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 September 30, 2000
[ ] 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
(State or other jurisdiction of 52-1762325
incorporation or organization) (I.R.S. Employer Identification No.)
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 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 27, 2000
---------------------------- -------------------------------
Common Stock, $.01 par value 61,328,024
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
THERMO FIBERTEK INC.
Consolidated Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, January 1,
(In thousands) 2000 2000
------------------------------------------------------------------------------- ------------- ----------
Current Assets:
Cash and cash equivalents (Note 8) $126,042 $ 39,254
Advance to affiliate (Note 8) 6,087 93,780
Available-for-sale investments, at quoted market value
(amortized cost of $56,850 and $46,470) 56,888 46,405
Accounts receivable, less allowances of $1,896 and $1,659 39,393 49,323
Unbilled contract costs and fees 12,116 9,570
Inventories:
Raw materials and supplies 12,348 12,088
Work in process 6,096 6,122
Finished goods 11,744 10,697
Deferred tax asset 4,691 4,896
Other current assets (Note 7) 3,429 1,034
-------- --------
278,834 273,169
-------- --------
Property, Plant, and Equipment, at Cost (Note 7) 66,754 67,804
Less: Accumulated depreciation and amortization 38,094 37,310
-------- --------
28,660 30,494
-------- --------
Other Assets (Note 7) 14,438 17,044
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 5) 120,234 121,870
-------- --------
$442,166 $442,577
======== ========
2
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THERMO FIBERTEK INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 30, January 1,
(In thousands except share amounts) 2000 2000
-------------------------------------------------------------------------------- ------------- ----------
Current Liabilities:
Current maturities of long-term obligations (Note 5) $ 562 $ 380
Accounts payable 21,917 21,957
Accrued payroll and employee benefits 8,195 8,659
Billings in excess of contract costs and fees 1,966 4,730
Accrued warranty costs 4,917 5,005
Customer deposits 2,089 3,242
Accrued income taxes 6,404 5,206
Other accrued expenses 10,651 15,116
Common stock of subsidiary subject to redemption ($50,641 and
$49,788 redemption value; Note 9) 50,641 49,160
Due to parent company and affiliated companies 1,266 1,003
-------- --------
108,608 114,458
-------- --------
Deferred Income Taxes and Other Deferred Items 6,155 6,365
-------- --------
Long-term Obligations:
Subordinated convertible debentures 153,000 153,000
Notes payable (Note 5) 1,650 1,350
-------- --------
154,650 154,350
-------- --------
Minority Interest 3,081 3,334
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 150,000,000 shares authorized;
63,603,756 and 63,537,556 shares issued 636 635
Capital in excess of par value 76,635 77,411
Retained earnings 130,788 118,380
Treasury stock at cost, 2,275,732 and 2,327,521 shares (20,758) (21,239)
Deferred compensation (43) (66)
Accumulated other comprehensive items (Note 2) (17,586) (11,051)
-------- --------
169,672 164,070
-------- --------
$442,166 $442,577
======== ========
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
------------------------------
September 30, October 2,
(In thousands except per share amounts) 2000 1999
------------------------------------------------------------------------ ------------- ----------
Revenues $56,997 $53,075
------- -------
Costs and Operating Expenses:
Cost of revenues 35,484 31,177
Selling, general, and administrative expenses 14,352 14,903
Research and development expenses 1,987 1,753
Gain on sale of property (Note 7) (729) (55)
Unusual costs - 2,769
------- -------
51,094 50,547
------- -------
Operating Income 5,903 2,528
Interest Income 2,868 2,231
Interest Expense (1,866) (1,876)
------- -------
Income Before Provision for Income Taxes and Minority Interest 6,905 2,883
Provision for Income Taxes 2,672 1,055
Minority Interest Expense 156 260
------- -------
Net Income $ 4,077 $ 1,568
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .07 $ .03
======= =======
Weighted Average Shares (Note 3):
Basic 61,303 61,177
======= =======
Diluted 61,418 61,525
======= =======
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
------------------------------
September 30, October 2,
(In thousands except per share amounts) 2000 1999
