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 28, 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 October 25, 1996
---------------------------- -------------------------------
Common Stock, $.10 par value 18,254,067
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO TERRATECH INC.
Consolidated Balance Sheet
(Unaudited)
Assets
September 28, March 30,
(In thousands) 1996 1996
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 68,733 $ 31,182
Short-term available-for-sale investments,
at quoted market value (amortized cost
of $28,369 and $7,007) 28,426 7,004
Accounts receivable, less allowances of
$3,022 and $2,861 50,833 44,397
Unbilled contract costs and fees 25,053 21,113
Inventories:
Raw materials and supplies 2,630 3,822
Work in process and finished goods 795 61
Prepaid and refundable income taxes 7,871 9,556
Prepaid expenses 5,249 4,442
-------- --------
189,590 121,577
-------- --------
Property, Plant and Equipment, at Cost 132,766 126,129
Less: Accumulated depreciation and amortization 46,767 43,173
-------- --------
85,999 82,956
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $2,108 in fiscal 1996) - 2,098
-------- --------
Long-term Held-to-maturity Investments,
at Amortized Cost (quoted market value
of $25,632 and $24,963) 25,138 24,251
-------- --------
Other Assets 19,094 12,931
-------- --------
Cost in Excess of Net Assets of Acquired Companies 90,814 89,843
-------- --------
$410,635 $333,656
======== ========
2PAGE
THERMO TERRATECH INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 28, March 30,
(In thousands except share amounts) 1996 1996
-----------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 13,597 $ 10,922
Notes payable and current maturities of
long-term obligations (includes $38,000 and
$15,000 due to parent company) 44,312 19,711
Billings in excess of revenues earned 1,487 2,076
Accrued payroll and employee benefits 8,811 9,930
Accrued income taxes 845 -
Other accrued expenses 13,193 7,871
Due to parent company 3,552 5,059
-------- --------
85,797 55,569
-------- --------
Deferred Income Taxes 3,591 3,558
-------- --------
Other Deferred Items 950 980
-------- --------
Long-term Obligations:
4 5/8% Subordinated convertible debentures
(Note 2) 113,850 -
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) 26,489 99,252
-------- --------
191,671 155,384
-------- --------
Minority Interest 36,473 32,295
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 75,000,000
shares authorized; 18,278,210 and 17,598,013
shares issued 1,828 1,760
Capital in excess of par value 63,092 59,419
Retained earnings 27,204 24,474
Treasury stock at cost, 24,143 and 34,531
shares (282) (410)
Cumulative translation adjustment 274 635
Net unrealized gain (loss) on available-for-sale
investments 37 (8)
-------- --------
92,153 85,870
-------- --------
$410,635 $333,656
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
3PAGE
THERMO TERRATECH INC.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
----------------------------
September 28, September 30,
(In thousands except per share amounts) 1996 1995
------------------------------------------------------------------------
Revenues:
Service revenues $61,121 $49,452
Product revenues 6,148 5,046
------- -------
67,269 54,498
------- -------
Costs and Operating Expenses:
Cost of service revenues 50,995 36,686
Cost of product revenues 4,902 4,445
Selling, general and administrative expenses 9,727 8,300
Product and new business development expenses 275 282
Write-off of cost in excess of net assets of
acquired company - 4,995
------- -------
65,899 54,708
------- -------
Operating Income (Loss) 1,370 (210)
Interest Income 2,017 1,406
Interest Expense (includes $553 and $1,690
to parent company) (3,462) (2,959)
Equity in Earnings of Unconsolidated Subsidiary 280 -
Gain on Issuance of Stock by Subsidiary (Note 3) 1,475 -
Gain on Sale of Investments 19 -
Loss on Sale of Assets - (569)
Other Income 47 -
------- -------
Income Before Provision for Income Taxes
and Minority Interest 1,746 (2,332)
Provision for Income Taxes 207 1,350
Minority Interest Expense 89 433
------- -------
Net Income (Loss) $ 1,450 $(4,115)
======= =======
Earnings (Loss) per Share $ .08 $ (.24)
======= =======
Weighted Average Shares 18,848 17,373
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
THERMO TERRATECH INC.
