SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-11406
THERMO FIBERTEK INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1762325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Winter Street
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 29, 1999
Common Stock, $.01 par value 61,183,016
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO FIBERTEK INC.
Consolidated Balance Sheet
(Unaudited)
Assets
<S> <C> <C>
October 2, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Assets:
Cash and cash equivalents (includes $74,447 under repurchase $ 40,743 $115,472
agreement with parent company in fiscal 1998)
Advance to affiliate (Note 8) 90,404 -
Available-for-sale investments, at quoted market value 46,246 48,206
(amortized cost of $46,354 and $48,210)
Accounts receivable, less allowances of $2,021 and $2,231 42,911 50,281
Unbilled contract costs and fees 3,035 2,968
Inventories:
Raw materials and supplies 11,986 14,848
Work in process 5,655 5,341
Finished goods 11,448 10,435
Prepaid income taxes 6,625 6,806
Other current assets 947 1,935
-------- --------
260,000 256,292
-------- --------
Property, Plant, and Equipment, at Cost 65,937 68,661
Less: Accumulated depreciation and amortization 36,763 36,925
-------- --------
29,174 31,736
-------- --------
Other Assets (Note 7) 13,529 12,309
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 5) 123,030 126,763
-------- --------
$425,733 $427,100
======== ========
2
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THERMO FIBERTEK INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 2, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ---------
Current Liabilities:
Notes payable and current maturities of long-term obligation (Note 5) $ 456 $ -
Accounts payable 17,124 21,548
Accrued payroll and employee benefits 7,638 10,273
Billings in excess of contract costs and fees 2,159 5,846
Accrued warranty costs 4,907 5,830
Customer deposits 3,415 3,154
Accrued income taxes 5,236 2,810
Accrued interest 1,455 3,136
Other accrued expenses (Notes 5 and 6) 11,802 8,970
Common stock of subsidiary subject to redemption ($50,430 redemption value) 49,555 -
Due to parent company and affiliated companies 1,293 1,279
-------- --------
105,040 62,846
-------- --------
Deferred Income Taxes and Other Deferred Items 6,291 6,202
-------- --------
Long-term Obligations:
Subordinated convertible debentures 153,000 153,000
Note payable (Note 5) 1,350 -
-------- --------
154,350 153,000
-------- --------
Minority Interest 320 303
-------- --------
Common Stock of Subsidiary Subject to Redemption ($54,762 redemption value) - 53,801
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 150,000,000 shares authorized; 635 634
63,515,987 and 63,379,337 shares issued
Capital in excess of par value 77,088 78,731
Retained earnings 113,409 100,602
Treasury stock at cost, 2,332,971 and 2,238,830 shares (21,289) (21,286)
Deferred compensation (74) -
Accumulated other comprehensive items (Note 2) (10,037) (7,733)
-------- --------
159,732 150,948
-------- --------
$425,733 $427,100
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO FIBERTEK INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Revenues $53,075 $59,678
------- -------
Costs and Operating Expenses:
Cost of revenues 31,177 35,702
Selling, general, and administrative expenses 14,903 15,208
Research and development expenses 1,753 1,754
Gain on sale of business (Note 5) and property (55) (178)
Nonrecurring costs (Note 6) 2,769 -
------- -------
50,547 52,486
------- -------
Operating Income 2,528 7,192
Interest Income 2,231 1,918
Interest Expense (1,876) (1,854)
------- -------
Income Before Provision for Income Taxes and Minority Interest 2,883 7,256
Provision for Income Taxes 1,055 2,797
Minority Interest Expense 260 302
------- -------
Net Income $ 1,568 $ 4,157
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .03 $ .07
======= =======
Weighted Average Shares (Note 3):
Basic 61,177 61,684
======= =======
Diluted 61,525 62,339
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO FIBERTEK INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Revenues $166,847 $185,591
-------- --------
Costs and Operating Expenses:
Cost of revenues 99,449 110,218
Selling, general, and administrative expenses 45,554 47,006
Research and development expenses 5,413 5,378
Gain on sale of business (Note 5) and property (11,154) (260)
Restructuring and nonrecurring costs (Note 6) 6,152 -
-------- --------
145,414 162,342
-------- --------
Operating Income 21,433 23,249
Interest Income 6,238 6,002
Interest Expense (5,571) (5,562)
-------- --------
Income Before Provision for Income Taxes and Minority Interest 22,100 23,689
Provision for Income Taxes 8,548 9,183
Minority Interest Expense 745 770
-------- --------
Net Income $ 12,807 $ 13,736
