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
June 29, 1996.
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02254-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 622-1000
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of Common Stock, as of the latest practicable
date.
Class Outstanding at July 26, 1996
---------------------------- ----------------------------
Common Stock, $.10 par value 18,227,306
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO TERRATECH INC.
Consolidated Balance Sheet
(Unaudited)
Assets
June 29, March 30,
(In thousands) 1996 1996
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Current Assets:
Cash and cash equivalents $ 71,213 $ 31,182
Short-term available-for-sale investments,
at quoted market value (amortized cost
of $28,249 and $7,007) 28,254 7,004
Accounts receivable, less allowances of
$2,883 and $2,837 45,347 44,053
Unbilled contract costs and fees 24,394 21,113
Inventories:
Raw materials and supplies 3,399 3,822
Work in process and finished goods 42 61
Prepaid and refundable income taxes 7,846 9,500
Prepaid expenses 4,579 4,345
-------- --------
185,074 121,080
-------- --------
Property, Plant and Equipment, at Cost 125,168 121,847
Less: Accumulated depreciation and amortization 41,634 40,002
-------- --------
83,534 81,845
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $2,094 and $2,108) 2,073 2,098
-------- --------
Long-term Held-to-maturity Investments,
at Amortized Cost (quoted market value
of $25,212 and $24,963) 24,690 24,251
-------- --------
Other Assets 18,961 12,931
-------- --------
Cost in Excess of Net Assets of Acquired Companies 86,670 89,804
-------- --------
$401,002 $332,009
======== ========
2PAGE
THERMO TERRATECH INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
June 29, March 30,
(In thousands except share amounts) 1996 1996
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Current Liabilities:
Accounts payable $ 12,567 $ 10,841
Notes payable and current maturities of
long-term obligations (includes $38,000 and
$15,000 due to parent company) 42,691 19,711
Billings in excess of revenues earned 2,130 2,076
Accrued payroll and employee benefits 9,596 9,801
Accrued income taxes 1,410 -
Other accrued expenses 8,189 7,744
Due to parent company and Thermo Electron 2,167 3,459
-------- --------
78,750 53,632
-------- --------
Deferred Income Taxes 3,332 3,377
-------- --------
Other Deferred Items 977 980
-------- --------
Long-term Obligations:
4 5/8% Subordinated convertible debentures (Note 2) 115,000 -
6 1/2% Subordinated convertible debentures 13,382 18,182
4 7/8% Subordinated convertible debentures 37,950 37,950
Other (includes $73,000 due to parent company
in fiscal 1996) (Note 2) 26,651 99,252
-------- --------
192,983 155,384
-------- --------
Minority Interest 33,073 32,295
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 30,000,000
shares authorized; 18,073,769 and 17,598,013
shares issued 1,807 1,760
Capital in excess of par value 63,742 59,419
Retained earnings 26,383 24,945
Treasury stock at cost, 25,415 and 34,531
shares (306) (410)
Cumulative translation adjustment 271 635
Net unrealized loss on available-for-sale
investments (10) (8)
-------- --------
91,887 86,341
-------- --------
$401,002 $332,009
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3PAGE
THERMO TERRATECH INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
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June 29, July 1,
(In thousands except per share amounts) 1996 1995
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Revenues:
Service revenues $ 61,136 $ 46,294
Product revenues 5,752 3,562
-------- --------
66,888 49,856
-------- --------
Costs and Operating Expenses:
Cost of service revenues 49,221 34,581
Cost of product revenues 4,718 3,313
Selling, general and administrative expenses 8,437 8,244
Product and new business development expenses 299 276
-------- --------
62,675 46,414
-------- --------
Operating Income 4,213 3,442
Interest Income 1,630 1,360
Interest Expense (includes $829 and $1,208
to parent company) (3,108) (2,273)
Equity in Earnings of Unconsolidated Subsidiary 279 -
Gain on Issuance of Stock by Subsidiary - 2,742
Gain on Sale of Investments 147 80
-------- --------
Income Before Provision for Income Taxes
and Minority Interest 3,161 5,351
Provision for Income Taxes 1,501 1,024
Minority Interest Expense 222 378
-------- --------
Net Income $ 1,438 $ 3,949
======== ========
Earnings per Share $ .08 $ .22
======== ========
Weighted Average Shares 18,831 18,022
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4PAGE
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
