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 2, 1999.
[ ] 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 January 29, 1999
---------------------------- -------------------------------
Common Stock, $.10 par value 19,171,261
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO TERRATECH INC.
Consolidated Balance Sheet
(Unaudited)
Assets
January 2, April 4,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $31,721 and
$29,583 under repurchase agreement with parent
company) $ 34,845 $ 34,711
Available-for-sale investments, at quoted market
value (amortized cost of $2,008) - 2,003
Short-term held-to-maturity investments, at
amortized cost (quoted market value of $13,979) - 13,939
Accounts receivable, less allowances of $4,165
and $4,450 64,311 60,050
Unbilled contract costs and fees 19,917 20,547
Inventories 1,823 1,498
Prepaid and refundable income taxes 9,708 6,224
Prepaid expenses 3,436 3,810
-------- --------
134,040 142,782
-------- --------
Property, Plant, and Equipment, at Cost 148,467 142,368
Less: Accumulated depreciation and amortization 57,048 50,659
-------- --------
91,419 91,709
-------- --------
Other Assets 18,376 18,227
-------- --------
Cost in Excess of Net Assets of Acquired Companies 110,317 107,808
-------- --------
$354,152 $360,526
======== ========
2
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THERMO TERRATECH INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
January 2, April 4,
(In thousands except share amounts) 1999 1998
- --------------------------------------------------------------------------
Current Liabilities:
Note payable and current maturities of
long-term obligations $ 16,534 $ 27,165
Accounts payable 20,259 17,728
Accrued payroll and employee benefits 12,075 11,359
Other accrued expenses (Note 4) 18,695 14,870
Due to parent company 2,196 2,341
-------- --------
69,759 73,463
-------- --------
Deferred Income Taxes 2,904 2,901
-------- --------
Other Deferred Items 939 1,049
-------- --------
Long-term Obligations:
Subordinated convertible debentures (includes
$3,425 and $3,000 of related-party debt;
Note 5) 156,799 149,800
Other 2,880 3,344
-------- --------
159,679 153,144
-------- --------
Minority Interest 28,238 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 68,673 70,437
Retained earnings 25,395 27,319
Treasury stock at cost, 264,362 and 51,188 shares (2,188) (484)
Accumulated other comprehensive items (Note 3) (1,205) (2,100)
-------- --------
92,633 97,130
-------- --------
$354,152 $360,526
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO TERRATECH INC.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
-------------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Revenues $ 80,400 $ 73,875
-------- --------
Costs and Operating Expenses:
Cost of revenues 64,549 59,874
Selling, general, and administrative expenses 11,874 11,074
-------- --------
76,423 70,948
-------- --------
Operating Income 3,977 2,927
Interest Income 497 999
Interest Expense (includes $42 and $37 to parent
company) (2,307) (2,672)
Gain on Sale of Businesses, Net - 2,975
Other Income 40 -
-------- --------
Income Before Provision for Income Taxes and
Minority Interest 2,207 4,229
Provision for Income Taxes 1,343 2,004
Minority Interest Expense 93 569
-------- --------
Net Income $ 771 $ 1,656
======== ========
Earnings per Share (Note 2):
Basic $ .04 $ .09
======== ========
Diluted $ .04 $ .08
======== ========
Weighted Average Shares (Note 2):
Basic 19,421 19,218
======== ========
Diluted 21,268 19,268
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO TERRATECH INC.