======== ========
Basic and Diluted Earnings per Share (Note 3) $ .21 $ .22
======== ========
Weighted Average Shares (Note 3):
Basic 61,182 61,683
======== ========
Diluted 61,570 62,539
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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THERMO FIBERTEK INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Operating Activities:
Net income $ 12,807 $13,736
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,147 6,785
Provision for losses on accounts receivable - 112
Minority interest expense 745 770
Gain on sale of business (Note 5) and property (11,154) (260)
Noncash nonrecurring costs (Note 6) 3,239 -
Other (122) 210
Changes in current accounts, excluding the effects of acquisitions and
disposition:
Accounts receivable 3,433 8,973
Inventories and unbilled contract costs and fees (622) (448)
Prepaid income taxes and other current assets 850 834
Accounts payable (1,059) (7,554)
Other current liabilities (3,261) (3,786)
-------- -------
Net cash provided by operating activities 12,003 19,372
-------- -------
Investing Activities:
Acquisitions, net of cash acquired (Note 5) (2,607) (1,296)
Proceeds from sale of business, net of cash divested (Note 5) 13,592 -
Refund of acquisition purchase price (Note 5) 377 -
Advances to affiliate, net (Note 8) (90,404) -
Purchases of available-for-sale investments (61,825) (51,225)
Proceeds from sale and maturities of available-for-sale investments 62,827 43,961
Purchases of property, plant, and equipment (2,434) (6,832)
Advances under notes receivable - (2,910)
Other, net 546 401
-------- -------
Net cash used in investing activities (79,928) (17,901)
-------- -------
Financing Activities:
Purchases of Company and subsidiary common stock (4,109) (5,331)
Purchases of subsidiary common stock from Thermo Electron (2,227) -
Net proceeds from issuance of Company common stock 415 1,809
-------- -------
Net cash used in financing activities $ (5,921) $(3,522)
-------- -------
6
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THERMO FIBERTEK INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Exchange Rate Effect on Cash $ (883) $(1,248)
-------- -------
Decrease in Cash and Cash Equivalents (74,729) (3,299)
Cash and Cash Equivalents at Beginning of Period 115,472 111,648
-------- -------
Cash and Cash Equivalents at End of Period $ 40,743 $108,349
======== ========
Noncash Activities (Note 5):
Fair value of assets of acquired companies $ 4,860 $ 1,493
Cash paid for acquired companies (2,660) (1,296)
Note payable for acquired companies (1,730) -
-------- -------
Liabilities assumed of acquired companies $ 470 $ 197
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Fibertek Inc. (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at October 2, 1999, the results of
operations for the three- and nine-month periods ended October 2, 1999, and
October 3, 1998, and the cash flows for the nine-month periods ended October 2,
1999, and October 3, 1998. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of January 2, 1999, 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 January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the third quarter of 1999 and 1998, the
Company had comprehensive income of $2,772,000 and $4,520,000, respectively.
During the first nine months of 1999 and 1998, the Company had comprehensive
income of $10,520,000 and $13,374,000, respectively.
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3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ---------- ---------- ----------
Basic
Net Income $1,568 $ 4,157 $12,807 $13,736
------ ------- ------- -------
Weighted Average Shares 61,177 61,684 61,182 61,683
------ ------- ------ -------
Basic Earnings per Share $ .03 $ .07 $ .21 $ .22
====== ======= ====== =======
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3. Earnings per Share (continued)
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ---------- ---------- ----------
Diluted
Net Income $1,568 $ 4,157 $12,807 $13,736
Effect of Majority-owned Subsidiary's Dilutive Securities (8) (7) (46) (16)
------ ------- ------ -------
Income Available to Common Shareholders, as Adjusted $1,560 $ 4,150 $12,761 $13,720
------ ------- ------- -------
Weighted Average Shares 61,177 61,684 61,182 61,683
Effect of Stock Options 348 655 388 856
------ ------- ------ -------
Weighted Average Shares, as Adjusted 61,525 62,339 61,570 62,539
------ ------- ------ -------
Diluted Earnings per Share $ .03 $ .07 $ .21 $ .22
====== ======= ====== =======
The computation of diluted earnings per share for all periods excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of October 2, 1999, there were 888,000 of such
options outstanding, with exercise prices ranging from $7.46 to $14.32 per
share.
