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 April 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 02254-9046
(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 May 1, 1998
---------------------------- --------------------------
Common Stock, $.10 par value 11,822,963
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
THERMO POWER CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
April 4, September 27,
(In thousands) 1998 1997
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 29,797 $ 19,347
Available-for-sale investments, at quoted
market value (amortized cost of $4,043
and $9,129) 4,059 9,171
Accounts receivable, less allowances of
$13,703 and $757 57,451 21,012
Unbilled contract costs and fees 7,260 4,856
Inventories:
Raw materials 32,216 17,570
Work in process 4,384 1,077
Finished goods 6,126 1,237
Prepaid income taxes 4,652 3,118
Other current assets 2,744 219
-------- --------
148,689 77,607
-------- --------
Rental Assets, at Cost 13,813 13,645
Less: Accumulated depreciation and
amortization 3,591 3,369
-------- --------
10,222 10,276
-------- --------
Property, Plant, and Equipment, at Cost 33,518 19,637
Less: Accumulated depreciation and
amortization 8,961 9,046
-------- --------
24,557 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 238 236
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 3) 155,295 7,082
-------- --------
$339,001 $107,992
======== ========
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THERMO POWER CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 4, September 27,
(In thousands except share amounts) 1998 1997
------------------------------------------------------------------------
Current Liabilities:
Notes payable (Note 3) $ 822 $ -
Accounts payable 34,985 9,622
Accrued payroll and employee benefits 8,751 3,133
Billings in excess of contract costs and fees 5,824 1,353
Accrued income taxes 3,343 1,620
Accrued warranty costs 4,958 3,435
Common stock of subsidiary subject to
redemption ($18,450 redemption value) 18,215 -
Accrued acquisition expenses (Note 3) 12,489 -
Other accrued expenses 19,884 3,240
Due to parent company and affiliated
companies 3,045 496
-------- --------
112,316 22,899
-------- --------
Deferred Income Taxes 1,103 114
-------- --------
Long-term Obligations (includes $160,000 due
to parent company; Note 3) 160,333 252
-------- --------
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 55,392 55,283
Retained earnings 13,578 13,811
Treasury stock at cost, 670,408 and
578,124 shares (4,650) (3,636)
Cumulative translation adjustment (330) -
Net unrealized gain (loss) on available-
for-sale investments 10 (39)
-------- --------
65,249 66,668
-------- --------
$339,001 $107,992
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO POWER CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
----------------------
April 4, March 29,
(In thousands except per share amounts) 1998 1997
-----------------------------------------------------------------------
Revenues $68,554 $28,825
------- -------
Costs and Operating Expenses:
Cost of revenues 51,809 23,331
Selling, general, and administrative expenses 13,410 4,433
Research and development expenses 2,659 627
------- -------
67,878 28,391
------- -------
Operating Income 676 434
Interest Income 668 472
Interest Expense (includes $2,314 to related
party in fiscal 1998; Note 3) (2,636) (4)
------- -------
Income (Loss) Before Provision (Benefit) for
Income Taxes and Minority Interest (1,292) 902
Provision (Benefit) for Income Taxes (82) 449
Minority Interest Expense 78 78
------- -------
Net Income (Loss) $(1,288) $ 375
======= =======
Basic and Diluted Earnings (Loss) per Share
(Note 2) $ (.11) $ .03
======= =======
Weighted Average Shares (Note 2):
Basic 11,802 12,467
======= =======
Diluted 11,802 12,472
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO POWER CORPORATION
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
---------------------
April 4, March 29,
(In thousands except per share amounts) 1998 1997
----------------------------------------------------------------------
Revenues $132,116 $ 57,611
-------- --------
Costs and Operating Expenses:
Cost of revenues 97,058 47,864
Selling, general, and administrative expenses 26,845 8,213
Research and development expenses 4,388 1,271
-------- --------
128,291 57,348
-------- --------
Operating Income 3,825 263
Interest Income (includes $180 from related
party in fiscal 1998; Note 3) 1,257 923
Interest Expense (includes $3,489 to related
party in fiscal 1998; Note 3) (4,061) (9)
-------- --------
Income Before Provision for Income Taxes and
Minority Interest 1,021 1,177
Provision for Income Taxes 987 642
Minority Interest Expense 267 156
-------- --------
Net Income (Loss) $ (233) $ 379
======== ========
Basic and Diluted Earnings (Loss) per Share
(Note 2) $ (.02) $ .03
======== ========
Weighted Average Shares (Note 2):
Basic 11,850 12,478
======== ========
Diluted 11,850 12,488
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO POWER CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
----------------------
April 4, March 29,
(In thousands) 1998 1997
-----------------------------------------------------------------------
