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 4, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-10573
THERMO POWER CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2891371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 July 31, 1998
---------------------------- ----------------------------
Common Stock, $.10 par value 11,829,963
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO POWER CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
July 4, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 25,920 $ 19,347
Available-for-sale investments, at quoted
market value (amortized cost of $4,107
and $9,129) 4,114 9,171
Accounts receivable, less allowances of
$13,556 and $757 54,356 21,012
Unbilled contract costs and fees 8,935 4,856
Inventories:
Raw materials 28,320 17,570
Work in process 11,957 1,077
Finished goods 7,210 1,237
Prepaid income taxes 4,730 3,118
Other current assets 2,054 219
-------- --------
147,596 77,607
-------- --------
Rental Assets, at Cost 14,345 13,645
Less: Accumulated depreciation and
amortization 3,940 3,369
-------- --------
10,405 10,276
-------- --------
Property, Plant, and Equipment, at Cost 38,641 19,637
Less: Accumulated depreciation and
amortization 13,255 9,046
-------- --------
25,386 10,591
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $2,301 in fiscal 1997; Note 3) - 2,200
-------- --------
Other Assets 299 236
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 3) 155,504 7,082
-------- --------
$339,190 $107,992
======== ========
2
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THERMO POWER CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 4, September 27,
(In thousands except share amounts) 1998 1997
- --------------------------------------------------------------------------
Current Liabilities:
Notes payable $ 1,244 $ -
Accounts payable 31,320 9,622
Accrued payroll and employee benefits 8,171 3,133
Billings in excess of contract costs and fees 4,189 1,353
Accrued income taxes 4,913 1,620
Accrued warranty costs 5,847 3,435
Common stock of subsidiary subject to
redemption ($18,450 redemption value) 18,293 -
Accrued acquisition expenses (Note 3) 4,479 -
Other accrued expenses 32,673 3,240
Due to parent company and affiliated
companies 1,334 496
-------- --------
112,463 22,899
-------- --------
Deferred Income Taxes 1,095 114
-------- --------
Long-term Obligations (includes $160,000 due to
parent company; Note 3) 160,435 252
-------- --------
Common Stock of Subsidiary Subject to
Redemption ($18,450 redemption value) - 18,059
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 30,000,000
shares authorized; 12,493,371 shares issued 1,249 1,249
Capital in excess of par value 55,399 55,283
Retained earnings 14,969 13,811
Treasury stock at cost, 664,008 and 578,124
shares (4,605) (3,636)
Cumulative translation adjustment (1,819) -
Net unrealized gain (loss) on available-for-
sale investments 4 (39)
-------- --------
65,197 66,668
-------- --------
- -
$339,190 $107,992
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $64,923 $33,839
------- -------
Costs and Operating Expenses:
Cost of revenues 45,095 27,894
Selling, general, and administrative expenses 12,932 4,519
Research and development expenses 1,969 507
------- -------
59,996 32,920
------- -------
Operating Income 4,927 919
Interest Income 416 466
Interest Expense (includes $2,335 to related
party in fiscal 1998; Note 3) (2,483) (5)
Gain on Sale of Related-party Investments - 53
------- -------
Income Before Provision for Income Taxes and
Minority Interest 2,860 1,433
Provision for Income Taxes 1,391 639
Minority Interest Expense 78 78
------- -------
Net Income $ 1,391 $ 716
======= =======
Basic and Diluted Earnings per Share (Note 2) $ .12 $ .06
======= =======
Weighted Average Shares (Note 2):
Basic 11,823 11,977
======= =======
Diluted 11,951 11,977
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
--------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $197,039 $ 91,450
-------- --------
Costs and Operating Expenses:
Cost of revenues 142,153 75,758
Selling, general, and administrative expenses 39,777 12,732
