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 October 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.)
85 First Avenue
Waltham, Massachusetts 02451
(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 October 30, 1998
---------------------------- -------------------------------
Common Stock, $.10 par value 19,506,324
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO TERRATECH INC.
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, April 4,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $22,993 and
$29,583 under repurchase agreement with parent
company) $ 26,427 $ 34,711
Available-for-sale investments, at quoted market
value (amortized cost of $2,008) 2,006 2,003
Short-term held-to-maturity investments, at
amortized cost (quoted market value of $13,979) - 13,939
Accounts receivable, less allowances of $4,661
and $4,450 63,964 60,050
Unbilled contract costs and fees 21,450 20,547
Inventories 1,949 1,498
Prepaid and refundable income taxes 9,709 6,224
Prepaid expenses 3,977 3,810
-------- --------
129,482 142,782
-------- --------
Property, Plant, and Equipment, at Cost 147,587 142,368
Less: Accumulated depreciation and amortization 55,208 50,659
-------- --------
92,379 91,709
-------- --------
Other Assets 18,135 18,227
-------- --------
Cost in Excess of Net Assets of Acquired Companies 106,451 107,808
-------- --------
$346,447 $360,526
======== ========
2
<PAGE>
THERMO TERRATECH INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, April 4,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Note payable and current maturities of
long-term obligations $ 16,737 $ 27,165
Accounts payable 16,225 17,728
Accrued payroll and employee benefits 11,691 11,359
Other accrued expenses (Note 4) 19,270 14,870
Due to parent company 2,739 2,341
-------- --------
66,662 73,463
-------- --------
Deferred Income Taxes 2,904 2,901
-------- --------
Other Deferred Items 1,069 1,049
-------- --------
Long-term Obligations:
Subordinated convertible debentures (includes
$3,325 and $3,000 of related-party debt) 149,800 149,800
Other 3,257 3,344
-------- --------
153,057 153,144
-------- --------
Minority Interest 30,362 32,839
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 75,000,000 shares
authorized; 19,583,773 shares issued 1,958 1,958
Capital in excess of par value 67,680 70,437
Retained earnings 24,624 27,319
Treasury stock at cost, 77,449 and 51,188 shares (694) (484)
Accumulated other comprehensive items (Note 3) (1,175) (2,100)
-------- --------
92,393 97,130
-------- --------
$346,447 $360,526
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMO TERRATECH INC.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues:
Service revenues $77,177 $71,240
Product revenues - 9,921
------- -------
77,177 81,161
------- -------
Costs and Operating Expenses:
Cost of service revenues 62,034 57,072
Cost of product revenues - 8,604
Selling, general, and administrative expenses 10,723 10,519
Restructuring costs (Note 4) 10,217 -
------- -------
82,974 76,195
------- -------
Operating Income (Loss) (5,797) 4,966
Interest Income 511 793
Interest Expense (includes $40 and $36 to parent
company) (2,205) (2,566)
Equity in Earnings of Unconsolidated Subsidiary - 56
------- -------
Income (Loss) Before Income Taxes and Minority
Interest (7,491) 3,249
Income Tax (Provision) Benefit 2,108 (1,512)
Minority Interest (Expense) Income 1,687 (170)
------- -------
Net Income (Loss) $(3,696) $ 1,567
======= =======
Earnings (Loss) per Share (Note 2):
Basic $ (.19) $ .09
======= =======
Diluted $ (.19) $ .08
======= =======
Weighted Average Shares (Note 2):
Basic 19,513 18,404
======= =======
Diluted 19,513 18,989
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO TERRATECH INC.