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
--------------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Revenues:
Service revenues $234,270 $210,225
Product revenues - 17,330
-------- --------
234,270 227,555
-------- --------
Costs and Operating Expenses:
Cost of service revenues 187,628 168,766
Cost of product revenues - 14,735
Selling, general, and administrative expenses 34,172 31,753
Restructuring costs (Note 4) 10,217 -
-------- --------
232,017 215,254
-------- --------
Operating Income 2,253 12,301
Interest Income 1,652 3,195
Interest Expense (includes $118 and $556 to
parent company) (6,769) (8,371)
Gain on Sale of Businesses, Net - 2,975
Equity in Earnings of Unconsolidated Subsidiary - 174
Other Income 40 204
-------- --------
Income (Loss) Before Provision for Income Taxes
and Minority Interest (2,824) 10,478
Provision for Income Taxes 534 4,915
Minority Interest (Income) Expense (1,434) 1,008
-------- --------
Net Income (Loss) $ (1,924) $ 4,555
======== ========
Earnings (Loss) per Share (Note 2):
Basic $ (.10) $ .25
======== ========
Diluted $ (.10) $ .24
======== ========
Weighted Average Shares (Note 2):
Basic 19,483 18,423
======== ========
Diluted 19,483 18,791
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
--------------------------
January 2, January 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ (1,924) $ 4,555
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 12,356 11,094
Equity in earnings of unconsolidated
subsidiary - (174)
Minority interest (income) expense (1,434) 1,008
Provision for losses on accounts
receivable 963 381
Gain on sale of businesses, net - (2,975)
Other noncash items 225 (242)
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (4,362) (16,129)
Unbilled contract costs and fees (450) (1,418)
Other current assets (3,118) (852)
Accounts payable 2,737 6,982
Other current liabilities 3,220 (4,272)
-------- --------
Net cash provided by (used in) operating
activities 16,318 (2,042)
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (643) (8,419)
Proceeds from sale and maturities of
available-for-sale and held-to-maturity
investments 16,071 12,304
Purchases of property, plant, and equipment (12,656) (13,578)
Proceeds from sale of property, plant, and
equipment 371 1,844
Purchase of other assets (2,680) (1,536)
Proceeds from sale of businesses - 19,722
Other 60 -
-------- --------
Net cash provided by investing activities $ 523 $ 10,337
-------- --------
6
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THERMO TERRATECH INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
--------------------------
January 2, January 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Financing Activities:
Repayment of notes payable $(14,761) $ (546)
Repayment of notes payable to parent company - (38,000)
Repurchase of Company and subsidiaries'
common stock (1,705) (7,197)
Proceeds from issuance of Company and
subsidiary common stock 55 1,140
Issuance of long-term notes receivable (237) (453)
Collection of long-term notes receivable 596 -
Dividends paid by subsidiary to minority
shareholders (402) (354)
Other 11 (150)
-------- --------
Net cash used in financing activities (16,443) (45,560)
-------- --------
Exchange Rate Effect on Cash (264) (20)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents 134 (37,285)
Cash and Cash Equivalents at Beginning of
Period 34,711 63,172
-------- --------
Cash and Cash Equivalents at End of Period $ 34,845 $ 25,887
======== ========
Noncash Activities:
Fair value of assets of acquired companies $ 643 $ 21,412
Cash paid for acquired companies (643) (10,365)
Issuance of subsidiary common stock for
acquired company - (2,850)
-------- --------
Liabilities assumed of acquired companies $ - $ 8,197
======== ========
Conversions of subordinated convertible
debentures $ - $ 13,894
======== ========
Issuance of subordinated convertible
debentures in exchange for subsidiary
common stock (Note 5) $ 6,999 $ -
======== ========
Note receivable received upon sale of
business $ - $ 2,881
======== ========
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 January 2, 1999, the results of
operations for the three- and nine-month periods ended January 2, 1999, and
January 3, 1998, and the cash flows for the nine-month periods ended January 2,
1999, and January 3, 1998. The Company's results of operations for the
three-month periods ended January 2, 1999, and January 3, 1998, include 13 weeks
and 14 weeks, respectively, and its results of operations and cash flows for the
nine-month periods ended January 2, 1999, and January 3, 1998, include 39 weeks
and 40 weeks, respectively. 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 Nine Months Ended
------------------- -------------------
(In thousands except Jan. 2, Jan. 3, Jan. 2, Jan. 3,
per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------
Basic
Net Income (Loss) $ 771 $ 1,656 $(1,924) $ 4,555
------- ------- ------- -------
Weighted Average Shares 19,421 19,218 19,483 18,423
------- ------- ------- -------
Basic Earnings (Loss) per
Share $ .04 $ .09 $ (.10) $ .25
======= ======= ======= =======
8
<PAGE>
2. Earnings (Loss) per Share (continued)
Three Months Ended Nine Months Ended
------------------ -------------------
(In thousands except Jan. 2, Jan. 3, Jan. 2, Jan. 3,
per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------
Diluted
Net Income (Loss) $ 771 $ 1,656 $(1,924) $ 4,555
Effect of:
Convertible debentures 26 - - -
Majority-owned
subsidiaries' dilutive
securities - (23) - (22)
------- ------- ------- -------
Income (Loss) Available to
Common Shareholders, as
Adjusted $ 797 $ 1,633 $(1,924) $ 4,533
------- ------- ------- -------
Weighted Average Shares 19,421 19,218 19,483 18,423
Effect of:
Convertible debentures 1,333 - - -
Put rights 514 - - -
Stock options and warrants - 50 - 368
------- ------- ------- -------
Weighted Average Shares, as
Adjusted 21,268 19,268 19,483 18,791
------- ------- ------- -------
Diluted Earnings (Loss) per
Share $ .04 $ .08 $ (.10) $ .24
======= ======= ======= =======
The computation of diluted earnings per share for the quarter ended January
2, 1999, includes the effect of outstanding put rights that are attached to
certain shares issued in connection with an acquisition. The put rights obligate
the Company, at the holders' option, to purchase shares of the Company's 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. At January 2, 1999, put rights with
respect to an aggregate of 634,504 shares were outstanding.
