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 July 3, 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 Identification No.)
incorporation or organization)
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 July 30, 1999
Common Stock, $.10 par value 19,072,138
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO TERRATECH INC.
Consolidated Balance Sheet
(Unaudited)
Assets
July 3, April 3,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents (includes $884 and $41,667 under repurchase $ 2,529 $43,013
agreements with parent company)
Advance to affiliate (Note 7) 39,338 -
Accounts receivable, less allowances of $3,276 and $3,577 60,501 59,377
Unbilled contract costs and fees 17,259 19,974
Inventories 1,733 1,869
Prepaid and refundable income taxes 6,853 6,946
Prepaid expenses 3,256 3,196
-------- --------
131,469 134,375
-------- --------
Property, Plant, and Equipment, at Cost (Note 5) 132,055 151,219
Less: Accumulated depreciation and amortization 60,106 59,705
-------- --------
71,949 91,514
-------- --------
Other Assets (Note 5) 14,760 15,949
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 5) 89,382 108,627
-------- --------
$307,560 $350,465
======== ========
2
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THERMO TERRATECH INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 3, April 3,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 17,053 $17,618
(includes $8,383 and $9,228 under overdraft facility with related
party)
Subordinated convertible debentures (includes $4,300 of related-party 37,950 -
debt)
Accounts payable 16,877 17,404
Accrued payroll and employee benefits 11,863 12,771
Accrued restructuring costs (Note 5) 9,139 1,719
Deferred revenue 2,854 2,675
Other accrued expenses 12,165 12,623
Due to parent company and affiliated companies 2,405 2,522
-------- --------
110,306 67,332
-------- --------
Deferred Income Taxes 3,026 3,538
-------- --------
Other Deferred Items 1,076 1,076
-------- --------
Long-term Obligations:
Subordinated convertible debentures (includes $515 and $4,695 of 118,849 156,799
related-party debt)
Other 1,769 1,818
-------- --------
120,618 158,617
-------- --------
Minority Interest 23,598 27,745
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 75,000,000 shares authorized; 19,583,773 1,958 1,958
shares issued
Capital in excess of par value 70,837 70,633
Retained earnings (accumulated deficit) (19,196) 25,898
Treasury stock at cost, 533,169 and 543,319 shares (4,053) (4,130)
Deferred compensation (270) (252)
Accumulated other comprehensive items (Note 2) (340) (1,950)
-------- --------
48,936 92,157
-------- --------
$307,560 $350,465
======== ========
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
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $ 75,908 $76,693
-------- -------
Costs and Operating Expenses:
Cost of revenues (Note 5) 60,214 61,045
Selling, general, and administrative expenses 11,241 11,575
Restructuring costs (Note 5) 54,197 -
-------- -------
125,652 72,620
-------- -------
Operating Income (Loss) (49,744) 4,073
Interest Income 591 644
Interest Expense (includes $58 and $36 to related party) (2,139) (2,257)
-------- -------
Income (Loss) Before Income Taxes and Minority Interest (51,292) 2,460
Income Tax (Provision) Benefit (Note 5) 1,985 (1,299)
Minority Interest Income (Expense) 4,213 (160)
-------- -------
Net Income (Loss) $(45,094) $ 1,001
======== =======
Basic and Diluted Earnings (Loss) per Share (Note 3) $ (2.37) $ .05
======== =======
Basic and Diluted Weighted Average Shares (Note 3) 19,050 19,514
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO TERRATECH INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income (loss) $(45,094) $ 1,001
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Noncash restructuring costs (Note 5) 46,567 -
Change in deferred income taxes (2,841) -
Depreciation and amortization 3,484 4,068
Minority interest (income) expense (4,213) 160
Provision for losses on accounts receivable 8 363
Other noncash items 1,850 194
Changes in current accounts:
Accounts receivable (1,215) (466)
Inventories and unbilled contract costs and fees 2,108 (3,967)
Other current assets (193) (220)
Accounts payable (459) 661
Other current liabilities 3,067 (3,193)
-------- -------
Net cash provided by (used in) operating activities 3,069 (1,399)
-------- -------
Investing Activities:
Advances to affiliate, net (Note 7) (39,338) -
Proceeds from sale and maturities of available-for-sale investments - 14,065
Purchases of property, plant, and equipment (3,969) (5,814)
Proceeds from sale of property, plant, and equipment 206 181
Other (121) (262)
-------- -------
Net cash provided by (used in) investing activities (43,222) 8,170
-------- -------
Financing Activities:
Repayment of notes payable and long-term obligations (126) (14,194)
Proceeds from issuance of Company and subsidiary's common stock 57 36
Repurchase of Company common stock - (150)
Repayment of long-term notes receivable 43 487
Other 98 12
-------- -------
Net cash provided by (used in) financing activities 72 (13,809)
-------- -------
Exchange Rate Effect on Cash (403) (77)
-------- -------
Decrease in Cash and Cash Equivalents (40,484) (7,115)
Cash and Cash Equivalents at Beginning of Period 43,013 34,711
-------- -------
Cash and Cash Equivalents at End of Period $ 2,529 $27,596
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
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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 July 3, 1999, and the results of
operations and cash flows for the three-month periods ended July 3, 1999, and
July 4, 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.