In addition, the computation of diluted earnings per share for each period
excludes the effect of assuming the conversion of the Company's $153,000,000
principal amount of 4 1/2% subordinated convertible debentures, convertible at
$12.10 per share, because the effect would be antidilutive.
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4. Business Segment Information
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ---------------------------------------------------------- ----------- ------------ ----------- ----------
Revenues:
<S> <C> <C> <C> <C>
Pulp and Papermaking Equipment and Systems $ 50,815 $ 54,652 $158,509 $166,824
Dryers and Pollution-control Equipment (a) - 4,256 1,802 16,092
Water- and Fiber-recovery Services and Products 2,266 1,124 6,593 3,784
Intersegment sales elimination (b) (6) (354) (57) (1,109)
-------- --------- -------- --------
$ 53,075 $ 59,678 $166,847 $185,591
======== ========= ======== ========
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4. Business Segment Information (continued)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ---------- ---------- ----------
Income Before Provision for Income Taxes and Minority
Interest:
Pulp and Papermaking Equipment and Systems (c) $ 6,770 $ 7,923 $17,285 $ 25,814
Dryers and Pollution-control Equipment (d) 55 487 11,609 2,154
Water- and Fiber-recovery Services and Products (174) (646) (582) (2,086)
Corporate (e) (4,123) (572) (6,879) (2,633)
-------- --------- ------- --------
Total operating income 2,528 7,192 21,433 23,249
Interest income, net 355 64 667 440
-------- --------- ------- --------
$ 2,883 $ 7,256 $22,100 $ 23,689
======== ========= ======= ========
(a) The Company sold this segment in February 1999.
(b) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(c) Includes $3.1 million of restructuring and nonrecurring costs in the first
nine months of 1999.
(d) Includes $0.1 million and $11.2 million of gain on sale of business in the
third quarter of 1999 and first nine months of 1999, respectively.
(e) Includes $2.8 million and $3.0 million of nonrecurring costs in the third
quarter of 1999 and first nine months of 1999, respectively, for the
write-down of a note receivable. Also includes related carrying costs of the
note receivable and underlying security of $0.3 million in the third quarter
of 1999 and $1.0 million and $0.3 million in the first nine months of 1999
and 1998, respectively.
5. Acquisitions and Disposition
In May 1999, the Company acquired the outstanding stock of Arcline
Products, a manufacturer of shower oscillation systems, for $2,660,000 in cash
and $2,000,000 payable in equal annual installments over five years. The
liability has been recorded at its net present value of $1,730,000 in the
accompanying balance sheet.
This acquisition has been accounted for using the purchase method of
accounting and its results have been included in the Company's results from the
date of acquisition. The cost of this acquisition approximated the estimated
fair value of the acquired net assets. Allocation of the purchase price for this
acquisition was based on an estimate of the fair value of the net assets
acquired. Pro forma results have not been presented, as the results of the
acquired business were not material to the Company's results of operations.
In February 1999, the Company sold its Thermo Wisconsin, Inc. subsidiary
for $13,631,000 in cash, resulting in a pretax gain of $11,154,000. Thermo
Wisconsin, a manufacturer and marketer of dryers and pollution-control
equipment, had unaudited revenues to external customers and net income in 1998
of $18,877,000 and $1,547,000, respectively.
During the first quarter of 1999, the Company received $377,000 for a
post-closing purchase price adjustment related to the 1998 acquisition of Goslin
Birmingham. The Company recorded this amount as a reduction of cost in excess of
net assets of acquired companies.
