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 April 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-10573
THERMO POWER CORPORATION
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2891371
(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 April 30, 1999
Common Stock, $.10 par value 11,878,520
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO POWER CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
April 3, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents $ 15,040 $22,240
Available-for-sale investments, at quoted market value (amortized cost - 4,018
of $4,017)
Accounts receivable, less allowances of $9,634 and $10,299 56,281 52,098
Unbilled contract costs and fees 6,952 10,718
Inventories:
Raw materials 20,382 21,549
Work in process 11,133 14,422
Finished goods 7,851 8,013
Prepaid income taxes 10,998 11,205
Net assets of discontinued operations (Note 4) - 8,525
Other current assets (Note 4) 3,804 2,421
Due from parent company and affiliated companies - 732
-------- --------
132,441 155,941
-------- --------
Rental Assets, at Cost 15,274 14,884
Less: Accumulated depreciation and amortization 5,131 4,766
-------- --------
10,143 10,118
-------- --------
Property, Plant, and Equipment, at Cost 34,627 34,433
Less: Accumulated depreciation and amortization 10,969 9,562
-------- --------
23,658 24,871
-------- --------
Other Assets 283 282
-------- --------
Cost in Excess of Net Assets of Acquired Companies 157,844 160,423
-------- --------
$324,369 $351,635
======== ========
2
THERMO POWER CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, October 3,
(In thousands except share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 2,030 $ 396
Accounts payable 28,918 30,899
Accrued payroll and employee benefits 8,030 7,885
Billings in excess of contract costs and fees 6,857 8,517
Accrued income taxes 9,415 10,048
Accrued warranty costs 5,767 6,293
Common stock of subsidiary subject to redemption ($1,380 and $18,450 1,380 18,372
redemption value)
Accrued acquisition expenses (Note 5) 10,185 11,083
Other accrued expenses (Notes 4 and 6) 24,122 26,686
Due to parent company and affiliated companies 798 -
-------- --------
97,502 120,179
-------- --------
Deferred Income Taxes 877 1,093
-------- --------
Long-term Obligations (includes $160,000 due to parent company; Note 7) 160,393 160,499
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 30,000,000 shares authorized; 1,249 1,249
12,493,371 shares issued
Capital in excess of par value 55,491 55,401
Retained earnings 15,415 16,147
Treasury stock at cost, 622,851 and 663,208 shares (4,322) (4,600)
Accumulated other comprehensive items (Note 2) (2,236) 1,667
-------- --------
65,597 69,864
-------- --------
$324,369 $351,635
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO POWER CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Revenues $61,181 $62,005
------- -------
Costs and Operating Expenses:
Cost of revenues 45,298 45,774
Selling, general, and administrative expenses 13,550 12,760
Research and development expenses 1,630 2,554
Restructuring costs (Note 6) 701 -
------- -------
61,179 61,088
------- -------
Operating Income 2 917
Interest Income 38 668
Interest Expense (includes $2,037 and $2,314 to related party) (2,160) (2,636)
------- -------
Loss from Continuing Operations Before Income Taxes and Minority Interest (2,120) (1,051)
Provision (Benefit) for Income Taxes (416) 5
Minority Interest Expense - 78
------- -------
Loss from Continuing Operations (1,704) (1,134)
Loss from Discontinued Operations (Note 4) - (154)
------- -------
Net Loss $(1,704) $(1,288)
======= =======
Basic and Diluted Loss per Share from Continuing Operations (Note 3) $ (.14) $ (.10)
======= =======
Basic and Diluted Loss per Share (Note 3) $ (.14) $ (.11)
======= =======
Basic and Diluted Weighted Average Shares (Note 3) 11,843 11,802
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO POWER CORPORATION
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $137,442 $120,701
-------- --------
Costs and Operating Expenses:
Cost of revenues 100,369 86,557
Selling, general, and administrative expenses 28,956 25,543
Research and development expenses 3,411 4,184
Restructuring costs (Note 6) 701 -
-------- --------
133,437 116,284
-------- --------
Operating Income 4,005 4,417
Interest Income (includes $180 from related party in fiscal 1998) 367 1,257
Interest Expense (includes $4,205 and $3,489 to related party) (4,463) (4,061)
-------- --------
Income (Loss) from Continuing Operations Before Income Taxes and Minority (91) 1,613
