.6 million from $210.6 million in the first nine months of fiscal
1997. Revenues from remediation and recycling services increased to
$106.1 million in fiscal 1998 from $96.4 million in fiscal 1997,
primarily due to the inclusion of $15.7 million of revenues from acquired
businesses and, to a lesser extent, due to increased revenues from
construction and consulting engineering services at ReTec. These
increases were offset in part by a decrease in revenues at IEM Sealand
resulting from a decline in the number of contracts processed during the
third quarter of fiscal 1998. Revenues from soil-remediation services
decreased 17% as a result of a decline in the volume of soil processed
due to overcapacity in the industry and, to a lesser extent, competitive
pricing pressures early in the period. Revenues from Thermo EuroTech
decreased 10% to $9.6 million, primarily due to the sale of its J.
Amerika division in the fourth quarter of fiscal 1997, offset in part by
increased revenues relating to contracts to process oil-based muds and
perform soil-remediation services overseas. Revenues from consulting and
design services increased to $63.3 million in fiscal 1998 from $58.3
million in fiscal 1997. The inclusion of an aggregate of $11.1 million of
revenues from Carlan and Randers, acquired in November 1996 and May 1997,
respectively, was offset in part by a decrease in revenues due to the
completion of two major contracts in fiscal 1997. Revenues from
laboratory-testing services, excluding radiochemistry laboratory services
included in remediation and recycling services, increased to $28.4
million in fiscal 1998 from $26.9 million in fiscal 1997. Metal-treating
revenues remained relatively constant at $31.4 million in fiscal 1998,
compared with $31.7 million in fiscal 1997, primarily due to an increase
in demand for thermal-processing equipment and services at existing
businesses in the first six months of fiscal 1998, offset by the sale of
the Company's thermal-processing equipment business in October 1997
(Note 3).
15PAGE
<PAGE>
THERMO TERRATECH INC.
First Nine Months Fiscal 1998 Compared With First Nine Months Fiscal 1997
(continued)
The gross profit margin remained constant at 19% in the first nine
months of fiscal 1998 and 1997. The gross profit margin for laboratory-
testing services improved in fiscal 1998 due to lower margins in the
second quarter of fiscal 1997 as a result of costs incurred related to
efforts to eliminate redundant capabilities at regional laboratories.
This improvement was offset by lower margins from losses on certain
contracts at IEM Sealand and increased lower-margin revenues at Retec.
Selling, general, and administrative expenses as a percentage of
revenues remained constant at 14% in the first nine months of fiscal 1998
and 1997.
Equity in earnings of unconsolidated subsidiary represents Thermo
Remediation's proportionate share of income from a joint venture. Gain on
sale of businesses primarily results from Thermo Remediation's sale of
its interest in this joint venture (Note 3).
Interest income decreased to $3.2 million in the first nine months of
fiscal 1998 from $5.4 million in the first nine months of fiscal 1997.
Interest expense decreased to $8.4 million in the first nine months of
fiscal 1998 from $9.7 million in the first nine months of fiscal 1997.
The decreases in interest income and expense are primarily due to the
reasons discussed in the results of operations for the third quarter.
The effective tax rates were 47% and 42% in the first nine months of
fiscal 1998 and 1997, respectively. The effective tax rates exceeded the
statutory federal income tax rate primarily due to the nondeductible
amortization of cost in excess of net assets of acquired companies and
the impact of state income taxes. The lower effective tax rate in the
first nine months of fiscal 1997 was due to the nontaxable gain on
issuance of stock by subsidiary.
Minority interest expense increased to $1.0 million in the first nine
months of fiscal 1998 from $0.4 million in the first nine months of
fiscal 1997, primarily due to higher earnings from the Company's
majority-owned subsidiaries and the inclusion of minority interest
expense associated with Randers (Note 2).