Research and development expenses 6,357 1,778
-------- --------
188,287 90,268
-------- --------
Operating Income 8,752 1,182
Interest Income (includes $257 from related
party in fiscal 1998; Note 3) 1,673 1,389
Interest Expense (includes $5,824 to related
party in fiscal 1998; Note 3) (6,544) (14)
Gain on Sale of Related-party Investments - 53
-------- --------
Income Before Provision for Income Taxes and
Minority Interest 3,881 2,610
Provision for Income Taxes 2,378 1,281
Minority Interest Expense 345 234
-------- --------
Net Income $ 1,158 $ 1,095
======== ========
Basic and Diluted Earnings per Share (Note 2) $ .10 $ .09
======== ========
Weighted Average Shares (Note 2):
Basic 11,841 12,311
======== ========
Diluted 11,931 12,318
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-----------------------
July 4, June 28,
(In thousands) 1998 1997
- ------------------------------------------------------------------------
Operating Activities:
Net income $ 1,158 $ 1,095
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 8,270 2,223
Provision for losses on accounts
receivable 167 157
Gain on sale of investments - (53)
Minority interest expense 345 234
Change in deferred income taxes (877) -
Other noncash items (53) (132)
Changes in current accounts, excluding
the effects of acquisition:
Accounts receivable (1,674) (913)
Inventories 1,340 (2,993)
Unbilled contract costs and fees (890) (287)
Other current assets (35) (283)
Accounts payable (3,281) 3,574
Other current liabilities 609 3,081
--------- ---------
Net cash provided by operating activities 5,079 5,703
--------- ---------
Investing Activities:
Acquisition, net of cash acquired (Note 3) (148,854) -
Sale of acquired business to related party
(Note 3) 19,117 -
Proceeds from sale and maturities of
available-for-sale investments 5,011 6,000
Purchases of available-for-sale investments - (10,095)
Increase in rental assets (2,374) (2,304)
Proceeds from sale of rental assets 1,230 1,213
Purchases of property, plant, and equipment (5,868) (1,973)
Proceeds from sale of property, plant, and
equipment 2,066 -
Other (750) 273
--------- ---------
Net cash used in investing activities $(130,422) $ (6,886)
--------- ---------
6
<PAGE>
THERMO POWER CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
----------------------
July 4, June 28,
(In thousands) 1998 1997
- -------------------------------------------------------------------------
Financing Activities:
Issuance of long-term obligation to parent
company (Note 3) $ 160,000 $ -
Decrease in short-term notes payable (Note 3) (27,402) -
Purchases of Company common stock (1,390) (3,569)
Net proceeds from issuance of Company common
stock 537 71
Repayment of long-term obligations - (42)
--------- ---------
Net cash provided by (used in) financing
activities 131,745 (3,540)
--------- ---------
Exchange Rate Effect on Cash 171 -
--------- ---------
Increase (Decrease) in Cash and Cash
Equivalents 6,573 (4,723)
Cash and Cash Equivalents at Beginning of
Period 19,347 29,852
--------- ---------
Cash and Cash Equivalents at End of Period $ 25,920 $ 25,129
========= =========
Noncash Activities (Note 3):
Fair value of assets of acquired company $ 271,109 $ -
Cash paid for acquired company (164,435) -
Cash paid in prior year for acquired company (2,301) -
--------- ---------
Liabilities assumed of acquired company $ 104,373 $ -
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
THERMO POWER CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Power Corporation (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 4, 1998, the results of
operations for the three- and nine-month periods ended July 4, 1998, and June
28, 1997, and the cash flows for the nine-month periods ended July 4, 1998, and
June 28, 1997. The Company's results of operations for the nine-month periods
ended July 4, 1998, and June 28, 1997, included 40 weeks and 39 weeks,
respectively. Interim results are not necessarily indicative of results for a
full year.
The consolidated balance sheet presented as of September 27, 1997, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 27,
1997, filed with the Securities and Exchange Commission.