In addition, the computation of diluted earnings per share for the quarter
ended January 2, 1999, includes the effect of assuming the conversion of
$6,999,000 principal amount of 2 1/2% subordinated convertible debentures,
convertible at $5.25 per share (Note 5).
The computation of diluted earnings (loss) per share for the fiscal 1999
periods excludes the effect of assuming the exercise of outstanding stock
options and warrants because the effect would be antidilutive. As of January 2,
1999, there were 2,038,819 of such options and warrants outstanding, with
exercise prices ranging from $4.16 to $14.58 per share. The computation of
diluted earnings (loss) 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.
9
<PAGE>
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 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 third quarter of fiscal 1999 and
1998, the Company had comprehensive income of $741,000 and $1,499,000,
respectively. During the first nine months of fiscal 1999 and 1998, the Company
had a comprehensive loss of $1,488,000 and comprehensive income of $4,088,000,
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
include a $6.2 million write-down of fixed assets to their estimated disposal
value of $0.9 million and a $1.9 million write-off of intangible assets,
including cost in excess of net assets of acquired companies, as well as $1.1
million for other closure costs, including $0.5 million for lease costs and $0.3
million for severance for nine employees. ThermoRetec expects to complete the
closure of the two soil-recycling facilities before the end 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. During the first nine months of fiscal 1999, the Company
expended $0.1 million for closure costs. Other accrued expenses in the
accompanying balance sheet as of January 2, 1999, include $2.0 million for
closure costs related to these facilities, including ongoing lease costs and, to
a lesser extent, severance.
5. Issuance of Convertible Subordinated Debentures in Exchange for
Subsidiary Common Stock
During fiscal 1999, the Company reorganized the capital structure of Thermo
EuroTech N.V., a privately held subsidiary, by offering shareholders the right
to exchange their common shares in Thermo EuroTech for 2 1/2% Convertible
Subordinated Debentures due 2001 (the Debentures) issued by a new wholly owned
Delaware subsidiary of the Company, known as Thermo EuroTech (Delaware) Inc.
(TETD). As of October 31, 1998, when the exchange offer expired, 1,646,854
common shares had been exchanged by Thermo EuroTech's shareholders, subject to
certain conditions, for Debentures having an aggregate principal amount equal to
$6,999,000. The reacquisition of these shares was accounted for using the
purchase method of accounting. The Debentures are not redeemable prior to
maturity, and are convertible into common stock of TETD at an initial conversion
price of $5.25 per share. The Debentures are guaranteed on a subordinated basis
10
<PAGE>
5. Issuance of Convertible Subordinated Debentures in Exchange for
Subsidiary Common Stock (continued)
by the Company's parent company, Thermo Electron Corporation. Following the
transaction, the Company owned 78% of Thermo EuroTech's outstanding common
shares.
6. Option Exchange
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 1,182,000 shares at a weighted average exercise price of $8.80 elected
to participate in this exchange and, as a result, received options to purchase
591,000 shares of Company common stock at $4.50 per share. The other terms of
the new options are the same as the exchanged options except that the holders
may not sell shares purchased pursuant to such new options for six months from
the exchange date.
7. 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 Corporation
and The Randers Killam Group Inc. (formerly The Randers Group Incorporated).
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 fairness opinions from investment
banking firms that the transactions are 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.