Operating Activities:
Net income (loss) $ (233) $ 379
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 5,213 1,257
Provision for losses on accounts
receivable 158 9
Minority interest expense 267 156
Increase in deferred income taxes (1,814) -
Other noncash items 75 30
Changes in current accounts, excluding
the effects of acquisition:
Accounts receivable 973 (1,149)
Inventories 9,851 75
Unbilled contract costs and fees 1,191 2,143
Other current assets (468) (351)
Accounts payable (2,678) 515
Other current liabilities (6,030) 976
--------- ---------
Net cash provided by operating activities 6,505 4,040
--------- ---------
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
Increase in rental assets (1,035) (570)
Proceeds from sale of rental assets 619 944
Purchases of property, plant, and equipment (2,956) (1,508)
Proceeds from sale of property, plant,
and equipment 1,305 -
Other (751) -
--------- ---------
Net cash provided by (used in) investing
activities (127,544) 4,866
--------- ---------
Financing Activities:
Issuance of long-term obligation to parent
company (Note 3) 160,000 -
Decrease in short-term notes payable (Note 3) (27,823) -
Repurchases of Company common stock (1,380) (2,034)
Net proceeds from issuance of Company
common stock 475 71
Repayment of long-term obligations (103) (27)
--------- ---------
Net cash provided by (used in) financing
activities $ 131,169 $ (1,990)
--------- ---------
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THERMO POWER CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
----------------------
April 4, March 29,
(In thousands) 1998 1997
-----------------------------------------------------------------------
Exchange Rate Effect on Cash $ 320 $ -
--------- ---------
Increase in Cash and Cash Equivalents 10,450 6,916
Cash and Cash Equivalents at Beginning of
Period 19,347 29,852
--------- ---------
Cash and Cash Equivalents at End of Period $ 29,797 $ 36,768
========= =========
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.
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THERMO POWER CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements 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 April 4,
1998, the results of operations for the three- and six-month periods
ended April 4, 1998, and March 29, 1997, and the cash flows for the
six-month periods ended April 4, 1998, and March 29, 1997. The Company's
results of operations for the six-month periods ended April 4, 1998, and
March 29, 1997, included 27 weeks and 26 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 (Loss) 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 equals the
Company's previously reported earnings per share for the fiscal 1997
periods. Basic earnings (loss) per share have been computed by dividing
net income (loss) by the weighted average number of shares outstanding
during the period. Diluted earnings per share for the fiscal 1997 periods
have been computed assuming the exercise of stock options and their
related income tax effect. The computation of diluted loss per share for
the fiscal 1998 periods excludes the effect of assuming the exercise of
stock options because the effect would be antidilutive due to the
Company's net loss during those periods.
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THERMO POWER CORPORATION
2. Earnings (Loss) per Share (continued)
Basic and diluted earnings (loss) per share were calculated as
follows:
Three Months Ended Six Months Ended
-------------------- --------------------
(In thousands except April 4, March 29, April 4, March 29,
per share amounts) 1998 1997 1998 1997
------------------------------------------------------------------------
Basic
Net income (loss) $(1,288) $ 375 $ (233) $ 379
------- ------- ------- -------
Weighted average shares 11,802 12,467 11,850 12,478
------- ------- ------- -------
Basic earnings (loss)
per share $ (.11) $ .03 $ (.02) $ .03
======= ======= ======= =======
Diluted
Net income (loss) $(1,288) $ 375 $ (233) $ 379
------- ------- ------- -------
Weighted average shares 11,802 12,467 11,850 12,478
Effect of stock options - 5 - 10
------- ------- ------- -------
Weighted average shares,
as adjusted 11,802 12,472 11,850 12,488
------- ------- ------- -------
Diluted earnings (loss)
per share $ (.11) $ .03 $ (.02) $ .03
======= ======= ======= =======
As of April 4, 1998, the computation of diluted loss per share
excludes the effect of assuming the exercise of 1,188,749 outstanding
stock options, with exercise prices ranging from $6.40 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.
9PAGE
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THERMO POWER CORPORATION
3. Acquisition (continued)
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.
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 Six Months Ended
------------------ -----------------------
(In thousands except March 29, April 4, March 29,
per share amounts) 1997 1998 1997
------------------------------------------------------------------------
Revenues $ 60,767 $150,202 $169,346
Net loss (12,982) (912) (2,910)
Basic and diluted loss
per share (1.04) (.08) (.23)
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.