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues:
Service revenues $153,870 $136,350
Product revenues - 17,330
-------- --------
153,870 153,680
-------- --------
Costs and Operating Expenses:
Cost of service revenues 123,079 108,892
Cost of product revenues - 14,735
Selling, general, and administrative expenses 22,298 20,679
Restructuring costs (Note 4) 10,217 -
-------- --------
155,594 144,306
-------- --------
Operating Income (Loss) (1,724) 9,374
Interest Income 1,155 2,196
Interest Expense (includes $76 and $447 to
parent company) (4,462) (5,699)
Equity in Earnings of Unconsolidated Subsidiary - 174
Other Income - 204
-------- --------
Income (Loss) Before Income Taxes and Minority
Interest (5,031) 6,249
Income Tax (Provision) Benefit 809 (2,911)
Minority Interest (Expense) Income 1,527 (439)
-------- --------
Net Income (Loss) $ (2,695) $ 2,899
======== ========
Earnings (Loss) per Share (Note 2):
Basic $ (.14) $ .16
======== ========
Diluted $ (.14) $ .16
======== ========
Weighted Average Shares (Note 2):
Basic 19,514 18,025
======== ========
Diluted 19,514 18,552
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ (2,695) $ 2,899
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Noncash restructuring costs (Note 4) 8,105 -
Depreciation and amortization 8,340 7,107
Equity in earnings of unconsolidated
subsidiary - (174)
Minority interest expense (income) (1,527) 439
Provision for losses on accounts receivable 628 223
Other noncash items 152 (166)
Changes in current accounts, excluding the
effects of acquisitions:
Accounts receivable (5,224) (11,404)
Unbilled contract costs and fees (2,094) (9,142)
Other current assets (3,647) (663)
Accounts payable (1,223) 3,056
Current liabilities 3,524 (1,965)
-------- --------
Net cash provided by (used in) operating
activities 4,339 (9,790)
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (576) (5,546)
Proceeds from sale and maturities of
available-for-sale and held-to-maturity
investments 14,065 10,232
Purchases of property, plant, and equipment (10,373) (9,654)
Proceeds from sale of property, plant, and
equipment 187 458
Purchase of other assets (1,284) (724)
Other (48) -
-------- --------
Net cash provided by (used in) investing
activities $ 1,971 $ (5,234)
-------- --------
6
<PAGE>
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Financing Activities:
Repayment of notes payable $(14,292) $ (392)
Repayment of notes payable to parent company - (38,000)
Repayment of long-term notes receivable 537 -
Repurchase of Company and subsidiaries' common
stock (210) (6,622)
Proceeds from issuance of Company and
subsidiary common stock 45 758
Dividends paid by subsidiary to minority
shareholders (463) (354)
Other (7) (274)
-------- --------
Net cash used in financing activities (14,390) (44,884)
-------- --------
Exchange Rate Effect on Cash (204) 7
-------- --------
Decrease in Cash and Cash Equivalents (8,284) (59,901)
Cash and Cash Equivalents at Beginning of Period 34,711 63,172
-------- --------
Cash and Cash Equivalents at End of Period $ 26,427 $ 3,271
======== ========
Noncash Activities:
Fair value of assets of acquired companies $ 576 $ 16,977
Cash paid for acquired companies (576) (7,465)
Issuance of subsidiary common stock for
acquired company - (2,400)
-------- --------
Liabilities assumed of acquired companies $ - $ 7,112
======== ========
Conversions of subordinated convertible
debentures $ - $ 13,220
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
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 October 3, 1998, the results of
operations for the three- and six-month periods ended October 3, 1998, and
September 27, 1997, and the cash flows for the six-month periods ended October
3, 1998, and September 27, 1997. Interim results are not necessarily indicative
of results for a full year.
The consolidated balance sheet presented as of April 4, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. Certain amounts in fiscal 1998 have
been reclassified to conform to the presentation in the fiscal 1999 financial
statements. 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 April 4, 1998, filed with the Securities and
Exchange Commission.
2. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Six Months Ended
------------------- -------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income (Loss) $(3,696) $ 1,567 $(2,695) $ 2,899
------- ------- ------- -------
Weighted Average Shares 19,513 18,404 19,514 18,025
------- ------- ------- -------
Basic Earnings (Loss) per
Share $ (.19) $ .09 $ (.14) $ .16
======= ======= ======= =======
8
<PAGE>
2. Earnings (Loss) per Share (continued)
Three Months Ended Six Months Ended
------------------- -------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Diluted
Net Income (Loss) $(3,696) $ 1,567 $(2,695) $ 2,899
Effect of Majority-owned
Subsidiaries' Dilutive
Securities - (5) (2) (15)
------- ------- ------- -------
Income (Loss) Available to
Common Shareholders,
as Adjusted $(3,696) $ 1,562 $(2,697) $ 2,884
------- ------- ------- -------
Weighted Average Shares 19,513 18,404 19,514 18,025
Effect of Stock Options and
Warrants - 585 - 527
------- ------- ------- -------
Weighted Average Shares,
as Adjusted 19,513 18,989 19,514 18,552
------- ------- ------- -------
Diluted Earnings (Loss) per
Share $ (.19) $ .08 $ (.14) $ .16
======= ======= ======= =======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of outstanding stock options and warrants because the
effect would be antidilutive. As of October 3, 1998, there were 2,652,850 such
options and warrants outstanding, with exercise prices ranging from $6.96 to
$12.18 per share. The computation of diluted earnings per share for all periods
excludes the effect of assuming the conversion of $111,850,000 principal amount
of 4 5/8% subordinated convertible debentures, convertible at $15.90 per share,
because the effect would be antidilutive.
