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 January 1, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-9549
THERMO TERRATECH INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-2925807
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at January 28, 2000
Common Stock, $.10 par value 18,900,667
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO TERRATECH INC.
Consolidated Balance Sheet
(Unaudited)
Assets
January 1, April 3,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents (includes $41,667 under repurchase $ 4,905 $ 43,013
agreements with parent company in fiscal 1999)
Advance to affiliate (Note 8) 49,436 -
Accounts receivable, less allowances of $3,399 and $3,577 52,330 58,933
Unbilled contract costs and fees 26,950 19,974
Inventories 2,452 1,869
Deferred tax asset 6,668 6,946
Other current assets 3,685 3,640
-------- --------
146,426 134,375
-------- --------
Property, Plant, and Equipment, at Cost (Note 5) 135,302 151,219
Less: Accumulated depreciation and amortization 64,945 59,705
-------- --------
70,357 91,514
-------- --------
Other Assets (Note 5) 9,623 15,949
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Notes 5 and 6) 88,865 108,627
-------- --------
$315,271 $350,465
======== ========
2
THERMO TERRATECH INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
January 1, April 3,
(In thousands except share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Short-term obligations and current maturities of $ 19,549 $ 17,618
long-term obligations (includes $9,228 under overdraft
facility with related party in fiscal 1999)
Subordinated convertible debentures (includes $4,300 of 37,950 -
related-party debt)
Accounts payable 20,939 17,404
Accrued payroll and employee benefits 12,223 12,771
Accrued restructuring costs (Note 5) 8,660 1,719
Deferred revenue 4,169 2,675
Other accrued expenses 13,347 12,623
Due to parent company and affiliated companies 2,140 2,522
-------- --------
118,977 67,332
-------- --------
Deferred Income Taxes 685 3,538
-------- --------
Other Deferred Items 1,097 1,076
-------- --------
Long-term Obligations:
Subordinated convertible debentures (includes $515 and 116,892 156,799
$4,695 of related-party debt)
Other 1,349 1,818
-------- --------
118,241 158,617
-------- --------
Minority Interest 24,785 27,745
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 75,000,000 shares 1,959 1,958
authorized; 19,592,562 and 19,583,773 shares issued
Capital in excess of par value 70,993 70,633
Retained earnings (accumulated deficit) (17,807) 25,898
Treasury stock at cost, 505,940 and 543,319 shares (3,846) (4,130)
Deferred compensation (216) (252)
Accumulated other comprehensive items (Note 2) 403 (1,950)
-------- --------
51,486 92,157
-------- --------
$315,271 $350,465
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO TERRATECH INC.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
January 1, January 2,
(In thousands except per share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $80,846 $80,400
------- -------
Costs and Operating Expenses:
Cost of revenues (Note 5) 63,229 64,549
Selling, general, and administrative expenses 12,461 11,834
Restructuring costs (Note 5) 2,207 -
------- -------
77,897 76,383
------- -------
Operating Income 2,949 4,017
Interest Income 723 497
Interest Expense (includes $58 and $42 to related party) (2,213) (2,307)
------- -------
Income Before Income Taxes, Minority Interest, and Extraordinary Item 1,459 2,207
Provision for Income Taxes (Note 5) 1,003 1,343
Minority Interest Expense 370 93
------- -------
Income Before Extraordinary Item 86 771
Extraordinary Item, Net of Provision for Income Taxes of $64 (Note 7) 96 -
------- -------
Net Income $ 182 $ 771
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .01 $ .04
======= =======
Weighted Average Shares (Note 3):
Basic 19,079 19,421
======= =======
Diluted 19,279 19,935
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO TERRATECH INC.