2. Earnings per Share
During the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." As a
result, all previously reported earnings per share have been restated; however,
basic and diluted earnings per share equal the Company's previously reported
earnings per share for the fiscal 1997 periods. Basic earnings per share have
been computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted earnings per share have been computed
assuming the exercise of stock options and their related income tax effect.
8
<PAGE>
2. Earnings per Share (continued)
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
-------------------- --------------------
(In thousands except July 4, June 28, July 4, June 28,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net income $ 1,391 $ 716 $ 1,158 $ 1,095
------- ------- ------- -------
Weighted average shares 11,823 11,977 11,841 12,311
------- ------- ------- -------
Basic earnings per share $ .12 $ .06 $ .10 $ .09
======= ======= ======= =======
Diluted
Net income $ 1,391 $ 716 $ 1,158 $ 1,095
------- ------- ------- -------
Weighted average shares 11,823 11,977 11,841 12,311
Effect of stock options 128 - 90 7
------- ------- ------- -------
Weighted average shares,
as adjusted 11,951 11,977 11,931 12,318
------- ------- ------- -------
Diluted earnings per share $ .12 $ .06 $ .10 $ .09
======= ======= ======= =======
As of July 4, 1998, the computation of diluted earnings per share excludes
the effect of assuming the exercise of 73,000 outstanding stock options, with
exercise prices ranging from $11.33 to $17.53 per share, because the effect
would be antidilutive.
3. Acquisition
On November 6, 1997, the Company declared unconditional in all respects its
cash tender offer for the outstanding ordinary shares of Peek plc (Peek). The
aggregate cost to acquire all outstanding Peek ordinary shares, including
related expenses, is estimated at approximately $166,736,000. The purchase price
includes $2,301,000 that was paid for shares acquired in fiscal 1997, classified
as "Long-term Available-for-sale Investments" in the accompanying September 27,
1997, balance sheet. The Company made final payments for the Peek ordinary
shares outstanding in the second quarter of fiscal 1998. Peek develops, markets,
installs, and services equipment to monitor and regulate traffic flow in cities
and towns around the world. In addition, through its Measurement business, sold
by the Company effective November 6, 1997, Peek developed and marketed field
measurement products.
To finance the acquisition of Peek, the Company borrowed $160,000,000 from
Thermo Electron Corporation pursuant to a promissory note due November 1999, and
bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis
points, set at the beginning of each quarter.
9
<PAGE>
3. Acquisition (continued)
Subsequent to Peek's acquisition by the Company, the Company sold its
Measurement business to ONIX Systems Inc., a majority-owned subsidiary of Thermo
Instrument Systems Inc., effective November 6, 1997, for $19,117,000 in cash.
Thermo Instrument is a majority-owned subsidiary of Thermo Electron. The
components of the sales price for the Measurement business consisted of the net
tangible book value of the Measurement business, cost in excess of net assets of
acquired company, and the estimated tax liability relating to the sale. The cost
in excess of net assets of acquired company was determined based upon a
percentage of the Company's total cost in excess of net assets of acquired
company associated with its acquisition of Peek, based on the 1997 revenues of
the Measurement business relative to Peek's total 1997 consolidated revenues.
The acquisition has been accounted for using the purchase method of
accounting and its results have been included in the accompanying financial
statements from the date of acquisition. The cost of the acquisition exceeded
the estimated fair value of the acquired net assets by $150,710,000, which is
being amortized over 40 years. Allocation of the purchase price was based on
estimates of the fair value of the net assets acquired and is subject to
adjustment upon finalization of the purchase price allocation.
Based on unaudited data, the following table presents selected financial
information for the Company and Peek on a pro forma basis, assuming the
companies had been combined since the beginning of fiscal 1997. The results of
Peek exclude the results of businesses sold by Peek prior to its acquisition by
the Company and Peek's Measurement business, which was sold to ONIX effective
November 6, 1997.