In addition, the computation of diluted earnings per share excludes the
effect of outstanding put rights that attached to certain shares issued in
connection with an acquisition because the effect would be antidilutive. The put
rights obligate the Company, at the holders' option, to purchase an aggregate of
821,417 shares of its common stock for $8.00 per share at any time through
January 2002. At the time a holder elects to tender shares, the Company has the
option to net cash settle the obligation in lieu of purchasing the shares.
3. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income
9
<PAGE>
3. Comprehensive Income (continued)
and "other comprehensive items," which represents certain items that are
reported as components of shareholders' investment in the accompanying balance
sheet, including foreign currency translation adjustments and unrealized net of
tax gains or losses from available-for-sale investments. During the second
quarter of fiscal 1999 and 1998, the Company had a comprehensive loss of
$3,308,000 and comprehensive income of $1,483,000, respectively. During the
first six months of fiscal 1999 and 1998, the Company had a comprehensive loss
of $2,229,000 and comprehensive income of $2,589,000, respectively.
4. Restructuring Costs
During the second quarter of fiscal 1999, the Company recorded $10.2 million
of restructuring costs. Of these restructuring costs, $9.2 million was recorded
by the Company's ThermoRetec Corporation subsidiary (formerly Thermo Remediation
Inc.) in connection with the closure of two soil-recycling facilities. The costs
included a write-down of fixed assets to their estimated disposal value and a
write-off of intangible assets, including cost in excess of net assets of
acquired companies, as well as other closure costs. In addition, the Company
recorded $1.0 million of restructuring costs for abandoned-facility payments
relating to the consolidation of the facilities of another business. Other
accrued expenses in the accompanying October 3, 1998, balance sheet includes
$2.1 million for closure costs related to these actions, including severance and
lease costs.
5. Proposed Reorganization
On August 12, 1998, Thermo Electron Corporation announced a proposed
reorganization involving certain of Thermo Electron's subsidiaries, including
the Company. As part of this reorganization, Thermo Electron announced that the
Company may take private its two public subsidiaries, ThermoRetec and The
Randers Group Incorporated, and privately held Thermo EuroTech. These businesses
would become wholly owned subsidiaries of the Company. It is currently
contemplated that shareholders of those subsidiaries would receive shares of
common stock of the Company in exchange for their shares of the subsidiaries'
common stock. The completion of this transaction is subject to numerous
conditions, including the establishment of prices or exchange ratios;
confirmation of anticipated tax consequences; the approval of the Board of
Directors of the affected subsidiaries; the negotiation and execution of a
definitive merger agreement; the receipt of a fairness opinion from an
investment banking firm that the transaction is fair to the subsidiaries'
shareholders (other than the Company and Thermo Electron) from a financial point
of view; the approval of the Company's Board of Directors, including its
independent directors; and clearance by the Securities and Exchange Commission
of any necessary documents regarding the proposed transaction.
10
<PAGE>
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 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 4, 1998, filed with the Securities and Exchange
Commission.
Overview
The Company provides industrial outsourcing services and manufacturing
support encompassing a broad range of specializations, including infrastructure
engineering, design and construction, environmental compliance, laboratory
testing, and metal treating.
Environmental-liability Management - The Company's majority-owned
ThermoRetec Corporation (formerly Thermo Remediation Inc.) subsidiary is a
national provider of environmental-liability management services. ThermoRetec
offers these and related consulting services in five areas: industrial
remediation, nuclear remediation, waste-fluids collection and recycling, soil
remediation, and environmental-management and information technology consulting.
The Company's majority-owned Thermo EuroTech N.V. subsidiary, located in the
Netherlands, specializes in converting "off-spec" and contaminated petroleum
fluids into usable oil products. Thermo EuroTech also provides in-plant waste
management and recycling services through its Ireland-based Green Sunrise
Holdings Ltd. subsidiary, acquired in February 1998.