Interest
Provision for Income Taxes 563 1,200
Minority Interest Expense 78 267
-------- --------
Income (Loss) from Continuing Operations (732) 146
Loss from Discontinued Operations (Note 4) - (379)
-------- --------
Net Loss $ (732) $ (233)
======== ========
Basic and Diluted Earnings (Loss) per Share from Continuing Operations $ (.06) $ .01
========= ========
(Note 3)
Basic and Diluted Loss per Share (Note 3) $ (.06) $ (.02)
======== ========
Basic and Diluted Weighted Average Shares (Note 3) 11,837 11,850
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO POWER CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Operating Activities:
Net loss $ (732) $ (233)
Adjustment to reconcile net loss to income (loss) from continuing operations:
Loss from discontinued operations (Note 4) - 379
---------- ---------
Income (loss) from continuing operations (732) 146
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by operating activities of continuing operations:
Depreciation and amortization 5,219 5,036
Provision for losses on accounts receivable 384 158
Restructuring costs (Note 6) 701 -
Minority interest expense 78 267
Change in deferred income taxes - (1,814)
Other noncash items - 75
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable (5,943) (338)
Inventories 2,666 8,364
Unbilled contract costs and fees 3,619 1,191
Other current assets 384 (468)
Accounts payable 974 (2,918)
Other current liabilities (4,402) (6,171)
---------- ---------
Net cash provided by continuing operations 2,948 3,528
Net cash provided by discontinued operations 1,077 2,977
---------- ---------
Net cash provided by operating activities 4,025 6,505
---------- ---------
Investing Activities:
Acquisitions, net of cash acquired (1,587) (148,854)
Proceeds from sale of a business (Note 4) 6,393 -
Proceeds from sale of a business to related party - 19,117
Proceeds from sale and maturities of available-for-sale investments 4,018 5,011
Purchases of property, plant, and equipment (2,319) (2,876)
Proceeds from sale of property, plant and equipment 292 1,305
Increase in rental assets (1,142) (1,035)
Proceeds from sale of rental assets 607 619
Other 45 (777)
---------- ---------
Net cash provided by (used in) continuing operations 6,307 (127,490)
Net cash used in discontinued operations - (54)
---------- ---------
Net cash provided by (used in) investing activities $ 6,307 $(127,544)
---------- ---------
6
THERMO POWER CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Financing Activities:
Redemption of subsidiary common stock $ (17,070) $ -
Issuance of long-term obligation to parent company - 160,000
Decrease in short-term obligations (70) (27,823)
Purchases of Company common stock - (1,380)
Net proceeds from issuance of Company common stock 368 475
Repayment of long-term obligations (108) (103)
---------- ----------
Net cash provided by (used in) financing activities of (16,880) 131,169
---------- ---------
continuing operations
Exchange Rate Effect on Cash (652) 320
---------- ---------
Increase (Decrease) in Cash and Cash Equivalents (7,200) 10,450
Cash and Cash Equivalents at Beginning of Period 22,240 19,347
---------- ---------
Cash and Cash Equivalents at End of Period $ 15,040 $ 29,797
========== =========
Noncash Activities:
Fair value of assets of acquired companies $ 1,767 $ 271,109
Cash paid for acquired companies (1,587) (164,435)
Cash paid in prior year for acquired company - (2,301)
---------- ---------
Liabilities assumed of acquired companies $ 180 $ 104,373
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
THERMO POWER CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Power Corporation (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 April 3, 1999, the results of
operations for the three- and six-month periods ended April 3, 1999, and April
4, 1998, and the cash flows for the six-month periods ended April 3, 1999, and
April 4, 1998. The Company's results of operations for the six-month periods
ended April 3, 1999, and April 4, 1998, include 26 weeks and 27 weeks,
respectively. In addition, prior period amounts have been reclassified to
conform to the presentation in the current financial statements and to classify
the results of the Company's Engines segment as discontinued operations (Note
4). Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of October 3, 1998, 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, as amended, for the fiscal year ended
October 3, 1998, filed with the Securities and Exchange Commission.
Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including foreign currency
translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the second quarter of fiscal 1999 and
1998, the Company had a comprehensive loss of $4,582,000 and $1,683,000,
respectively. During the first six months of fiscal 1999 and 1998, the Company
had a comprehensive loss of $4,635,000 and $514,000, respectively.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Six Months Ended
April 3, April 4, April 3, April 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Income (Loss) from Continuing Operations $(1,704) $(1,134) $ (732) $ 146
Loss from Discontinued Operations - (154) - (379)
------- ------- ------ -------
Net Loss $(1,704) $(1,288) $ (732) $ (233)
======= ======= ====== =======
Basic
Weighted Average Shares 11,843 11,802 11,837 11,850
------- ------- ------ -------
Basic Earnings (Loss) per Share:
Continuing operations $ (.14) $ (.10) $ (.06) $ .01
Discontinued operations - (.01) - (.03)
------- ------- ------ -------
$ (.14) $ (.11) $ (.06) $ (.02)
======= ======= ====== =======
8
3. Earnings (Loss) per Share (continued)
Three Months Ended Six Months Ended
April 3, April 4, April 3, April 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Diluted
Weighted Average Shares 11,843 11,802 11,837 11,850
Effect of Stock Options - - - 72
------ ------- ------ -------
Weighted Average Shares, as Adjusted for Continuing 11,843 11,802 11,837 11,922
Operations
Less:
Effect of Stock Options - - - (72)
------ ------- ------ -------
Weighted Average Shares, as Adjusted 11,843 11,802 11,837 11,850
------ ------- ------ -------
Diluted Earnings (Loss) per Share:
Continuing operations $ (.14) $ (.10) $ (.06) $ .01
Discontinued operations - (.01) - (.03)
------ ------- ------ -------
$ (.14) $ (.11) $ (.06) $ (.02)
====== ======= ====== =======
The computation of diluted loss per share for all periods excludes the
effect of assuming the exercise of outstanding stock options because the effect
would be antidilutive because of the Company's net loss. As of April 3, 1999,
there were 1,255,000 of such options outstanding, with exercise prices ranging
from $6.40 to $11.90 per share. The computation of diluted earnings per share
from continuing operations for the six-months ended April 4, 1998, excluded the
effect of certain outstanding stock options because the effect was antidilutive.
4. Discontinued Operations
During fiscal 1998, the Company adopted a plan to divest its Engines
segment, that consisted of its Crusader Engines division. In accordance with the
provisions of Accounting Principles Board Opinion No. 30 concerning reporting
the effect of disposal of a segment of a business, the results of operations of
the Engines segment have been classified as discontinued in the accompanying
statement of operations for fiscal 1998, and have been recorded as a reduction
of previously established reserves in fiscal 1999. The Engines segment had
revenues through the date of disposition and a net loss for the first six months
of fiscal 1999 of $2,695,000 and $365,000, respectively. The revenues and net
loss from the Engines segment for the first six months of fiscal 1998 were
$11,415,000 and $379,000, respectively. The reserve for estimated losses on
disposal of discontinued operations at October 3, 1998, totaled $993,000,
including $700,000 for estimated losses from operations of the Engines segment
through the expected date of disposition. During the first six months of fiscal
1999, the reserve was increased by a pretax gain on the sale of the net assets
of the industrial and marine engine product lines of $508,000, discussed below,
and was reduced by pretax operating losses of discontinued operations of
$571,000. The remaining reserve at April 3, 1999, was $973,000, primarily
representing continuing warranty obligations and a reserve for estimated losses
from operations as the Company winds down this business following its
divestiture. The tax effect on these items was recorded as an adjustment to
accrued income taxes. The reserve for estimated losses on disposal of
discontinued operations is included in other accrued expenses in the
accompanying balance sheet.
9
THERMO POWER CORPORATION
4. Discontinued Operations (continued)
In December 1998, the Company completed the sale of the industrial and
marine engine product lines of its Crusader Engines division to two unrelated
third parties. Such sale represents a complete divestiture of the Engines
segment. The aggregate sales price for the two product lines consisted of
$6,393,000 in cash, the assumption of certain liabilities of the Crusader
Engines division, and a receivable of $1,035,000. The receivable, which is
included in other current assets in the accompanying balance sheet, is due in
December 1999 and is secured by an irrevocable letter of credit. The sale of the
net assets of the two product lines resulted in a pretax gain of $508,000, which
was recorded as an increase in the reserve for estimated losses on disposal of
discontinued operations.