-----------------------
June 29, July 1,
(In thousands) 1996 1995
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Operating Activities:
Net income $ 1,438 $ 3,949
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,182 2,817
Equity in earnings of unconsolidated
subsidiary (279) -
Minority interest expense 222 378
Provision for losses on accounts receivable 122 28
Other noncash expenses 97 101
Increase (decrease) in deferred income taxes (10) 376
Gain on issuance of stock by subsidiary - (2,742)
Gain on sale of investments (147) (80)
Changes in current accounts, excluding the
effects of acquisition:
Accounts receivable (1,165) (2,123)
Inventories and unbilled contract
costs and fees (2,958) (304)
Other current assets (613) 72
Current liabilities 3,333 (541)
-------- --------
Net cash provided by operating
activities 3,222 1,931
-------- --------
Investing Activities:
Acquisition, net of cash acquired - (24,763)
Purchase of minority interest in Thermo Terra
Tech joint venture - (34,267)
Purchases of available-for-sale investments (33,977) (23,243)
Proceeds from sale and maturities of
available-for-sale investments 12,897 5,580
Purchases of property, plant and equipment (4,448) (4,034)
Proceeds from sale of property, plant and
equipment 134 229
Purchase of other assets (489) (25)
-------- --------
Net cash used in investing
activities $(25,883) $(80,523)
-------- --------
5PAGE
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
-----------------------
June 29, July 1,
(In thousands) 1996 1995
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Financing Activities:
Net proceeds from issuance of subordinated
convertible debentures (Note 2) $112,500 $ 36,889
Issuance of note payable to parent company - 35,000
Repayment of notes payable to parent
company (Note 2) (50,000) (4,000)
Proceeds from issuance of Company and
subsidiary common stock 242 6,677
Other (42) -
-------- --------
Net cash provided by financing
activities 62,700 74,566
-------- --------
Exchange Rate Effect on Cash (8) (366)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents 40,031 (4,392)
Cash and Cash Equivalents at Beginning of Period 31,182 35,808
-------- --------
Cash and Cash Equivalents at End of Period $ 71,213 $ 31,416
======== ========
Noncash Activities:
Fair value of assets of acquired companies $ - $ 27,560
Cash paid for acquired companies - (25,195)
-------- --------
Liabilities assumed of acquired companies $ - $ 2,365
======== ========
Conversions of subordinated convertible
debentures $ 4,800 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
6PAGE
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 June 29, 1996,
the results of operations for the three-month periods ended June 29, 1996
and July 1, 1995, and the cash flows for the three-month periods ended June
29, 1996 and July 1, 1995. Interim results are not necessarily indicative
of results for a full year.
The consolidated balance sheet presented as of March 30, 1996, 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 March 30, 1996, filed with the Securities and
Exchange Commission.
Certain amounts in fiscal 1996 have been reclassified to conform to
the fiscal 1997 financial statement presentation. Certain of these
reclassifications are required to present consistent classification of
expenses within the Company's consulting and design services business.
2. Subordinated Convertible Debentures
In May 1996, the Company issued and sold $115.0 million principal
amount of 4 5/8% subordinated convertible debentures due 2003 for net
proceeds of $112.5 million. The debentures are convertible into shares of
the Company's common stock at a price of $15.90 per share and are
guaranteed on a subordinated basis by Thermo Electron Corporation (Thermo
Electron). The Company has agreed to reimburse Thermo Electron in the event
Thermo Electron is required to make a payment under the guarantee. In May
1996, the Company repaid its $15.0 million and $35.0 million promissory
notes to Thermo Electron with proceeds from the offering.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company is a provider of environmental services and infrastructure
planning and design, encompassing a range of specializations within the
remediation and recycling, consulting and design, and laboratory-testing
industries. The Company also provides metal-treating services and
thermal-processing systems used to treat primary metals and metal parts.
7PAGE
THERMO TERRATECH INC.
Overview (continued)
The Company's environmental services businesses are affected by several
factors, particularly, extreme weather variations, government spending, and
regulation of remediation activities.