Engineering and Design - The Company's majority-owned subsidiary The Randers
Group Incorporated provides comprehensive engineering and outsourcing services
such as water and wastewater treatment, highway and bridge projects, process
engineering, construction management, and inspection and operational services.
Randers has proposed changing its name to The Randers Killam Group Inc., subject
to shareholder approval. 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.
11
<PAGE>
Overview (continued)
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.
The Company's revenues were as follows:
Three Months Ended Six Months Ended
-------------------- -------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Environmental-liability
Management $ 39,067 $ 37,019 $ 79,032 $ 67,759
Engineering and Design 23,764 21,358 46,540 41,954
Laboratory Testing 9,901 9,021 19,572 18,376
Metal Treating (a) 4,798 14,494 9,504 26,588
Intercompany Sales
Eliminations (353) (731) (778) (997)
-------- -------- -------- --------
$ 77,177 $ 81,161 $153,870 $153,680
======== ======== ======== ========
(a) Includes the results of the Company's thermal-processing equipment business,
which was sold in October 1997.
The Company has acquired a number of businesses in the last three years. The
Company does not presently intend to actively seek to make additional
acquisitions in the near future, and expects instead to concentrate its
resources on strengthening its core business. The Company may, however, acquire
one or more additional businesses if they are presented to the Company on terms
the Company believes to be attractive.
Results of Operations
Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998
Total revenues decreased to $77.2 million in the second quarter of fiscal
1999 from $81.2 million in the second quarter of fiscal 1998. Metal-treating
revenues decreased to $4.8 million in fiscal 1999 from $14.5 million in fiscal
1998, due to the sale of the Company's thermal- processing equipment business in
October 1997, which contributed revenues of $9.9 million in fiscal 1998.
Revenues from environmental-liability management services increased 6% to $39.1
million in fiscal 1999 from $37.0 million in fiscal 1998. Revenues at
ThermoRetec increased to $35.1 million in fiscal 1999 from $33.6 million in
fiscal 1998, primarily due to increased revenues from consulting and engineering
services at Remediation Technologies, Inc. (RETEC) and the inclusion of $2.5
million of revenues from two businesses acquired in fiscal 1998. Revenues from
ThermoRetec's soil-remediation services increased $1.1 million in fiscal
12
<PAGE>
Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998
(continued)
1999, resulting from higher volumes of soil processed. These increases were
offset in part by a $5.5 million decrease in revenues resulting from a decline
in the number of contracts in process at ThermoRetec's IEM Sealand subsidiary.
Revenues from Thermo EuroTech increased $0.5 million to $3.9 million, primarily
due to the inclusion of $1.8 million in revenues from Green Sunrise, acquired in
February 1998, offset in part by a decrease in sales of usable oil products.
Revenues from engineering and design services increased to $23.8 million in
fiscal 1999 from $21.4 million in fiscal 1998, primarily due to increased
revenues from two construction and labor management contracts for which work
commenced during the first quarter of fiscal 1999 and is expected to be
completed by the end of the first quarter of fiscal 2000. Revenues from
laboratory-testing services, excluding radiochemistry laboratory services
included in environmental-liability management services, increased to $9.9
million in fiscal 1999 from $9.0 million in fiscal 1998, due to higher demand.
The gross profit margin remained relatively unchanged at 19.6% in the second
quarter of fiscal 1999, compared with 19.1% in the second quarter of fiscal
1998. The overall gross profit margin increased due to the effect of the sale of
the lower-margin thermal-processing equipment business in October 1997. The
gross profit margin from environmental-liability management services increased
in fiscal 1999 primarily as a result of improved margins at Thermo EuroTech due
to the inclusion of higher-margin revenue at Green Sunrise, offset in part by
lower margins on certain remedial-construction contracts at ThermoRetec's IEM
Sealand subsidiary. The gross profit margin from engineering and design services
decreased in fiscal 1999, primarily due to a change in the sales mix of
contracts.
Selling, general, and administrative expenses as a percentage of revenues
increased slightly to 14% in the second quarter of fiscal 1999 from 13% in the
second quarter of fiscal 1998, primarily due to the sale of the Company's
thermal-processing equipment business which had lower relative selling, general,
and administrative expenses.
During the second quarter of fiscal 1999, the Company recorded $10.2 million
of restructuring costs. Of these restructuring costs, $9.2 million was recorded
by ThermoRetec in connection with the closure of two soil-recycling facilities.