5. Accrued Acquisition Expenses
During fiscal 1998, in connection with its November 1997 acquisition of
Peek plc, the Company undertook a restructuring of the acquired business. The
restructuring activities were accounted for in accordance with Emerging Issues
Task Force Pronouncement (EITF) 95-3. At October 3, 1998, the Company had
finalized its plan for restructuring the acquired business and the remaining
reserve for these restructuring activities totaled $10,970,000. During the first
six months of fiscal 1999, the Company expended $885,000 for restructuring costs
relating to this acquisition, primarily for ongoing severance and
abandoned-facility payments. At April 3, 1999, the remaining reserve for
restructuring the Peek business was $10,029,000, including the impact of
currency translation, and is comprised of $6,830,000 for estimated costs for the
completion of acquired loss contracts at two business locations which the
Company intends to close, $1,835,000 for estimated losses on an acquired loss
contract at a business location the Company has closed, and $1,364,000 for
ongoing payments for abandoned facilities and severance.
6. Restructuring Costs
During the second quarter of fiscal 1999, the Company recorded
restructuring costs of $701,000 related to actions taken at its Peek subsidiary.
The restructuring costs, which were accounted for in accordance with EITF 94-3,
consisted of $389,000 related to severance costs for approximately 70 employees
across all functions, $222,000 for abandoned-facility payments related to the
consolidation of facilities, and an asset write-down of $90,000 related to the
consolidation of such facilities. The Company plans to complete its
restructuring plan by September 1999. As of April 3, 1999, the Company had
terminated 20 employees and had expended $71,000 of the reserve established for
severance. The remaining reserve of $532,000, as adjusted for the impact of
currency translation, is included in other accrued expenses in the accompanying
1999 balance sheet.
7. Promissory Note
The Company's $160.0 million promissory note to Thermo Electron
Corporation is due in November 1999. In February 1999, Thermo Electron issued a
commitment letter to the Company pursuant to which Thermo Electron has agreed to
refinance the promissory note at the option of the Company, on its maturity
date, with the net proceeds from its October 1998 offering of 7.625% Notes due
2008, and other available cash. In accordance with the commitment letter, the
new promissory note from the Company to Thermo Electron would be due in 2008 and
bear interest at a rate of 7.625%. The promissory note has been classified as
long-term in the accompanying fiscal 1999 balance sheet as a result of the
Company's ability and intent to refinance the $160.0 million promissory note at
maturity.
8. Proposed Merger
On May 5, 1999, the Company entered into a definitive agreement and plan
of merger with Thermo Electron, under which Thermo Electron would acquire all of
the outstanding shares of Company common stock held by minority shareholders.
The Board of Directors of the Company unanimously approved the merger agreement
based on a recommendation by a special committee of the Board of Directors,
consisting solely of outside directors of the Company. Under the terms of the
merger agreement, the Company would become a wholly owned subsidiary of
10
8. Proposed Merger (continued)
Thermo Electron. Each issued and outstanding share of Company common stock not
already owned by Thermo Electron would be converted into the right to receive
$12.00 in cash. Following the merger, the Company's common stock would cease to
be publicly traded. The completion of this merger is subject to 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 fourth quarter of 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, as
amended, for the fiscal year ended October 3, 1998, filed with the Securities
and Exchange Commission.
Overview
The Company's continuing operations are divided into three segments:
Traffic Control, Industrial Refrigeration Systems, and Cooling and Cogeneration
Systems. Through the Company's Peek subsidiary, acquired November 1997, the
Traffic Control segment develops, manufactures, markets, installs, and services
equipment to monitor and regulate traffic flow in cities and towns around the
world. Peek offers a wide range of products, including hardware, such as vehicle
detectors, counters, classifiers, traffic signals and controllers, video
cameras, and variable message signs, as well as traffic management systems that
integrate these products to ease roadway congestion, improve safety, and collect
data. Traffic management systems include variable message systems to advise
drivers of accidents and other roadway hazards, traffic signal-timing systems
that adapt continuously to changing conditions to minimize delays, parking
guidance systems, and public transportation-management systems that give buses
priority at intersections. The Company also offers high-resolution video
equipment to aid police officers in capturing the information necessary to
charge individuals with motor vehicle violations such as speeding and red light
violations.
Sales to governmental entities accounted for 26% of the Company's total
revenues in fiscal 1998, of which 92% related to sales to foreign governmental
entities. Sales to governmental entities related principally to the Traffic
Control segment and represented 39% of its revenues in fiscal 1998. In addition,
a significant portion of the Traffic Control segment's revenues are generated by
sales to distributors whose customers are governmental entities. A decrease in
demand from governmental entities could have an adverse effect on the Company's
business and future results of operations.