Remediation and Recycling - The Company's majority-owned Thermo
Remediation Inc. (Thermo Remediation) subsidiary operates a network of
soil-remediation centers, serving customers in more than a dozen states on
the East and West coasts by providing thermal treatment of soil to remove
and destroy petroleum contamination caused by leaking underground and
aboveground storage tanks, spills, and other sources. In December 1995,
Thermo Remediation acquired Remediation Technologies, Inc. (ReTec), which
provides integrated environmental services such as remediation of
industrial sites contaminated with organic wastes and residues. Through its
Thermo Nutech subsidiary, Thermo Remediation provides services to remove
radioactive contaminants from sand, gravel, and soil, as well as health
physics, radiochemistry laboratory, and radiation dosimetry services. In
addition, Thermo Remediation's Thermo Fluids subsidiary offers
fluids-recycling services including waste motor oil and wastewater
treatment throughout Arizona, Nevada, and in neighboring states. The
Company's majority-owned Thermo EuroTech N.V. (Thermo EuroTech) subsidiary,
located in the Netherlands, provides wastewater treatment services as well
as services to test, remove, and install underground storage tanks. Through
its North Refinery subsidiary, Thermo Eurotech specializes in converting
"off-spec" and contaminated petroleum fluids into usable oil products.
Consulting and Design - The Company's wholly owned Killam Associates
subsidiary provides environmental consulting and engineering services and
specializes in wastewater treatment and water resources management. The
Company's wholly owned Bettigole Andrews & Clark and Normandeau Associates
subsidiaries provide both private and public sector clients with a range of
consulting services that address transportation planning and design, and
natural resource management issues, respectively.
Laboratory Testing - The Company's wholly owned Thermo Analytical
subsidiary operates a network of analytical laboratories that provide
environmental testing services to commercial and government clients
throughout the U.S. The May 1995 acquisition of Lancaster Laboratories,
Inc. (Lancaster Laboratories) expanded the Company's range of contract
services beyond environmental testing to the pharmaceutical- and
food-testing industries.
Metal Treating - The Company performs metallurgical processing
services using thermal-treatment equipment at locations in California and
Minnesota. The Company also designs, manufactures, and installs advanced
custom-engineered, thermal-processing systems through its equipment
division located in Michigan.
8PAGE
THERMO TERRATECH INC.
Results of Operations
First Quarter Fiscal 1997 Compared With First Quarter Fiscal 1996
Total revenues in the first quarter of fiscal 1997 increased 34% to
$66.9 million from $49.9 million in the first quarter of fiscal 1996.
Revenues from remediation and recycling services were $27.5 million in
fiscal 1997, compared with $15.4 million in fiscal 1996, primarily due to
the inclusion of $10.5 million in revenues from ReTec, which was acquired
in December 1995, an increase in revenues at Thermo EuroTech and, to a
lesser extent, higher revenues from a long-term environmental restoration
contract for the U.S. Department of Energy's (DOE's) Hanford site (Hanford)
and related health physics services. These increases were largely offset by
a decrease in radiochemistry laboratory work, reflecting a reduction in
spending at the DOE and delays in federal government budget appropriations.
Revenues from soil-remediation services decreased 8% resulting from
declines in the volume and price of soil processed due to competitive
pricing pressures and ongoing regulatory uncertainties in several states.
Revenues from consulting and design services increased to $21.5 million in
fiscal 1997 from $19.8 million in fiscal 1996, primarily due to increased
revenues from two major contracts, offset in part by lower revenues from
federal government contracts, reflecting a reduction in spending and delays
in budget appropriations. Revenues from laboratory-testing services,
excluding the radiochemistry laboratory services included in remediation
and recycling services, increased to $8.8 million in fiscal 1997 from $7.5
million in fiscal 1996, largely due to the inclusion of an additional $2.8
million of revenues from Lancaster Laboratories, acquired in May 1995,
offset in part by a decline in revenues due to reduced federal spending.
Metal-treating revenues increased to $9.1 million in fiscal 1997 from $7.2
million in fiscal 1996, primarily due to an increase in demand for
thermal-processing equipment.
The gross profit margin decreased to 19% in the first quarter of
fiscal 1997 from 24% in the first quarter of fiscal 1996, primarily due to
the inclusion of lower-margin revenues from ReTec and a decrease in gross
profit margins for remediation and recycling services due to competitive
pricing pressures. These decreases were offset in part by higher gross
profit margins from metal-treating services resulting from an increase in
revenues.
Selling, general and administrative expenses as a percentage of
revenues decreased to 13% in the first quarter of fiscal 1997 from 17% in
the first quarter of fiscal 1996, primarily due to efficiencies associated
with an increase in revenues and a decline in expenses related to the
consolidation of administrative functions within the consulting and design
services business.
Interest income increased to $1.6 million in the first quarter of
fiscal 1997 from $1.4 million in the first quarter of fiscal 1996,
primarily due to an increase in invested amounts as a result of the
Company's May 1996 issuance of 4 5/8% subordinated convertible debentures
(Note 2). Interest expense increased to $3.1 million in fiscal 1997 from
$2.3 million in fiscal 1996, primarily due to the Company's May 1996
issuance of subordinated convertible debentures and Thermo Remediation's
9PAGE
THERMO TERRATECH INC.