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
January 1, January 2,
(In thousands except per share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $234,790 $234,270
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 5) 185,059 187,628
Selling, general, and administrative expenses 34,439 34,132
Restructuring costs (Note 5) 56,524 10,217
-------- -------
276,022 231,977
-------- -------
Operating Income (Loss) (41,232) 2,293
Interest Income 2,037 1,652
Interest Expense (includes $174 and $118 to related party) (6,678) (6,769)
-------- -------
Loss Before Income Taxes, Minority Interest, and Extraordinary Item (45,873) (2,824)
Provision for Income Taxes (Note 5) 1,244 534
Minority Interest Income (3,316) (1,434)
-------- -------
Loss Before Extraordinary Item (43,801) (1,924)
Extraordinary Item, Net of Provision for Income Taxes of $64 (Note 7) 96 -
-------- -------
Net Loss $(43,705) $(1,924)
======== =======
Basic and Diluted Loss per Share (Note 3) $ (2.29) $ (.10)
======== =======
Basic and Diluted Weighted Average Shares (Note 3) 19,066 19,483
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
January 1, January 2,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net loss $(43,705) $ (1,924)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Noncash restructuring costs (Note 5) 48,776 8,105
Change in deferred income taxes (2,841) -
Depreciation and amortization 10,589 12,356
Minority interest income (3,316) (1,434)
Provision for losses on accounts receivable 411 963
Gain on purchase of subordinated convertible debentures (Note 7) (96) -
Other noncash items 2,361 225
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 6,741 (4,362)
Inventories and unbilled contract costs and fees (8,660) (450)
Other current assets 43 (3,118)
Accounts payable 2,888 2,737
Other current liabilities 6,799 3,220
-------- --------
Net cash provided by operating activities 19,990 16,318
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 6) (2,016) (643)
Advances to affiliate, net (Note 8) (49,436) -
Proceeds from maturities of available-for-sale investments - 2,006
Proceeds from maturity of held-to-maturity investments - 14,065
Purchases of property, plant, and equipment (9,384) (12,656)
Proceeds from sale of property, plant, and equipment 1,308 371
Purchase of other assets (590) (2,680)
Other - 60
-------- --------
Net cash provided by (used in) investing activities (60,118) 523
-------- --------
Financing Activities:
Increase in short-term obligations to fund an acquisition (Note 6) 2,286 -
Repayment and repurchase of notes payable and long-term obligations (Note 7) (3,353) (14,761)
Issuance of long-term notes receivable - (237)
Collection of long-term notes receivable 2,554 596
Proceeds from issuance of Company and subsidiary's common stock 546 55
Purchase of Company common stock - (1,705)
Dividends paid by subsidiary to minority shareholders (409) (402)
Other 96 11
-------- --------
Net cash provided by (used in) financing activities $ 1,720 $(16,443)
-------- --------
6
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
January 1, January 2,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Exchange Rate Effect on Cash $ 300 $ (264)
-------- -------
Increase (Decrease) in Cash and Cash Equivalents (38,108) 134
Cash and Cash Equivalents at Beginning of Period 43,013 34,711
-------- -------
Cash and Cash Equivalents at End of Period $ 4,905 $34,845
======== =======
Noncash Activities:
Fair value of assets of acquired companies $ 3,328 $ 643
Cash paid for acquired companies (2,286) (643)
Issuance of subsidiary common stock for acquired company (384) -
-------- -------
Liabilities assumed of acquired companies $ 658 $ -
======== =======
Issuance of subordinated convertible debentures in $ - $ 6,999
exchange for subsidiary common stock
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
THERMO TERRATECH INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo TerraTech Inc. (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at January 1, 2000, the results of
operations for the three- and nine-month periods ended January 1, 2000, and
January 2, 1999, and the cash flows for the nine-month periods ended January 1,
2000, and January 2, 1999. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of April 3, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. Certain amounts in fiscal 1999 have
been reclassified to conform to the presentation in the fiscal 2000 financial
statements. The consolidated financial statements and notes are presented as
permitted by Form 10-Q and do not contain certain information included in the
annual financial statements and notes of the Company. The consolidated financial
statements and notes included herein should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the fiscal year ended April 3, 1999, filed with the Securities and
Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income (loss) and "other comprehensive
items," which represents certain items that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains or losses from
available-for-sale investments. During the third quarter of fiscal 2000 and
1999, the Company had comprehensive income of $1,013,000 and $741,000,
respectively. During the first nine months of fiscal 2000 and 1999, the Company
had comprehensive losses of $41,841,000 and $1,488,000, respectively.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Nine Months Ended
January 1, January 2, January 1, January 2,
(In thousands except per share amounts) 2000 1999 2000 1999
- ------------------------------------------------------------- ---------- ---------- ---------- ----------
Basic
Net Income (Loss) $ 182 $ 771 $(43,705) $ (1,924)
------- -------- -------- --------
Weighted Average Shares 19,079 19,421 19,066 19,483
------- -------- -------- --------
Basic Earnings (Loss) per Share $ .01 $ .04 $ (2.29) $ (.10)
======= ======== ======== ========
8
3. Earnings (Loss) per Share (continued)
Three Months Ended Nine Months Ended
January 1, January 2, January 1, January 2,
(In thousands except per share amounts) 2000 1999 2000 1999
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Diluted
Net Income (Loss) $ 182 $ 771 $(43,705) $ (1,924)
Effect of majority-owned subsidiaries' dilutive securities (18) - - -
------- -------- -------- --------
Income (Loss) Available to Common Shareholders, $ 164 $ 771 $(43,705) $ (1,924)
as Adjusted
------- -------- -------- --------
Weighted Average Shares 19,079 19,421 19,066 19,483
Effect of:
Stock options 149 - - -
Put rights 51 514 - -
------- -------- -------- --------
Weighted Average Shares, as Adjusted 19,279 19,935 19,066 19,483
------- -------- -------- --------
Diluted Earnings (Loss) per Share $ .01 $ .04 $ (2.29) $ (.10)
======= ======== ======== ========
The computation of diluted earnings (loss) per share for each period
excludes the effect of assuming the exercise of certain outstanding stock
options, warrants, and put rights because the effect would be antidilutive. As
of January 1, 2000, there were 593,000 of such options outstanding, with
exercise prices ranging from $6.96 to $10.40 per share. As of January 1, 2000,
put rights with respect to an aggregate of 195,675 shares were outstanding. The
put rights obligate the Company, at the holders' option, to purchase shares of
the Company's common stock for $8.00 per share. In January 2000, the Company
purchased the applicable shares for $1,565,000 and settled the put right
obligation.