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
----------------------------
September 28, September 30,
(In thousands except per share amounts) 1996 1995
------------------------------------------------------------------------
Revenues:
Service revenues $122,987 $ 96,618
Product revenues 11,900 8,608
-------- --------
134,887 105,226
-------- --------
Costs and Operating Expenses:
Cost of service revenues 100,803 71,880
Cost of product revenues 9,620 7,758
Selling, general and administrative expenses 18,274 16,649
Product and new business development expenses 574 558
Write-off of cost in excess of net assets of
acquired company - 4,995
-------- --------
129,271 101,840
-------- --------
Operating Income 5,616 3,386
Interest Income 3,647 2,766
Interest Expense (includes $1,382 and $2,898
to parent company) (6,570) (5,232)
Equity in Earnings of Unconsolidated Subsidiary 559 -
Gain on Issuance of Stock by Subsidiaries
(Note 3) 1,475 2,742
Gain on Sale of Investments 166 80
Loss on Sale of Assets - (569)
Other Income 47 -
-------- --------
Income Before Provision for Income Taxes
and Minority Interest 4,940 3,173
Provision for Income Taxes 1,721 2,436
Minority Interest Expense 311 811
-------- --------
Net Income (Loss) $ 2,908 $ (74)
======== ========
Earnings (Loss) per Share $ .15 $ -
======== ========
Weighted Average Shares 18,839 17,362
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
5PAGE
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
----------------------------
September 28, September 30,
(In thousands) 1996 1995
------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ 2,908 $ (74)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 6,523 5,960
Write-off of cost in excess of net asset
of acquired company - 4,995
Loss on sale of assets - 569
Equity in earnings of unconsolidated
subsidiary (559) -
Minority interest expense 311 811
Provision for losses on accounts receivable 388 (21)
Other noncash expenses - 194
Increase (decrease) in deferred income
taxes (22) 91
Gain on issuance of stock by subsidiaries (1,475) (2,742)
Gain on sale of investments (166) (80)
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (5,850) (3,018)
Inventories and unbilled contract
costs and fees (3,423) (803)
Other current assets (1,153) (1,026)
Current liabilities 5,997 3,473
Other (87) -
-------- --------
Net cash provided by operating
activities 3,392 8,329
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (1,681) (25,404)
Purchase of minority interest in Thermo Terra
Tech joint venture - (34,267)
Purchases of available-for-sale investments (39,027) (23,299)
Proceeds from sale and maturities of
available-for-sale investments 19,915 11,630
Purchases of property, plant and equipment (8,262) (8,609)
Proceeds from sale of property, plant and
equipment 393 594
Purchase of other assets (413) (26)
-------- --------
Net cash used in investing
activities $(29,075) $(79,381)
-------- --------
6PAGE
THERMO TERRATECH INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
----------------------------
September 28, September 30,
(In thousands) 1996 1995
------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of subordinated
convertible debentures (Note 2) $112,429 $ 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 (Note 3) 4,720 6,959
Repurchase of Company common stock (1,865) -
Repurchase of subordinated convertible
debentures (1,078) -
Issuance of short-term obligations 560 2,178
Repayment of note payable (901) (618)
Dividends paid by subsidiary to minority
shareholders (450) (551)
Issuance of note receivable - (401)
Metal Treating, Inc. transfer to parent
company (178) (296)
-------- --------
Net cash provided by financing
activities 63,237 75,160
-------- --------
Exchange Rate Effect on Cash (3) (372)
-------- --------
Increase in Cash and Cash Equivalents 37,551 3,736
Cash and Cash Equivalents at Beginning of Period 31,182 35,808
-------- --------
Cash and Cash Equivalents at End of Period $ 68,733 $ 39,544
======== ========
Noncash Activities:
Fair value of assets of acquired companies $ 6,476 $ 28,201
Cash paid for acquired companies (1,705) (25,836)
Issuance of subsidiary common stock for
acquired company (2,006) -
-------- --------
Liabilities assumed of acquired companies $ 2,765 $ 2,365
======== ========
Conversions of subordinated convertible
debentures $ 4,800 $ -
The accompanying notes are an integral part of these consolidated
financial statements.
7PAGE
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
September 28, 1996, the results of operations for the three- and
six-month periods ended September 28, 1996 and September 30, 1995, and
the cash flows for the six-month periods ended September 28, 1996 and
September 30, 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.