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THERMO POWER CORPORATION
3. Acquisition (continued)
In connection with the acquisition of Peek, the Company has
undertaken a restructuring of the acquired business. The restructuring
activities will primarily include reductions in staffing levels and
abandonment of excess facilities. In connection with these restructuring
activities, the Company established reserves totaling $15,101,000,
primarily for estimated severance, excess facilities, and other exit
costs associated with the acquisition, $2,822,000 of which was expended
during the first six months of fiscal 1998. Amounts expended included
operating losses of $1,682,000 at businesses the Company intends to sell,
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
April 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.
Notes payable in the accompanying April 4, 1998, balance sheet
includes $475,000 of outstanding borrowings under a line of credit at
Peek. Borrowings under the line of credit are payable on demand and are
denominated in British pounds sterling. As of April 4, 1998, the
remaining amount available under the line of credit was 4,712,000 British
pounds sterling. Borrowings under the line of credit bear interest at
applicable London interbank market rates plus 45 basis points and are
guaranteed by Thermo Electron. In addition, in connection with the
acquisition of Peek, the Company assumed promissory notes, which were
repaid during the first six months 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.
11PAGE
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THERMO POWER CORPORATION
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.
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, video systems to give real-time analysis
of traffic flows at intersections and on highways, and automatic
toll-collection systems. 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. The Company's results of operations and financial
position for fiscal 1998 are expected to be affected significantly by the
acquisition of Peek.
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 second and
fourth calendar quarters and lower sales and net income in the first and
third calendar 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. The Company's operations resulted in a net loss for the second
quarter of fiscal 1998, principally due to interest expense on borrowings
to fund the acquisition of Peek exceeding the current quarter's operating
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THERMO POWER CORPORATION
Overview (continued)
income. Government funding patterns and seasonality resulted in a
decrease in operating income in the second quarter of fiscal 1998, as
compared to the first 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 reduces 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 and economic conditions
in Europe. In addition, the Traffic Control segment has operations in
Asia and revenues from exports to Asia. Asia is experiencing a severe
economic crisis, which has been characterized by sharply reduced economic
activity and liquidity, highly volatile foreign-currency-exchange and
interest rates, and unstable stock markets. The Company's sales to Asia
could be adversely affected by the unstable economic conditions in Asia.
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,
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
typically 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.
13PAGE
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THERMO POWER CORPORATION
Overview (continued)
The Company's revenues by industry segment are as follows:
Three Months Ended Six Months Ended
-------------------- --------------------
April 4, March 29, April 4, March 29,
(In thousands) 1998 1997 1998 1997
------------------------------------------------------------------------
Traffic Control $ 38,983 $ - $ 77,735 $ -
Industrial Refrigeration
Systems 18,387 15,639 35,396 34,785
Engines 6,484 7,916 11,608 13,323
Cooling and Cogeneration
Systems 4,797 5,948 7,755 10,564
Intersegment sales
elimination (97) (678) (378) (1,061)
-------- -------- -------- --------
$ 68,554 $ 28,825 $132,116 $ 57,611
======== ======== ======== ========
Results of Operations
Second Quarter Fiscal 1998 Compared With Second Quarter Fiscal 1997
-------------------------------------------------------------------
Total revenues increased to $68,554,000 in the second quarter of
fiscal 1998 from $28,825,000 in the second quarter of fiscal 1997, due to
the inclusion of $38,983,000 of revenues from Peek, acquired November
1997. Peek's second quarter revenues are not necessarily indicative of
future quarterly operating results due to funding patterns of
governmental entities and seasonality. Industrial Refrigeration Systems
segment revenues increased to $18,387,000 in fiscal 1998 from $15,639,000
in fiscal 1997, primarily due to greater demand for custom-designed
industrial refrigeration packages at FES. Engines segment revenues
decreased to $6,484,000 in fiscal 1998 from $7,916,000 in fiscal 1997,
primarily due to decreased sales of marine-engine related products.
Cooling and Cogeneration Systems segment revenues decreased to $4,797,000
in fiscal 1998 from $5,948,000 in fiscal 1997, principally due to
decreased revenues from gas-fueled cooling systems.
The gross profit margin increased to 24% in the second quarter of
fiscal 1998 from 19% in the second quarter of fiscal 1997, primarily due
to a 29% 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 was unchanged at 21% in fiscal 1998 and
1997. The gross profit margin for the Engines segment decreased to 7% in
fiscal 1998 from 10% in fiscal 1997, primarily due to a decrease in
revenues. The gross profit margin for the Cooling and Cogeneration
Systems segment increased to 22% in fiscal 1998 from 20% in fiscal 1997,
primarily due to a decrease in sales of lower-margin gas-fueled cooling
systems.
