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 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
incorporation or organization) (I.R.S. Employer Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(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 October 29, 1999
Common Stock, $.10 par value 19,072,133
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO TERRATECH INC.
Consolidated Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
October 2, April 3,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (includes $41,667 under repurchase $ 3,888 $ 43,013
agreements with parent company in fiscal 1999)
Advance to affiliate (Note 7) 49,265 -
Accounts receivable, less allowances of $3,327 and $3,577 54,672 58,933
Unbilled contract costs and fees 23,357 19,974
Inventories 2,359 1,869
Prepaid and refundable income taxes 6,828 6,946
Other current assets 4,102 3,640
-------- --------
144,471 134,375
-------- --------
Property, Plant, and Equipment, at Cost (Note 5) 135,248 151,219
Less: Accumulated depreciation and amortization 62,850 59,705
-------- --------
72,398 91,514
-------- --------
Other Assets (Note 5) 11,930 15,949
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Notes 5 and 6) 90,367 108,627
-------- --------
$319,166 $350,465
======== ========
2
<PAGE>
THERMO TERRATECH INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 2, April 3,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations $ 20,437 $ 17,618
(includes $9,228 under overdraft facility with related party in
fiscal 1999)
Subordinated convertible debentures (includes $4,300 of related-party 37,950 -
debt)
Accounts payable 17,289 17,404
Accrued payroll and employee benefits 12,856 12,771
Accrued restructuring costs (Note 5) 9,008 1,719
Deferred revenue 3,912 2,675
Other accrued expenses 16,387 12,623
Due to parent company and affiliated companies 2,586 2,522
-------- --------
120,425 67,332
-------- --------
Deferred Income Taxes 3,027 3,538
-------- --------
Other Deferred Items 1,119 1,076
-------- --------
Long-term Obligations:
Subordinated convertible debentures (includes $515 118,849 156,799
and $4,695 of related-party debt)
Other 1,702 1,818
-------- --------
120,551 158,617
-------- --------
Minority Interest 24,371 27,745
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 75,000,000 shares 1,958 1,958
authorized; 19,583,773 shares issued
Capital in excess of par value 70,405 70,633
Retained earnings (accumulated deficit) (17,989) 25,898
Treasury stock at cost, 511,640 and 543,319 shares (3,890) (4,130)
Deferred compensation (243) (252)
Accumulated other comprehensive items (Note 2) (568) (1,950)
-------- --------
49,673 92,157
-------- --------
$319,166 $350,465
======== ========
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 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $78,036 $77,177
------- -------
Costs and Operating Expenses:
Cost of revenues (Note 5) 61,616 62,034
Selling, general, and administrative expenses 10,737 10,723
Restructuring costs (Note 5) 120 10,217
------- -------
72,473 82,974
------- -------
Operating Income (Loss) 5,563 (5,797)
Interest Income 723 511
Interest Expense (includes $58 and $40 to related party) (2,326) (2,205)
------- -------
Income (Loss) Before Income Taxes and Minority Interest 3,960 (7,491)
Income Tax (Provision) Benefit (Note 5) (2,226) 2,108
Minority Interest Income (Expense) (527) 1,687
------- -------
Net Income (Loss) $ 1,207 $(3,696)
======= =======
Basic and Diluted Earnings (Loss) per Share (Note 3) $ .06 $ (.19)
======= =======
Weighted Average Shares (Note 3):
Basic 19,070 19,513
======= =======
Diluted 19,346 19,513
======= =======
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 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $153,944 $153,870
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 5) 121,830 123,079
Selling, general, and administrative expenses 21,978 22,298
Restructuring costs (Note 5) 54,317 10,217
-------- --------
198,125 155,594
-------- --------
Operating Loss (44,181) (1,724)
Interest Income 1,314 1,155
Interest Expense (includes $116 and $76 to related party) (4,465) (4,462)
-------- --------
Loss Before Income Taxes and Minority Interest (47,332) (5,031)
Income Tax (Provision) Benefit (Note 5) (241) 809
Minority Interest Income 3,686 1,527
-------- --------
Net Loss $(43,887) $ (2,695)
======== ========
Basic and Diluted Loss per Share (Note 3) $ (2.30) $ (.14)
======== ========
Basic and Diluted Weighted Average Shares (Note 3) 19,060 19,514
======== ========
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 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net loss $(43,887) $ (2,695)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Noncash restructuring costs (Note 5) 46,594 8,105