Historical financial results have been restated to include Metal
Treating, Inc. (Metal Treating), which was acquired in October 1996 in a
transaction accounted for under the pooling-of-interests method (Note 4).
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 $112.4 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). In September 1996, the Company repurchased $1,150,000
principal amount of these debentures, resulting in no material gain or
loss. In May 1996, the Company repaid its $15.0 million and $35.0 million
promissory notes to Thermo Electron with proceeds from the offering.
3. Transaction in Stock of Subsidiary
In September 1996, the Company's majority-owned Thermo EuroTech
N.V. (Thermo EuroTech) subsidiary sold 1,105,000 shares of its common
stock in a private placement at $4.25 per share, for net proceeds of $4.4
8PAGE
THERMO TERRATECH INC.
3. Transaction in Stock of Subsidiary (continued)
million, resulting in a gain of $1.5 million. Following the private
placement, the Company owned 53% of Thermo EuroTech's outstanding common
stock.
4. Subsequent Event
In October 1996, the Company acquired Metal Treating from Thermo
Electron in exchange for $1.6 million in cash. Metal Treating provides
heat treating services, including carburizing, vacuum hardening, silver
and copper brazing, and aluminum heat treating, primarily to the
Milwaukee and southeastern Wisconsin areas. Because the Company and Metal
Treating were deemed for accounting purposes to be under control of their
common majority owner, Thermo Electron, the transaction has been
accounted for at historical cost in a manner similar to the
pooling-of-interests method. Accordingly, all historical information
presented has been restated to include the results of Metal Treating. The
purchase price of $1.6 million is included in due to parent company in
the accompanying balance sheet.
Revenues and net income (loss) as previously reported by the
separate entities prior to the acquisition and as restated for the
combined Company are as follows:
Three Three Six
Months Ended Months Ended Months Ended
------------- -------------- --------------
(In thousands) June 29, 1996 Sept. 30, 1995 Sept. 30, 1995
------------------------------------------------------------------------
Revenues:
Previously reported $ 66,888 $ 53,782 $103,638
Metal Treating 739 716 1,588
Elimination (9) - -
-------- -------- --------
$ 67,618 $ 54,498 $105,226
======== ======== ========
Net Income (Loss):
Previously reported $ 1,438 $ (4,159) $ (210)
Metal Treating 20 44 136
-------- -------- --------
$ 1,458 $ (4,115) $ (74)
======== ======== ========
9PAGE
THERMO TERRATECH INC.
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. These statements involve a number of risks and
uncertainties, including those detailed in Item 5 of this Quarterly
Report on Form 10-Q.
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. 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 - In December 1995, the Company's
majority-owned Thermo Remediation Inc. (Thermo Remediation) subsidiary
acquired Remediation Technologies, Inc. (ReTec), a provider of integrated
environmental services such as remediation of industrial sites
contaminated with organic wastes and residues. In September 1996, Thermo
Remediation acquired IEM Sealand Corporation (IEM Sealand), a provider of
construction services for the remediation of hazardous wastes under
contracts with federal and state governments, and other public and
private sector clients. 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. Through its TPS
Technologies Inc. division, Thermo Remediation is also a national leader
in the design and operation of nonhazardous soil-remediation facilities
and operates a network of such facilities serving customers in more than
a dozen states along the East and West coasts. In addition, Thermo
Remediation's Thermo Fluids subsidiary collects, tests, processes, and
recycles used motor oil and other industrial oils. 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.
10PAGE
THERMO TERRATECH INC.
Overview (continued)
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,
Minnesota, and Wisconsin. The Company also designs, manufactures, and
installs advanced custom-engineered, thermal-processing systems through
its equipment division located in Michigan.
Results of Operations
Second Quarter Fiscal 1997 Compared With Second Quarter Fiscal 1996
Total revenues in the second quarter of fiscal 1997 increased 23%
to $67.3 million from $54.5 million in the second quarter of fiscal 1996.