Liquidity and Capital Resources
Consolidated working capital was $77.6 million at January 3, 1998,
compared with $77.3 million at March 29, 1997. Included in working
capital were cash, cash equivalents, and short-term available-for-sale
investments of $32.0 million at January 3, 1998, compared with
$81.6 million at March 29, 1997. Of the $32.0 million balance at
January 3, 1998, $12.4 million was held by Thermo Remediation,
$4.7 million by Randers, and the remainder by the Company and its wholly
owned subsidiaries. In addition, at January 3, 1998, the Company had
$27.5 million of short-term held-to-maturity investments, compared with
$26.1 million of short- and long-term held-to-maturity investments at
March 29, 1997. During the first nine months of fiscal 1998, $0.2 million
16PAGE
<PAGE>
THERMO TERRATECH INC.
Liquidity and Capital Resources (continued)
of cash was provided by operating activities. The Company funded an
increase of $16.1 million in accounts receivable. The increase in
accounts receivable primarily related to increased revenues at ReTec and
delays in pursuit of collections on IEM Sealand's accounts receivable.
Thermo Remediation expects to address this matter by increasing
collection efforts over the next several quarters. In addition, accounts
receivable increased in the consulting and design group primarily as a
result of the timing of cash collections at Killam Associates and an
increase in accounts receivable at BACKillam, which have subsequently
been collected.
Excluding available-for-sale investments activity, the Company's
investing activities in the first nine months of fiscal 1998 primarily
consisted of acquisitions and capital additions, as well as the sale of
two businesses. In May 1997, the Company purchased a controlling interest
in Randers for approximately $4.7 million (Note 2). In addition, Thermo
Remediation made acquisitions for an aggregate purchase price of
$5.7 million in cash and 459,613 shares of Thermo Remediation's common
stock, valued at $2.9 million (Note 2). The Company expended $13.6
million for purchases of property, plant, and equipment in the first nine
months of fiscal 1998. The Company expects to expend approximately $8.1
million on purchases of property, plant, and equipment during the
remainder of fiscal 1998, including $3.0 million related to a new
building at the Company's Lancaster Laboratories subsidiary.
In October 1997, Thermo Remediation sold its 50% limited-liability
interest in RETEC/TETRA L.C. for $8.8 million in cash, subject to
post-closing adjustments (Note 3), and the Company sold substantially all
of the assets of its Holcroft Division, excluding certain accounts
receivable, for a total purchase price of $10.9 million in cash and $2.9
million of notes, plus the assumption by the purchaser of certain
liabilities of the Holcroft Division (Note 3).
In the first nine months of fiscal 1998, the Company's financing
activities used cash of $48.2 million. This use of cash primarily
resulted from the repayment of a $38.0 million promissory note to Thermo
Electron in the first quarter of fiscal 1998, the advance of $2.6 million
by Thermo Remediation to a subcontractor associated with several of its
projects, and the repurchase of Company and subsidiary common stock. The
Board of Directors of the Company authorized the repurchase, through
August 23, 1997, of up to $10.0 million of its own securities. The Board
of Directors of Thermo Remediation, through a series of actions
commencing in September 1996, authorized the repurchase, through various
dates ending in July 1998, of up to $15.0 million of its own securities.
Through January 3, 1998, the Company and Thermo Remediation had expended
$10.0 million and $11.4 million, respectively, under these
authorizations, of which $3.3 million and $3.1 million, respectively, was
expended in fiscal 1998. Any such purchases are funded from working
capital.
17PAGE
<PAGE>
THERMO TERRATECH INC.
Liquidity and Capital Resources (continued)
In December 1997, the Company signed a letter of intent to acquire
Green Sunrise Holdings LTD., an environmental services and industrial
outsourcing firm, for approximately $4.5 million. The completion of this
transaction is subject to several conditions, including completion of the
Company's due diligence investigation, negotiation of a definitive
agreement, and approval by both companies' boards of directors. The
Company has no other material commitments for the acquisition of
businesses or for capital expenditures. Such expenditures will largely be
affected by the number and size of the complementary businesses that can
be acquired or developed during the year. Thermo Electron has expressed
its willingness to lend funds to the Company for potential acquisitions
and major capital expenditures that may occur in the foreseeable future.
PART II - OTHER INFORMATION
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
18PAGE
<PAGE>
THERMO TERRATECH INC.
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 as of the 6th day of February
1998.
THERMO TERRATECH INC.