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 first quarter of fiscal 2000 and
1999, the Company had a comprehensive loss of $43,832,000 and comprehensive
income of $1,079,000, respectively.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------ ----------- ---------
Net Income (Loss) $(45,094) $ 1,001
-------- -------
Weighted Average Shares 19,050 19,514
-------- -------
Basic and Diluted Earnings (Loss) per Share $ (2.37) $ .05
======== =======
The computation of diluted earnings (loss) per share for each period
excludes the effect of assuming the exercise of outstanding stock options,
warrants, and put rights because the effect would be antidilutive. As of July 3,
1999, there were 2,379,075 of such options and warrants outstanding, with
exercise prices ranging from $4.16 to $11.34 per share. As of July 3, 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.
6
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4. Business Segment Information
Three Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------ ----------- ----------
Revenues:
Environmental-liability Management $ 38,865 $ 39,716
Engineering and Design 21,905 22,775
Laboratory Testing 10,984 9,671
Metal Treating 4,358 4,707
Intersegment sales elimination (a) (204) (176)
-------- --------
$ 75,908 $ 76,693
======== ========
Income (Loss) Before Income Taxes and Minority Interest:
Environmental-liability Management (b) $(37,088) $ 1,413
Engineering and Design (c) (13,957) 1,433
Laboratory Testing 1,624 1,261
Metal Treating 441 612
Corporate (d) (764) (646)
-------- --------
Total operating income (loss) (49,744) 4,073
Interest expense, net (1,548) (1,613)
-------- --------
$(51,292) $ 2,460
======== ========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and related costs of $39,187,000 in the first quarter
of fiscal 2000 (Note 5).
(c) Includes restructuring costs of $15,668,000 in the first quarter of fiscal
2000 (Note 5).
(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 $55,910,000 of restructuring and related costs, including
restructuring costs of $54,197,000, 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 $20,239,000 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;
$581,000 for severance costs for 42 employees across all functions, 9 of whom
were terminated in the first quarter of fiscal 2000; and a $443,000 write-off of
other current assets associated with the businesses. 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-
7
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5. Restructuring and Related Costs (continued)
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 reducing the pretax
operating loss by approximately $1,000,000 during the first quarter of fiscal
2000.
The businesses that are proposed to be sold reported unaudited aggregate
revenues and operating income, prior to restructuring and related costs, of
$9,402,000 and $385,000, respectively, in the first quarter of fiscal 2000 and
aggregate revenues and operating loss of $49,627,000 and $112,000, respectively,
in fiscal 1999.
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 April 3, 1999. During the first quarter of fiscal 2000, the Company did not
terminate any additional employees related to this restructuring action.
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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:
Facility-
closing Land
(In thousands) Severance Costs Reclamation Total
- -------------------------------------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at April 3, 1999 $ 112 $ 1,607 $ - $1,719
Provision charged to expense 581 4,555 2,494 7,630
Usage (49) (54) - (103)
Currency translation - (47) (60) (107)
------ ------- ------ ------
Balance at July 3, 1999 $ 644 $ 6,061 $2,434 $9,139
====== ======= ====== ======
The Company expects to incur additional restructuring costs of $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. Proposed Reorganization
Thermo Electron Corporation has announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company.
Under this plan, the Company, ThermoRetec, and Randers Killam would be merged
into Thermo Electron. As a result, all three companies would become wholly owned
subsidiaries of Thermo Electron. The public shareholders of all three companies
would receive common stock in Thermo Electron in exchange for their shares. The
completion of these transactions is subject to numerous conditions, including
the establishment of prices and exchange ratios; confirmation of anticipated tax
consequences; the approval of the Board of Directors of ThermoRetec and Randers
Killam; the negotiation and execution of definitive merger agreements; the
receipt of fairness opinions from investment banking firms that the transactions
are fair to the Company's and 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
completion of review by the Securities and Exchange Commission of any necessary
documents regarding the proposed transactions.
8
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7. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron 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 July 3, 1999.
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.
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.
9
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Overview (continued)
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.