In addition, the computation of diluted earnings (loss) per share for each
period excludes the effect of assuming the conversion of $111,850,000 principal
amount of 4 5/8% subordinated convertible debentures, convertible at $15.90 per
share, because the effect would be antidilutive.
An extraordinary gain recorded by the Company increased basic and diluted
earnings per share by $.01 in the three- and nine-month periods ended January 1,
2000 (Note 7).
4. Business Segment Information
Three Months Ended Nine Months Ended
January 1, January 2, January 1, January 2,
(In thousands) 2000 1999 2000 1999
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues:
Environmental-liability Management $ 45,946 $41,321 $127,303 $120,006
Engineering and Design 18,891 23,566 61,814 70,106
Laboratory Testing 11,963 11,001 33,541 30,573
Metal Treating 4,172 4,654 12,551 14,158
Intersegment sales elimination (a) (126) (142) (419) (573)
-------- ------- -------- --------
$ 80,846 $80,400 $234,790 $234,270
======== ======= ======== ========
9
4. Business Segment Information (continued)
Three Months Ended Nine Months Ended
January 1, January 2, January 1, January 2,
(In thousands) 2000 1999 2000 1999
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes, Minority Interest,
and Extraordinary Item:
Environmental-liability Management (b) $ 2,175 $ 1,237 $(32,184) $ (4,757)
Engineering and Design (c) (724) 1,410 (12,943) 3,213
Laboratory Testing 1,704 1,509 4,957 4,000
Metal Treating 453 582 1,092 1,764
Corporate (d) (659) (721) (2,154) (1,927)
-------- ------- -------- --------
Total operating income (loss) 2,949 4,017 (41,232) 2,293
Interest expense, net (1,490) (1,810) (4,641) (5,117)
-------- ------- -------- --------
$ 1,459 $ 2,207 $(45,873) $ (2,824)
======== ======= ======== ========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and related costs of $38.6 million and $9.2 million
in the first nine months of fiscal 2000 and fiscal 1999, respectively.
(c) Includes restructuring costs of $17.9 million and $1.0 million in the first
nine months of fiscal 2000 and fiscal 1999.
(d) Primarily general and administrative expenses.
5. Restructuring and Related Costs
Fiscal 2000 Plan
In May 1999, the Company announced that its majority-owned subsidiaries
plan to sell several businesses. At the time of the decision, the businesses
that will be sold were considered outside the future focus of the Company and
its subsidiaries because of low growth prospects, marginal profitability, or the
need to invest significant capital to achieve desired returns. The businesses
proposed to be sold include the used-oil processing operation of Thermo
EuroTech, N.V.; three soil-recycling facilities of ThermoRetec Corporation, in
addition to the sites previously announced; and the Randers division, BAC Killam
Inc., and E3-Killam Inc. businesses of The Randers Killam Group Inc. The Randers
Killam businesses provide engineering and construction services, including
transportation planning and design. In connection with these actions, the
Company recorded $58,237,000 of restructuring and related costs during the first
nine months of fiscal 2000, including restructuring costs of $56,524,000, a tax
asset write-off of $1,055,000, and an inventory provision of $658,000. In the
accompanying statement of operations, the tax write-off is included in provision
for income taxes and the inventory provision is included in cost of revenues.
Restructuring costs include a $22,192,000 write-down of cost in excess of net
assets of acquired companies to reduce the carrying value of the businesses
proposed to be sold to the estimated proceeds from their sale; a $20,234,000
write-down of fixed assets to their estimated disposal value; $4,555,000 for
ongoing lease costs for facilities that will be exited in connection with the
sale of certain businesses; $2,494,000 for estimated land reclamation costs;
$2,214,000 for a loss on the sale of the Randers division (Note 10); a
$1,905,000 charge for the cumulative foreign translation adjustment related to
Thermo EuroTech's used-oil processing business; a $1,788,000 write-off of
intangible assets related to license acquisition costs at the used-oil
processing business; $638,000 for severance costs for 42 employees across all
functions, 12 of whom were terminated in the first nine months of fiscal 2000; a
$443,000 write-off of other current assets associated with the businesses; and
$61,000 for retention bonuses paid. The tax write-off represents a deferred tax
asset that will not be realized as a result of selling Thermo EuroTech's
used-oil processing business. The inventory provision also relates to
10
5. Restructuring and Related Costs (continued)
exiting this business. The write-down of fixed assets principally relates to
special-purpose equipment in the used-oil processing and soil-recycling
businesses. The effects of these charges reduced depreciation and amortization
expense, thereby increasing the Company's pretax operating income by
approximately $700,000 in the third quarter of fiscal 2000 and reducing the
Company's pretax operating loss by approximately $2,100,000 during the first
nine months of fiscal 2000.