Change in deferred income taxes (2,841) -
Depreciation and amortization 6,976 8,340
Minority interest income (3,686) (1,527)
Provision for losses on accounts receivable 217 628
Other noncash items 2,087 152
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 4,638 (5,224)
Inventories and unbilled contract costs and fees (4,530) (2,094)
Other current assets (460) (3,647)
Accounts payable (374) (1,223)
Other current liabilities 9,530 3,524
-------- --------
Net cash provided by operating activities 14,264 4,339
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 6) (2,016) (576)
Advances to affiliate, net (Note 7) (49,265) -
Proceeds from sale and maturities of available-for-sale investments - 14,065
Purchases of property, plant, and equipment (6,317) (10,373)
Proceeds from sale of property, plant, and equipment 324 187
Purchase of other assets (167) (1,284)
Other - (48)
-------- --------
Net cash provided by (used in) investing activities (57,441) 1,971
-------- --------
Financing Activities:
Increase in short-term obligations to fund an acquisition (Note 6) 2,286 -
Repayment of notes payable and long-term obligations (217) (14,292)
Repayment of long-term notes receivable 2,535 537
Proceeds from issuance of Company and subsidiary's common stock 161 45
Repurchase of Company common stock - (210)
Dividends paid by subsidiary to minority shareholders (469) (463)
Other 101 (7)
-------- --------
Net cash provided by (used in) financing activities 4,397 (14,390)
-------- --------
Exchange Rate Effect on Cash (345) (204)
-------- --------
Decrease in Cash and Cash Equivalents (39,125) (8,284)
Cash and Cash Equivalents at Beginning of Period 43,013 34,711
-------- --------
Cash and Cash Equivalents at End of Period $ 3,888 $ 26,427
======== ========
6
<PAGE>
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Noncash Activities:
Fair value of assets of acquired companies $ 3,328 $ 576
Cash paid for acquired companies (2,286) (576)
Issuance of subsidiary common stock for acquired company (384) -
-------- --------
Liabilities assumed of acquired companies $ 658 $ -
======== ========
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 2, 1999, the results of
operations for the three- and six-month periods ended October 2, 1999, and
October 3, 1998, and the cash flows for the six-month periods ended October 2,
1999, and October 3, 1998. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of April 3, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. Certain amounts in fiscal 1999 have
been reclassified to conform to the presentation in the fiscal 2000 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 3, 1999, filed with the Securities and
Exchange Commission.
</TABLE>
2. Comprehensive Income
Comprehensive income combines net income (loss) 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 2000 and
1999, the Company had comprehensive income of $978,000 and a comprehensive loss
of $3,308,000, respectively. During the first six months of fiscal 2000 and
1999, the Company had comprehensive losses of $42,854,000 and $2,229,000,
respectively.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Basic
Net Income (Loss) $ 1,207 $ (3,696) $(43,887) $ (2,695)
------- -------- -------- --------
Weighted Average Shares 19,070 19,513 19,060 19,514
------- -------- -------- --------
Basic Earnings (Loss) per Share $ .06 $ (.19) $ (2.30) $ (.14)
======= ======== ======= ========
Diluted
Net Income (Loss) $ 1,207 $ (3,696) $(43,887) $ (2,695)
Effect of Majority-owned Subsidiaries' Dilutive (19) - - (2)
------- -------- -------- --------
Securities
Income (Loss) Available to Common Shareholders, $ 1,188 $ (3,696) $(43,887) $ (2,697)
as Adjusted
------- -------- -------- --------
Weighted Average Shares 19,070 19,513 19,060 19,514
Effect of:
Stock options 67 - - -
Put options 209 - - -
------- -------- -------- --------
Weighted Average Shares, as Adjusted 19,346 19,513 19,060 19,514
------- -------- -------- --------
Diluted Earnings (Loss) per Share $ .06 $ (.19) $ (2.30) $ (.14)
======= ======== ======== ========
8
<PAGE>
3. Earnings (Loss) per Share (continued)
The computation of diluted earnings (loss) per share for each period
excludes the effect of assuming the exercise of certain outstanding stock
options, warrants, and put rights because the effect would be antidilutive. As
of October 2, 1999, there were 634,000 of such options outstanding, with
exercise prices ranging from $6.34 to $10.40 per share. As of October 2, 1999,
put rights with respect to an aggregate of 423,854 shares were outstanding. The
put rights obligate the Company, at the holders' option, to purchase shares of
the Company's common stock for $8.00 per share.