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THERMO POWER CORPORATION
Second Quarter Fiscal 1998 Compared With Second Quarter Fiscal 1997
-------------------------------------------------------------------
(continued)
Selling, general, and administrative expenses as a percentage of
revenues increased to 20% in the second quarter of fiscal 1998 from 15%
in the second quarter of fiscal 1997, principally due to relatively
higher selling, general, and administrative expenses as a percentage of
revenues at Peek. Research and development expenses increased to
$2,659,000 in fiscal 1998 from $627,000 in fiscal 1997, due to the
inclusion of $2,136,000 of research and development expenses at Peek.
Interest income increased to $668,000 in the second quarter of fiscal
1998 from $472,000 in the second quarter of fiscal 1997, principally due
to an increase in average invested balances. Interest expense increased
by $2,632,000 due to borrowings from Thermo Electron to finance the
acquisition of Peek (Note 3) and the inclusion of $319,000 of interest
expense at Peek.
The effective tax rate decreased to 6% in the second quarter of
fiscal 1998 from 50% in the second quarter of fiscal 1997. The Company
recorded a tax benefit in fiscal 1998 at an effective tax rate below 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 loss for the quarter. The effective tax
rate for fiscal 1997 exceeded the statutory federal income tax rate
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
in fiscal 1998 was substantially lower than the effective tax rate in
fiscal 1997 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, except those of Peek, are
either year 2000 compliant or will be so prior to the year 2000 without
incurring material costs. The Company is in the process of assessing the
impact of the year 2000 problem on the internal information systems and
current products of Peek. At this time the Company is unable to determine
the materiality of the year 2000 problem at Peek. There can be no
assurance 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
problem 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
15PAGE
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THERMO POWER CORPORATION
Second Quarter Fiscal 1998 Compared With Second Quarter Fiscal 1997
-------------------------------------------------------------------
(continued)
completed its analysis and is unable to conclude at this time that the
year 2000 problem 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 Six Months Fiscal 1998 Compared With First Six Months Fiscal 1997
-----------------------------------------------------------------------
Total revenues increased to $132,116,000 in the first six months of
fiscal 1998 from $57,611,000 in the first six months of fiscal 1997, due
to the inclusion of $77,735,000 of revenues from Peek, acquired November
1997. Industrial Refrigeration Systems segment revenues increased to
$35,396,000 in fiscal 1998 from $34,785,000 in fiscal 1997, primarily due
to revenue improvement at FES, resulting principally from greater demand
for custom-designed industrial refrigeration packages, offset in part by
lower demand for standard industrial refrigeration packages. Engines
segment revenues decreased to $11,608,000 in fiscal 1998 from $13,323,000
in fiscal 1997, primarily due to decreased sales of marine-engine related
products. Cooling and Cogeneration Systems segment revenues decreased to
$7,755,000 in fiscal 1998 from $10,564,000 in fiscal 1997, principally
due to decreased revenues from gas-fueled cooling systems.
The gross profit margin increased to 27% in the first six months of
fiscal 1998 from 17% in the first six months of fiscal 1997, primarily
due to a 32% gross profit margin at Peek. The gross profit margin for the
Industrial Refrigeration Systems segment increased to 21% in fiscal 1998
from 19% in fiscal 1997, primarily due to manufacturing efficiencies at
FES. The gross profit margin for the Engines segment was unchanged at 7%
in fiscal 1998 and 1997. The gross profit margin for the Cooling and
Cogeneration Systems segment increased to 21% in fiscal 1998 from 20% in
fiscal 1997, primarily due to a decrease in sales of lower-margin
gas-fueled cooling systems.
Selling, general, and administrative expenses as a percentage of
revenues increased to 20% in the first six months of fiscal 1998 from 14%
in the first six months of fiscal 1997, principally due to relatively
higher selling, general, and administrative expenses as a percentage of
revenues at Peek. Research and development expenses increased to
$4,388,000 in fiscal 1998 from $1,271,000 in fiscal 1997, due to the
inclusion of $3,290,000 of research and development expenses at Peek.
Interest income increased to $1,257,000 in the first six months of
fiscal 1998 from $923,000 in the first six months of fiscal 1997,
principally due to an increase in average invested balances. Interest
expense increased by $4,052,000 due to borrowings from Thermo Electron to
finance the acquisition of Peek (Note 3) and the inclusion of $564,000 of
interest expense at Peek.
The effective tax rate increased to 97% in the first six months of
fiscal 1998 from 55% in the first six months 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
16PAGE
<PAGE>
THERMO POWER CORPORATION
First Six Months Fiscal 1998 Compared With First Six Months Fiscal 1997
-----------------------------------------------------------------------
(continued)
Company's pretax income for the first six months of fiscal 1998. The
effective tax rate for fiscal 1997 exceeded the statutory federal income
tax rate 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.