------------------------------------------------------------------------ ------------- ----------
Revenues $179,473 $166,847
-------- --------
Costs and Operating Expenses:
Cost of revenues 110,358 99,449
Selling, general, and administrative expenses 46,113 45,554
Research and development expenses 5,803 5,413
Gain on sale of property (Note 7) and business (1,700) (11,154)
Restructuring and unusual costs - 6,152
-------- --------
160,574 145,414
-------- --------
Operating Income 18,899 21,433
Interest Income 8,062 6,238
Interest Expense (5,621) (5,571)
-------- --------
Income Before Provision for Income Taxes and Minority Interest 21,340 22,100
Provision for Income Taxes 8,582 8,548
Minority Interest Expense 350 745
-------- --------
Net Income $ 12,408 $ 12,807
======== ========
Basic and Diluted Earnings per Share (Note 3) $ .20 $ .21
======== ========
Weighted Average Shares (Note 3):
Basic 61,277 61,182
======== ========
Diluted 61,507 61,570
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
5
<PAGE>
THERMO FIBERTEK INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
------------------------------
September 30, October 2,
(In thousands) 2000 1999
------------------------------------------------------------------------ ------------- ----------
Operating Activities:
Net income $ 12,408 $ 12,807
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,254 7,147
Provision for losses on accounts receivable 817 -
Minority interest expense 350 745
Gain on sale of property (Note 7) and business (1,700) (11,154)
Noncash unusual costs - 3,239
Other noncash items (184) (122)
Changes in current accounts, excluding the effects of
acquisitions and dispositions:
Accounts receivable 7,541 3,433
Inventories and unbilled contract costs and fees (4,460) (622)
Prepaid income taxes and other current assets 334 850
Accounts payable 389 (1,059)
Other current liabilities (6,785) (3,261)
-------- --------
Net cash provided by operating activities 15,964 12,003
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 5) (3,302) (2,607)
Acquisition of capital equipment and technology (1,200) -
Proceeds from sale of property (Note 7) and business, net of
cash divested 4,109 13,592
Payment received on note for sale of property (Note 7) 200 -
Refund of acquisition purchase price - 377
Advances to affiliate, net (Note 8) 87,693 (90,404)
Purchases of available-for-sale investments (71,000) (61,825)
Proceeds from maturities of available-for-sale investments 60,619 62,827
Purchases of property, plant, and equipment (3,956) (2,434)
Other, net 84 546
-------- --------
Net cash provided by (used in) investing activities 73,247 (79,928)
-------- --------
Financing Activities:
Purchases of Company and subsidiary common stock - (4,109)
Purchases of subsidiary common stock from Thermo Electron - (2,227)
Net proceeds from issuance of Company and subsidiary
common stock 585 415
-------- --------
Net cash provided by (used in) financing activities $ 585 $ (5,921)
-------- --------
6
<PAGE>
THERMO FIBERTEK INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
------------------------------
September 30, October 2,
(In thousands) 2000 1999
------------------------------------------------------------------------ ------------- ----------
Exchange Rate Effect on Cash $ (3,008) $ (883)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents 86,788 (74,729)
Cash and Cash Equivalents at Beginning of Period 39,254 115,472
-------- --------
Cash and Cash Equivalents at End of Period $126,042 $ 40,743
======== ========
Noncash Activities (Note 5):
Fair value of assets of acquired companies $ 6,345 $ 4,860
Cash paid for acquired companies (3,889) (2,660)
Note payable for acquired companies (795) (1,730)
-------- --------
Liabilities assumed of acquired companies $ 1,661 $ 470
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
7
<PAGE>
THERMO FIBERTEK INC.
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 September 30, 2000, the results of
operations for the three- and nine-month periods ended September 30, 2000, and
October 2, 1999, and the cash flows for the nine-month periods ended September
30, 2000, and October 2, 1999. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of January 1, 2000, 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 1, 2000,
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 2000 and 1999, the
Company had comprehensive income of $2,737,000 and $2,772,000, respectively.