Results of Operations
First Quarter Fiscal 2000 Compared With First Quarter Fiscal 1999
Total revenues were $75.9 million in the first quarter of fiscal 2000,
compared with $76.7 million in the first quarter of fiscal 1999. Revenues from
the Environmental-liability Management segment decreased slightly to $38.9
million in fiscal 2000 from $39.7 million in fiscal 1999. Excluding intrasegment
sales, revenues at ThermoRetec increased to $35.8 million in fiscal 2000 from
$34.2 million in fiscal 1999, due to an increase of $1.6 million from consulting
and engineering services. Revenues from Thermo EuroTech decreased $2.5 million
to $3.0 million due to a decrease in sales of useable oil products and, to a
lesser extent, a decrease in revenues relating to contracts to process oil-based
muds and perform soil-remediation services overseas. Revenues from the
Engineering and Design segment decreased slightly to $21.9 million in fiscal
2000 from $22.8 million in fiscal 1999, primarily due to decreased contract
revenue. Revenues from the Laboratory Testing segment increased to $11.0 million
in fiscal 2000 from $9.7 million in fiscal 1999 due to higher demand. Revenues
from the Metal Treating segment decreased slightly to $4.4 million in fiscal
2000 from $4.7 million in fiscal 1999.
The gross profit margin increased to 22% in the first quarter of fiscal
2000 from 20% in the first quarter of fiscal 1999, excluding a $0.7 million
write-off of inventory at the Environmental-liability Management segment (Note
5). The increase was primarily due to the reduction of depreciation expenses in
fiscal 2000 at the Environmental-liability Management and Engineering and Design
segments (Note 5), which reduced the pretax operating loss by $0.9 million. The
gross profit margin also increased at the Laboratory Testing segment, due to an
increase in revenues without a significant increase in overhead costs.
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 15% in the first quarters of both fiscal 2000 and fiscal
1999.
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; three soil-recycling
facilities of ThermoRetec; and the Randers division, BAC Killam Inc., and
E3-Killam Inc. businesses of Randers Killam. In connection with these actions,
the Company recorded $54.2 million of restructuring costs in the first quarter
of fiscal 2000. Of these restructuring costs, $38.5 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). These businesses reported aggregate revenues and operating income, prior to
restructuring, of $9.4 million and $0.4 million, respectively, in the first
quarter of fiscal 2000 and aggregate revenues and operating loss of $49.6
million and $0.1 million, respectively, in fiscal 1999.
Interest income remained constant at $0.6 million in the first quarter of
fiscal 2000 and fiscal 1999. Interest expense remained relatively constant at
$2.1 million in the first quarter of fiscal 2000, compared with $2.3 million in
the first quarter of fiscal 1999.
10
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First Quarter Fiscal 2000 Compared With First Quarter Fiscal 1999 (continued)
The Company recorded a tax benefit in the first quarter of fiscal 2000 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. In addition, the net tax benefit recorded in fiscal 2000 includes a
$1,055,000 write-off of deferred tax assets (Note 5). The effective tax rate in
the first quarter of fiscal 1999 was 53% and exceeded the statutory federal
income tax rate primarily due to the impact of state income taxes and the
nondeductible amortization of cost in excess of net assets of acquired
companies.
The Company recorded minority interest income of $4.2 million in the first
quarter of fiscal 2000, compared with minority interest expense of $0.2 million
in the first quarter of fiscal 1999, primarily due to losses incurred in fiscal
2000 by the Company's majority-owned subsidiaries.
Liquidity and Capital Resources
Consolidated working capital was $21.2 million at July 3, 1999, compared
with $67.0 million at April 3, 1999. Working capital decreased $38.0 million due
to the reclassification of subordinated convertible debentures due May 2000 to
current liabilities. Cash and cash equivalents were $2.5 million at July 3,
1999, compared with $43.0 million at April 3, 1999. In addition, as of July 3,
1999, the Company had $39.3 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, $2.2 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,
$38.9 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 quarter of fiscal 2000, $3.1 million of cash was provided
by operating activities. During this period, $2.1 million of cash was provided
by a decrease in inventories and unbilled contract costs and fees, primarily due
to the timing of billings at ThermoRetec and Randers Killam. In addition, an
increase in other current liabilities provided $3.1 million of cash, primarily
due to a $7.4 million increase in accrued restructuring costs, which the Company
expects to pay primarily over the next 12 months. This increase was offset in
part by decreases in accrued interest and billings in excess of costs and fees,
due to the timing of payments and billings.
Excluding advances to affiliate activity (Note 7), the Company's investing
activities in the first quarter of fiscal 2000 primarily consisted of capital
additions. The Company expended $4.0 million for purchases of property, plant,
and equipment in the first quarter of fiscal 2000 and expects to spend
approximately $9.0 million for capital additions during the remainder of fiscal
2000.