The costs include a write-down of fixed assets to their estimated disposal value
and a write-off of intangible assets, including cost in excess of net assets of
acquired companies, as well as other closure costs. The closure was in response
to changes in market conditions, which resulted in lower priced disposal
alternatives. These facilities reported revenues and operating losses of $2.2
million and $0.8 million, respectively, in fiscal 1998, and revenues and
operating losses before the restructuring costs of $1.8 million and $0.1
million, respectively, in the first six months of fiscal 1999. In addition, the
Company recorded $1.0 million of restructuring costs for abandoned-facility
payments relating to the consolidation of the facilities of another business
(Note 4).
13
<PAGE>
Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998
(continued)
Interest income decreased to $0.5 million in the second quarter of fiscal
1999 from $0.8 million in the second quarter of fiscal 1998 as a result of lower
average invested balances. Interest expense decreased to $2.2 million in fiscal
1999 from $2.6 million in fiscal 1998, primarily due to the repayment of a note
payable in February and May 1998, offset in part by an increase in borrowed
funds for the acquisition of Green Sunrise in February 1998.
Equity in earnings of unconsolidated subsidiary in fiscal 1998 represented
ThermoRetec's proportionate share of income from a joint venture sold in October
1997.
The Company recorded a tax benefit in the second quarter of fiscal 1999 at
an effective rate below the statutory federal income tax rate primarily due to
the write-off of nondeductible cost in excess of net assets of acquired
companies. The effective tax rate in the second quarter of fiscal 1998 was 47%
and 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 Company recorded minority interest income of $1.7 million in the second
quarter of fiscal 1999, compared with minority interest expense of $0.2 million
in the second quarter of fiscal 1998, primarily due to losses incurred in fiscal
1999 by two of the Company's majority-owned subsidiaries.
In July 1998, ThermoRetec filed suit against a customer, seeking payment of
$2.6 million that has been billed under a contract to provide remediation
services. The customer has disputed its obligation to pay ThermoRetec. While the
Company generally maintains reserves for these types of matters, failure to
collect this receivable would have a material adverse impact on the Company's
future results of operations.
First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998
Total revenues were $153.9 million in the first six months of fiscal 1999,
compared with $153.7 million in the first six months of fiscal 1998.
Metal-treating revenues decreased to $9.5 million in fiscal 1999 from $26.6
million in fiscal 1998, due to the sale of the Company's thermal-processing
equipment business in October 1997, which contributed revenues of $17.3 million
in fiscal 1998. Revenues from environmental-liability management services
increased 17% to $79.0 million in fiscal 1999 from $67.8 million in fiscal 1998.
Revenues at ThermoRetec increased to $69.6 million in fiscal 1999 from $61.8
million in fiscal 1998, primarily due to increased revenues from consulting and
engineering services at RETEC and, to a lesser extent, the inclusion of $5.2
million of revenues from two businesses acquired in fiscal 1998. Revenues from
ThermoRetec's soil-remediation services increased $2.9 million in fiscal 1999,
resulting from higher volumes of soil processed. These increases
14
<PAGE>
First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998
(continued)
were offset in part by a $9.7 million decrease in revenues resulting from a
decline in the number of contracts in process at ThermoRetec's IEM Sealand
subsidiary. Revenues from Thermo EuroTech increased $3.6 million to $9.5
million, primarily due to the inclusion of $3.6 million of revenues from Green
Sunrise, acquired in February 1998. Revenues from engineering and design
services increased to $46.5 million in fiscal 1999 from $42.0 million in fiscal
1998. Revenues increased $3.5 million due to the inclusion of revenues from
Randers, acquired in May 1997. Revenues from laboratory-testing services,
excluding radiochemistry laboratory services included in environmental-liability
management services, increased to $19.6 million in fiscal 1999 from $18.4
million in fiscal 1998, due to higher demand.
The gross profit margin remained relatively unchanged at 20.0% in the first
six months of fiscal 1999, compared with 19.6% in the first six months of fiscal
1998. The overall gross profit margin increased due to the effect of the sale of
the lower-margin thermal-processing equipment business in October 1997. The
gross profit margin from engineering and design services decreased in fiscal
1999, primarily due to a change in the sales mix of contracts. The gross profit
margin from environmental-liability management services increased in fiscal 1999
primarily as a result of improved margins at Thermo EuroTech due to the
inclusion of higher-margin revenue at Green Sunrise, offset in part by
lower-margin revenue from certain remedial-construction contracts at IEM
Sealand.