Fiscal 1999 Plan
During fiscal 1999, the Company recorded restructuring costs, primarily
related to the closure or sale of two soil-recycling facilities by ThermoRetec.
The Company closed one soil-recycling facility in March 1999 and is actively
seeking a buyer for the second soil-recycling facility. Negotiations are ongoing
with a potential buyer. However, there can be no assurance that ThermoRetec will
complete the sale. If negotiations are not successful and the Company cannot
identify another buyer, ThermoRetec expects to close the facility in the first
half of calendar 2000. In addition, the Company recorded restructuring costs for
abandoned-facility payments relating to the consolidation of the facilities of
another business. In connection with these restructuring activities, the Company
established reserves, primarily for ongoing lease costs and severance for 13
employees, 6 of whom were terminated as of January 1, 2000.
All businesses proposed to be sold, including those announced in fiscal
1999, reported unaudited aggregate revenues and operating income, prior to
restructuring and related costs, of $28,286,000 and $1,136,000, respectively, in
the first nine months of fiscal 2000 and $54,015,000 and $225,000, respectively,
in fiscal 1999. The aggregate net assets to be sold of $6,301,000 at January 1,
2000, include net assets of $5,113,000 in the Engineering and Design segment and
$1,188,000 in the Environmental-liability Management segment. Although there can
be no assurance concerning the timing of the completion of the sale of any of
these businesses, the Company expects that the sales will primarily occur in the
first half of calendar 2000.
Substantially all of the restructuring and related costs to date have been
noncash charges except for amounts recorded as accrued restructuring costs. A
summary of the changes in accrued restructuring costs, which the Company expects
to pay primarily during the remainder of calendar 2000, is as follows:
Severance Facility- Land Other Total
(In thousands) closing Reclamation
Costs
- ------------------------------------ ------------- ------------- -------------- ------------- ------------
Fiscal 1999 Plan
Balance at April 3, 1999 $ 112 $1,607 $ - $ - $1,719
Usage (71) (141) - - (212)
------ ------ ------ ------ ------
Balance at January 1, 2000 $ 41 $1,466 $ - $ - $1,507
====== ====== ====== ====== ======
Fiscal 2000 Plan
Balance at April 3, 1999 $ - $ - $ - $ - $ -
Provision charged to expense 638 4,555 2,494 61 7,748
Usage (167) (149) - (61) (377)
Currency translation - (95) (123) - (218)
------ ------ ------ ------ ------
Balance at January 1, 2000 $ 471 $4,311 $2,371 $ - $7,153
====== ====== ====== ====== ======
The Company expects to incur additional restructuring costs of
approximately $2,500,000, primarily during the remainder of calendar 2000, for
severance, employee retention, and relocation expenses. Pursuant to the
requirements of Emerging Issues Task Force Pronouncement 94-3, these costs are
not permitted as charges until they are incurred.
11
6. Acquisition
In August 1999, a subsidiary of the Company acquired the outstanding stock
of Dempsey Drums Limited for $2,286,000 in cash and 1,605 shares of the
subsidiary's common stock valued at $384,000. Dempsey Drums is an Ireland-based
service provider in the supply, disposal, and reconditioning of steel and
plastic drums and the supply of specialized packaging. 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 exceeded the estimated fair value of the acquired net assets by
$1,538,000, which is being amortized over 20 years. Allocation of the purchase
price for this acquisition 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 allocation. The Company has gathered no information that indicates the
final allocation will differ materially from the preliminary estimates. Pro
forma results have not been presented, as the results of the acquired business
were not material to the Company's results of operations.
7. Purchase of Subordinated Convertible Debentures
During the third quarter of fiscal 2000, the Company purchased $1,957,000
principal amount of the 2 1/2% subordinated convertible debentures, convertible
into shares of Thermo EuroTech (Delaware) Inc., for $1,797,000 in cash,
resulting in an extraordinary gain of $96,000, net of taxes of $64,000.
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.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron for domestic cash management purposes bear
interest at the 30-day Dealer Commercial Paper Rate plus 150 basis points, set
at the beginning of each month. The Company has no borrowings under this
arrangement at January 1, 2000.