In addition, the computation of diluted earnings (loss) per share for each
period 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.
4. Business Segment Information
Three Months Ended Six Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues:
Environmental-liability Management $ 42,492 $ 38,969 $81,357 $ 78,685
Engineering and Design 21,018 23,765 42,923 46,540
Laboratory Testing 10,594 9,901 21,578 19,572
Metal Treating 4,021 4,797 8,379 9,504
Intersegment sales elimination (a) (89) (255) (293) (431)
-------- -------- -------- --------
$ 78,036 $ 77,177 $153,944 $153,870
======== ======== ======== ========
Income (Loss) Before Income Taxes and Minority Interest:
Environmental-liability Management (b) $ 2,729 $(7,407) $(34,359) $ (5,994)
Engineering and Design (c) 1,738 370 (12,219) 1,803
Laboratory Testing 1,629 1,230 3,253 2,491
Metal Treating 198 570 639 1,182
Corporate (d) (731) (560) (1,495) (1,206)
-------- ------- -------- --------
Total operating income (loss) 5,563 (5,797) (44,181) (1,724)
Interest expense, net (1,603) (1,694) (3,151) (3,307)
-------- ------- -------- --------
$ 3,960 $(7,491) $(47,332) $ (5,031)
======== ======= ======== ========
</TABLE>
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and related costs of $39.2 million in the first six
months of fiscal 2000 and restructuring costs of $9.2 million in the fiscal
1999 periods.
(c) Includes restructuring costs of $15.7 million in the first six months of
fiscal 2000 and $1.0 million in the fiscal 1999 periods.
(d) Primarily general and administrative expenses.
5. Restructuring and Related Costs
In May 1999, the Company announced that its majority-owned subsidiaries
plan to sell several businesses. The businesses proposed to be sold include the
used-oil processing operation of Thermo EuroTech, N.V.; three soil-recycling
facilities of ThermoRetec Corporation, in addition to the sites previously
announced; and the Randers division, BAC Killam Inc., and E3-Killam Inc.
businesses of The Randers Killam Group Inc. In connection with these actions,
the Company recorded $56,030,000 of restructuring and related costs during the
first six months of fiscal
9
<PAGE>
5. Restructuring and Related Costs (continued)
2000, including restructuring costs of $54,317,000, a tax asset write-off of
$1,055,000, and an inventory provision of $658,000. In the accompanying
statement of operations, the tax write-off is included in income tax (provision)
benefit and the inventory provision is included in cost of revenues.
Restructuring costs include a $22,192,000 write-down of cost in excess of net
assets of acquired companies to reduce the carrying value of the businesses
proposed to be sold to the estimated proceeds from their sale; a $20,266,000
write-down of fixed assets to their estimated disposal value; $4,555,000 for
ongoing lease costs for facilities that will be exited in connection with the
sale of certain businesses; $2,494,000 for estimated land reclamation costs; a
$1,905,000 charge for the cumulative foreign translation adjustment related to
Thermo EuroTech's used-oil processing business; a $1,788,000 write-off of
intangible assets related to license acquisition costs at the used-oil
processing business; $638,000 for severance costs for 42 employees across all
functions, 9 of whom were terminated in the first six months of fiscal 2000; a
$443,000 write-off of other current assets associated with the businesses; and
$36,000 for retention bonuses paid. The tax write-off represents a deferred tax
asset that will not be realized as a result of selling Thermo EuroTech's
used-oil processing business. The inventory provision also relates to exiting
this business. The write-down of fixed assets principally relates to
special-purpose equipment in the used-oil processing and soil-recycling
businesses. The effects of these charges reduced depreciation and amortization
expense, thereby increasing the Company's pretax operating income by
approximately $1,000,000 in the second quarter of fiscal 2000 and reducing the
Company's pretax operating loss by approximately $2,000,000 during the first six
months of fiscal 2000.
During fiscal 1999, the Company recorded restructuring costs, primarily
related to the closure or sale of two soil-recycling facilities by ThermoRetec.