The quarterly revenues and income of the Traffic Control segment fluctuate
significantly based on funding patterns of governmental entities and
seasonality. As a result of these factors, Peek has historically experienced
higher sales and income in the first and third fiscal quarters and lower sales
and income in the second and fourth fiscal quarters. Additionally, a portion of
the Traffic Control segment's revenues result from the sale of large systems,
the timing of which can lead to variability in the Company's quarterly revenues
and income.
In fiscal 1998, approximately 44% of the Company's revenues originated
outside the U.S., principally in Europe, and approximately 8% of the Company's
revenues were exports from the U.S. Foreign divisions and subsidiaries
principally sell in their local currencies and generally seek to charge their
customers in the same currency as their operating costs. However, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations affecting the relationship between the U.S. dollar
and foreign currencies. The Company
11
Overview (continued)
seeks to reduce its exposure to currency fluctuations through the use of forward
contracts. Since the operations of the Traffic Control segment are conducted
principally in Europe, the Company's operating results could be adversely
affected by capital spending levels and economic conditions in Europe. In
addition, the Company's results of operations could be adversely affected by
possible costs related to the conversion to the Euro currency, which began on
January 1, 1999.
Through the Company's FES division, the Industrial Refrigeration Systems
segment supplies standard and custom-designed industrial refrigeration systems
used primarily by the food-processing, chemical, petrochemical, and
pharmaceutical industries. NuTemp, Inc. is a supplier of rental cooling and
industrial refrigeration equipment. The Company also offers custom-made and
remanufactured equipment for sale. NuTemp's industrial refrigeration equipment
is used primarily in the food-processing, chemical, petrochemical, and
pharmaceutical industries, and its commercial cooling equipment is used
primarily in institutions and commercial buildings, as well as by service
contractors. The demand for NuTemp's equipment is highest in the summer months
and can be adversely affected by cool summer weather.
The Cooling and Cogeneration Systems segment consists of the Company's
Tecogen division and the Company's ThermoLyte Corporation subsidiary. Tecogen
develops, markets, and services preassembled cooling and cogeneration systems
fueled principally by natural gas for sale to a wide range of commercial,
institutional, industrial, and multi-unit residential users. Certain
large-capacity cooling systems are manufactured for Tecogen by FES. Tecogen also
conducts research and development on natural gas-engine technology, applications
of thermal energy, and pollution-control technologies. ThermoLyte is developing
and commercializing various propane-powered lighting products. In July 1998,
ThermoLyte acquired the outstanding stock of Optronics, Inc. Optronics makes
over 400 lighting and associated products, including tail-lights and turn-signal
lights for trailers, portable lights for fishing and hunting, and docking
lights, and serves the automotive, sporting goods, and marine markets.
The Company's revenues by industry segment are:
Three Months Ended Six Months Ended
April 3, April 4, April 3, April 4,
(In thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------- ----------- ----------- ---------- ----------
Traffic Control $ 30,620 $ 38,983 $82,725 $ 77,735
Industrial Refrigeration Systems 20,897 18,387 37,726 35,396
Cooling and Cogeneration Systems 9,824 4,797 17,174 7,755
Intersegment Sales Elimination (160) (162) (183) (185)
--------- --------- -------- --------
$ 61,181 $ 62,005 $137,442 $120,701
========= ========= ======== ========
Results of Operations
Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998
Total revenues decreased to $61.2 million in the second quarter of fiscal
1999 from $62.0 million in the second quarter of fiscal 1998, primarily due to a
decrease in revenues at the Traffic Control segment of $8.4 million, which was
substantially offset by an increase in revenues at the Industrial Refrigeration
Systems segment and the Cooling and Cogeneration Systems segment. Revenues at
the Traffic Control segment decreased by $8.7 million, principally due to a
decrease in orders from governmental entities as a result of a reduction in
funding allocated to traffic control projects, primarily in the Netherlands,
Sweden, and the United Kingdom, and the divestiture and closure of certain Peek
businesses in fiscal 1998. The favorable effects of currency translation, due to
a decline in the value of the U.S. dollar relative to currencies in foreign
countries in which the Company operates, increased revenues at the Traffic
12
Second Quarter Fiscal 1999 Compared With Second Quarter Fiscal 1998 (continued)
Control segment by $0.3 million in fiscal 1999. Industrial Refrigeration Systems
segment revenues increased to $20.9 million in fiscal 1999 from $18.4 million in
fiscal 1998, primarily due to increased demand for custom-designed industrial
refrigeration packages at FES. Cooling and Cogeneration Systems segment revenues
increased to $9.8 million in fiscal 1999 from $4.8 million in fiscal 1998,
principally due to the inclusion of $3.7 million in revenues from Optronics,
acquired in July 1998, and increased demand for gas-fueled cooling systems.