9. Proposed Merger
On October 19, 1999, the Company entered into a definitive agreement and
plan of merger with Thermo Electron, pursuant to which Thermo Electron would
acquire all of the outstanding shares of Company common stock held by
shareholders other than Thermo Electron in exchange for Thermo Electron Common
Stock worth between $7.25 and $9.25 per share of Company Common Stock. At the
same time, the Company's two publicly traded subsidiaries, ThermoRetec and
Randers Killam, also entered into merger agreements with Thermo Electron,
pursuant to which all of the shares of common stock of those companies held by
stockholders other than the Company and Thermo Electron would be acquired for
cash. The Board of Directors of the Company approved the merger agreement based
on a recommendation by a special committee of the Board of Directors, consisting
of an independent director of the Company. The completion of this merger is
subject to certain conditions, including shareholder approval of the merger
agreement and the completion of review by the Securities and Exchange Commission
of certain required filings. Thermo Electron intends to vote all of its shares
of common stock of the Company in favor of approval of the merger agreement and,
therefore, approval of the merger agreement is assured. This merger is expected
to be completed in the first quarter of fiscal 2001. Following the merger, the
Company's common stock would cease to be publicly traded.
12
10. Subsequent Events
Sale of the Randers Division
On January 28, 2000, the Company sold substantially all of the assets and
liabilities of the Randers division, exclusive of certain real estate, to a new
corporation formed by a former vice president and director of Randers Killam.
The aggregate sales price of $538,000 consists of a promissory note secured by
certain real estate. The promissory note is payable in monthly installments with
a final maturity in 2003 and bears interest at 8.0%. The Company incurred a
$2,214,000 loss on the sale, which has been included in restructuring costs in
the accompanying statement of operations for the third quarter of fiscal 2000.
Proposed Sale of the Company
On January 31, 2000, Thermo Electron announced that it plans to sell all
of the businesses of the Company. This action is part of a major reorganization
plan under which Thermo Electron will spin in, spin off, and sell various
businesses to focus solely on its core measurement and detection instruments
business.
Proposed Sale of Soil-remediation Facilities
In February 2000, ThermoRetec signed a letter of intent to sell five of
its six remaining soil-remediation facilities, including three facilities
announced for sale earlier in fiscal 2000 (Note 5). The transaction is expected
to be completed before the end of the second quarter of calendar 2000, although
there can be no assurance that ThermoRetec will complete this sale. Unaudited
revenues and operating income before restructuring charges of the five
soil-remediation facilities that will be sold aggregated $16,425,000 and
$4,351,000, respectively, in the first nine months of fiscal 2000, and
$19,439,000 and $3,445,000, respectively, in fiscal 1999.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 3, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company provides industrial outsourcing services and manufacturing
support encompassing a broad range of specializations. The Company operates in
four segments: environmental-liability management, engineering and design,
laboratory testing, and metal treating.
Environmental-liability Management
The Company's majority-owned ThermoRetec Corporation subsidiary is a
national provider of environmental-liability and resource-management services.
ThermoRetec offers these and related consulting services in four areas:
consulting and engineering, nuclear remediation, soil remediation, and fluids
recycling. In February 2000, ThermoRetec signed a letter of intent to sell five
of its six remaining soil-recycling facilities. The transaction is expected to
be completed before the end of the second quarter of calendar 2000, although
there can be no assurance
13
Overview (continued)
that ThermoRetec will complete this sale (Note 10). The Company's majority-owned
Thermo EuroTech N.V. subsidiary, located in the Netherlands, specializes in
converting "off-spec" and contaminated petroleum fluids into usable oil
products. The Company intends to exit this business, as discussed in the results
of operations. Thermo EuroTech also provides in-plant waste management and
recycling services through its Ireland-based Green Sunrise Holdings Ltd.
subsidiary. In August 1999, Green Sunrise acquired the outstanding stock of
Dempsey Drums Limited, an Ireland-based service provider in the supply,
disposal, and reconditioning of steel and plastic drums and the supply of
specialized packaging (Note 6).
Engineering and Design
The Company's majority-owned The Randers Killam Group Inc. subsidiary
provides comprehensive engineering and outsourcing services such as water and
wastewater treatment, process engineering and construction, highway and bridge
engineering, and infrastructure engineering. In January 2000, Randers Killam
sold its Randers division, a process engineering and construction business (Note
10), and intends to exit the highway and bridge engineering business as
discussed in the results of operations. The Company's wholly owned Normandeau
Associates Inc. subsidiary provides consulting services that address natural
resource management issues.
Laboratory Testing
The Company's wholly owned Thermo Analytical Inc. subsidiary operates
analytical laboratories that provide environmental- and pharmaceutical-testing
services, primarily to commercial clients throughout the U.S.
Metal Treating
The Company performs metallurgical processing services using
thermal-treatment equipment at locations in California, Minnesota, and
Wisconsin.