The Company closed one soil-recycling facility in March 1999 and is actively
seeking a buyer for the second soil-recycling facility. If no buyer is found,
ThermoRetec will close the facility. In addition, the Company recorded
restructuring costs for abandoned-facility payments relating to the
consolidation of the facilities of another business. In connection with these
restructuring activities, the Company established reserves, primarily for
ongoing lease costs and severance for 13 employees, 6 of whom were terminated as
of October 2, 1999.
All businesses proposed to be sold, including those announced in fiscal
1999, reported unaudited aggregate revenues and operating income, prior to
restructuring and related costs, of $21,030,000 and $1,143,000, respectively, in
the first six months of fiscal 2000 and $54,015,000 and $225,000, respectively,
in fiscal 1999.
Substantially all of the restructuring and related costs to date have been
noncash charges except for amounts recorded as accrued restructuring costs. A
summary of the changes in accrued restructuring costs, which the Company expects
to pay primarily during the remainder of fiscal 2000, is as follows:
<TABLE>
<CAPTION>
Severance Facility- Land Other Total
(In thousands) closing Reclamation
Costs
- ------------------------------------ ------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fiscal 1999 Plan
Balance at April 3, 1999 $ 112 $1,607 $ - $ - $1,719
Usage (71) (101) - - (172)
------ ------ ------ ------ ------
Balance at October 2, 1999 $ 41 $1,506 $ - $ - $1,547
====== ====== ====== ====== ======
Fiscal 2000 Plan
Balance at April 3, 1999 $ - $ - $ - $ - $ -
Provision charged to expense 638 4,555 2,494 36 7,723
Usage (133) (110) - (36) (279)
Currency Translation - 7 10 - 17
------ ------ ------ ------ ------
Balance at October 2, 1999 $ 505 $4,452 $2,504 $ - $7,461
====== ====== ====== ====== ======
</TABLE>
10
<PAGE>
5. Restructuring and Related Costs (continued)
The Company expects to incur additional restructuring costs of
approximately $3,000,000, primarily during the remainder of fiscal 2000, for
severance, employee retention, and relocation expenses. Pursuant to the
requirements of Emerging Issues Task Force Pronouncement 94-3, these costs are
not permitted as charges until they are incurred.
6. Acquisition
In August 1999, a subsidiary of the Company acquired the outstanding stock
of Dempsey Drums Limited for $2,286,000 in cash and 1,605 shares of the
subsidiary's common stock valued at $384,000. Dempsey Drums is an Ireland-based
service provider in the supply, disposal, and reconditioning of steel and
plastic drums and the supply of specialized packaging. This acquisition has been
accounted for using the purchase method of accounting and its results have been
included in the Company's results from the date of acquisition. The cost of this
acquisition exceeded the estimated fair value of the acquired net assets by
$1,538,000, which is being amortized over 20 years. Allocation of the purchase
price for this acquisition was based on an estimate 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 the
final allocation will differ materially from the preliminary estimates. Pro
forma results have not been presented, as the results of the acquired business
were not material to the Company's results of operations.
7. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron for domestic cash management purposes bear
interest at the 30-day Dealer Commercial Paper Rate plus 150 basis points, set
at the beginning of each month. The Company has no borrowings under this
arrangement at October 2, 1999.
8. Proposed Merger
On October 19, 1999, the Company entered into a definitive agreement and
plan of merger with Thermo Electron pursuant to which Thermo Electron would
acquire all of the outstanding shares of Company common stock held by
shareholders other than Thermo Electron in exchange for Thermo Electron Common
Stock worth between $7.25 and $9.25 per share of Company Common Stock. At the
same time, the Company's two publicly traded subsidiaries, ThermoRetec and
Randers Killam, entered into merger agreements with Thermo Electron pursuant to
which all of the shares of common stock of those companies held by stockholders
other than the Company and Thermo Electron would be acquired for cash. The Board
of Directors of the Company approved the merger agreement based on a
recommendation by a special committee of the Board of Directors, consisting of
an independent director of the Company. The completion of this merger is subject
to certain conditions, including shareholder approval of the merger agreement
and the completion of review by the Securities and Exchange Commission of
certain required filings. Thermo Electron intends to vote all of its shares of
common stock of the Company in favor of approval of the merger agreement and,
therefore, approval of the merger agreement is assured. This merger is expected
to be completed in the fourth quarter of fiscal 2000. Following the merger, the
Company's common stock would cease to be publicly traded.