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and acquired overmarket leases, for
which the
10
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5. Acquisitions and Disposition (continued)
Company established reserves as part of the cost of acquisitions. In accordance
with EITF 95-3, the Company finalizes its restructuring plans no later than one
year from the respective dates of the acquisitions. A summary of the changes in
accrued acquisition expenses, which represent ongoing payments for severance and
are included in other accrued expenses in the accompanying 1998 balance sheet,
follows:
(In thousands) Total
- ----------------------------------------------------------------------------- -------------- -------------
Balance at January 2, 1999 $149
Usage (69)
Decrease due to finalization of restructuring plan, recorded as a (80)
decrease to cost in excess of net assets of acquired companies
----
Balance at October 2, 1999 $ -
====
6. Restructuring and Nonrecurring Costs
During the first nine months of 1999, the Company recorded restructuring
and nonrecurring costs of $6,152,000. Restructuring costs of $2,257,000, which
were accounted for in accordance with EITF 94-3, include severance costs of
$1,283,000 for 24 employees across all functions at the Company's E. & M.
Lamort, S.A. subsidiary, all of whom were terminated as of October 2, 1999, and
$974,000 to terminate distributor agreements. Nonrecurring charges of $3,895,000
include $3,239,000 for asset write-downs, consisting of $3,034,000 for the
write-down of a note receivable secured by a tissue mill (Note 7) and $205,000
for impairment of a building held for disposal, which was sold in July 1999;
$526,000 for the expected settlement of a legal dispute; and $130,000 for
facility-closure costs. A summary of the changes in accrued restructuring costs,
which are included in other accrued expenses in the accompanying balance sheet,
follows:
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<S> <C> <C> <C>
Severance Total
(In thousands) Other
- ----------------------------------------------------------------- ------------- ------------- ------------
Balance at January 2, 1999 $ - $ 34 $ 34
Provision charged to expense 1,283 974 2,257
Usage (767) (246) (1,013)
Currency translation (115) (88) (203)
------- ------- -------
Balance at October 2, 1999 $ 401 $ 674 $ 1,075
======= ======= =======
7. Note Receivable
During 1996, the Company loaned $6,000,000 to Tree-Free Fiber Company, LLC
in connection with a proposed engineering, procurement, and construction
project. This project was delayed due to weakness in pulp prices, and will not
proceed as a result of Tree-Free's insolvency. Tree-Free was unable to repay the
note upon its original maturity. The note is secured by pari-passu liens on a
tissue mill in Maine and related assets. In December 1997, the Superior Court of
Maine appointed a receiver to preserve and protect the collateral for the loans
made by the Company and other lenders to Tree-Free. In May 1998, the Company
purchased an assignment of Tree-Free's secured indebtedness to the other
pari-passu lender for $2,910,000. In June 1998, the Company conducted a
foreclosure sale of the tissue mill, at which it was the successful bidder, and
executed a purchase and sale agreement. In October 1998, the stock of a mill
located in Mexico, which had also secured the note, was sold and the proceeds of
$1,250,000 were paid to the Company and recorded as a reduction of the carrying
value of the note. During the second quarter of 1999, the Company entered into a
nonbinding letter of intent with a third party to dispose of this asset for an
amount in excess of the carrying value. During the third quarter of 1999, the
third party elected to not proceed with the transaction. Accordingly, the
Company recorded a $2,834,000 write-down to reflect the asset at its estimated
recoverable value. The Company had previously recorded impairment on this note
of $200,000 in the first quarter of 1999 (Note 6).
11
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8. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
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 January 2, 1999, filed with the Securities and Exchange
Commission.
Overview
Prior to March 1999, the Company operated in three segments: Pulp and
Papermaking Equipment and Systems, Dryers and Pollution-control Equipment, and
Water- and Fiber-recovery Services and Products. The Company's Pulp and
Papermaking Equipment and Systems (Papermaking Equipment) segment designs and
manufactures stock-preparation equipment, accessories, and water-management
systems for the paper and paper recycling industries. Principal products
manufactured by this segment include custom-engineered systems and equipment for
the preparation of wastepaper for conversion into recycled paper; accessory
equipment and related consumables important to the efficient operation of
papermaking machines; and water-management systems essential for draining,
purifying, and recycling process water. In May 1999, this segment acquired the
outstanding stock of Arcline Products, a manufacturer of shower and doctor
oscillation systems (Note 5).
The Dryers and Pollution-control Equipment segment, which consisted of the
Company's Thermo Wisconsin, Inc. subsidiary, manufactured and marketed dryers
and pollution-control equipment for the printing, papermaking, and converting
industries. In February 1999, the Company sold its Thermo Wisconsin subsidiary
for $13.6 million in cash (Note 5). Thermo Wisconsin's unaudited revenues to
external customers and net income for fiscal 1998 were $18.9 million and $1.5
million, respectively.