Revenues from remediation and recycling services increased to $30.8
million in fiscal 1997 from $17.1 million in fiscal 1996, primarily due
to the inclusion of $13.7 million in revenues in fiscal 1997 from ReTec
and IEM Sealand, which were acquired in December 1995 and September 1996,
respectively, and, to a lesser extent, higher revenues from health
physics services. Revenues from soil-remediation services decreased 21%
resulting from declines in the volume of soil processed due to reduced
compliance requirements and/or relaxed enforcement activities in several
states and competitive pricing pressures. Revenues from consulting and
design services remained relatively unchanged at $18.7 million in fiscal
1997 and $18.4 million in fiscal 1996. Revenues from laboratory-testing
services, excluding the radiochemistry laboratory services included in
remediation and recycling services, decreased to $8.3 million in fiscal
1997 from $10.2 million in fiscal 1996, largely due to reduced federal
spending. Metal-treating revenues increased to $10.2 million in fiscal
1997 from $8.8 million in fiscal 1996, primarily due to an increase in
demand for thermal-processing equipment at existing businesses.
The gross profit margin decreased to 17% in the second quarter of
fiscal 1997 from 25% in the second quarter of fiscal 1996, primarily due
to a decrease in gross profit margins for remediation and recycling
services due to lower volumes of soil processed at the Company's
traditionally higher-margin soil-remediation centers and, to a lesser
extent, lower margins on the soil processed due to competitive pricing
pressures, and the inclusion of lower-margin revenues from ReTec. This
decline is also due to a decrease in gross profit margins for
laboratory-testing services due to costs incurred related to efforts to
eliminate redundant capabilities at regional laboratories. These
decreases were offset in part by higher gross profit margins from
metal-treating services resulting from an increase in revenues.
11PAGE
THERMO TERRATECH INC.
Second Quarter Fiscal 1997 Compared With Second Quarter Fiscal 1996
(continued)
During the second quarter of fiscal 1996, the Company wrote off
$4,995,000 of "Cost in excess of net assets of acquired company" related
to its thermal-processing equipment business. In addition, the Company
incurred a loss of $569,000 as a result of the sale of an engineering
office. These noncash expenses are nondeductible for tax purposes.
Selling, general and administrative expenses as a percentage of
revenues decreased to 14% in the second quarter of fiscal 1997 from 15%
in the second quarter of fiscal 1996, primarily due to efficiencies
associated with an increase in revenues and lower expenses as a
percentage of revenues at acquired companies.
Interest income increased to $2.0 million in the second quarter of
fiscal 1997 from $1.4 million in the second quarter of fiscal 1996,
primarily as a result of interest income earned on invested proceeds from
the Company's issuance of 4 5/8% subordinated convertible debentures in
May 1996 (Note 2). Interest expense increased to $3.5 million in fiscal
1997 from $3.0 million in fiscal 1996, primarily due to interest on the
Company's 4 5/8% issuance of 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 4 5/8% subordinated convertible debentures.
Equity in earnings of unconsolidated subsidiary in the second
quarter of fiscal 1997 represents ReTec's proportionate share of income
from a joint venture.
As a result of the sale of stock by Thermo EuroTech, the Company
recorded a gain of $1.5 million in the second quarter of fiscal 1997
(Note 3). The gain represents an increase in the Company's proportionate
share of the subsidiary's equity and is classified as gain on issuance of
stock by subsidiary in the accompanying statement of operations.
The effective tax rate in the second quarter of fiscal 1997 was
lower than the statutory federal income tax rate primarily due to the
nontaxable gain on issuance of stock by subsidiary, offset in part by
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 higher than the federal statutory rate primarily due to
the nondeductible write-off of cost in excess of net assets of acquired
company and the loss on sale of assets.
Minority interest expense decreased to $0.1 million in the second
quarter of fiscal 1997 from $0.4 million in the second quarter of fiscal
1996, due to a reduction in earnings from the Company's majority-owned
subsidiaries.
12PAGE
THERMO TERRATECH INC.
First Six Months of Fiscal 1997 Compared With First Six Months of Fiscal
1996
Total revenues in the first six months of fiscal 1997 increased 28%
to $134.9 million from $105.2 million in the first six months of fiscal
1996. Revenues from remediation and recycling services increased to $58.7
million in fiscal 1997 from $32.5 million in fiscal 1996, primarily due
to the inclusion of $24.2 million in revenues from ReTec and IEM Sealand,
which were acquired in December 1995 and September 1996, respectively.