11
<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 3, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company provides industrial outsourcing services and manufacturing
support encompassing a broad range of specializations. The Company operates in
four segments: environmental-liability management, engineering and design,
laboratory testing, and metal treating.
Environmental-liability Management
The Company's majority-owned ThermoRetec Corporation subsidiary is a
national provider of environmental-liability and resource-management services.
ThermoRetec offers these and related consulting services in four areas:
consulting and engineering, nuclear remediation, soil remediation, and fluids
recycling. The Company's majority-owned Thermo EuroTech N.V. subsidiary, located
in the Netherlands, specializes in converting "off-spec" and contaminated
petroleum fluids into useable oil products. The Company intends to exit this
business, as discussed in the results of operations. Thermo EuroTech also
provides in-plant waste management and recycling services through its
Ireland-based Green Sunrise Holdings Ltd. subsidiary. In August 1999, Green
Sunrise acquired the outstanding stock of Dempsey Drums Limited, an
Ireland-based service provider in the supply, disposal, and reconditioning of
steel and plastic drums and the supply of specialized packaging (Note 6).
Engineering and Design
The Company's majority-owned The Randers Killam Group Inc. subsidiary
provides comprehensive engineering and outsourcing services such as water and
wastewater treatment, process engineering and construction, highway and bridge
engineering, and infrastructure engineering. The Company intends to exit the
Process Engineering and Construction segment and Highway and Bridge Engineering
segment of this business, as discussed in the results of operations. 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- and pharmaceutical-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.
12
<PAGE>
Results of Operations
Second Quarter Fiscal 2000 Compared With Second Quarter Fiscal 1999
Total revenues were $78.0 million in the second quarter of fiscal 2000,
compared with $77.2 million in the second quarter of fiscal 1999. Revenues from
the Environmental-liability Management segment increased to $42.5 million in
fiscal 2000 from $39.0 million in fiscal 1999. Excluding intrasegment sales,
revenues at ThermoRetec increased to $38.6 million in fiscal 2000 from $35.0
million in fiscal 1999, primarily at its Consulting and Engineering Services
segment due to higher revenues from a large remedial-construction contract that
is expected to continue through fiscal 2001. Revenues from Thermo EuroTech
remained constant at $3.9 million in both fiscal 2000 and 1999. A decrease in
revenues relating to a contract to perform soil-remediation services in Europe
was offset by $0.6 million of revenues from Dempsey Drums, which was acquired in
August 1999 (Note 6). Revenues from the Engineering and Design segment decreased
to $21.0 million in fiscal 2000 from $23.8 million in fiscal 1999, primarily due
to decreased contract revenue resulting in part from a recession in the chemical
industry. Revenues from the Laboratory Testing segment increased to $10.6
million in fiscal 2000 from $9.9 million in fiscal 1999 due to higher demand.
Revenues from the Metal Treating segment decreased to $4.0 million in fiscal
2000 from $4.8 million in fiscal 1999 due to weaknesses in the agricultural
equipment and commercial aerospace industries.
The gross profit margin increased to 21% in the second quarter of fiscal
2000 from 20% in the second quarter of fiscal 1999. The increase was primarily
due to a reduction of depreciation expense in fiscal 2000 at the
Environmental-liability Management and Engineering and Design segments as a
result of certain write-offs (Note 5), which increased the pretax operating
income by approximately $0.8 million. The gross profit margin also increased at
the Laboratory Testing segment, due to increased revenues and relatively stable
overhead costs. These increases were offset in part by lower gross profit
margins at the Metal Treating segment as a result of a decrease in revenues.
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 14% in the second quarters of both fiscal 2000 and 1999.
In May 1999, the Company announced that its majority-owned subsidiaries
plan to sell several businesses (Note 5). The businesses proposed to be sold
include the used-oil processing operation of Thermo EuroTech; three
soil-recycling facilities of ThermoRetec, in addition to those proposed to be
closed in fiscal 1999 discussed below; and the Randers division, BAC Killam
Inc., and E3-Killam Inc. businesses of Randers Killam. In connection with these
actions, the Company recorded $119,000 of restructuring costs in the second
quarter of fiscal 2000, including $63,000 recorded by the
Environmental-liability Management segment for retention bonuses and cash costs
incurred in connection with the proposed sale of a facility and $56,000 recorded
by the Engineering and Design segment for severance costs that were not
permitted as charges until they were incurred pursuant to the requirements of
Emerging Issues Task Force Pronouncement No. 94-3.