The Water- and Fiber-recovery Services and Products segment, which
consists of the Company's Thermo Fibergen subsidiary, designs, builds, owns, and
operates plants to help pulp and paper mill customers close the loop in their
water and solids systems on a long-term contract basis. The plants clean and
recycle water and long fiber for reuse in the papermaking process. In July 1998,
the Company completed construction of, and began operating, its first plant. In
addition, through its GranTek subsidiary, Thermo Fibergen employs patented
technology to produce absorbing granules from papermaking byproducts. These
granules are used as agricultural carriers, oil- and grease-absorbents, and cat
box fillers. In October 1999, Thermo Fibergen formed a joint venture that plans
to produce, market, and sell thermoplastic composites using byproducts from the
papermaking process.
12
<PAGE>
Overview (continued)
The Company's manufacturing facilities are principally located in the
United States and France. The manufacturing facility in France is located at the
Company's E. & M. Lamort, S.A. subsidiary, which manufactures stock-preparation
equipment, accessories, and water-management systems.
During 1998, approximately 48% of the Company's sales were to customers
outside the United States, principally in Europe. The Company generally seeks to
charge its customers in the same currency as its 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. The Company may enter into
forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than its subsidiaries' local currencies. These
contracts principally hedge transactions denominated in U.S. dollars, French
francs, British pounds sterling, and Canadian dollars. The purpose of the
Company's foreign currency hedging activities is to protect the Company's local
currency cash flows related to these commitments from fluctuations in foreign
exchange rates. Because the Company'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.
The Company's sales to customers in Asia were approximately 5% of the
Company's total sales in 1998, a substantial portion of which were sales to
China. The Company's sales to Asia have been adversely affected by the unstable
economic conditions in that region.
The Company's products are primarily sold to the paper industry.
Generally, the financial condition of the paper industry corresponds to changes
in the general economy and to a number of other factors, including paper and
pulp production capacity. The paper industry entered a severe downcycle in early
1996 and has not recovered. This cyclical downturn, which began adversely
affecting the Company's business during the second half of 1996, continues to
have an adverse effect on the Company's business. In addition, the unstable
economic conditions in Asia, and weakened currencies in that region, have
resulted in increased low-cost imports of pulp and paper in North America and
Europe, resulting in reduced pricing. These factors have also resulted in a
decline in paper and pulp exports from North America and Europe to Asia. The
timing of the recovery of the financial condition of the paper industry cannot
be predicted.
Results of Operations
Third Quarter 1999 Compared With Third Quarter 1998
Excluding the results of Thermo Wisconsin, which was sold in February
1999, revenues decreased to $53.1 million in the third quarter of 1999 from
$55.7 million in the third quarter of 1998. Thermo Wisconsin's revenues to
external customers were $4.0 million in the third quarter of 1998. Arcline
Products, which was acquired in May 1999, added revenues of $0.4 million during
the quarter. The unfavorable effects of currency translation due to the
strengthening in value of the U.S. dollar relative to foreign currencies in
countries in which the Company operates decreased revenues at the Papermaking
Equipment segment by $0.6 million in the third quarter of 1999. Excluding the
results of Arcline and the effect of currency translation, revenues at the
Company's Papermaking Equipment segment decreased $3.7 million, primarily due to
lower revenues from the stock-preparation equipment product line in Europe and
North America, due to reduced capital spending in the pulp and paper industry.
The Water- and Fiber-recovery Services and Products segment revenues increased
$1.1 million, primarily due to increased demand for cellulose-based products and
increased sales of its cat box filler product, which was introduced in the third
quarter of 1998.
The gross profit margin increased to 41% in the third quarter of 1999 from
40% in the third quarter of 1998, primarily due to the absence of lower-margin
sales following the sale of Thermo Wisconsin.