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
11
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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
Killam Group Inc. (formerly 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. 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.
12
<PAGE>
Overview (continued)
The Company's revenues were as follows:
Three Months Ended Nine Months Ended
-------------------- -------------------
Jan. 2, Jan. 3, Jan. 2, Jan. 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------
Environmental-liability
Management $ 41,321 $ 38,293 $120,353 $106,053
Engineering and Design 23,565 21,319 70,105 63,273
Laboratory Testing 11,001 10,058 30,573 28,434
Metal Treating (a) 4,655 4,857 14,159 31,444
Intercompany Sales
Eliminations (142) (652) (920) (1,649)
-------- -------- -------- --------
$ 80,400 $ 73,875 $234,270 $227,555
======== ======== ======== ========
(a) Includes the results of the Company's thermal-processing equipment business
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
Third Quarter Fiscal 1999 Compared With Third Quarter Fiscal 1998
Total revenues increased to $80.4 million in the third quarter of fiscal
1999 from $73.9 million in the third quarter of fiscal 1998. Revenues from
environmental-liability management services increased to $41.3 million in fiscal
1999 from $38.3 million in fiscal 1998. Revenues at ThermoRetec increased to
$36.9 million in fiscal 1999 from $34.6 million in fiscal 1998, primarily due to
$1.2 million of increased revenues from consulting and engineering services at
Remediation Technologies, Inc. (RETEC) and the inclusion of $1.0 million of
revenues from a business acquired in fiscal 1998. These increases were
substantially offset by a decrease in revenues at ThermoRetec's IEM Sealand
subsidiary, resulting from a decline in the number of contracts in process.
Revenues from Thermo EuroTech increased $0.7 million to $4.4 million, primarily
due to the inclusion of $2.0 million in revenues from Green Sunrise, acquired
February 1998, offset in part by a decrease in sales of usable oil products as a
result of a decline in world oil prices. Revenues from engineering and design
services increased to $23.6 million in fiscal 1999 from $21.3 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
13
<PAGE>
Third Quarter Fiscal 1999 Compared With Third Quarter Fiscal 1998
(continued)
fiscal 2000. Revenues from laboratory-testing services, excluding radiochemistry
laboratory services included in environmental-liability management services,
increased to $11.0 million in fiscal 1999 from $10.1 million in fiscal 1998, due
to higher demand.
The gross profit margin increased to 19.7% in the third quarter of fiscal
1999 compared with 19.0% in the third quarter of fiscal 1998. The gross profit
margin from environmental-liability management services increased in fiscal
1999, primarily due to the effect in fiscal 1998 of certain loss contracts for
remedial construction services at IEM Sealand and higher utilization of billable
personnel at RETEC in fiscal 1999. Following the decision to close two
soil-recycling facilities and to write down the associated assets (Note 4), the
Company discontinued depreciating the fixed assets at the sites. This action
reduced cost of revenues in the third quarter of fiscal 1999 by $0.2 million.
This improvement was offset in part by a lower gross margin from engineering and
design services, primarily due to a change in the mix of contracts.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 15% in the third quarter of fiscal 1999 and 1998.
Interest income decreased to $0.5 million in the third quarter of fiscal
1999 from $1.0 million in the third quarter of fiscal 1998 as a result of lower
average invested balances. Interest expense decreased to $2.3 million in fiscal
1999 from $2.7 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.
"Gain on sale of businesses, net" in the third quarter of fiscal 1998
primarily resulted from ThermoRetec's sale of a joint venture.
The effective tax rates in the third quarter of fiscal 1999 and 1998 were
61% and 47%, 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 effective tax rate increased in fiscal 1999 primarily due to higher
relative nondeductible expenses.
Minority interest expense decreased to $0.1 million in the third quarter of
fiscal 1999 from $0.6 million in the third quarter of fiscal 1998, primarily due
to lower earnings from the Company's majority-owned subsidiaries in fiscal 1999.
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.
14
<PAGE>
First Nine Months Fiscal 1999 Compared With First Nine Months Fiscal 1998
Total revenues were $234.3 million in the first nine months of fiscal 1999,
compared with $227.6 million in the first nine months of fiscal 1998.