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 have resulted in lower
priced soil-recycling alternatives. 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.
The businesses the Company expects to sell reported unaudited aggregate
revenues and operating income, prior to restructuring and related costs, of
$21.0 million and $1.1 million, respectively, in the first six months of fiscal
2000 and $54.0 million and $0.2 million, respectively, in fiscal 1999.
13
<PAGE>
Second Quarter Fiscal 2000 Compared With Second Quarter Fiscal 1999 (continued)
Interest income increased to $0.7 million in the second quarter of fiscal
2000 from $0.5 million in the second quarter of fiscal 1999, primarily as a
result of higher average invested cash balances. Interest expense remained
relatively constant at $2.3 million in the second quarter of fiscal 2000,
compared with $2.2 million in the second quarter of fiscal 1999.
The effective tax rate of 56% in the second quarter of fiscal 2000
exceeded the statutory federal income tax rate primarily due to the impact of
state income taxes, the nondeductible amortization of cost in excess of net
assets of acquired companies, and certain losses for which state tax benefits
could not be utilized. 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.
Minority interest expense was $0.5 million in the second quarter of fiscal
2000, compared with minority interest income of $1.7 million in the second
quarter of fiscal 1999. The Company recorded minority interest income in fiscal
1999, primarily due to losses incurred by ThermoRetec.
First Six Months Fiscal 2000 Compared With First Six Months Fiscal 1999
Total revenues remained constant at $153.9 million in the first six months
of fiscal 2000 and 1999. Revenues from the Environmental-liability Management
segment increased to $81.4 million in fiscal 2000 from $78.7 million in fiscal
1999. Excluding intrasegment sales, revenues at ThermoRetec increased to $74.4
million in fiscal 2000 from $69.2 million in fiscal 1999, primarily at its
Consulting and Engineering Services segment due to higher revenues from a large
remedial-construction contract that is expected to continue through fiscal 2001.
Revenues from Thermo EuroTech decreased $2.5 million to $6.9 million due to a
decrease in sales of useable oil products and a decrease in revenues relating to
contracts to perform soil-remediation services overseas and to process oil-based
muds. Revenues from the Engineering and Design segment decreased to $42.9
million in fiscal 2000 from $46.5 million in fiscal 1999, primarily due to
decreased contract revenue resulting in part from a recession in the chemical
industry. Revenues from the Laboratory Testing segment increased to $21.6
million in fiscal 2000 from $19.6 million in fiscal 1999 due to higher demand.
Revenues from the Metal Treating segment decreased to $8.4 million in fiscal
2000 from $9.5 million in fiscal 1999 due to weaknesses in the agricultural
equipment and commercial aerospace industries.
The gross profit margin increased to 21% in the first six months of fiscal
2000 from 20% in the first six months of fiscal 1999. Excluding the effect of a
$0.7 million write-off of inventory at the Environmental-liability Management
segment (Note 5), the gross profit margin increased primarily due to a reduction
of depreciation expense in fiscal 2000 at the Environmental-liability Management
and Engineering and Design segments (Note 5), which decreased the pretax
operating loss by approximately $1.7 million. The gross profit margin also
increased at the Laboratory Testing segment, due to increased revenues and
relatively stable overhead costs.
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 14% in the first six months of both fiscal 2000 and 1999.
In connection with the proposed sale of businesses discussed in the
results of operations for the second quarter, the Company recorded $54.3 million
of restructuring costs in the first six months of fiscal 2000. Of these
restructuring costs, $38.6 million was recorded by the Environmental-liability
Management segment and $15.7 million was recorded by the Engineering and Design
segment. These charges represent the excess of book value of the businesses
proposed to be sold over the estimated proceeds from their sale, a write-down of
fixed assets to their estimated disposal value, ongoing lease obligations, land
reclamation costs, a charge for a cumulative translation adjustment, write-offs
of intangible and other assets, and severance costs (Note 5).