This increase in revenues is also due to an increase in revenues at
Thermo EuroTech and, to a lesser extent, higher revenues from health
physics services and a long-term environmental restoration contract for
the U.S. Department of Energy's (DOE's) Hanford site (Hanford). These
increases were offset in part by a decrease in radiochemistry laboratory
work, reflecting ongoing reductions in spending at the DOE as well as a
shift in DOE spending from investigative work performed by the Company's
laboratories to cleanup work. Revenues from soil-remediation services
decreased 15% primarily due to the reasons discussed in the results of
operations for the second quarter. Revenues from consulting and design
services increased to $40.2 million in fiscal 1997 from $38.2 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, remained relatively constant at $17.6 million in fiscal 1997
and $17.7 million in fiscal 1996. Metal-treating revenues increased to
$20.1 million in fiscal 1997 from $16.9 million in fiscal 1996, primarily
due to an increase in demand for thermal-processing equipment at existing
businesses.
The gross profit margin decreased to 18% in the first six months of
fiscal 1997 from 24% in the first six months of fiscal 1996, primarily
due to the reasons discussed in the results of operations for the second
quarter.
Selling, general and administrative expenses as a percentage of
revenues decreased to 14% in the first six months of fiscal 1997 from 16%
in the first six months of fiscal 1996, primarily due to efficiencies
associated with an increase in revenues, a decline in expenses related to
the consolidation of administrative functions within the consulting and
design services business, and lower expenses as a percentage of revenues
at acquired companies.
Interest income increased to $3.6 million in the first six months
of fiscal 1997 from $2.8 million in the first six months of fiscal 1996,
primarily as a result of interest income earned on invested proceeds from
the Company's issuance of 4 5/8% subordinated convertible debentures in
May 1996 (Note 2). Interest expense increased to $6.6 million in fiscal
1997 from $5.2 million in fiscal 1996, primarily due to interest on the
Company's 4 5/8% subordinated convertible debentures and Thermo
Remediation's issuance of 4 7/8% subordinated convertible debentures in
13PAGE
THERMO TERRATECH INC.
First Six Months of Fiscal 1997 Compared With First Six Months of Fiscal
1996 (continued)
May 1995, offset in part by a decrease in interest expense due to the
repayment of promissory notes to Thermo Electron with proceeds from the
Company's 4 5/8% subordinated convertible debentures.
During the first six months of fiscal 1997 and 1996, the Company
recorded gains of $1.5 million and $2.7 million, respectively, from the
sale of stock by subsidiaries (Note 3).
The effective tax rate in the first six months of fiscal 1997 was
lower than the statutory federal income tax rate primarily due to the
nontaxable gain on issuance of stock by subsidiaries offset in part by
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 higher than the federal statutory rate primarily due to
the nondeductible write-off of cost in excess of net assets of acquired
company and the loss on sale of assets, offset in part by the nontaxable
gains on issuance of stock by subsidiaries.
Minority interest expense decreased to $0.3 million in the first
six months of fiscal 1997 from $0.8 million in the first six months 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 $103.8 million at
September 28, 1996 from $66.0 million at March 30, 1996. Cash, cash
equivalents, and short- and long-term available-for-sale investments were
$97.2 million at September 28, 1996, compared with $40.3 million at March
30, 1996. Of the $97.2 million balance at September 28, 1996, $28.7
million and $4.4 million was held by Thermo Remediation and Thermo
EuroTech, respectively, and the remainder by the Company and its wholly
owned subsidiaries. In addition, at September 28, 1996, the Company had
$25.1 million of long-term held-to-maturity investments, compared with
$24.3 million at March 30, 1996. During the first six months of fiscal
1997, $3.4 million of cash was provided by operating activities. In the
first six months of fiscal 1997, the Company funded increases in accounts
receivable and unbilled contract costs and fees of $5.8 million and $3.4
million, respectively. The increase in accounts receivable is primarily
due to higher revenues at Thermo Remediation's IEM Sealand, Thermo
NuTech, and Thermo Fluids divisions. The increase in unbilled contract
costs and fees was due to an increase in thermal-processing equipment
contracts, remediation contracts at ReTec, and consulting and design
services contracts. These uses of cash were largely offset by an increase
in other current liabilities, including $3.0 million in accrued interest
related to the 4 5/8% convertible debentures (Note 2).