During the first nine months of 2000 and 1999, the Company had comprehensive
income of $5,857,000 and $10,520,000, respectively.
</TABLE>
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands except per share amounts) 2000 1999 2000 1999
------------------------------------------- ------------- ---------- ------------- ----------
Basic
Net Income $ 4,077 $ 1,568 $12,408 $12,807
------- ------- ------- -------
Weighted Average Shares 61,303 61,177 61,277 61,182
------- ------- ------- -------
Basic Earnings per Share $ .07 $ .03 $ .20 $ .21
======= ======= ======= =======
8
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THERMO FIBERTEK INC.
3. Earnings per Share (continued)
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands except per share amounts) 2000 1999 2000 1999
------------------------------------------- ------------- ---------- ------------- ----------
Diluted
Net Income $ 4,077 $ 1,568 $12,408 $12,807
Effect of Majority-owned Subsidiary's
Dilutive Securities (5) (8) (11) (46)
------- ------- ------- -------
Income Available to Common Shareholders,
as Adjusted $ 4,072 $ 1,560 $12,397 $12,761
------- ------- ------- -------
Weighted Average Shares 61,303 61,177 61,277 61,182
Effect of Stock Options 115 348 230 388
------- ------- ------- -------
Weighted Average Shares, as Adjusted 61,418 61,525 61,507 61,570
------- ------- ------- -------
Diluted Earnings per Share $ .07 $ .03 $ .20 $ .21
======= ======= ======= =======
Options to purchase 2,367,000 and 888,000 shares of common stock for the
third quarter of 2000 and 1999, respectively, and 1,409,000 and 890,000 shares
of common stock for the first nine months of 2000 and 1999, respectively, were
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price for the
common stock and their effect would be antidilutive.
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.
4. Business Segment Information
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, October 2, September 30, October 2,
(In thousands) 2000 1999 2000 1999
------------------------------------------- --------------- ---------- -------------- ----------
Revenues:
Pulp and Papermaking Equipment and
Systems $ 55,725 $ 50,815 $173,732 $158,509
Dryers and Pollution-control Equipment (a) - - - 1,802
Water- and Fiber-recovery Services and
Products (b) 1,276 2,266 5,755 6,593
Intersegment sales elimination (c) (4) (6) (14) (57)
-------- -------- -------- --------
$ 56,997 $ 53,075 $179,473 $166,847
======== ======== ======== ========
9
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THERMO FIBERTEK INC.
4. Business Segment Information (continued)
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands) 2000 1999 2000 1999
------------------------------------------- ------------- ---------- ------------- ----------
Income Before Provision for Income Taxes and Minority Interest:
Pulp and Papermaking Equipment and
Systems (d) $ 6,687 $ 6,770 $22,212 $17,285
Dryers and Pollution-control Equipment (a)(e) - 55 - 11,609
Water- and Fiber-recovery Services and
Products (b)(f) (374) (174) (1,415) (582)
Corporate (g) (410) (4,123) (1,898) (6,879)
------- ------- ------- -------
Total operating income 5,903 2,528 18,899 21,433
Interest income, net 1,002 355 2,441 667
------- ------- ------- -------
$ 6,905 $ 2,883 $21,340 $22,100
======= ======= ======= =======
(a) The Company sold this segment in February 1999.
(b) Reflects the sale of the Company's fiber-recovery and water-clarification services plant in September
2000 (Note 7).
(c) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated
parties.
(d) Includes restructuring and unusual costs of $3.1 million in the first nine months of 1999.
(e) Includes gain on sale of business of $0.1 million and $11.2 million in the third quarter of 1999 and
first nine months of 1999, respectively.
(f) Includes gain on sale of plant of $0.7 million in the 2000 periods (Note 7).
(g) Primarily general and administrative expenses in the third quarter of 2000; includes gain on sale of
property of $1.0 million in the first nine months of 2000. Includes $2.8 million and $3.0 million of
unusual 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 and $1.0 million in the third quarter of 1999 and the first nine months of
1999, respectively.