The gross profit margin was unchanged at 26% in the second quarter of
fiscal 1999 and 1998. The gross profit margin at the Traffic Control segment
increased to 30% in fiscal 1999 from 29% in fiscal 1998, primarily due to
certain cost reduction programs implemented at its U.S. operations, including
improved outsourcing and purchasing techniques, offset in part by the effect of
a change in sales mix at its subsidiary located in the Netherlands. Changes in
gross profit margin from fiscal 1998 to fiscal 1999 at the Industrial
Refrigeration Systems segment and the Cooling and Cogeneration Systems segment
did not materially impact the Company's consolidated gross profit margin. The
impact of margin improvement at the Traffic Control segment on the Company's
consolidated gross profit margin was mitigated by the effect of proportionately
lower revenues from the higher-margin Traffic Control segment.
Selling, general, and administrative expenses as a percentage of revenues
increased to 22% in the second quarter of fiscal 1999 from 21% in the second
quarter of fiscal 1998, principally due to an increase at the Traffic Control
segment due to lower revenues.
Research and development expenses were $1.6 million in the second quarter
of fiscal 1999, compared with $2.6 million in the second quarter of fiscal 1998.
Research and development expenses decreased $0.6 million at the Traffic Control
segment primarily due to a decline in consulting costs at its subsidiary located
in the Netherlands. In addition, research and development expenses at the
Cooling and Cogeneration segment decreased due to a reduction in spending on
natural gas-engine products and propane-powered lighting products due to the
completion of a phase of development efforts for these products.
The Company recorded restructuring costs of $0.7 million in the second
quarter of fiscal 1999 at the Traffic Control segment, primarily for severance
and abandoned facility-payments relating to the consolidation of facilities at
Peek (Note 6).
Interest income decreased by $0.6 million in the second quarter of fiscal
1999 principally due to lower average invested balances resulting from the use
of cash to redeem ThermoLyte common stock in fiscal 1999 and to fund
acquisitions and repay short-term obligations assumed in connection with the
Peek acquisition in fiscal 1998. Interest expense decreased to $2.2 million in
the second quarter of fiscal 1999 from $2.6 million in the second quarter of
fiscal 1998, principally due to the repayment in fiscal 1998 of short-term
obligations assumed in connection with the Peek acquisition and the effect of
lower interest rates.
The Company recorded a tax benefit at an effective rate of 20% in the
second quarter of fiscal 1999. The effective tax rate was below the statutory
federal income tax rate principally due to the effect of $1.0 million of
nondeductible amortization of cost in excess of net assets of acquired
companies. The Company recorded a tax provision of $5,000 in the second quarter
of fiscal 1998 on a pretax loss of $1.1 million, principally due to the effect
of $1.0 million of nondeductible amortization of cost in excess of net assets of
acquired companies, and an increase in the valuation allowance on net operating
loss carryforwards and other tax assets at the Company's ThermoLyte subsidiary.
Minority interest expense of $0.1 million in the second quarter of fiscal
1998 represents the accretion of ThermoLyte common stock subject to redemption,
which was accreted to its full redemption value in December 1998.
In accordance with the provisions of Accounting Principles Board Opinion
No. 30 concerning reporting the effect of disposal of a segment of a business,
the results of operations of the Engines segment have been classified as
discontinued in the accompanying statement of operations for fiscal 1998, and
have been recorded as a reduction of previously established reserves in fiscal
1999 (Note 4). The loss from discontinued operations was $0.1 million in the
second quarter of fiscal 1999 and $0.2 million in the second quarter of fiscal
1998.