14
<PAGE>
First Six Months Fiscal 2000 Compared With First Six Months Fiscal 1999
(continued)
During the first six months of fiscal 1999, the Company recorded $10.2
million of restructuring costs, as discussed in the results of operations for
the second quarter.
Interest income increased to $1.3 million in the first six months of
fiscal 2000 from $1.2 million in the first six months of fiscal 1999, primarily
as the result of higher average invested cash balances. Interest expense
remained constant at $4.5 million in the first six months of fiscal 2000 and
1999.
The Company recorded a tax provision in the first six months of fiscal
2000 and a tax benefit in the first six months of fiscal 1999. The effective
rate in both periods was below the statutory federal income tax rate, primarily
due to the write-off of nondeductible cost in excess of net assets of acquired
companies. In addition, the tax provision recorded in fiscal 2000 includes a
$1.1 million write-off of deferred tax assets (Note 5).
The Company recorded minority interest income of $3.7 million and $1.5
million in the first six months of fiscal 2000 and 1999, respectively, primarily
due to losses incurred by the Company's majority-owned subsidiaries.
Liquidity and Capital Resources
Consolidated working capital was $24.0 million at October 2, 1999,
compared with $67.0 million at April 3, 1999. Working capital decreased $38.0
million as a result of the reclassification of subordinated convertible
debentures due May 2000 to current liabilities. Cash and cash equivalents were
$3.9 million at October 2, 1999, compared with $43.0 million at April 3, 1999.
In addition, as of October 2, 1999, the Company had $49.3 million invested in an
advance to affiliate. Prior to the use of a new domestic cash management
arrangement between the Company and Thermo Electron Corporation (Note 7), which
became effective June 1, 1999, amounts invested with Thermo Electron were
included in cash and cash equivalents. Of the total cash and cash equivalents,
$2.8 million was held by the Company's majority-owned subsidiaries and the
balance was held by the Company and its wholly owned subsidiaries. Of the total
advance to affiliate, $47.8 million was advanced by the Company's majority-owned
subsidiaries and the balance was advanced by the Company and its wholly owned
subsidiaries.
During the first six months of fiscal 2000, $14.3 million of cash was
provided by operating activities. During this period, $9.5 million of cash was
provided by an increase in other current liabilities, primarily due to a net
$7.3 million increase in accrued restructuring costs, which the Company expects
to pay primarily over the next 12 months. A decrease in accounts receivable
provided $4.6 million of cash, primarily at ThermoRetec due to the timing of
billings and increased collection efforts. This decrease at ThermoRetec was
offset in part by increased accounts receivable at the Laboratory Testing and
Engineering and Design segments, primarily as a result of the timing of billings
and customer payments and increased laboratory testing revenues. An increase in
inventories and unbilled contract costs and fees used $4.5 million of cash,
primarily due to the timing of billings at ThermoRetec.
Excluding advances to affiliate activity (Note 7), the Company's investing
activities in the first six months of fiscal 2000 primarily consisted of an
acquisition and capital additions. In August 1999, a subsidiary of the Company
acquired Dempsey Drums Limited for $2.0 million, net of cash acquired, and the
issuance of shares of the subsidiary's common stock valued at $0.4 million (Note
6). The Company expended $6.3 million for purchases of property, plant, and
equipment in the first six months of fiscal 2000 and expects to spend
approximately $6.0 million for capital additions during the remainder of fiscal
2000.
The Company's financing activities provided cash of $4.4 million in the
first six months of fiscal 2000 and primarily consisted of $2.5 million received
from the repayment of long-term notes receivable and $2.3 million borrowed to
finance an acquisition (Note 6). Pursuant to certain put rights on shares issued
in connection with an acquisition, the Company has cash obligations aggregating
$3.4 million to purchase its common stock through fiscal 2002.
15
<PAGE>
Liquidity and Capital Resources (continued)
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. The Company expects that it will finance any such acquisitions
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. Thermo Electron has expressed
its willingness to advance up to $5 million to the Company for short-term
liquidity in the event that the need arises. In addition, ThermoRetec's $38.0
million principal amount 4 7/8% subordinated convertible debentures are due to
mature on May 1, 2000. These debentures may be repaid prior to the maturity date
if the merger of ThermoRetec with Thermo Electron (Note 8) is completed prior to
that time. The merger of ThermoRetec with Thermo Electron is considered a
redemption event causing the acceleration of the repayment of the debentures.