5. Acquisition
During the third quarter of 2000, the Company acquired Cyclotech
AB-Stockholm, a Swedish manufacturer of stock-preparation equipment, for
$637,000 in cash, subject to a post-closing adjustment. Of the total purchase
price, $478,000 was paid at closing and the remaining $159,000, which is
included in other accrued expenses in the accompanying 2000 balance sheet, will
be paid one year from the date of acquisition.
In February 2000, the Company acquired the assets of Gauld Equipment
Manufacturing Company, Inc., a manufacturer of stock-preparation accessory
equipment, for $3,411,000 in cash and a $923,000 noninterest bearing contract
with a controlling shareholder, payable in equal annual installments over four
years. The liability was initially recorded at its net present value of
$795,000.
These acquisitions have been accounted for using the purchase method of
accounting and their results have been included in the Company's results from
the respective dates of acquisition. The cost of these acquisitions exceeded the
estimated fair value of the acquired net assets by $2,706,000, which is being
amortized over 40 years. Allocation of the purchase price for these acquisitions
was based on an estimate of the fair value of the net assets acquired and is
subject to adjustment upon finalization of the purchase price allocations. To
date, no information has been gathered that would cause the Company to believe
that the final allocation of the purchase price will be materially different
from the preliminary estimates. Pro forma results have not been presented, as
the results of the acquired businesses were not material to the Company's
results of operations.
10
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THERMO FIBERTEK INC.
</TABLE>
6. Restructuring Costs
During 1999, the Company recorded restructuring costs of $2,257,000,
including 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
January 1, 2000, and $974,000 to terminate distributor agreements. A summary of
the changes in accrued restructuring costs, which are included in other accrued
expenses in the accompanying balance sheet, follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) Severance Other Total
---------------------------------------------------------------- ------------- ------------- ------------
Balance at January 1, 2000 $ 15 $654 $669
Usage (15) (18) (33)
Currency translation - (74) (74)
---- ---- ----
Balance at September 30, 2000 $ - $562 $562
==== ==== ====
The Company expects to pay the accrued restructuring costs during the
remainder of 2000.
7. Sales of Property
Sale of Tissue Mill
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 did not
proceed as a result of Tree-Free's insolvency. Tree-Free was unable to repay the
note upon its original maturity. The note and loans by another lender were
secured by 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 another 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
then-estimated recoverable value. The Company had previously recorded impairment
on this note of $200,000 in the first quarter of 1999. In December 1999, the
Company entered into a purchase and sale agreement, as amended, to sell the
mill. The Company sold its interest in the mill in June 2000 for $3,909,000 in
cash, resulting in a gain of $971,000.
Sale of Fiber-recovery and Water-clarification Services Plant
On September 5, 2000, Thermo Fibergen Inc. sold substantially all of the
assets of its fiber-recovery and water-clarification services plant to the host
mill for $3,600,000. The purchase price consists of an initial payment of
$200,000 at the date of closing and a note receivable to be paid in seventeen
monthly payments of $200,000, plus interest at 9.5%, beginning September 28,
2000. The note receivable is secured by a letter of credit. Thermo Fibergen
recognized a pre-tax gain of $729,000 on the sale.
11
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THERMO FIBERTEK INC.
8. Advance to Affiliate
Effective August 2000, the Company no longer participates in a domestic
cash management arrangement with Thermo Electron Corporation. Amounts previously
invested in this arrangement are included in cash and cash equivalents and
available-for-sale investments in the September 30, 2000, balance sheet. Amounts
invested in cash equivalents primarily include investments in commercial paper
and U.S. government-agency and U.S. Treasury securities.
9. Common Stock Subject to Redemption
During the month of September 2000, holders of Thermo Fibergen common
stock and common stock redemption rights surrendered 2,713,951 shares of Thermo
Fibergen common stock at a redemption price of $12.75 per share. In October
2000, Thermo Fibergen remitted $34,603,000 for the shares, using available
working capital to fund the payment. The accrued liability for the payment is
included in common stock of subsidiary subject to redemption in the September
30, 2000, balance sheet. Following the redemption period, 2,001,049 redemption
rights, redeemable in September 2001, and 1,027,349 shares of Thermo Fibergen
common stock held by persons other than Thermo Electron or Thermo Fibertek
remain outstanding.
10. Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for recording shipments as revenue when the terms
of the sale include customer acceptance provisions or an obligation of the
seller to install the product. In such instances, SAB 101 may require that
revenue recognition occur at completion of installation and/or upon customer
acceptance. SAB 101 requires that companies conform their revenue recognition
practices to the requirements therein no later than the fourth quarter of
calendar 2000 through recording a cumulative net of tax effect of the change in
accounting as of January 2, 2000. The Company has not yet completed the analysis
to determine the effect that SAB 101 will have on its financial statements.
11. Proposed Spin Off
On January 31, 2000, Thermo Electron announced that, as part of a major
reorganization plan, it plans to spin off its equity interest in the Company as
a dividend to Thermo Electron shareholders. The distribution is subject to
receipt of a favorable ruling from the Internal Revenue Service regarding the
tax treatment of the spin off, and other customary conditions. If these
conditions are met, the Company expects the transaction to occur in early 2001.
Following the spin off, Thermo Electron will continue to guarantee, on a
subordinated basis, the Company's $153,000,000 principal amount of 4 1/2%
subordinated convertible debentures due 2004 and any remaining obligation of
Thermo Fibergen under its redemption rights.
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 1, 2000, filed with the Securities and Exchange
Commission.
12
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THERMO FIBERTEK INC.
Overview
The Company operates in two segments: Pulp and Papermaking Equipment and
Systems, 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, paper machine 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 1999, this segment acquired the
outstanding stock of Arcline Products, a manufacturer of shower and doctor
oscillation systems. In 2000, this segment acquired the assets of Gauld
Equipment Manufacturing Company, Inc., a manufacturer of stock- preparation
equipment, and Cyclotech AB-Stockholm, a Swedish manufacturer of stock-
preparation equipment (Note 5).
The Water- and Fiber-recovery Services and Products segment consists of
the Company's Thermo Fibergen Inc. subsidiary. Prior to September 2000, this
segment owned and operated a plant that helped the host mill close the loop in
its water and solids systems on a long-term contract basis. The plant, which the
Company began operating in July 1998, cleans and recycles water and long fiber
for reuse in the papermaking process. Thermo Fibergen sold this plant to the
host mill in September 2000 (Note 7), although it intends to continue operating
in this line of business. In addition, through its GranTek subsidiary, Thermo
Fibergen employs patented technology to produce biodegradable 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
established a subsidiary to develop, produce, and market fiber-based composites
primarily for the building industry, used for applications such as decking,
soundwalls, privacy fencing, and siding. Thermo Fibergen owns 51% of this
subsidiary. Thermo Fibergen began construction of the composites manufacturing
facility, located in Green Bay, Wisconsin, in the first quarter of 2000 and
began limited-scale production in June 2000. Thermo Fibergen expects to continue
to improve the manufacturing process throughout 2000.
Prior to February 1999, the Company also operated in the Dryers and
Pollution-control Equipment segment, which consisted of the Company's Thermo
Wisconsin Inc. subsidiary and 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.
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 1999, 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. 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 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 Company's fourth quarter results will be affected
by the ongoing weak market conditions in the paper industry. As paper companies
continue to consolidate, they frequently reduce capacity. This trend, along
13
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THERMO FIBERTEK INC.
Overview (continued)
with the paper companies' actions to almost immediately suspend operations when
they perceive softness in their markets, has affected the Company's business and
will continue to do so in the short term. In the longer term, however, the
Company expects the impact of these developments to be favorable both to the
paper companies and to the supplier industry. Better capacity management will
help the overall financial health of the Company's customers and the Company
believes that this may eventually result in stronger markets for the Company's
products and systems. Nevertheless, the Company expects that there will continue
to be a significant amount of downtime in the paper industry in the fourth
quarter of 2000. This, coupled with the strong U.S. dollar, will continue to
produce a weak market environment that will soften demand for the Company's
products in the near term. Furthermore, the Company's composites business will
continue to be dilutive to earnings at least through the remainder of 2000. As a
result, the Company expects fourth quarter earnings in 2000 to be between $.06
and $.07 per diluted share.