13
First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998
Total revenues increased to $137.4 million in the first six months of
fiscal 1999 from $120.7 million in the first six months of fiscal 1998,
primarily due to the inclusion of $6.2 million in revenues from Optronics,
acquired in July 1998, and an increase in revenues at the Traffic Control
segment of $5.0 million. Revenues increased at the Traffic Control segment in
fiscal 1999 due to a $12.6 million increase in the first quarter of fiscal 1999,
which was due to the inclusion of revenues from Peek plc, acquired in November
1997, for the full three-month period. This increase was offset in part by a
decrease of $8.7 million in the second quarter of fiscal 1999 for the reasons
discussed in the results of operations for the second quarter. In addition, the
favorable effects of currency translation increased revenues at the Traffic
Control segment by $1.1 million. Industrial Refrigeration Systems segment
revenues increased to $37.7 million in fiscal 1999 from $35.4 million in fiscal
1998 primarily due to increased demand for custom-designed industrial
refrigeration packages at FES. Cooling and Cogeneration Systems segment revenues
increased to $17.2 million in fiscal 1999 from $7.8 million in fiscal 1998,
principally due to the inclusion of revenues from Optronics and increased demand
for gas-fueled cooling systems.
The gross profit margin decreased to 27% in the first six months of fiscal
1999 from 28% in the first six months of fiscal 1998, principally due to a
decrease at the Traffic Control segment. The gross profit margin at the Traffic
Control segment decreased to 30% in fiscal 1999 from 32% in fiscal 1998,
primarily due to a change in sales mix at its subsidiary located in the
Netherlands, offset in part by margin improvement at its U.S. operations. The
fiscal 1998 gross profit margin included a $0.9 million charge relating to the
sale of inventories revalued at the date of the acquisition of Peek. Changes in
gross profit margin from fiscal 1998 to fiscal 1999 at the Industrial
Refrigeration Systems segment and the Cooling and Cogeneration Systems segment
did not materially impact the Company's consolidated gross profit margin. The
effect of a decrease in the gross profit margin at the Traffic Control segment
on the Company's consolidated gross profit margin was mitigated in part by the
effect of an increase in revenues from the higher-margin Traffic Control
segment.
Selling, general, and administrative expenses as a percentage of revenues
were unchanged at 21% in the first six months of fiscal 1999 and 1998. Selling,
general, and administrative expenses increased to $29.0 million in fiscal 1999
from $25.5 million in fiscal 1998, principally due to an increase in expenses at
the Cooling and Cogeneration segment, due to the inclusion of expenses from
Optronics, and an increase in expenses at the Traffic Control segment. The
increase in selling, general, and administrative expenses at the Traffic Control
segment was due to the inclusion of expenses from Peek for the full six-month
period, and was offset in part by the effect of efforts to reduce expenses at
that business.
Research and development expenses decreased to $3.4 million in the first
six months of fiscal 1999 from $4.2 million in the first six months of fiscal
1998, primarily due to reduced spending at the Cooling and Cogeneration segment
on natural gas-engine products and propane-powered lighting products, due to the
completion of a phase of development efforts for these products. In addition, an
increase in research and development expenses at the Traffic Control segment due
to the inclusion of expenses from Peek for the full six-month period in fiscal
1999, was offset by a decrease in research and development expenses at this
segment for the reason discussed in the results of operations for the second
quarter.
The Company recorded restructuring costs of $0.7 million in the first six
months of fiscal 1999 for the reasons discussed in the results of operations for
the second quarter.
Interest income decreased to $0.4 million in the first six months of
fiscal 1999 from $1.3 million in the first six months of fiscal 1998,
principally for the reasons discussed in the results of operations for the
second quarter. Interest expense increased to $4.5 million in the first six
months of fiscal 1999 from $4.1 million in the first six months of fiscal 1998,
principally due to borrowings from Thermo Electron to finance the November 1997
acquisition of Peek, offset in part by a reduction in interest expense for the
reasons discussed in the results of operations for the second quarter.
14
First Six Months Fiscal 1999 Compared With First Six Months Fiscal 1998
(continued)
The Company recorded a tax provision of $0.6 million in the first six
months of fiscal 1999 on a pretax loss of $0.1 million, principally due to the
effect of $2.0 million of nondeductible amortization of cost in excess of net
assets of acquired companies. The Company recorded a tax provision of $1.2
million in the first six months of fiscal 1998 on pretax income of $1.6 million,
principally due to the effect of $1.7 million of nondeductible amortization of
cost in excess of net assets of acquired companies, and an increase in the
valuation allowance on net operating loss carryforwards and other tax assets at
the Company's ThermoLyte subsidiary.