13
<PAGE>
Third Quarter 1999 Compared With Third Quarter 1998 (continued)
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the third quarter of 1999 from 25% in the third quarter of
1998. The increase was primarily at the Papermaking Equipment segment, due to
decreased revenues. The increase in selling, general, and administrative
expenses as a percentage of revenues also resulted from the sale of Thermo
Wisconsin, for which such costs represented 16% of its revenues in the 1998
period. These increases were offset in part by the impact of increased revenues
at the Water- and Fiber-recovery Services and Products segment.
Research and development expenses were unchanged at $1.8 million in the
third quarter of 1999 and 1998.
Nonrecurring costs of $2.8 million in the third quarter of 1999 primarily
represent the writedown of a note receivable secured by a tissue mill (Notes 6
and 7). During 1996, the Company loaned $6.0 million to Tree-Free Fiber Company,
LLC in connection with a proposed engineering, procurement, and construction
project. This project was delayed due to weakness in pulp prices, and will not
proceed as a result of Tree-Free's recent insolvency. Tree-Free was unable to
repay the note upon its original maturity. The note is secured by pari-passu
liens on a tissue mill in Maine and related assets. In December 1997, the
Superior Court of Maine appointed a receiver to preserve and protect the
collateral for the loans made by the Company and other lenders to Tree-Free. In
May 1998, the Company purchased an assignment of Tree-Free's secured
indebtedness to the other pari-passu lender for $2.9 million. In June 1998, the
Company conducted a foreclosure sale of the tissue mill, at which it was the
successful bidder, and executed a purchase and sale agreement. In October 1998,
the stock of a mill located in Mexico, which had also secured the note, was sold
and the proceeds of $1.3 million were paid to the Company and recorded as a
reduction of the carrying value of the note. During the first quarter of 1999,
the Company recorded a $0.2 million write-down to reflect the note at its
estimated recoverable value at that time. During the second quarter of 1999, the
Company entered into a nonbinding letter of intent with a third party to dispose
of this asset for an amount in excess of the carrying value. During the third
quarter of 1999, the third party elected to not proceed with the transaction.
Accordingly, the Company recorded a $2.8 million write-down to reflect the asset
at its estimated recoverable value.
Interest income increased to $2.2 million in the third quarter of 1999
from $1.9 million in the third quarter of 1998, due to higher average invested
balances primarily as a result of cash received from the sale of Thermo
Wisconsin. Interest expense was unchanged at $1.9 million in the third quarter
of 1999 and 1998.
The effective tax rate was 37% in the third quarter of 1999, compared with
39% in the third quarter of 1998. The effective tax rates exceeded the statutory
federal income tax rate primarily due to the impact of state income taxes. The
effective tax rate decreased in 1999 due to the relative decrease in earnings in
jurisdictions with higher tax rates.
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
First Nine Months 1999 Compared With First Nine Months 1998
Excluding the results of Thermo Wisconsin, which was sold in February
1999, revenues decreased to $165.1 million in the first nine months of 1999 from
$170.1 million in the first nine months of 1998. Thermo Wisconsin's revenues to
external customers were $1.8 million and $15.5 million in the first nine months
of 1999 and 1998, respectively. Arcline Products, which was acquired in May
1999, added revenues of $0.5 million during the period. The unfavorable effects
of currency translation due to the strengthening in value of the U.S. dollar
relative to foreign currencies in countries in which the Company operates
decreased revenues at the Papermaking Equipment segment by $0.5 million in the
first nine months of 1999. Excluding the results of Arcline and the effect of
currency translation, revenues at the Company's Papermaking Equipment segment
decreased $8.3 million, primarily due to decreased revenues from the
stock-preparation equipment and accessories product lines in North America. This
decrease was offset in part by increased revenues at that segment's
water-management product line in North America. The Water-
14
<PAGE>
First Nine Months 1999 Compared With First Nine Months 1998 (continued)
and Fiber-recovery Services and Products segment revenues increased $2.8 million
due to increased demand for cellulose-based products, sales of its cat box
filler product, and the inclusion of revenues for the full 1999 period from its
fiber-recovery and water-clarification facility, which began operations in July
1998.
The gross profit margin decreased slightly to 40.4% in the first nine
months of 1999, compared with 40.6% in the first nine months of 1998, primarily
due to competitive pricing pressures at the Papermaking Equipment segment's
Lamort subsidiary.