Further affecting the Company's fourth quarter results will be
clarification of revenue recognition rules from the Securities and Exchange
Commission, which will become effective in the fourth quarter. The
implementation of Staff Accounting Bulletin (SAB) 101 (Note 10) will have no
cash flow impact on the Company. However, the Company has not yet completed the
analysis to determine the effect that SAB 101 will have on its financial
statements.
Results of Operations
Third Quarter 2000 Compared With Third Quarter 1999
---------------------------------------------------
Revenues increased to $57.0 million in the third quarter of 2000 from
$53.1 million in the third quarter of 1999. Gauld Equipment, which was acquired
in the first quarter of 2000, and Cyclotech, which was acquired in the third
quarter of 2000 (Note 5), added revenues of $1.3 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 $2.1 million
in 2000. Excluding the results of acquisitions and the effect of currency
translation, revenues in the Company's Papermaking Equipment segment increased
$5.7 million, or 11%. Revenues from that segment's stock-preparation equipment
product line increased $7.9 million as a result of a $5.7 million increase in
sales by the Company's North American operations, due principally to greater
export demand in China, and increased demand in Europe. Revenues from the
accessories product line decreased $1.5 million, principally in North America.
Revenues from the water-management product line decreased $0.9 million,
principally in North America, offset in part by an increase in sales in Europe.
The Water- and Fiber-recovery Services and Products segment revenues decreased
$1.0 million, primarily due to decreased demand for cellulose-based products
from that segment's two largest customers.
The gross profit margin decreased to 38% in the third quarter of 2000 from
41% in the third quarter of 1999. The gross profit margin decreased at the
Papermaking Equipment segment, primarily due to a change in product mix that
resulted largely from a higher proportion of lower-margin sales at its North
American stock-preparation equipment business. To a lesser extent, the gross
profit margin decreased at Thermo Fibergen, primarily due to decreased sales
without a corresponding decrease in costs, higher natural gas prices, and the
inclusion of $300,000 of overhead costs at its new fiber-based composites
business.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 25% in the third quarter of 2000 from 28% in the third quarter of
1999, primarily due to increased revenues from the stock-preparation equipment
product line.
Research and development expenses increased slightly to $2.0 million in
the third quarter of 2000, compared with $1.8 million in the third quarter of
1999, primarily due to increased spending in the Papermaking Equipment segment.
14
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THERMO FIBERTEK INC.
Third Quarter 2000 Compared With Third Quarter 1999 (continued)
---------------------------------------------------
In September 2000, Thermo Fibergen sold its fiber-recovery and
water-clarification services plant for $3.6 million, resulting in a gain of $0.7
million (Note 7).
Unusual costs of $2.8 million in the third quarter of 1999 primarily
represents the write-down of a note receivable secured by a tissue mill (Note
7). In connection with a proposed engineering, procurement, and construction
project, the Company loaned $6.0 million to Tree-Free Fiber Company, LLC
(Tree-Free) during 1996. This project was delayed due to weakness in pulp
prices, and did not proceed as a result of Tree-Free's insolvency. Tree-Free was
unable to repay the note upon its original maturity. The note and loans by
another lender were secured by 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 another lender for $2.9 million. In June
1998, the Company was the successful bidder at a foreclosure sale of the tissue
mill 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 amount of the notes. During 1999, the Company recorded an aggregate
$3.0 million write-down to reflect the asset at its then-estimated recoverable
value. In December 1999, the Company entered into a purchase and sale agreement,
as amended, to sell the mill. The Company sold its interest in the mill in June
2000 for $3.9 million in cash, resulting in a gain of $1.0 million.