The Company's financing activities provided cash of $0.1 million in the
first quarter of fiscal 2000. 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.
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, ThermoRetec's $38.0 million principal amount 4
7/8% subordinated convertible debentures mature on May 1, 2000. The maturity of
ThermoRetec's debentures could adversely affect the Company's liquidity in the
first quarter of fiscal 2001. 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
11
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Liquidity and Capital Resources (continued)
available on acceptable terms or at all. Thermo Electron has expressed a
willingness to advance up to $5 million to the Company for short-term liquidity
in the event that the need arises. Except as described in this paragraph
with respect to ThermoRetec's debentures, the Company believes that its existing
resources are sufficient to meet the capital requirements of its existing
businesses for the foreseeable future.
Year 2000
The 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. The first phase of the program, testing and evaluating
the Company's critical information technology systems and non-information
technology systems 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
non-information technology systems. The Company's efforts included testing the
year 2000 readiness of the utility and telecommunications systems at its
critical facilities. The Company is currently in phase two of its program,
during which any material noncompliant information technology systems or
non-information technology systems that were identified during phase one are
prioritized and remediated. Based on its evaluations, the Company does not
believe that any material upgrades or modifications to its critical
non-information technology systems are required. The Company is currently
upgrading or replacing its material noncompliant information technology systems,
and this process was approximately 85% complete as of July 3, 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 October 1999.
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. To date, no significant supplier or
vendor has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company has started to follow up with
significant suppliers and vendors that have not responded 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 the end of
October 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying manual or backup systems in the event of a
failure of the Company's material information technology systems. 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. The Company expects to complete its
contingency plan by the end of October 1999.
12
<PAGE>
Year 2000 (continued)
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 July 3, 1999, and the total
external costs of year 2000 remediation are expected to be approximately
$400,000. All of the external costs incurred as of July 3, 1999, were spent on
testing and upgrading information technology systems. In fiscal 1999 and in the
first quarter 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.
13
<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
On May 12, 1999, the Company filed a Current Report on Form 8-K, dated as
of May 5, 1999, with respect to modifications to the previously announced
reorganization plan of the Company's parent, Thermo Electron Corporation,
involving certain of Thermo Electron's subsidiaries, including the Company.
On May 25, 1999, the Company filed a Current Report on Form 8-K, dated as
of May 24, 1999, with respect to certain pretax restructuring and other charges
that will be taken by the Company.
14
<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 August 1999.
THERMO TERRATECH INC.
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27.1 Financial Data Schedule.
27.2 Amended Financial Data Schedule for the fiscal year ended April 3, 1999.
</TABLE>
<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 JULY 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-02-2000
<PERIOD-END> JUL-03-1999
<CASH> 2,529
<SECURITIES> 0
<RECEIVABLES> 63,777
<ALLOWANCES> 3,276
<INVENTORY> 1,733
<CURRENT-ASSETS> 131,469
<PP&E> 132,055
<DEPRECIATION> 60,106
<TOTAL-ASSETS> 307,560
<CURRENT-LIABILITIES> 110,306
<BONDS> 120,103
0
0
<COMMON> 1,958
<OTHER-SE> 46,978
<TOTAL-LIABILITY-AND-EQUITY> 307,560
<SALES> 0
<TOTAL-REVENUES> 75,908
<CGS> 0
<TOTAL-COSTS> 60,214
<OTHER-EXPENSES> 54,197
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 2,139
<INCOME-PRETAX> (51,292)
<INCOME-TAX> (1,985)
<INCOME-CONTINUING> (45,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,094)
<EPS-BASIC> (2.37)
<EPS-DILUTED> (2.37)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
TERRATECH INC.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED APRIL 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-END> APR-03-1999
<CASH> 43,013
<SECURITIES> 0
<RECEIVABLES> 62,954
<ALLOWANCES> 3,577
<INVENTORY> 1,869
<CURRENT-ASSETS> 134,375
<PP&E> 151,219
<DEPRECIATION> 59,705
<TOTAL-ASSETS> 350,465
<CURRENT-LIABILITIES> 67,332
<BONDS> 153,922
0
0
<COMMON> 1,958
<OTHER-SE> 90,199
<TOTAL-LIABILITY-AND-EQUITY> 92,157
<SALES> 0
<TOTAL-REVENUES> 310,039
<CGS> 0
<TOTAL-COSTS> 247,610
<OTHER-EXPENSES> 10,217
<LOSS-PROVISION> 2,085
<INTEREST-EXPENSE> 8,981
<INCOME-PRETAX> (808)
<INCOME-TAX> 1,786
<INCOME-CONTINUING> (1,421)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,421)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