Three Months Ended Nine Months Ended
------------------ ---------------------
(In thousands except June 28, July 4, June 28,
per share amounts) 1997 1998 1997
- --------------------------------------------------------------------------
Revenues $ 81,686 $215,125 $251,032
Net income (loss) (3,243) 479 (6,153)
Basic and diluted earnings (loss)
per share (.27) .04 (.50)
The pro forma results are not necessarily indicative of future operations or
the actual results that would have occurred had the acquisition of Peek been
made at the beginning of fiscal 1997.
In connection with the acquisition of Peek, the Company has undertaken a
restructuring of the acquired business. The restructuring activities primarily
include reductions in staffing levels, abandonment of excess facilities, and the
sale or closure of certain businesses. In connection with these restructuring
activities, the Company established reserves totaling $15,101,000, primarily for
estimated severance, excess facilities, operating losses at businesses the
Company intends to sell, and other exit costs associated with the acquisition,
$10,654,000 of which was expended during the first nine months of fiscal 1998.
Amounts expended included operating losses of $3,840,000 at businesses the
10
<PAGE>
3. Acquisition (continued)
Company intends to sell or discontinue, and the remainder primarily represented
severance costs. Acquisition reserves were recorded as a cost of the acquisition
of Peek in accordance with Emerging Issues Task Force Pronouncement 95-3 (EITF
95-3). As of July 4, 1998, unresolved matters related to the restructuring of
Peek include completing the identification of specific employees for termination
and locations to be abandoned or consolidated, as well as other decisions
concerning the integration of the acquired businesses into the Company. In
accordance with EITF 95-3, finalization of the Company's plan for restructuring
Peek will not occur beyond one year from the date of acquisition. Any changes to
estimates of these costs will be recorded as adjustments to cost in excess of
net assets of acquired companies.
As of July 4, 1998, Peek had an unused line of credit of 5,000,000 British
pounds sterling. Borrowings under the line of credit will bear interest at
applicable London interbank market rates plus 45 basis points, are payable on
demand, and are guaranteed by Thermo Electron. In addition, in connection with
the acquisition of Peek, the Company assumed promissory notes totaling
$28,407,000, which were repaid during the first half of fiscal 1998.
Peek enters into forward contracts to hedge certain firm purchase and sale
commitments denominated in currencies other than its subsidiaries' local
currencies. The purpose of Peek's foreign currency hedging activities is to
protect Peek's local currency cash flows related to these commitments from
fluctuations in foreign exchange rates. Because Peek's forward contracts are
entered into as hedges against existing foreign currency exposures, there
generally is no effect on the income statement since gains or losses on the
customer contract offset gains or losses on the forward contract.
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 September 27, 1997, filed with the Securities and Exchange
Commission.
11
<PAGE>
Overview
The Company's business is divided into four segments: Traffic Control,
Industrial Refrigeration Systems, Engines, and Cooling and Cogeneration Systems.
Through the Company's Peek subsidiary, acquired November 1997, the Traffic
Control segment develops, markets, installs, and services equipment to monitor
and regulate traffic flow in cities and towns around the world. Peek offers a
wide range of products, including hardware, such as detectors, counter
classifiers, traffic signals and controllers, and variable message signs, as
well as traffic management systems that integrate these products to ease roadway
congestion, improve safety, and collect data. Traffic management systems include
variable message systems to advise drivers of accidents and other roadway
hazards, traffic signal-timing systems that adapt continuously to changing
conditions to minimize delays, parking guidance systems, and public
transportation-management systems that give buses priority at intersections. The
Company also offers high-resolution video equipment to aid police officers in
capturing the information necessary to charge individuals with motor vehicle
violations such as speeding and red light violations.
Funding patterns of governmental entities, as well as seasonality, are
expected to result in fluctuations in quarterly revenues and income of the
Traffic Control segment. As a result of these factors, Peek has historically
experienced higher sales and net income in the first and third fiscal quarters
and lower sales and net income in the second and fourth fiscal quarters.