Selling, general, and administrative expenses as a percentage of revenues
increased slightly to 14% in the first six months of fiscal 1999 from 13% in the
first six months of fiscal 1998, primarily due to the inclusion of higher
relative expenses at Green Sunrise and, to a lesser extent, lower expenses in
the first quarter of fiscal 1998 during a period of management transition at
Thermo EuroTech. This increase was also due to the absence in fiscal 1999 of
lower relative expenses at the Company's thermal-processing equipment business.
Interest income decreased to $1.2 million in the first six months of fiscal
1999 from $2.2 million in the first six months of fiscal 1998 as a result of
lower average invested balances. Interest expense decreased to $4.5 million in
fiscal 1999 from $5.7 million in fiscal 1998, primarily due to the repayment of
a note payable in February and May 1998, 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.
During the second quarter of fiscal 1999, the Company recorded $10.2 million
of restructuring costs. Of these restructuring costs, $9.2 million was recorded
by ThermoRetec in connection with the closure of two soil-recycling facilities
and $1.0 million related to restructuring costs for abandoned-facility payments
relating to the consolidation of the facilities of another business (Note 4).
15
<PAGE>
First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998
(continued)
Equity in earnings of unconsolidated subsidiary in fiscal 1998 represented
ThermoRetec's proportionate share of income from a joint venture sold in October
1997.
The Company recorded a tax benefit in the first six months of fiscal 1999 at
an effective rate below the statutory federal income tax rate primarily due to
the write-off of nondeductible cost in excess of net assets of acquired
companies. The effective tax rate in the first six months of fiscal 1998 was
47%. This rate 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 Company recorded minority interest income of $1.5 million in the first
six months of fiscal 1999, compared with minority interest expense of $0.4
million in the first six months of fiscal 1998, primarily due to losses incurred
in fiscal 1999 by two of the Company's majority-owned subsidiaries.
Liquidity and Capital Resources
Consolidated working capital was $62.8 million at October 3, 1998, compared
with $69.3 million at April 4, 1998. Cash, cash equivalents, and
available-for-sale investments were $28.4 million at October 3, 1998, compared
with $36.7 million at April 4, 1998. Of the $28.4 million balance at October 3,
1998, $20.5 million was held by the Company's majority-owned subsidiaries, and
the remainder was held by the Company and its wholly owned subsidiaries. During
the first six months of fiscal 1999, $4.3 million of cash was provided by
operating activities. During this period, the Company used $5.2 million of cash
to fund an increase in accounts receivable. This increase was primarily a result
of a large remedial-construction contract and a slowing of collections at
ThermoRetec. ThermoRetec expects to increase collection efforts over the
remainder of fiscal 1999. In addition, cash of $2.1 million and $3.6 million was
used to fund an increase in unbilled contract costs and fees and other current
assets, respectively. The increase in unbilled contract costs and fees was
primarily due to a construction and labor management contract at Randers, which
commenced during the first quarter of fiscal 1999, and, to a lesser extent, the
timing of billings. The increase in other current assets was primarily due to an
increase in prepaid and refundable income taxes.
Excluding available-for-sale and held-to-maturity investment activity, the
Company's investing activities in the first six months of fiscal 1999 primarily
consisted of capital additions. The Company expended $10.4 million for purchases
of property, plant, and equipment in fiscal 1999 and expects to spend
approximately $5.0 million for capital additions during the remainder of fiscal
1999. In addition, during August 1998, ThermoRetec made an acquisition for $0.6
million in cash.
16
<PAGE>
Liquidity and Capital Resources (continued)
The Company's financing activities used cash of $14.4 million in the first
six months of fiscal 1999. During fiscal 1999, the Company repaid notes payable
totaling $14.3 million. The Board of Directors of ThermoRetec, 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 October 3, 1998, ThermoRetec had expended $11.4 million under these