Paul F. Kelleher
------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
------------------------
John N. Hatsopoulos
Chief Financial Officer
and Vice President
19PAGE
<PAGE>
THERMO TERRATECH INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.1 Thermo TerraTech Inc. - The Randers Group Incorporated
Nonqualified Stock Option Plan.
27 Financial Data Schedule.
EXHIBIT 10.1
THERMO TERRATECH INC.
THE RANDERS GROUP INCORPORATED NONQUALIFIED STOCK OPTION PLAN
1. Purpose
This Nonqualified Stock Option Plan (the "Plan") is intended
to encourage ownership of Common Stock, $0.01 par value (the
"Common Stock"), of The Randers Group Incorporated
("Subsidiary"), a subsidiary of Thermo TerraT ech Inc. (the
"Company"), by persons selected by the Board of Directors (or a
committee thereof) in its sole discretion, including directors,
executive officers, key employees and consultants of the Company
and its subsidiaries, and to provide additional incentive for
them to promote the success of the business of the Company and
Subsidiary. The Plan is intended to be a nonstatutory stock
option plan.
2. Effective Date of the Plan
The Plan shall become effective when adopted by the Board of
Directors of the Company.
3. Stock Subject to Plan
At no time shall the number of shares of the Common Stock
then outstanding which are attributable to the exercise of
options granted under the Plan plus the number of shares then
issuable upon the exercise of outstanding options granted under
the Plan exceed 1,600,000 shares, subject however, to the
provisions of paragraph 11 of the Plan. Shares to be issued upon
the exercise of options granted under the Plan shall be shares of
Subsidiary beneficially owned by the Company. If any option
expires or terminates for any reason without having been
exercised in full, the unpurchased shares subject thereto shall
again be available for options thereafter to be granted.
4. Administration
The Plan shall be administered by a committee (the
"Committee") composed of the members of the Board of Directors of
the Company, no member of which shall act upon any matter
exclusively affecting any option granted or to be granted to
himself or herself under the Plan. Subject to the provisions of
the Plan, the Committee shall have complete authority, in its
discretion, to make the following determinations with respect to
each option to be granted by the Company: (a) the person to
receive the option (the "Optionee"); (b) the time of granting the
option; (c) the number of shares subject thereto; (d) the option
price; (e) the option period; and (f) the terms of the option and
form of option agreement (which need not be identical, but which
shall conform to the applicable terms and conditions of the Plan
and contain such other provisions as the Board of Directors deems
PAGE
<PAGE>
advisable and not inconsistent with the Plan). In making such
determinations, the Committee may take into account the nature of
the services rendered by the Optionees, their present and
potential contributions to the success of the Company and/or one
or more of its subsidiaries, and such other factors as the
Committee in its discretion shall deem relevant. Subject to the
provisions of the Plan, the Committee shall also have complete
authority to interpret the Plan, to prescribe, amend, and rescind
rules and regulations relating to it, to determine the terms and
provisions of the respective option agreements (which need not be
identical), and to make all other determinations necessary or
advisable for the administration of the Plan. The Committee's
determinations on the matters referred to in this paragraph 4
shall be conclusive.
5. Eligibility
An option may be granted to any person selected by the
Committee in its sole discretion.
6. Time of Granting Options
The granting of an option shall take place at the time
specified by the Committee. Only if expressly so provided by the
Committee shall the granting of an option be regarded as taking
place at the time when a written option agreement shall have been
duly executed and delivered by or on behalf of the Company and
the Optionee to whom such option shall be granted. The agreement
shall provide, among other things, that it does not confer upon
an Optionee any right to continue in the employ of the Company
and/or one or more of its subsidiaries or to continue as a
director or consultant of the Company, and that it does not
interfere in any way with the right of the Company or any such
subsidiary to terminate the employment of the Optionee at any
time if the Optionee is an employee, to remove the Optionee as a
director of the Company if the Optionee is a director, or to
terminate the services of the Optionee if the Optionee is a
consultant.
7. Option Period
An option may become exercisable immediately or in such
installments, cumulative or noncumulative, as the Committee may
determine.