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 $112.4 million (Note 2). The debentures are guaranteed on a
14PAGE
THERMO TERRATECH INC.
Liquidity and Capital Resources (continued)
subordinated basis by Thermo Electron. In September 1996, the Company
repurchased $1,150,000 principal amount of these debentures. In May 1996,
the Company repaid its $15.0 million and $35.0 million promissory notes
to Thermo Electron with proceeds from the offering.
The Boards of Directors of the Company and Thermo Remediation each
authorized the repurchase, through August 23, 1997 and September 10,
1997, respectively, of up to $10.0 million of their own securities. Any
such purchases would be funded from working capital. Through September
28, 1996, the Company and Thermo Remediation had expended $.1 million and
$1.8 million, respectively, under these authorizations.
In the first six months of fiscal 1997, the Company expended $1.7
million for acquisitions and $8.3 million for purchases of property,
plant and equipment. During the remainder of fiscal 1997, the Company
expects to expend an additional $3.0 million for purchases of property,
plant and equipment. In October 1996, the Company signed a definitive
agreement to acquire the stock of privately held Carlan Consulting Group,
Inc., a provider of transportation and environmental consulting and
professional engineering services, located in Pensacola and Tampa,
Florida, for approximately $3.3 million. The completion of this
transaction is subject to several conditions, including completion of the
Company's due diligence investigation. The Company has no other 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 4 - Submission of Matters to a Vote of Security Holders
On September 25, 1996, at the Annual Meeting of Shareholders, the
shareholders elected six incumbent directors to one-year terms expiring
in 1997. The directors reelected at the meeting were: John P. Appleton,
John N. Hatsopoulos, Donald E. Noble, William A. Rainville, Paul E.
Tsongas, and Polyvios C. Vintiadis. Dr. Appleton received 16,788,646
shares voted in favor of election and 263,051 shares voted against; Mr.
Hatsopoulos, Mr. Rainville, and Mr. Vintiadis each received 16,788,749
shares voted in favor of election and 262,948 shares voted against; Mr.
Noble received 16,787,849 shares voted in favor of election and 263,848
shares voted against; and Mr. Tsongas received 16,788,748 shares voted in
favor of election and 262,949 shares voted against. No abstentions or
broker nonvotes were recorded on the election of directors.
The shareholders also approved a proposal to amend the Company's
Restated Certificate of Incorporation to increase the Company's
authorized common stock, $.10 par value per share, from 30 million
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THERMO TERRATECH INC.
Item 4 - Submission of Matters to a Vote of Security Holders (continued)
shares to 75 million shares as follows: 16,579,935 shares voted in favor,
440,862 shares voted against, 12,300 shares abstained, and 18,600 broker
nonvotes were recorded on the proposal.
Item 5 - Other Information
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution
readers that the following important factors, among others, in some cases
have affected, and in the future could affect, the Company's actual
results and could cause its actual results in fiscal 1997 and beyond to
differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company.
Dependence on Environmental Regulation. Federal, state and local
environmental laws govern each of the markets in which the Company
conducts business, as well as many of the Company's operations. The
markets for many of the Company's services, including industrial
remediation services, nuclear remediation services, hazardous waste
remedial construction services, soil-remediation services, waste-fluids
recycling services, consulting and design services, and laboratory
services, and the standards governing most aspects of the construction
and operation of the Company's facilities, were directly or indirectly
created by, and are dependent on, the existence and enforcement of those
laws. There can be no assurance that these laws and regulations will not
change in the future, requiring new technologies or stricter standards
with which the Company must comply. In addition, there can be no
assurance that these laws and regulations will not be made more lenient
in the future, thereby reducing the size of the markets addressed by the
Company. Any such change in such federal, state and local environmental
laws and regulations may have a material adverse effect on the Company's
business.