Results of Operations
Third Quarter Fiscal 2000 Compared With Third Quarter Fiscal 1999
Total revenues were $80.8 million in the third quarter of fiscal 2000,
compared with $80.4 million in the third quarter of fiscal 1999. Revenues from
the Environmental-liability Management segment increased to $45.9 million in
fiscal 2000 from $41.3 million in fiscal 1999. Excluding intrasegment sales,
revenues at ThermoRetec increased to $42.6 million in fiscal 2000 from $36.9
million in fiscal 1999, primarily due to higher revenues in its Consulting and
Engineering Services group as a result of a large remedial-construction contract
that is expected to continue through fiscal 2001. Revenues from Thermo EuroTech
decreased to $3.4 million in fiscal 2000 from $4.4 million in fiscal 1999 due to
a decrease in sales of usable oil products and a decrease in revenues relating
to a contract to process oil-based muds. The Company intends to exit this
business. These decreases were offset in part by $0.5 million of revenues from
Dempsey Drums, which was acquired in August 1999 (Note 6). Revenues from the
Engineering and Design segment decreased to $18.9 million in fiscal 2000 from
$23.6 million in fiscal 1999, primarily due to lower contract revenue resulting
in part from a recession in the chemical industry and, to a lesser extent, from
the announced sale of certain of its businesses. Revenues from the Laboratory
Testing segment increased to $12.0 million in fiscal 2000 from $11.0 million in
fiscal 1999, due to higher demand resulting from new industrial customers.
Revenues from the Metal Treating segment decreased to $4.2 million in fiscal
2000 from $4.7 million in fiscal 1999, due to weakness in the agricultural
equipment and commercial aerospace industries.
14
Third Quarter Fiscal 2000 Compared With Third Quarter Fiscal 1999 (continued)
The gross profit margin increased to 22% in the third quarter of fiscal
2000 from 20% in the third quarter of fiscal 1999. The gross profit margin from
the Environmental-liability Management segment increased to 18% in fiscal 2000
from 16% in fiscal 1999, primarily due to a $1.1 million increase in gross
profit in ThermoRetec's Consulting and Engineering Services group for the reason
discussed above and a $0.4 million reduction of depreciation expense in fiscal
2000 as a result of certain write-offs (Note 5). The gross profit margin from
the Engineering and Design segment increased to 27% in fiscal 2000 from 22% in
fiscal 1999, primarily due to a decrease in low-margin contract revenue.
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 15% in the third quarters of fiscal 2000 and 1999.
In May 1999, the Company announced that its majority-owned subsidiaries
plan to sell several businesses (Note 5). At the time of the decision, the
businesses that will be sold were considered outside the future focus of the
Company and its subsidiaries because of low growth prospects, marginal
profitability, or the need to invest significant capital to achieve desired
returns. The businesses proposed to be sold include the used-oil processing
operation of Thermo EuroTech; three soil-recycling facilities of ThermoRetec, in
addition to those proposed to be closed in fiscal 1999 discussed below; and the
Randers division, BAC Killam Inc., and E3-Killam Inc. businesses of Randers
Killam. The Randers Killam businesses provide engineering and construction
services, including transportation planning and design. In January 2000, the
Company sold substantially all of the assets and liabilities of the Randers
division for $538,000, resulting in a loss of $2,214,000 (Note 10).
The businesses the Company announced it would sell reported unaudited
aggregate revenues and operating income, prior to restructuring and related
costs, of $28.3 million and $1.1 million, respectively, in the first nine months
of fiscal 2000 and $54.0 million and $0.2 million, respectively, in fiscal 1999.
These businesses had aggregate net assets of $6.3 million at January 1, 2000,
including net assets of $5.1 million in the Engineering and Design segment and
$1.2 million in the Environmental-liability Management segment. Although there
can be no assurance concerning the timing of the completion of the sale of these
businesses, the Company expects that the sales will primarily occur in the first
half of calendar 2000.
Interest income increased to $0.7 million in the third quarter of fiscal
2000 from $0.5 million in the third quarter of fiscal 1999, primarily as a
result of higher average invested balances. Interest expense remained relatively
constant at $2.2 million in the third quarter of fiscal 2000, compared with $2.3
million in the third quarter of fiscal 1999.
The effective tax rates of 69% and 61% in the third quarter of fiscal 2000
and 1999, respectively, exceeded the statutory federal income tax rate primarily
due to the impact of state income taxes, the nondeductible amortization of cost
in excess of net assets of acquired companies, and certain losses for which
state tax benefits could not be utilized. The effective tax rate was higher in
fiscal 2000 primarily due to higher relative nondeductible expenses.
Minority interest expense increased to $0.4 million in the third quarter
of fiscal 2000 from $0.1 million in the second quarter of fiscal 1999, due to
increased earnings from the Company's majority-owned subsidiaries in fiscal
2000.
During the third quarter of fiscal 2000, the Company purchased $2.0
million principal amount of 2 1/2% subordinated convertible debentures,
convertible into shares of Thermo EuroTech (Delaware) Inc., for $1.8 million in
cash, resulting in an extraordinary gain of $96,000, net of taxes of $64,000
(Note 7).
15
First Nine Months Fiscal 2000 Compared With First Nine Months Fiscal 1999
Total revenues were $234.8 million in the first nine months of fiscal
2000, compared with $234.3 million in the first nine months of fiscal 1999.