Additionally, a portion of the Traffic Control segment's revenues result from
the sale of large systems, the timing of which can lead to variability in the
Company's quarterly revenues and income. Government funding patterns and
seasonality resulted in higher operating income in the first and third quarters
of fiscal 1998, as compared to the second quarter of fiscal 1998.
A significant portion of the Traffic Control segment's revenues originate
outside the U.S., principally in Europe. Foreign divisions and subsidiaries
principally sell in their local currencies and generally seek to charge their
customers in the same currency as their operating costs. However, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations affecting the relationship between the U.S. dollar
and foreign currencies. The Company seeks to reduce its exposure to currency
fluctuations through the use of forward contracts. Since the operations of the
Traffic Control segment are conducted principally in Europe, the Company's
operating results could be adversely affected by capital spending levels and
economic conditions in Europe.
Through the Company's FES division, the Industrial Refrigeration Systems
segment supplies standard and custom-designed industrial refrigeration systems
used primarily by the food-processing, chemical, petrochemical, and
pharmaceutical industries. NuTemp, Inc. is a supplier of both remanufactured and
new industrial refrigeration and commercial cooling equipment for sale or
rental. NuTemp's industrial refrigeration equipment is used primarily in the
food-processing, chemical,
12
<PAGE>
Overview (continued)
petrochemical, and pharmaceutical industries, and its commercial cooling
equipment is used primarily in institutions and commercial buildings, as well as
by service contractors. The demand for NuTemp's equipment is highest in the
summer months and can be adversely affected by cool summer weather.
Within the Engines segment, the Company's Crusader Engines division
manufactures gasoline engines for recreational boats; propane and gasoline
engines for lift trucks; and natural gas engines for vehicular, cooling,
pumping, refrigeration, and other industrial applications.
The Cooling and Cogeneration Systems segment consists of the Company's
Tecogen division and the Company's ThermoLyte Corporation subsidiary. Tecogen
designs, develops, markets, and services packaged cooling and cogeneration
systems fueled principally by natural gas for sale to a wide range of
commercial, institutional, industrial, and multi-unit residential users. Certain
large-capacity cooling systems are manufactured for Tecogen by FES, and the
cogeneration systems are manufactured for Tecogen by Crusader. Tecogen also
conducts research and development of natural gas-engine technology and on
applications of thermal energy. ThermoLyte is developing and commercializing
various gas-powered lighting products. On July 8, 1998, ThermoLyte acquired the
outstanding stock of Optronics, Inc. for approximately $6.6 million in cash,
including the repayment of $1.5 million of operating debt. The purchase price is
subject to a post-closing adjustment. Optronics makes over 400 lighting and
associated products, including tail-lights and turn-signal lights, portable
lights for fishing and hunting, docking lights, and marine trailer lights, and
serves the automotive, sporting goods, and marine markets.
The Company's revenues by industry segment are as follows:
Three Months Ended Nine Months Ended
------------------- -------------------
July 4, June 28, July 4, June 28,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Traffic Control $ 34,292 $ - $112,027 $ -
Industrial Refrigeration
Systems 20,149 21,297 55,545 56,082
Engines 7,080 9,294 18,688 22,617
Cooling and Cogeneration
Systems 4,193 3,716 11,948 14,280
Intersegment Sales
Elimination (791) (468) (1,169) (1,529)
-------- -------- -------- --------
$ 64,923 $ 33,839 $197,039 $ 91,450
======== ======== ======== ========
13
<PAGE>
Results of Operations
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
Total revenues increased to $64,923,000 in the third quarter of fiscal 1998
from $33,839,000 in the third quarter of fiscal 1997, primarily due to the
inclusion of $34,292,000 of revenues from Peek, acquired November 1997.