Interest income increased to $2.9 million in the third quarter of 2000
from $2.2 million in the third quarter of 1999, primarily due to higher invested
balances and, to a lesser extent, higher interest rates. Interest expense was
unchanged at $1.9 million in 2000 and 1999. Interest income will decline in
future periods due to the October 2000 purchase of Thermo Fibergen common stock
from common stock redemption rightholders for $34.6 million in cash (Note 9).
The effective tax rate was 39% in the third quarter of 2000, compared with
37% in the third quarter of 1999. The effective tax rate was higher in 2000
primarily due to an increase in the valuation allowance for losses at Thermo
Fibergen's majority-owned fiber-based composites joint venture. 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 and minority investors' share of
earnings in Thermo Fibergen, offset in part by the minority investor's share of
losses in Thermo Fibergen's majority-owned subsidiary in 2000. As of September
30, 2000, Thermo Fibergen's common stock subject to redemption was fully
accreted.
First Nine Months 2000 Compared With First Nine Months 1999
-----------------------------------------------------------
Excluding the results of Thermo Wisconsin, which was sold in February
1999, revenues increased to $179.5 million in the first nine months of 2000 from
$165.0 million in the first nine months of 1999. Thermo Wisconsin's revenues to
external customers were $1.8 million in 1999. Arcline Products, which was
acquired in 1999, and Gauld Equipment and Cyclotech, which were acquired in 2000
(Note 5), added revenues of $3.9 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 $5.4 million in 2000.
Excluding the results of acquisitions and the effect of currency translation,
revenues in the Company's Papermaking Equipment segment increased $16.8 million,
or 11%. Revenues from that segment's stock-preparation equipment product line
increased $16.4 million as a result of a $19.7 million increase in sales by the
Company's North American operations, due principally to greater demand, offset
in part by a decrease in sales in Europe, due to market weakness. The Water- and
Fiber-recovery Services and Products segment revenues decreased $0.8 million,
primarily due to decreased demand for cellulose-based products from that
segment's two largest customers.
15
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THERMO FIBERTEK INC.
First Nine Months 2000 Compared With First Nine Months 1999 (continued)
-----------------------------------------------------------
The gross profit margin decreased to 39% in the first nine months of 2000
from 40% in the first nine months of 1999. The gross profit margin decreased at
the Papermaking Equipment segment, primarily due to a change in product mix that
resulted largely from a higher proportion of lower-margin sales at its North
American stock-preparation equipment business.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 26% in the first nine months of 2000 from 27% in the first nine
months of 1999, primarily due to increased revenues from the stock-preparation
equipment product line.
Research and development expenses were relatively unchanged at $5.8
million in the first nine months of 2000, compared with $5.4 million in the
first nine months of 1999, or 3.2% of revenues in both periods.
In September 2000, Thermo Fibergen sold its fiber-recovery and
water-clarification services plant for $3.6 million, resulting in a gain of $0.7
million (Note 7). In June 2000, the Company sold its interest in the Tree-Free
mill for $3.9 million in cash, resulting in a gain of $1.0 million (Note 7). In
February 1999, the Company sold its Thermo Wisconsin subsidiary for $13.6
million in cash, resulting in a pretax gain of $11.2 million.
Restructuring and unusual 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 contractual
dispute, and facility-closure costs.
Interest income increased to $8.1 million in the first nine months of 2000
from $6.2 million in the first nine months of 1999, due to higher average
invested balances and, to a lesser extent, higher interest rates. Interest
expense was unchanged at $5.6 million in 2000 and 1999.
The effective tax rate was 40% in the first nine months of 2000, compared
with 39% in the first nine months of 1999. 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 in the first nine months of 2000
and 1999, offset in part by the minority investor's share of losses in Thermo
Fibergen's majority-owned subsidiary in 2000. As of September 30, 2000, Thermo
Fibergen's common stock subject to redemption was fully accreted.