Metal-treating revenues decreased to $14.2 million in fiscal 1999 from $31.4
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 13% to $120.4 million in fiscal 1999 from $106.1 million in fiscal
1998. Revenues at ThermoRetec increased to $106.5 million in fiscal 1999 from
$96.5 million in fiscal 1998, primarily due to $7.1 million of higher revenues
from consulting and engineering services at RETEC and, to a lesser extent, the
inclusion of $6.2 million of revenues from businesses acquired in fiscal 1998.
Revenues from ThermoRetec's soil-remediation services increased $3.8 million in
fiscal 1999, resulting from higher volumes of soil processed. These increases
were offset in part by a 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 $4.3 million to $13.9 million due to the
inclusion of $5.7 million of revenues from Green Sunrise, acquired February
1998, offset in part by a decrease in sales of usable oil products. Revenues
from engineering and design services increased to $70.1 million in fiscal 1999
from $63.3 million in fiscal 1998, primarily due to increased revenues from two
construction and labor management contracts. Engineering and design services
revenues also increased $3.5 million due to the inclusion of revenues from
Randers, acquired May 1997. Revenues from laboratory-testing services, excluding
radiochemistry laboratory services included in environmental-liability
management services, increased to $30.6 million in fiscal 1999 from $28.4
million in fiscal 1998, due to higher demand.
The gross profit margin remained relatively unchanged at 19.9% in the first
nine months of fiscal 1999, compared with 19.4% in the first nine 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 environmental-liability management services
increased in fiscal 1999 primarily due to higher volumes of soil processed and
higher utilization of billable personnel at RETEC and, to a lesser extent, at
Thermo EuroTech due to the inclusion of higher-margin revenue at Green Sunrise.
The gross profit margin from engineering and design services decreased in fiscal
1999, primarily due to a change in the mix of contracts.
Selling, general, and administrative expenses as a percentage of revenues
increased slightly to 14.6% in the first nine months of fiscal 1999 from 14.0%
in the first nine months of fiscal 1998, primarily due to the absence in fiscal
1999 of lower relative expenses at the Company's thermal-processing equipment
business.
Interest income decreased to $1.7 million in the first nine months of fiscal
1999 from $3.2 million in the first nine months of fiscal 1998 as a result of
lower average invested balances. Interest expense decreased to $6.8 million in
fiscal 1999 from $8.4 million in fiscal 1998, primarily due to the repayment of
a note payable in February and May
15
<PAGE>
First Nine Months Fiscal 1999 Compared With First Nine Months Fiscal 1998
(continued)
1998, the repayment of a promissory note to Thermo Electron Corporation, 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.
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 aggregated revenues and operating losses
of $2.2 million and $0.8 million, respectively, in fiscal 1998, and aggregated
revenues and operating losses prior to the decision to close the facilities of
$1.8 million and $0.1 million, respectively, in 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).
Equity in earnings of unconsolidated subsidiary in fiscal 1998 represented
ThermoRetec's proportionate share of income from a joint venture. "Gain on sale
of businesses, net" in fiscal 1998 primarily resulted from ThermoRetec's sale of
its interest in this joint venture.
The Company recorded income tax expense of $0.5 million in the first nine
months of fiscal 1999 on a pretax loss primarily due to the effect of
nondeductible amortization and write off of cost in excess of net assets of
acquired companies. The effective tax rate in the first nine 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 $1.4 million in the first
nine months of fiscal 1999, compared with minority interest expense of $1.0
million in the first nine months of fiscal 1998, primarily due to lower earnings
at the Company's majority-owned subsidiaries in fiscal 1999.
Liquidity and Capital Resources
Consolidated working capital was $64.3 million at January 2, 1999, compared
with $69.3 million at April 4, 1998. Cash, cash equivalents, and
available-for-sale investments were $34.8 million at January 2, 1999, compared
with $36.7 million at April 4, 1998. Of the $34.8 million balance at January 2,
1999, $29.6 million was held by the Company's majority-owned subsidiaries, and
the remainder was held by the Company
16
<PAGE>
Liquidity and Capital Resources (continued)
and its wholly owned subsidiaries. During the first nine months of fiscal 1999,
$16.3 million of cash was provided by operating activities. During this period,
the Company used $4.4 million of cash to fund an increase in accounts
receivable. This increase was primarily a result of the $2.6 million receivable
at ThermoRetec under dispute, discussed in the results of operations for the
third quarter of fiscal 1999. In addition, cash of $3.1 million was used to fund
an increase in other current assets, primarily due to an increase in prepaid and
refundable income taxes. These uses of cash were offset in part by $6.0 million
of cash provided by an increase in accounts payable and other current
liabilities due to increased subcontract work at Randers, as well as timing of
payments, including restructuring costs (Note 4).