Selling, general, and administrative expenses as a percentage of revenues
increased to 27% in the first nine months of 1999 from 25% in the first nine
months of 1998, primarily due to the decline in revenues and the effect of the
sale of Thermo Wisconsin, for which such costs represented 13% of its revenues
in the 1998 period.
Research and development expenses were unchanged at $5.4 million in the
first nine months of 1999 and 1998.
During the first quarter of 1999, the Company sold its Thermo Wisconsin
subsidiary for $13.6 million in cash, resulting in a pretax gain of $11.2
million (Note 5).
Restructuring and nonrecurring costs of $6.2 million in the first nine
months of 1999 represents write-downs for impairment of assets, severance costs,
termination of distributor agreements, the expected settlement of a legal
dispute, and facility-closure costs (Note 6).
Interest income and expense were relatively unchanged in the first nine
months of 1999 and 1998.
The effective tax rate was unchanged at 39% in the first nine months of
1999 and 1998. The effective tax rate exceeded the statutory federal income tax
rate primarily due to the impact of state income taxes.
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
Liquidity and Capital Resources
Consolidated working capital was $155.0 million at October 2, 1999,
compared with $193.4 million at January 2, 1999. Working capital decreased $49.6
million due to the reclassification of common stock of subsidiary subject to
redemption to current liabilities. Included in working capital are cash, cash
equivalents, and available-for-sale investments of $87.0 million at October 2,
1999, compared with $163.7 million at January 2, 1999. Also, as of October 2,
1999, the Company had $90.4 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 8), which became effective June 1, 1999,
amounts invested with Thermo Electron were included in cash and cash
equivalents. Of the total cash, cash equivalents, and available-for-sale
investments, $46.3 million was held by Thermo Fibergen and the remainder was
held by the Company and its wholly owned subsidiaries. Of the total advance to
affiliate, $6.7 million was advanced by Thermo Fibergen, $7.0 million was
advanced by the Company's Thermo Fiberprep subsidiary, and the balance was
advanced by the Company. At October 2, 1999, $39.2 million of the Company's cash
and cash equivalents was held by its foreign subsidiaries. Repatriation of this
cash into the United States would be subject to foreign withholding taxes and
could also be subject to a U.S. tax.
15
<PAGE>
Liquidity and Capital Resources (continued)
During the first nine months of 1999, $12.0 million of cash was provided
by operating activities. A decrease in accounts receivable, which was primarily
related to the decline in sales at the Company's Lamort subsidiary, provided
$3.4 million of cash. The Company used $1.1 million to reduce accounts payable,
primarily due to the decline in sales at the Company's Lamort subsidiary. A
decrease in other current liabilities used $3.3 million of cash, due to the
decline in sales and the timing of billings on long-term contracts. The Company
expects to pay the remaining accrued restructuring costs of $1.1 million through
2000.
During the first nine months of 1999, the Company's investing activities,
excluding available-for-sale investments and advance to affiliate activity (Note
8), provided $9.5 million of cash. The Company received proceeds of $13.6
million from the sale of Thermo Wisconsin and used $2.6 million, net of cash
acquired, to purchase the assets of Arcline (Note 5). In addition, the Company
purchased property, plant, and equipment for $2.4 million and received a refund
of $0.4 million related to the 1998 acquisition of Goslin Birmingham (Note 5).
During the first nine months of 1999, the Company's financing activities
used $5.9 million of cash. The Company used $2.5 million to purchase Company
common stock and Thermo Fibergen used $3.8 million to purchase its common stock.
These purchases were made pursuant to authorizations by the Company's and Thermo
Fibergen's Boards of Directors. As of October 2, 1999, the Company had a
remaining authorization to purchase $8.3 million of Company common stock,
outstanding convertible debentures, or Thermo Fibergen common stock in open
market or negotiated transactions through January 22, 2000 and Thermo Fibergen
had a remaining authorization to purchase $2.6 million of its common stock in
open market or negotiated transactions through March 16, 2000. Any such
purchases are funded from working capital.
Thermo Fibergen's common stock is subject to redemption in September 2000
or September 2001, the redemption value of which is $50.4 million.
At October 2, 1999, the Company had $64.3 million of undistributed foreign
earnings that could be subject to tax if remitted to the U.S. The Company does
not intend to repatriate undistributed foreign earnings into the U.S., and does
not expect that this will have a material adverse effect on the Company's
current liquidity.