8. Exercise of Option
An option may be exercised in accordance with its terms by
written notice of intent to exercise the option, specifying the
number of shares of stock with respect to which the option is
then being exercised. The notice shall be accompanied by payment
in the form of cash or shares of Subsidiary Common Stock (the
"Tendered Shares") with a then current market value equal to the
option price of the shares to be purchased; provided, however,
PAGE
<PAGE>
that such Tendered Shares shall have been acquired by the
Optionee more than six months prior to the date of exercise,
unless such requirement is waived in writing by the Company.
Against such payment the Company shall deliver or cause to be
delivered to the Optionee a certificate for the number of shares
then being purchased, registered in the name of the Optionee or
other person exercising the option. If any law or applicable
regulation of the Securities and Exchange Commission or other
body having jurisdiction in the premises shall require the
Company, Subsidiary or the Optionee to take any action in
connection with shares being purchased upon exercise of the
option, exercise of the option and delivery of the certificate or
certificates for such shares shall be postponed until completion
of the necessary action, which shall be taken at the Company's
expense.
9. Transferability
Except as may be authorized by the Committee , in its sole
discretion, no Option may be transferred other than by will or
the laws of descent and distribution, and during a Optionee's
lifetime an option requiring exercise may be exercised only by
him or her (or in the event of incapacity, the person or persons
properly appointed to act on his or her behalf). The Committee
may, in its discretion, determine the extent to which options
granted to an Optionee shall be transferable, and such provisions
permitting or acknowledging transfer shall be set forth in the
written agreement evidencing the option executed and delivered by
or on behalf of the Company and the Optionee.
10. Vesting, Restrictions and Termination of Options
The Committee, in its sole discretion, may determine the
manner in which options shall vest, the rights of the Company to
repurchase the shares issued upon the exercise of any option and
the manner in which such rights shall lapse, and the terms upon
which any option granted shall terminate. The Board of Directors
shall have the right to accelerate the date of exercise of any
installment or to accelerate the lapse of the Company's
repurchase rights. All of such terms shall be specified in a
written option agreement executed and delivered by or on behalf
of the Company and the Optionee to whom such option shall be
granted.
11. Adjustment of Number of Shares
Each stock option agreement shall provide that in the event
of any stock dividend payable in the Common Stock or any split-up
or contraction in the number of shares of the Common Stock
occurring after the date of the agreement and prior to the
exercise in full of the option, the number of shares for which
the option may thereafter be exercised shall be proportionately
adjusted and the price to be paid for each share subject to the
option shall be proportionately adjusted. Each such agreement
PAGE
<PAGE>
shall also provide that in case of any reclassification or change
of outstanding shares of the Common Stock or in case of any
consolidation or merger of Subsidiary with or into another
company or in case of any sale or conveyance to another company
or entity of the property of Subsidiary as a whole or
substantially as a whole, the Optionee shall, upon exercise of
the option, be entitled to receive shares of stock or other
securities in its place equivalent in kind and value to those
shares which he would have received if he had exercised the
option in full immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance and had
continued to hold the shares subject to the option (together with
all other shares, stock and securities thereafter issued in
respect thereof) to the time of the exercise of the option;
provided , that if any recapitalization is to be effected through
an increase in the par value of the Common Stock without an
increase in the number of authorized shares and such new par
value will exceed the option price under such agreement, the
Company shall notify the Optionee of such proposed
recapitalization, and the Optionee shall then have the right,
exercisable at any time prior to such recapitalization becoming
effective, to purchase all of the shares subject to the option
which he has not theretofore purchased (anything in such
agreement to the contrary notwithstanding), but if the Optionee
fails to exercise such right before such recapitalization becomes
effective, the option price under such agreement shall be
appropriately adjusted. Each such agreement shall further
provide that upon dissolution or liquidation of Subsidiary, the
option shall terminate, but the Optionee (if at the time an
employee or director of the Company and/or any one or more of its
subsidiaries) shall have the right, immediately prior to such
dissolution or liquidation, to exercise the option to the full
extent not theretofore exercised; that no adjustment provided for
above shall apply to any share with respect to which the option
has been exercised prior to the effective date of such
adjustment; and that no fraction of a share or fractional shares
shall be purchasable or deliverable under such agreement, but in
the event any adjustment thereunder of the number of shares
covered by the option shall cause such number to include a
fraction of a share, such fraction shall be adjusted to the
nearest smaller whole number of shares. In the event of changes
in the outstanding Common Stock by reason of any stock dividend,
split-up, contraction, reclassification, or change of outstanding
shares of the Common Stock of the nature contemplated by this
paragraph 11, the number of shares of Common Stock available for
the purpose of the Plan as stated in paragraph 3 hereof shall be
correspondingly adjusted by the Committee.