Industrial Refrigeration Systems segment revenues decreased to $20,149,000 in
fiscal 1998 from $21,297,000 in fiscal 1997, primarily due to lower revenues for
custom-designed industrial refrigeration packages at FES, offset in part by
increased revenues at NuTemp. Engines segment revenues decreased to $7,080,000
in fiscal 1998 from $9,294,000 in fiscal 1997, primarily due to the inclusion in
fiscal 1997 of a large shipment of TecoDrive engines to one customer and, to a
lesser extent, decreased sales of marine-engine related products, offset in part
by an increase in lift truck engine sales. Cooling and Cogeneration Systems
segment revenues increased to $4,193,000 in fiscal 1998 from $3,716,000 in
fiscal 1997, principally due to increased revenues from gas-fueled cooling
systems and packaged cogeneration systems.
The gross profit margin increased to 31% in the third quarter of fiscal 1998
from 18% in the third quarter of fiscal 1997, primarily due to a 39% gross
profit margin at Peek. The gross profit margin at Peek is not necessarily
indicative of future quarterly operating results for the reasons discussed
above. The gross profit margin for the Industrial Refrigeration Systems segment
increased to 24% in fiscal 1998 from 20% in fiscal 1997, primarily due to
manufacturing efficiencies and lower warranty expense at FES. The gross profit
margin for the Engines segment increased to 12% in fiscal 1998 from 10% in
fiscal 1997, primarily due to a reduction in warranty expenses in fiscal 1998.
The gross profit margin for the Cooling and Cogeneration Systems segment
decreased to 18% in fiscal 1998 from 21% in fiscal 1997, primarily due to an
increase in sales of lower-margin gas-fueled cooling systems.
Selling, general, and administrative expenses as a percentage of revenues
increased to 20% in the third quarter of fiscal 1998 from 13% in the third
quarter of fiscal 1997, principally due to selling, general, and administrative
expenses representing 25% of revenues at Peek. Research and development expenses
increased to $1,969,000 in fiscal 1998 from $507,000 in fiscal 1997, due to the
inclusion of $1,491,000 of research and development expenses at Peek.
Interest expense increased by $2,478,000 due to borrowings from Thermo
Electron to finance the acquisition of Peek (Note 3) and the inclusion of
$143,000 of interest expense at Peek.
The effective tax rate increased to 49% in the third quarter of fiscal 1998
from 45% in the third quarter of fiscal 1997. The effective tax rate for fiscal
1998 exceeded the statutory federal income tax rate primarily due to the
relative impact of nondeductible amortization of cost in excess of net assets of
acquired companies on the Company's pretax income for the third quarter of
fiscal 1998. The effective tax rate for fiscal 1997 exceeded the statutory
federal income tax rate
14
<PAGE>
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997
(continued)
primarily due to an increase in the valuation allowance for net operating loss
carryforwards and other tax assets of the Company's ThermoLyte subsidiary, and
the impact of state income taxes. The effective tax rate increased from fiscal
1997 to fiscal 1998 principally due to the impact of nondeductible amortization
of cost in excess of net assets of acquired companies relating to the Peek
acquisition.
The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and on products sold as well as products purchased by the
Company. The Company believes that its internal information systems and current
products are either year 2000 compliant or will be so prior to the year 2000
without incurring material costs. There can be no assurance, however, that the
Company will not experience unexpected costs and delays in achieving year 2000
compliance for its internal information systems and current products, which
could result in a material adverse effect on the Company's future results of
operations.
The Company is presently assessing the effect that the year 2000 issue may
have on its previously sold products. The Company is also assessing whether its
key suppliers are adequately addressing this issue and the effect this might
have on the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 issue as it relates to its previously
sold products and products purchased from key suppliers is not reasonably likely
to have a material adverse effect on the Company's future results of operations.
First Nine Months Fiscal 1998 Compared With First Nine Months Fiscal 1997
Total revenues increased to $197,039,000 in the first nine months of fiscal
1998 from $91,450,000 in the first nine months of fiscal 1997, due to the
inclusion of $112,027,000 of revenues from Peek, acquired November 1997.