authorizations, of which none was expended in the first six months of fiscal
1999. Any such purchases were funded from working capital.
The Company generally expects to have positive cash flow from its existing
operations. Although the Company does not presently intend to actively seek to
acquire additional businesses in the near future, it may acquire one or more
complimentary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. In addition, $38.0 million principal amount of ThermoRetec's 4
7/8% subordinated convertible debentures matures on May 1, 2000. The Company
expects that it will finance any such acquisitions and the redemption of such
debentures through a combination of internal funds and/or short-term borrowings
from Thermo Electron, although it has no agreement with Thermo Electron to
ensure that funds will be available on acceptable terms or at all. Except as
described in this paragraph with respect to ThermoRetec's debentures, the
Company believes that its existing resources are sufficient to meet the capital
requirements of its existing businesses for the foreseeable future.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. In most cases, such
upgrades or replacements are being made in the ordinary course of business. The
Company expects that all of its material information technology systems will be
year 2000 compliant by the end of 1999. The Company is also evaluating the
potential year 2000 impact on its facilities, including its buildings and
utility systems. Any problems that are identified will be prioritized and
remediated based on their assigned priority. The Company will
17
<PAGE>
Year 2000 (continued)
continue periodic testing of its critical internal business systems and
facilities in an effort to minimize operating disruptions due to year 2000
issues.
The Company is in the process of identifying and contacting suppliers,
vendors and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan may include identifying and securing other suppliers, and
modifying production facilities and schedules. As the Company continues to
evaluate the year 2000 readiness of its business systems and facilities,
products, and significant suppliers, vendors, and customers, it will modify and
adjust its contingency plan as may be required.
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Some services provided by the Company may involve the delivery to clients of
third-party software and hardware. Accordingly, the Company may see an increase
in warranty and other claims related to Company services that incorporate such
software or hardware. In addition, certain older third-party products, which the
Company no longer uses in providing its services to clients, may not be year
2000 compliant, which may expose the Company to claims. If any of the Company's
material suppliers, vendors or customers experience business disruptions due to
year 2000 issues, the Company might also be
18
<PAGE>
Year 2000 (continued)
materially adversely affected. The Company's research and development,
production, distribution, financial, administrative, and communications
operations might be disrupted. There is expected to be a significant amount of
litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. Any
unexpected costs or delays arising from the year 2000 issue could have a
significant adverse impact on the Company's business, operations, and financial
condition.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On September 15, 1998, at the Annual Meeting of Shareholders, the
shareholders elected six incumbent directors to a one-year term expiring
in 1999. The Directors elected at the meeting were: Dr. John P. Appleton,
Mr. John N. Hatsopoulos, Mr. Brian D. Holt, Mr. Donald E. Noble, Mr.
William A. Rainville, and Mr. Polyvios C. Vintiadis. Mr. Brian D. Holt,
Mr. William A. Rainville, and Mr. Polyvios C. Vintiadis each received
18,656,641 shares voted in favor of his election and 12,273 shares voted
against. Dr. John P. Appleton, Mr. John N. Hatsopoulos, and Mr. Donald E.
Noble received 18,654,611, 18,656,566, and 18,656,253 shares,
respectively, voted in favor of their election and 14,303, 12,348, and
12,661 shares, respectively, voted against. No abstentions or broker
nonvotes were recorded on the election of directors.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On August 13, 1998, the Company filed a Current Report on Form 8-K dated
August 12, 1998, with respect to a proposed reorganization by the Company's
ultimate parent corporation, Thermo Electron Corporation, involving certain of
Thermo Electron's subsidiaries, including the Company.
On September 29, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, with respect to restructuring and other charges recorded
during the second quarter of fiscal 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 10th day of November 1998.
THERMO TERRATECH INC.
Paul F. Kelleher
---------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
---------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
20
<PAGE>
THERMO TERRATECH INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ---------------------------------------------------------------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
TERRATECH INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-END> OCT-03-1998
<CASH> 26,427
<SECURITIES> 2,006
<RECEIVABLES> 68,625
<ALLOWANCES> 4,716
<INVENTORY> 1,949
<CURRENT-ASSETS> 129,427
<PP&E> 147,587
<DEPRECIATION> 55,208
<TOTAL-ASSETS> 346,392
<CURRENT-LIABILITIES> 63,321
<BONDS> 146,800
0
0
<COMMON> 1,958
<OTHER-SE> 93,721
<TOTAL-LIABILITY-AND-EQUITY> 346,392
<SALES> 0
<TOTAL-REVENUES> 153,870
<CGS> 0
<TOTAL-COSTS> 123,079
<OTHER-EXPENSES> 10,217
<LOSS-PROVISION> 683
<INTEREST-EXPENSE> 4,462
<INCOME-PRETAX> (5,031)
<INCOME-TAX> (809)
<INCOME-CONTINUING> (2,695)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,695)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
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