Minority interest expense increased to $267,000 in the first six
months of fiscal 1998 from $156,000 in the first six 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 $36,373,000 at April 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
$33,856,000 at April 4, 1998, compared with $28,518,000 at September 27,
1997. Of the $33,856,000 balance at April 4, 1998, $14,644,000 was held
by ThermoLyte, and the remainder was held by the Company and its wholly
owned subsidiaries. At April 4, 1998, $14,822,000 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 April 4, 1998, was reduced by common
stock of subsidiary subject to redemption of $18,215,000, which
represents ThermoLyte's common stock, redeemable in December 1998 or
1999, the redemption value of which is $18,450,000.
During the first six months of fiscal 1998, $6,505,000 of cash was
provided by operating activities. Cash provided by the Company's
operating results was improved by a reduction in inventories of
$9,851,000, offset in part by a reduction in other current liabilities of
$6,030,000. The decrease in inventories resulted primarily at Peek,
principally due to the timing of shipments. The decrease in other current
liabilities also resulted primarily at Peek, principally from a reduction
in accrued acquisition expenses (Note 3) and tax and dividend payments
made during the first six months of fiscal 1998.
During the first six 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 $3,991,000 for purchases
of rental assets and property, plant, and equipment, and received
17PAGE
<PAGE>
THERMO POWER CORPORATION
Liquidity and Capital Resources (continued)
$1,924,000 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 $11,500,000,
including approximately $500,000 for software and hardware that is year
2000 compliant.
In April 1998, ThermoLyte signed a non-binding letter of intent to
acquire the outstanding stock of Optronics, Inc. and Optronics
International, Inc. for approximately $5.1 million in cash and the
assumption of certain liabilities. The proposed acquisition is subject to
certain conditions, including completion of due diligence and negotiation
of a definitive agreement, as well as approval by the Company's and
ThermoLyte's boards of directors and the stockholders of the potential
acquiree. The final terms of such acquisition have not been determined,
and there can be no assurance that the acquisition will be completed.
The Company's financing activities provided $131,169,000 of cash in
the first six months of fiscal 1998. The Company borrowed $160,000,000
from Thermo Electron to finance the acquisition of Peek (Note 3), repaid
$27,823,000 of short-term borrowings, and expended $1,380,000 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. The Company believes
its existing resources are sufficient to meet the capital requirements of
its existing operations for the foreseeable future, except for repayment
of the promissory note to Thermo Electron as discussed above.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
On March 13, 1998, at the Annual Meeting of Shareholders, the
shareholders elected six incumbent directors to a one-year term expiring
in 1999. The directors reelected at the meeting were: Marshall J.
Armstrong, J. Timothy Corcoran, Peter O. Crisp, John N. Hatsopoulos,
Donald E. Noble, and Arvin H. Smith. Mr. Armstrong received 11,680,616
shares voted in favor of his election and 10,126 shares voted against.
Messrs. Corcoran, Hatsopoulos, and Smith each received 11,681,942 shares
voted in favor of his election and 8,800 shares voted against. Mr. Crisp
received 11,681,892 shares voted in favor of his election and 8,850
shares voted against. Mr. Noble received 11,681,392 shares voted in favor
of his election and 9,350 shares voted against. No abstentions or broker
nonvotes were recorded on the election of directors.
Item 6 - Exhibits
-----------------
See Exhibit Index on the page immediately preceding the exhibits.
18PAGE
<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 11th day of May 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
19PAGE
<PAGE>
THERMO POWER CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO POWER
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 4, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> APR-03-1998
<CASH> 29,797
<SECURITIES> 4,059
<RECEIVABLES> 71,154
<ALLOWANCES> 13,703
<INVENTORY> 42,726
<CURRENT-ASSETS> 148,689
<PP&E> 33,518
<DEPRECIATION> 8,961
<TOTAL-ASSETS> 339,001
<CURRENT-LIABILITIES> 112,316
<BONDS> 333
0
0
<COMMON> 1,249
<OTHER-SE> 64,000
<TOTAL-LIABILITY-AND-EQUITY> 339,001
<SALES> 132,116
<TOTAL-REVENUES> 132,116
<CGS> 97,058
<TOTAL-COSTS> 97,058
<OTHER-EXPENSES> 4,388
<LOSS-PROVISION> 158
<INTEREST-EXPENSE> 4,061
<INCOME-PRETAX> 1,021
<INCOME-TAX> 987
<INCOME-CONTINUING> (233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (233)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
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