Industrial Refrigeration Systems segment revenues decreased to $55,545,000 in
fiscal 1998 from $56,082,000 in fiscal 1997, primarily due to lower demand for
standard industrial refrigeration packages at FES. Engines segment revenues
decreased to $18,688,000 in fiscal 1998 from $22,617,000 in fiscal 1997,
primarily due to decreased sales of marine-engine related products and, to a
lesser extent, the inclusion in fiscal 1997 of a large shipment of TecoDrive
engines to one customer, offset in part by an increase in lift truck engine
sales. Cooling and Cogeneration Systems segment revenues decreased to
$11,948,000 in fiscal 1998 from $14,280,000 in fiscal 1997, principally due to
decreased revenues from gas-fueled cooling systems.
The gross profit margin increased to 28% in the first nine months of fiscal
1998 from 17% in the first nine months of fiscal 1997, primarily due to a 34%
gross profit margin at Peek. The gross profit margin for the Industrial
Refrigeration Systems segment increased to 22% in fiscal 1998 from 20% in fiscal
1997 and the gross profit margin for the Engines segment increased to 9% in
fiscal 1998 from 8% in fiscal 1997, primarily
15
<PAGE>
First Nine Months Fiscal 1998 Compared With First Nine Months Fiscal 1997
(continued)
due to the reasons discussed in the results of operations for the third quarter.
The gross profit margin for the Cooling and Cogeneration Systems segment was
unchanged at 20% in fiscal 1998 and fiscal 1997.
Selling, general, and administrative expenses as a percentage of revenues
increased to 20% in the first nine months of fiscal 1998 from 14% in the first
nine months of fiscal 1997, principally due to selling, general, and
administrative expenses representing 24% of revenues at Peek. Research and
development expenses increased to $6,357,000 in fiscal 1998 from $1,778,000 in
fiscal 1997, due to the inclusion of $4,781,000 of research and development
expenses at Peek.
Interest income increased to $1,673,000 in the first nine months of fiscal
1998 from $1,389,000 in the first nine months of fiscal 1997, principally due to
an increase in average invested balances. Interest expense increased by
$6,530,000 due to borrowings from Thermo Electron to finance the acquisition of
Peek (Note 3) and the inclusion of $707,000 of interest expense at Peek.
The effective tax rate increased to 61% in the first nine months of fiscal
1998 from 49% in the first nine months of fiscal 1997. The effective tax rate
exceeded the statutory federal income tax rate and increased from fiscal 1997 to
fiscal 1998 principally due to the reasons discussed in the results of
operations for the third quarter.
Minority interest expense increased to $345,000 in the first nine months of
fiscal 1998 from $234,000 in the first nine months of fiscal 1997 due to
minority interest expense on Peek's earnings relating to Peek shares tendered
after November 6, 1997, through January 16, 1998. As of January 16, 1998, the
Company had acquired all of the Peek outstanding ordinary shares.
Liquidity and Capital Resources
Consolidated working capital was $35,133,000 at July 4, 1998, compared with
$54,708,000 at September 27, 1997. Included in working capital are cash, cash
equivalents, and available-for-sale investments of $30,034,000 at July 4, 1998,
compared with $28,518,000 at September 27, 1997. Of the $30,034,000 balance at
July 4, 1998, $14,335,000 was held by ThermoLyte, and the remainder was held by
the Company and its wholly owned subsidiaries. At July 4, 1998, $8,876,000 of
the Company's cash and cash equivalents was held by its foreign subsidiaries.
While this cash can be used outside of the United States, repatriation of this
cash into the United States would be subject to a United States tax.
Additionally, working capital at July 4, 1998, was reduced by common stock of
subsidiary subject to redemption of $18,293,000, which represents ThermoLyte's
common stock, redeemable at the option of the holder in December 1998 or 1999,
the redemption value of which is $18,450,000.
16
<PAGE>
Liquidity and Capital Resources (continued)
During the first nine months of fiscal 1998, $5,079,000 of cash was provided
by operating activities. Cash provided by the Company's operating results was
reduced by $3,281,000 to fund a decrease in accounts payable, primarily at Peek.