Responsibility for establishing and enforcing certain federal
policies, such as the federal underground storage tank policy, has been
delegated to the states, which are not only required to establish
regulatory programs, but also are permitted to mandate more stringent
requirements than are otherwise required by federal law. Currently, many
states are considering adopting a "risk-based" approach to prioritizing
site cleanups and setting cleanup standards, which attempts to balance
the costs of remediation against the potential harm to human health and
the environment from leaving sites unremediated. Although the Company
believes that it will be able to take advantage of this shift toward a
risk-based approach, there can be no assurance that these policies, if
implemented, will not reduce the size of the potential market addressed
by the Company.
Potential Environmental and Regulatory Liability. The Company's
operations are subject to comprehensive laws and regulations related to
the protection of the environment. Among other things, these laws and
regulations impose requirements to control air, soil, and water
pollution, and regulate health, safety, zoning, land use, and the
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THERMO TERRATECH INC.
Item 5 - Other Information (continued)
handling and transportation of hazardous and nonhazardous materials. Such
laws and regulations also impose liability for remediation and cleanup of
environmental contamination, both on-site and off-site, resulting from
past and present operations. These requirements may also be imposed as
conditions of operating permits or licenses that are subject to renewal,
modification or revocation. Existing laws and regulations, and new laws
and regulations, may require the Company to modify, supplement, replace,
or curtail its operating methods, facilities, or equipment at costs which
may be substantial without any corresponding increase in revenue. The
Company is also potentially subject to monetary fines, penalties,
remediation, cleanup, or stop orders, injunctions, or orders to cease or
suspend certain of its practices. The outcome of any proceedings and
associated costs and expenses could have a material adverse impact on the
Company's business. In addition, the Company's Thermo NuTech and IEM
Sealand divisions are subject to numerous laws and regulations related to
the protection of human health and safety. Such laws and regulations may
pose liability on the Company for exposure of its employees to radiation
or other hazardous contamination or failure to isolate and remove
radioactive or other hazardous contaminants from soil.
The Company endeavors to operate its business to minimize its
exposure to environmental and other regulatory liabilities. In entering
into contracts with its customers, the Company seeks to maximize its
insulation from regulatory liabilities associated with the contaminated
soil, oil, and other wastes it handles. Although no claims giving rise to
such liabilities have been asserted by the Company's customers or
employees to date, there can be no assurance that such claims cannot or
will not be asserted against the Company.
Uncertainty of Funding. Remediation compliance requirements and
attendant costs are often beyond the financial capabilities of many
individuals and small companies. To address this problem, some states
have established tax-supported trust funds to assist in the financing of
compliance and site remediation. As a consequence, in many of the states
in which the Company markets its soil-remediation services, the majority,
and in some cases virtually all, of the soil remediated by the Company is
paid for by large companies and/or these state trust funds. Any
substantial decrease in this funding could have a material adverse effect
on the Company's business and financial performance. Many states have
realized that the number of sites requiring remediation and the costs of
compliance are substantially higher than were originally estimated. As a
result, several states have relaxed enforcement activities and others
have reduced compliance requirements in order to reduce the costs of
cleanup. These factors have already resulted in lower levels of cleanup
activity in some states. Continued de-emphasis on enforcement activities
and/or further reductions in compliance requirements is having a material
adverse effect on the Company's business.
The Company depends on funding from the federal and state
governments, and their agencies and instrumentalities, for compensation
for its services. For example, Thermo NuTech provides a large portion of
its services directly or indirectly to the U.S. Department of Energy
(DOE) and the Company's consulting and design businesses perform
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THERMO TERRATECH INC.
Item 5 - Other Information (continued)
significant amounts of services for state and municipal government.
Thermo NuTech has experienced a decrease in its radiochemistry laboratory
work as a result of ongoing reductions in spending at the DOE as well as
a shift in DOE spending from investigative work to cleanup work.
Continued declines in spending by DOE and other governmental agencies
could have a material adverse effect on the Company's business.
Competition. The markets for many of the Company's services are
regional and are characterized by intense competition from numerous local
competitors. Some of the Company's competitors have greater technical and
financial resources than those of the Company. As a result, they may be
able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion
and sale of their services than the Company. Competition could increase
if new companies enter the market or if existing competitors expand their
service lines. There can be no assurance that the Company's current
technology, technology under development, or ability to develop new
technologies will be sufficient to enable it to compete effectively with
its competitors.