Revenues from the Environmental-liability Management segment increased to $127.3
million in fiscal 2000 from $120.0 million in fiscal 1999. Excluding
intrasegment sales, revenues at ThermoRetec increased to $117.0 million in
fiscal 2000 from $106.5 million in fiscal 1999, primarily due to higher revenues
from a large remedial-construction contract that is expected to continue through
fiscal 2001. Revenues from Thermo EuroTech decreased $3.6 million to $10.3
million due to a decrease in sales of usable oil products and a decrease in
revenues relating to contracts to perform soil-remediation services overseas and
to process oil-based muds. The Company intends to exit this business. These
decreases were offset in part by $1.1 million of revenues from Dempsey Drums,
which was acquired in August 1999 (Note 6). Revenues from the Engineering and
Design segment decreased to $61.8 million in fiscal 2000 from $70.1 million in
fiscal 1999, primarily due to lower contract revenue resulting in part from a
recession in the chemical industry. Revenues from the Laboratory Testing segment
increased to $33.5 million in fiscal 2000 from $30.6 million in fiscal 1999, due
to higher demand for the reason discussed in the results of operations for third
quarter. Revenues from the Metal Treating segment decreased to $12.6 million in
fiscal 2000 from $14.2 million in fiscal 1999, due to weakness in the
agricultural equipment and commercial aerospace industries.
The gross profit margin increased to 21% in the first nine months of
fiscal 2000 from 20% in the first nine months of fiscal 1999. Excluding the
effect of a $0.7 million write-off of inventory in the Environmental-liability
Management segment in fiscal 2000 (Note 5), the gross profit margin increased
primarily due to a $1.9 million reduction of depreciation expense in fiscal 2000
as a result of certain write-offs in the Environmental-liability Management and
Engineering and Design segments (Note 5). The gross profit margin from the
Engineering and Design segment increased to 25% in fiscal 2000 from 23% in
fiscal 1999, due to a decrease in low-margin contract revenue.
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 15% in the first nine months of fiscal 2000 and 1999.
In connection with the proposed sale of businesses discussed in Note 5,
the Company recorded $56.5 million of restructuring costs in the first nine
months of fiscal 2000. Of these restructuring costs, $38.6 million was recorded
by the Environmental-liability Management segment and $17.9 million was recorded
by the Engineering and Design segment. These charges represent the excess of
book value of the businesses proposed to be sold over the estimated proceeds
from their sale, a write-down of fixed assets to their estimated disposal value,
ongoing lease obligations, land reclamation costs, a charge for a cumulative
translation adjustment, write-offs of intangible and other assets, and severance
costs.
During the first nine months of fiscal 1999, the Company recorded $10.2
million of restructuring costs. Of these restructuring costs, $9.2 million was
recorded by ThermoRetec in connection with the closure of two soil-recycling
facilities. ThermoRetec took this action after a period of operating losses at
the facilities, which it believes arose from relaxed enforcement of state rules
concerning disposal of contaminated soils and the availability of alternative
disposal options to customers. The costs include a write-down of fixed assets to
their estimated disposal value and a write-off of intangible assets, including
cost in excess of net assets of acquired companies, as well as other closure
costs. In addition, the Company recorded $1.0 million of restructuring costs for
abandoned-facility payments relating to the consolidation of the facilities of
another business.
Interest income increased to $2.0 million in the first nine months of
fiscal 2000 from $1.7 million in the first nine months of fiscal 1999, primarily
as the result of higher average invested balances. Interest expense remained
relatively constant at $6.7 million in the first nine months of fiscal 2000,
compared with $6.8 million in the first nine months of fiscal 1999.
16
First Nine Months Fiscal 2000 Compared With First Nine Months Fiscal 1999
(continued)
The Company recorded tax provisions of $1.2 million and $0.5 million on
pretax losses in the first nine months of fiscal 2000 and 1999, respectively,
primarily due to the effect of nondeductible amortization and write-off of cost
in excess of net assets of acquired companies. In addition, the tax provision
recorded in fiscal 2000 includes a $1.1 million write-off of deferred tax assets
(Note 5).
The Company recorded minority interest income of $3.3 million and $1.4
million in the first nine months of fiscal 2000 and 1999, respectively,
primarily due to losses incurred by the Company's majority-owned subsidiaries.
During the third quarter of fiscal 2000, the Company purchased $2.0
million principal amount of 2 1/2% subordinated convertible debentures,
convertible into shares of Thermo EuroTech (Delaware) Inc., for $1.8 million in
cash, resulting in an extraordinary gain of $96,000, net of taxes of $64,000
(Note 7).
Liquidity and Capital Resources
Consolidated working capital was $27.4 million at January 1, 2000,
compared with $67.0 million at April 3, 1999. Working capital decreased $38.0
million as a result of the reclassification of subordinated convertible
debentures due May 2000 to current liabilities. Cash and cash equivalents were
$4.9 million at January 1, 2000, compared with $43.0 million at April 3, 1999.