The maturity of ThermoRetec's debentures could adversely affect the Company's
liquidity in the first quarter of fiscal 2001.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
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) assessing the year 2000
readiness of its key suppliers and vendors; 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 non-information technology systems
will be ready for the year 2000. In the first phase of the program, the Company
tested and evaluated its critical information technology systems and
non-information technology systems for year 2000 compliance, which efforts
included testing and evaluating 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 non-information
technology systems, which efforts included testing the year 2000 readiness of
the utility and telecommunications systems at its critical facilities. In phase
two of its program, any material noncompliant information technology systems or
non-information technology systems that were identified during phase one were
prioritized and remediated. Based on its evaluations, the Company concluded that
no material upgrades or modifications to its critical non-information technology
systems were required. The Company is currently upgrading or replacing its
material noncompliant information technology systems, and this process was
approximately 90% complete as of October 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
non-information technology systems will be year 2000 compliant by the end of
November 1999.
The Company has also identified and assessed 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 developed and
distributed questionnaires relating to year 2000 compliance to its significant
suppliers and vendors. The Company also followed up with significant suppliers
and vendors that did not respond to the Company's questionnaires. To date, no
significant supplier or vendor has indicated that it believes its business
operations will be materially disrupted by the year 2000 issue. As of October 2,
1999, the Company has completed the majority of its assessment of third-party
risk.
16
<PAGE>
Year 2000 (continued)
Contingency Plan
The Company has developed a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan includes identifying manual or backup systems in the event of a
failure of the Company's material information technology systems. The Company
may, in the future, modify and adjust its contingency plan as may be required in
the event that there are changes in the year 2000 readiness of its business
systems and facilities and significant suppliers and vendors.
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 $350,000 as of October 2, 1999. All of the
external costs incurred as of October 2, 1999, were spent on testing and
upgrading information technology systems. In fiscal 1999 and in the first six
months of fiscal 2000, an immaterial amount of the Company's total information
technology budget was spent on year 2000 issues. 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.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that the Company experiences year 2000
problems in its material information technology systems that cause the Company
to be unable to access data, to process transactions, and to maintain accurate
books and records. In such an event, the Company's operations could be delayed
or temporarily shut down, and it could be unable to meet its obligations to
customers in a timely fashion. The Company's business, operations, and financial
condition could be adversely affected in amounts that cannot be reasonably
estimated at this time.
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 of
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. As
discussed above, if any of the Company's key 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
material adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk from changes in foreign exchange
rates, equity prices, and interest rates has not changed materially from its
exposure at fiscal year-end 1999.
17
<PAGE>
PART II - OTHER INFORMATION
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
None.
18
<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 1999.
THERMO TERRATECH INC.
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of October 19, 1999, by and
among Thermo Electron Corporation, TTT Acquisition Corporation,
and Thermo TerraTech Inc. (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K relating to events
occurring on October 19, 1999 [File No. 1-9549] and incorporated
herein by reference).
27 Financial Data Schedule.
<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 PERIOD ENDED OCTOBER 2,
1999 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-01-2000
<PERIOD-END> OCT-02-1999
<CASH> 3,888
<SECURITIES> 0
<RECEIVABLES> 57,999
<ALLOWANCES> 3,327
<INVENTORY> 2,359
<CURRENT-ASSETS> 144,471
<PP&E> 135,248
<DEPRECIATION> 62,850
<TOTAL-ASSETS> 319,166
<CURRENT-LIABILITIES> 120,425
<BONDS> 120,036
0
0
<COMMON> 1,958
<OTHER-SE> 47,715
<TOTAL-LIABILITY-AND-EQUITY> 319,166
<SALES> 0
<TOTAL-REVENUES> 153,944
<CGS> 0
<TOTAL-COSTS> 121,830
<OTHER-EXPENSES> 54,317
<LOSS-PROVISION> 217
<INTEREST-EXPENSE> 4,465
<INCOME-PRETAX> (47,332)
<INCOME-TAX> 241
<INCOME-CONTINUING> (43,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,887)
<EPS-BASIC> (2.30)
<EPS-DILUTED> (2.30)
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