During the first nine months of fiscal 1998, the Company's primary investing
activities, excluding available-for-sale investments activity, included the
acquisition of Peek for $148,854,000 in cash, net of cash acquired, and the sale
of Peek's Measurement business for $19,117,000 in cash (Note 3). In addition,
the Company expended $8,242,000 for purchases of rental assets and property,
plant, and equipment, and received $3,296,000 in proceeds from the sale of
rental assets and property, plant, and equipment. During the remainder of fiscal
1998, the Company expects to make capital expenditures for the purchase of
rental assets and property, plant, and equipment of approximately $4 million,
including approximately $250,000 for software and hardware that is year 2000
compliant.
On July 8, 1998, ThermoLyte acquired the outstanding stock of Optronics,
Inc. for approximately $6.6 million in cash, including the repayment of $1.5
million of operating debt. The purchase price is subject to a post-closing
adjustment.
The Company's financing activities provided $131,745,000 of cash in the
first nine months of fiscal 1998. The Company borrowed $160,000,000 from Thermo
Electron to finance the acquisition of Peek (Note 3), repaid $27,402,000 of
short-term borrowings, and expended $1,390,000 of cash for the purchase of
Company common stock.
The Company's $160,000,000 promissory note to Thermo Electron is due in
November 1999. Thermo Electron has indicated its intention to require that the
Company's indebtedness to Thermo Electron be repaid only to the extent the
Company's liquidity and cash flow permit. Accordingly, the Company believes its
existing resources are sufficient to meet the capital requirements of its
existing operations for the foreseeable future.
17
<PAGE>
PART II - OTHER INFORMATION
Item 5 - Other Information
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934, as amended (the Exchange Act),
shareholders of the Company are hereby notified that any shareholder proposal
not included in the Company's proxy materials for its 1999 Annual Meeting of
Shareholders (the Annual Meeting) in accordance with Rule 14a-8 under the
Exchange Act will be considered untimely for the purposes of Rules 14a-4 and
14a-5 under the Exchange Act if notice thereof is received by the Company after
December 9, 1998. Management proxies will be authorized to exercise
discretionary voting authority with respect to any shareholder proposal not
included in the Company's proxy materials for the Annual Meeting unless (a) the
Company receives notice of such proposal by December 9, 1998, and (b) the
conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under the Exchange Act are
met.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding the exhibits.
(b) Reports on Form 8-K
On June 3, 1998, the Company filed a Current Report on Form 8-K pertaining
to a possible debt offering of $150 million to $200 million.
18
<PAGE>
THERMO POWER CORPORATION
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 12th day of August 1998.
THERMO POWER CORPORATION
Paul F. Kelleher
---------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
---------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
19
<PAGE>
THERMO POWER CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -----------------------------------------------------------------------------
27 Financial Data Schedule.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 4, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> JUL-04-1998
<CASH> 25,920
<SECURITIES> 4,114
<RECEIVABLES> 67,912
<ALLOWANCES> 13,556
<INVENTORY> 47,487
<CURRENT-ASSETS> 147,596
<PP&E> 38,641
<DEPRECIATION> 13,255
<TOTAL-ASSETS> 339,190
<CURRENT-LIABILITIES> 112,463
<BONDS> 435
0
0
<COMMON> 1,249
<OTHER-SE> 63,948
<TOTAL-LIABILITY-AND-EQUITY> 339,190
<SALES> 197,039
<TOTAL-REVENUES> 197,039
<CGS> 142,153
<TOTAL-COSTS> 142,153
<OTHER-EXPENSES> 6,357
<LOSS-PROVISION> 167
<INTEREST-EXPENSE> 6,544
<INCOME-PRETAX> 3,881
<INCOME-TAX> 2,378
<INCOME-CONTINUING> 1,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 0.10
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