12. Limitation of Rights in Option Stock
The Optionees shall have no rights as stockholders in
respect of shares as to which their options shall not have been
exercised, certificates issued and delivered and payment as
PAGE
<PAGE>
herein provided made in full, and shall have no rights with
respect to such shares not expressly conferred by this Plan.
13. Stock Reserved
The Company shall at all times during the term of the
options reserve and keep available such number of shares of the
Common Stock as will be sufficient to satisfy the requirements of
this Plan and shall pay all other fees and expenses necessarily
incurred by the Company in connection therewith.
14. Securities Laws Restrictions
Each Optionee exercising an option, at the request of the
Company, will be required to give a representation in form
satisfactory to counsel for the Company that he will not
transfer, sell or otherwise dispose of the shares received upon
exercise of the option at any time purchased by him, upon
exercise of any portion of the option, in a manner which would
violate the Securities Act of 1933, as amended, and the
regulations of the Securities and Exchange Commission thereunder
and the Company may, if required or at its discretion, make a
notation on any certificates issued upon exercise of options to
the effect that such certificate may not be transferred except
after receipt by the Company of an opinion of counsel
satisfactory to it to the effect that such transfer will not
violate such Act and such regulations.
15. Tax Withholding
The Company shall have the right to deduct from payments of
any kind otherwise due to an Optionee any federal, state or local
taxes of any kind required by law to be withheld with respect to
any shares issued upon exercise of options under the Plan (the
"withholding requirements"). The Committee will have the right
to require that the Optionee or other appropriate person remit to
the Company an amount sufficient to satisfy the withholding
requirements, or make other arrangements satisfactory to the
Committee with regard to such requirements, prior to the delivery
of any Common Stock pursuant to exercise of an option. If and to
the extent that such withholding is required, the Committee may
permit the Optionee or such other person to elect at such time
and in such manner as the Committee provides to have the Company
hold back from the shares to be delivered, or to deliver to the
Company, Common Stock having a value calculated to satisfy the
withholding requirements.
16. Termination and Amendment of Plan
The Board of Directors may at any time, and from time to
time, modify or amend the Plan in any respect, except that if at
any time the approval of the Stockholders of the Company is
required as to such modification or amendment under Rule 16b-3,
PAGE
<PAGE>
the Board of Directors may not effect such modification or
amendment without such approval.
The termination or any modification or amendment of the Plan
shall not, without the consent of an Optionee, affect his or her
rights under an option previously granted to him or her. With
the consent of the Optionees affected, the Board of Directors may
amend outstanding option agreements in a manner not inconsistent
with the Plan. The Board of Directors shall have the right to
amend or modify the terms and provisions of the Plan and of any
outstanding option to the extent necessary to ensure the
qualification of the Plan under Rule 16b-3.
Notwithstanding any other provisions hereof, the Plan shall
terminate on December 31, 2008 and no options shall be granted
hereunder thereafter.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
TERRATECH INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JANUARY 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> APR-04-1998
<PERIOD-END> JAN-03-1998
<CASH> 25,887
<SECURITIES> 33,566
<RECEIVABLES> 68,336
<ALLOWANCES> 3,721
<INVENTORY> 1,259
<CURRENT-ASSETS> 156,645
<PP&E> 136,068
<DEPRECIATION> 48,142
<TOTAL-ASSETS> 369,375
<CURRENT-LIABILITIES> 79,004
<BONDS> 152,553
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<COMMON> 1,958
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<TOTAL-LIABILITY-AND-EQUITY> 369,375
<SALES> 17,330
<TOTAL-REVENUES> 227,555
<CGS> 14,735
<TOTAL-COSTS> 183,501
<OTHER-EXPENSES> 644
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