First Quarter Fiscal 1997 Compared With First Quarter Fiscal 1996
(continued)
May 1995 issuance of 4 7/8% subordinated convertible debentures, offset in
part by a decrease in interest expense due to the repayment of promissory
notes to Thermo Electron Corporation (Thermo Electron) with proceeds from
the Company's May 1996 issuance of subordinated convertible debentures
(Note 2).
Equity in earnings of unconsolidated subsidiary in the first quarter
of fiscal 1997 represents ReTec's proportionate share of income from a
joint venture.
During the first quarter of fiscal 1996, the Company recorded gains of
$2.7 million from the sale of stock by subsidiary.
The effective tax rates were 47% and 19% in the first quarter of
fiscal 1997 and 1996, respectively. The effective tax rate in fiscal 1997
was higher than the statutory federal income tax rate primarily due to
nondeductible amortization of cost in excess of net assets of acquired
companies and the impact of state income taxes. The effective tax rate in
fiscal 1996 was lower than the statutory federal income tax rate primarily
due to the nontaxable gain on issuance of stock by subsidiary.
Minority interest expense decreased to $0.2 million in the first
quarter of fiscal 1997 from $0.4 million in the first quarter of fiscal
1996, due to a reduction in earnings from the Company's majority-owned
subsidiaries.
Liquidity and Capital Resources
Consolidated working capital, including cash, cash equivalents, and
short-term available-for-sale investments, increased to $106.3 million at
June 29, 1996 from $67.4 million at March 30, 1996. Cash, cash equivalents,
and short- and long-term available-for-sale investments were $101.5 million
at June 29, 1996, compared with $40.3 million at March 30, 1996. Of the
$101.5 million balance at March 30, 1996, $33.7 million was held by Thermo
Remediation and the remainder by the Company and its wholly owned
subsidiaries. In addition, at June 29, 1996 the Company had $24.7 million
of long-term held-to-maturity investments, compared with $24.3 million at
March 30, 1996. During the first quarter of fiscal 1997, $3.2 million of
cash was provided by operating activities. In the first quarter of fiscal
1997, the Company used cash of $3.0 million primarily to fund an increase
in unbilled contract costs and fees due to an increase in thermal-
processing equipment contracts, an increase in remediation contracts at
ReTec, as well as an increase in consulting and design services contracts.
In May 1996, the Company issued and sold $115.0 million principal
amount of 4 5/8% subordinated convertible debentures due 2003 for net
proceeds of $112.5 million (Note 2). The debentures are guaranteed on a
subordinated basis by Thermo Electron. The Company has agreed to reimburse
Thermo Electron in the event Thermo Electron is required to make a payment
under the guarantee. In May 1996, the Company repaid its $15.0 million and
$35.0 million promissory notes to Thermo Electron with proceeds from the
offering.
10PAGE
THERMO TERRATECH INC.
Liquidity and Capital Resources (continued)
In the first quarter of fiscal 1997, the Company expended $4.4 million
on purchases of property, plant and equipment. During the remainder of
fiscal 1997, the Company expects to expend $5.6 million for purchases of
property, plant and equipment. The Company has no material commitments for
the acquisition of businesses or for capital expenditures. Such
expenditures will largely be affected by the number and size of the
complementary businesses that can be acquired or developed during the year.
The Company believes that it has adequate resources to meet the financial
needs of its current operations for the foreseeable future.
PART II - OTHER INFORMATION
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
11PAGE
THERMO TERRATECH 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 6th day of August 1996.
THERMO TERRATECH INC.
Paul F. Kelleher
------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
------------------------
John N. Hatsopoulos
Vice President and
Chief Financial Officer
12PAGE
THERMO TERRATECH INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Page
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10.1 Elson T. Killam Associated, Inc. 1987 Incentive Stock
Option Plan.
10.2 Elson T. Killam Associates, Inc. 1987 Incentive Stock
Option Plan, Incentive Stock Option Agreement.
10.3 Elson T. Killam Associates, Inc. Shareholders' Agreement
dated January 29, 1995.
10.4 Amendment No. 1 to Shareholders' Agreement, dated
February 6, 1995.
10.5 Option Exchange Agreement between the Company and
Emil C. Herkert, dated February 6, 1995.
11 Statement re: Computation of earnings per share.
27 Financial Data Schedule.