Excluding available-for-sale and held-to-maturity investment activity, the
Company's investing activities in the first nine months of fiscal 1999 primarily
consisted of capital additions. The Company expended $12.7 million for purchases
of property, plant, and equipment in the first nine months of fiscal 1999 and
expects to spend approximately $4.0 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.
The Company's financing activities used cash of $16.4 million in the first
nine months of fiscal 1999. During fiscal 1999, the Company repaid notes payable
totaling $14.8 million. In October 1998, the Company issued $7.0 million
principal amount of 2 1/2% convertible subordinated debentures due 2001 in
exchange for 1,646,854 common shares of the Company's Thermo EuroTech N.V.
subsidiary (Note 5). During fiscal 1999, the Company used cash of $1.7 million
to repurchase Company common stock pursuant to certain put rights on shares
issued in connection with an acquisition.
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.
17
<PAGE>
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, services, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) contacting key suppliers and vendors to
determine their year 2000 compliance status; and (iii) developing a contingency
plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its critical
information technology systems and facilities will be ready for the year 2000.
The first phase of the program, testing and evaluating the Company's critical
information technology systems and facilities for year 2000 compliance, has
largely been completed. During phase one, the Company tested and evaluated its
significant computer systems, software applications, and related equipment for
year 2000 compliance. The Company also evaluated the potential year 2000 impact
on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and this process was approximately 60% complete as of January 2, 1999.
In many cases, such upgrades or replacements are being made in the ordinary
course of business, without accelerating previously scheduled upgrades or
replacements. The Company expects that all of its material information
technology systems and critical facilities will be year 2000 compliant by
September 1999. For phase three of the program, the Company will 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 assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed the majority of its
assessment of third party risk, but expects to be substantially completed by
September 1999.
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. As the
Company continues to evaluate the year 2000 readiness of its business systems
and facilities and significant suppliers and vendors, it will modify and adjust
its contingency plan as may be required.
18
<PAGE>
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred third-party expenses (External Costs) related to
year 2000 issues of approximately $70,000 as of January 2, 1999, and the total
External Costs of year 2000 remediation are expected to be approximately
$320,000. All of the External Costs incurred as of January 2, 1999, were spent
on testing and upgrading information technology systems. All internal costs and
related External Costs, other than capital additions, related to year 2000
remediation have been and will continue to be expensed as incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
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 involve the delivery to clients if
third-party software and 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 or vendors experience business disruptions
due to year 2000 issues, the Company might also be materially adversely
affected. 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. In addition, if any year
2000 issues are identified, there can be no assurance that the Company will be
able to retain qualified personnel to remedy such issues. 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 in amounts
that cannot be reasonably estimated at this time.
PART II - OTHER INFORMATION
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
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 8th day of February 1999.
THERMO TERRATECH INC.
/s/ Paul F. Kelleher
--------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
--------------------------
Theo Melas-Kyriazi
Chief Financial Officer
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. REPORT ON FORM 10-Q FOR THE QUARTER ENDED JANUARY 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-END> JAN-02-1999
<CASH> 34,845
<SECURITIES> 0
<RECEIVABLES> 68,476
<ALLOWANCES> 4,165
<INVENTORY> 1,823
<CURRENT-ASSETS> 134,040
<PP&E> 148,467
<DEPRECIATION> 57,048
<TOTAL-ASSETS> 354,152
<CURRENT-LIABILITIES> 69,759
<BONDS> 159,679
0
0
<COMMON> 1,958
<OTHER-SE> 90,675
<TOTAL-LIABILITY-AND-EQUITY> 354,152
<SALES> 234,270
<TOTAL-REVENUES> 234,270
<CGS> 187,628
<TOTAL-COSTS> 232,017
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 963
<INTEREST-EXPENSE> 6,769
<INCOME-PRETAX> (2,824)
<INCOME-TAX> 534
<INCOME-CONTINUING> (1,924)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,924)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
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