During the remainder of 1999, the Company plans to make expenditures for
property, plant, and equipment of approximately $1.0 million. In addition,
Thermo Fibergen may, in the future, make capital expenditures for the
construction of additional fiber-recovery and water-clarification facilities.
Construction of such facilities is dependent upon Thermo Fibergen entering into
long-term contracts with pulp and paper mills, under which Thermo Fibergen will
charge fees to process the mills' papermaking byproducts. There is no assurance
that Thermo Fibergen will be able to obtain such additional contracts. In
addition, the Company's liquidity may be adversely affected if the redemption of
Thermo Fibergen's common stock occurs in the third quarter of 2000. The Company
believes that its existing resources are sufficient to meet the capital
requirements of its existing operations 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, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) evaluating the compliance
status of the Company's current products and certain discontinued products;
(iii) assessing the year 2000 readiness of its key suppliers and vendors; and
(iv) developing contingency plans.
16
<PAGE>
Year 2000 (continued)
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, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. In phase two of its program, any material
noncompliant information technology systems or non-information technology
systems that were identified during phase one were prioritized and remediated.
Based on its evaluations, the Company does not believe that any material
upgrades are necessary to make its critical non-information technology systems
year 2000 compliant. The Company has substantially completed upgrading or
replacing its material noncompliant information technology systems and expects
that its material information technology systems and critical non-information
technology systems will be year 2000 compliant by the end of November 1999.
The Company has also tested and evaluated the year 2000 readiness of the
material products that it currently manufactures and sells. The Company believes
that all of such material products are either year 2000 compliant or not date
sensitive. Certain of the Company's older products, which it no longer
manufactures or sells, may not be year 2000 compliant.
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 developed
and distributed 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 is following up with significant
suppliers and vendors that have not responded to the Company's questionnaires.
The Company has substantially completed its assessment of third-party risk.
Contingency Plan
The Company has substantially completed its contingency plans that will
allow its primary business operations to continue despite disruptions due to
year 2000 problems. These plans include identifying and securing other
suppliers, increasing inventories, and modifying production facilities and
schedules. As the Company continues to evaluate the year 2000 readiness of its
business systems, facilities, and significant suppliers and vendors, it will
modify and adjust its contingency plans as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
are funded from working capital. 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 internal
costs incurred for its year 2000 compliance project. Such costs are principally
the related payroll costs for its information systems group.
17
<PAGE>
Year 2000 (continued)
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 certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and would be unable to provide materials and services to the Company on time.
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. If the
Company believes that any of its key suppliers or vendors may not be year 2000
ready, it will seek to identify and secure other suppliers or vendors as part of
its contingency plan.
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.
Certain of the Company's older products, which it no longer manufactures or
sells, may not be year 2000 compliant, which may expose the Company to claims.
As discussed above, if any of the Company's material suppliers or vendors
experience business disruptions due to year 2000 issues, the Company might also
be materially adversely affected. If any countries in which the Company operates
experience significant year 2000 disruption, the Company could also be
materially adversely impacted. 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 Disclosures About Market Risk
The Company's exposure to market risk from changes in interest rates,
equity prices, and foreign currency exchange rates has not changed materially
from its exposure at year-end 1998.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 9th day of November 1999.
THERMO FIBERTEK INC.
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
FIBERTEK INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 2,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> OCT-02-1999
<CASH> 40,743
<SECURITIES> 46,246
<RECEIVABLES> 44,932
<ALLOWANCES> 2,021
<INVENTORY> 29,089
<CURRENT-ASSETS> 260,000
<PP&E> 65,937
<DEPRECIATION> 36,763
<TOTAL-ASSETS> 425,733
<CURRENT-LIABILITIES> 105,040
<BONDS> 154,350
0
0
<COMMON> 635
<OTHER-SE> 159,097
<TOTAL-LIABILITY-AND-EQUITY> 425,733
<SALES> 166,847
<TOTAL-REVENUES> 166,847
<CGS> 99,449
<TOTAL-COSTS> 99,449
<OTHER-EXPENSES> (411)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,571
<INCOME-PRETAX> 22,100
<INCOME-TAX> 8,548
<INCOME-CONTINUING> 12,807
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<NET-INCOME> 12,807
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
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