Liquidity and Capital Resources
Consolidated working capital was $170.2 million at September 30, 2000,
compared with $158.7 million at January 1, 2000. Included in working capital are
cash, cash equivalents, and available-for-sale investments of $182.9 million at
September 30, 2000, compared with $85.7 million at January 1, 2000. In addition,
the Company had $6.1 million and $93.8 million invested in an advance to
affiliate as of September 30, 2000 and January 1, 2000, respectively (Note 8).
Of the total cash, cash equivalents, and available-for-sale investments at
September 30, 2000, $48.6 million and $7.0 million was held by the Company's
majority-owned Thermo Fibergen and Thermo Fiberprep subsidiaries, respectively,
and the remainder was held by the Company and its wholly owned subsidiaries. At
September 30, 2000, $39.8 million of the Company's cash and cash equivalents was
held by its foreign subsidiaries.
During the month of September 2000, holders of Thermo Fibergen common
stock and common stock redemption rights surrendered 2,713,951 shares of Thermo
Fibergen common stock at a redemption price of $12.75 per share. In October
2000, Thermo Fibergen remitted $34.6 million for the shares, using available
working capital to fund the payment. The accrued liability for the payment is
included in common stock of subsidiary subject to redemption in the September
30, 2000, balance sheet. Following the redemption period, 2,001,049 redemption
rights, redeemable in September 2001, remain outstanding. These redemption
rights are guaranteed on a subordinated basis
16
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THERMO FIBERTEK INC.
Liquidity and Capital Resources (continued)
by Thermo Electron Corporation, but the Company is required to reimburse Thermo
Electron if Thermo Electron makes any payment under the guarantee. As of
September 30, 2000, there were 1,027,349 shares of Thermo Fibergen common stock
held by persons other than Thermo Electron or Thermo Fibertek.
During the first nine months of 2000, $16.0 million of cash was provided
by operating activities. A decrease in accounts receivable provided $7.5 million
of cash, primarily due to improved collection efforts as well as a decline in
sales at the Company's Lamort subsidiary. Inventories and unbilled contract
costs and fees used cash of $4.5 million, including $2.8 million related to an
increase in unbilled contract costs and fees, primarily in the stock-preparation
product line due to the timing of billings and an increase in revenues, and $1.6
million related to an increase in inventories, primarily in the
stock-preparation product line and at Thermo Fibergen. A decrease in other
current liabilities used $6.8 million of cash, consisting primarily of a $2.6
million decrease in billings in excess of costs and fees related to the timing
of payments on long-term contracts, $1.8 million paid for interest accrued at
year-end, and a $1.0 million net decrease in customer deposits, primarily in the
stock preparation product line.
During the first nine months of 2000, the Company's investing activities,
excluding available-for-sale investments and advance to affiliate activity (Note
8), used $4.1 million of cash. The Company used $3.3 million, net of cash
acquired, to purchase the assets of Cyclotech and Gauld Equipment (Note 5) and
$1.2 million to purchase certain capital equipment and technology for Thermo
Fibergen's composites facility. In addition, the Company purchased property,
plant, and equipment for $4.0 million. In June 2000, the Company sold its
interest in the Tree-Free mill for $3.9 million in cash (Note 7). In September
2000, Thermo Fibergen sold its fiber-recovery and water-clarification systems
plant for $3.6 million. Thermo Fibergen received $0.2 million at the closing
date and will receive seventeen equal monthly installments of $0.2 million,
beginning September 28, 2000 (Note 7).
During the first nine months of 2000, the Company's financing activities
provided $0.6 million of cash.
At September 30, 2000, the Company had $71.8 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 2000, the Company plans to make expenditures for
property, plant, and equipment of approximately $3.2 million. Included in this
amount is $1.6 million for Thermo Fibergen, which intends to make capital
expenditures to develop and expand its fiber-based composites business. The
Company believes that its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future.
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 1999.
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.
17
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THERMO FIBERTEK INC.
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 8th day of November 2000.
THERMO FIBERTEK INC.
--------------------------------------------
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
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THERMO FIBERTEK INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
--------------------------------------------------------------------------------
27 Financial Data Schedule.
</TABLE>