In addition, as of January 1, 2000, the Company had $49.4 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 and cash equivalents,
$2.1 million was held by the Company's majority-owned subsidiaries and the
balance was held by the Company and its wholly owned subsidiaries. Of the total
advance to affiliate, $48.3 million was advanced by the Company's majority-owned
subsidiaries and the balance was advanced by the Company and its wholly owned
subsidiaries.
During the first nine months of fiscal 2000, $20.0 million of cash was
provided by operating activities. During this period, $6.8 million of cash was
provided by an increase in other current liabilities, primarily due to an
increase in accrued restructuring costs. The Company expects to pay the $8.7
million balance of accrued restructuring costs primarily over the next 12
months. A decrease in accounts receivable provided $6.7 million of cash,
primarily at ThermoRetec due to the timing of billings and, to a lesser extent,
at the Engineering and Design segment due to a decrease in revenues. These
decreases were offset in part by increased accounts receivable at the Laboratory
Testing and Engineering and Design segments, primarily as a result of the timing
of billings and customer payments and increased laboratory testing revenues. An
increase in inventories and unbilled contract costs and fees used $8.7 million
of cash, primarily at ThermoRetec, due to increased revenues in the third
quarter of fiscal 1999, compared with the fourth quarter of fiscal 2000 and, to
a lesser extent, the timing of billings.
Excluding advance to affiliate activity (Note 8), the Company's investing
activities in the first nine months of fiscal 2000 primarily consisted of an
acquisition and capital additions. In August 1999, a subsidiary of the Company
acquired Dempsey Drums Limited for $2.0 million in cash, net of cash acquired,
and the issuance of shares of the subsidiary's common stock valued at $0.4
million (Note 6). The Company expended $9.4 million for purchases of property,
plant, and equipment in the first nine months of fiscal 2000 and expects to
spend approximately $3.0 million for capital additions during the remainder of
fiscal 2000.
In January 2000, the Company sold substantially all of the assets and
liabilities of the Randers division (Note 10).
The Company's financing activities provided cash of $1.7 million in the
first nine months of fiscal 2000, consisting primarily of $2.6 million received
from the collection of long-term notes receivable and $2.3 million borrowed to
finance an acquisition (Note 6), offset in part by $1.8 million to purchase
subordinated convertible debentures (Note 7). In January 2000, the Company
purchased $1.6 million of its common stock pursuant to certain put rights on
shares issued in connection with an acquisition. As of January 31, 2000, the
Company has no further cash obligations pursuant to put rights.
17
Liquidity and Capital Resources (continued)
The Company has commenced an offer to repurchase all of the outstanding
shares of Thermo EuroTech N.V. stock that are held by shareholders other than
the Company, at a price of $3.00 per share in cash. If such efforts are
successful, the Company will pay approximately $2.9 million in cash. The offer
expires February 14, 2000.
The Company generally expects to have positive cash flow from its existing
operations. Thermo Electron has expressed its willingness to advance up to $5
million to the Company for short-term liquidity in the event that the need
arises. In addition, ThermoRetec's $38.0 million principal amount 4 7/8%
subordinated convertible debentures are due to mature on May 1, 2000. These
debentures may be repaid prior to the maturity date if the merger of ThermoRetec
with Thermo Electron (Note 9) is completed prior to that time. The merger of
ThermoRetec with Thermo Electron is considered a redemption event causing the
acceleration of the repayment of the debentures. The maturity of ThermoRetec's
debentures could adversely affect the Company's liquidity in the first quarter
of fiscal 2001.
Year 2000
As of the date of this report, the Company has completed its year 2000
initiatives which included: (i) testing and upgrading significant information
technology systems and facilities; (ii) assessing the year 2000 readiness of its
key suppliers, vendors, and customers; and (iii) developing contingency plans.
As a result of completing these initiatives, the Company believes that
all of its material information technology systems and critical non-information
technology systems are year 2000 compliant. In addition, the Company is not
aware of any significant supplier or vendor that has experienced material
disruption due to year 2000 issues. The Company has also developed a contingency
plan to allow its primary business operations to continue despite disruptions
due to year 2000 problems, if any, that might yet arise in the future. The costs
incurred to date by the Company in connection with the year 2000 issue have not
been material.
While the Company to date has been successful in minimizing negative
consequences arising from year 2000 issues, there can be no assurance that in
the future the Company's business operations or financial condition may not be
impacted by year 2000 problems, such as increased warranty claims, vendor and
supplier disruptions, or litigation relating to year 2000 issues.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk from changes in foreign exchange
rates, equity prices, and interest rates has not changed materially from its
exposure at fiscal year-end 1999.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On October 21, 1999, the Company filed a Current Report on Form 8-K dated
as of October 19, 1999, with respect to the execution of an Agreement and Plan
of Merger by and among the Company, TTT Acquisition Corporation, and Thermo
Electron Corporation.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 11th day of February 2000.
THERMO TERRATECH INC.
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
19
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.