Seasonal Influences. A majority of the Company's businesses
experience seasonal fluctuations. A majority of the Company's
soil-remediation sites, as well as the Company's fluids-recycling sites,
experience declines in severe weather conditions. Site remediation work
and certain environmental testing services, such as the services provided
by ReTec, Killam Associates, IEM Sealand, and Thermo NuTech, may also
decline in winter months as a result of severe weather conditions. In
Europe, Thermo EuroTech may experience a decline in the feedstock
delivered to its facilities during winter months, due to frozen
waterways. The Company's operations were adversely affected by severe
weather in the last quarter of fiscal 1996.
Possible Obsolescence Due to Technological Change. Technological
developments are expected to continue at a rapid pace in the
environmental services industry. The Company's technologies could be
rendered obsolete or uneconomical by technological advances by one or
more companies that address the Company's markets or by future entrants
into the industry. There can be no assurance that the Company would have
the resources to, or otherwise would be successful in, developing
responses to technological advances by others.
Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses that complement or augment the
Company's existing services. Promising acquisitions are difficult to
identify and complete for a number of reasons, including competition
among prospective buyers and the need for regulatory approvals, including
antitrust approvals. Any acquisitions completed by the Company may be
made at substantial premiums over the fair value of the net assets of the
acquired companies. There can be no assurance that the Company will be
able to complete future acquisitions or that the Company will be able to
successfully integrate any acquired businesses. In order to finance such
acquisitions, it may be necessary for the Company to raise additional
funds through public or private financings. Any equity or debt financing,
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THERMO TERRATECH INC.
Item 5 - Other Information (continued)
if available at all, may be on terms which are not favorable to the
Company and, in the case of equity financing, may result in dilution to
the Company's stockholders.
Risks Associated with Spin-Out of Subsidiaries. The Company has
adopted a strategy of spinning out certain of its businesses into
separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. As a result of the sale of stock by
subsidiaries, the issuance of stock by subsidiaries upon conversion of
convertible debentures and similar transactions, the Company records
gains that represent the increase in the Company's net investment in the
subsidiaries. These gains have represented a substantial portion of the
net income reported by the Company in certain periods. The size and
timing of these transactions are dependent on market and other conditions
that are beyond the Company's control. Accordingly, there can be no
assurance that the Company will be able to generate gains from such
transactions in the future.
In addition, in October 1995, the Financial Accounting Standards
Board ("FASB") issued an exposure draft of a Proposed Statement of
Financial Accounting Standards, "Consolidated Financial Statements:
Policy and Procedures" (the "Proposed Statement"). The Proposed Statement
would establish new rules for how consolidated financial statements
should be prepared. If the Proposed Statement is adopted, there could be
significant changes in the way the Company records certain transactions
of its controlled subsidiaries. Among those changes, any sale of the
stock of a subsidiary that does not result in a loss of control would be
accounted for as a transaction in equity of the consolidated entity with
no gain or loss being recorded. The FASB expects to issue a final
statement or a revised exposure draft in calendar 1997.
No Assurance of Development and Commercialization of Technology
Under Development. The Company is currently engaged in the development of
several technologies which may ultimately be commercialized to provide
services to customers. For example, the Company's Thermo Fluids division
is currently engaged in developing technology to enhance the quality of
the fuel oils produced in its fluids recycling business. There are a
number of technological challenges that the Company must successfully
address to complete any of its development efforts. Technology
development involves a high degree of risk, and returns to investors are
dependent upon successful development and commercialization of such
technology. There can be no assurance that any of the technology
currently being developed by the Company, or those to be developed in the
future by the Company, will be technologically feasible or accepted by
the marketplace, or that any such development will be completed in any
particular timeframe.
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
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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 1st day of November
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
20PAGE
THERMO TERRATECH INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Page
----------------------------------------------------------------------
3 Certificate of Amendment to Certificate of
Incorporation filed with Secretary of State
of Delaware on October 31, 1996.
10.1 Stock Holdings Assistance Plan and Form of
Promissory Note.
10.2 Stock Purchase Agreement between the Thermo
Electron Companies Inc. and Thermo TerraTech
Inc. dated October 30, 1996.
11 Statement re: Computation of earnings per share.
27 Financial Data Schedule.