Minority interest expense was $0.1 million in the first six months of
1999, compared with $0.3 million in the first six months of 1998. Minority
interest expense primarily represents accretion of ThermoLyte common stock
subject to redemption, which was accreted to its full redemption value in
December 1998. In addition, the fiscal 1998 period also includes minority
interest expense on Peek's earnings for the period from November 1997 to January
1998, prior to Peek becoming a wholly owned subsidiary of the Company.
In accordance with the provisions of Accounting Principles Board Opinion
No. 30 concerning reporting the effect of disposal of a segment of a business,
the results of operations of the Engines segment have been classified as
discontinued in the accompanying statement of operations for fiscal 1998, and
have been recorded as a reduction of previously established reserves in fiscal
1999 (Note 4). The loss from discontinued operations was $0.4 million in each of
the first six months of fiscal 1999 and 1998.
Liquidity and Capital Resources
Consolidated working capital was $34.9 million at April 3, 1999, compared
with $35.8 million at October 3, 1998. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $15.0 million at April
3, 1999, compared with $26.3 million at October 3, 1998. At April 3, 1999, $12.4
million of the Company's cash and cash equivalents was held by its foreign
subsidiaries. While this cash can be used outside of the United States,
repatriation of this cash into the U. S. would be subject to a U. S. tax.
During the first six months of fiscal 1999, $4.0 million of cash was
provided by operating activities, which consisted of $2.9 million provided by
continuing operations and $1.1 million provided by discontinued operations. Cash
provided by continuing operations was reduced by an increase in accounts
receivable of $5.9 million and a decrease in other current liabilities of $4.4
million, principally due to a decrease in billings in excess of contract costs
and fees. Accounts receivable increased primarily due to the timing of shipments
at FES and Tecogen and the timing of customer payments at Tecogen and Peek,
offset in part by the effect of lower revenues at Peek. Cash provided by
continuing operations was improved by a decrease in inventories of $2.7 million
and a decrease in unbilled costs and fees of $3.6 million. The reduction in
inventories was due to a decrease in inventories at the Traffic Control segment,
primarily in the United Kingdom and the Netherlands as a result of implementing
programs to reduce inventory levels and in response to declines in revenues at
these locations. The decrease in inventories at the Traffic Control business was
offset in part by an increase in inventories at the Industrial Refrigeration
Systems segment and the Cooling and Cogeneration Systems segment to meet
expected future demand. The change in billings in excess of contract costs and
fees and unbilled contract costs and fees was due to the timing of billings and
completion of contracts.
During the first six months of fiscal 1999, the Company's primary
investing activities, excluding available-for-sale investments activity,
included the sale of the industrial and marine engine product lines of its
Crusader Engines division for $6.4 million in cash and a receivable of $1.0
million (Note 4), and the acquisition of Linne Trafiksystem AB, acquired in
December 1998, for $1.6 million in cash. In addition, the Company expended $3.5
million for purchases of property, plant, and equipment and rental assets, and
received $0.9 million in proceeds from the sale of property, plant, and
equipment and rental assets. During the remainder of fiscal 1999, the Company
expects to make capital expenditures for the purchase of property, plant, and
equipment and rental assets of approximately $6 million.
15
Liquidity and Capital Resources (continued)
The Company's financing activities used $16.9 million of cash during the
first six months of fiscal 1999, principally to purchase $17.1 million of
ThermoLyte's common stock subject to redemption, which was redeemed in December
1998. The remaining liability for redeemable common stock of ThermoLyte, which
is $1.4 million, is included in working capital at April 3, 1999. The remaining
ThermoLyte shares are redeemable at the option of the holder in December 1999.
The Company's ownership of ThermoLyte increased to 98% following the December
1998 redemption.
The Company's $160.0 million promissory note to Thermo Electron is due in
November 1999. Thermo Electron has issued a commitment letter to the Company
pursuant to which Thermo Electron has agreed to refinance the promissory note at
the option of the Company, on its maturity date, with the net proceeds from its
October 1998 offering of 7.625% Notes due 2008, and other available cash (Note
7). In accordance with the commitment letter, the new promissory note from the
Company to Thermo Electron would be due in 2008 and bear interest at a rate of
7.625%. The Company's Board of Directors has authorized additional borrowings of
up to $10 million from Thermo Electron to fund working capital requirements and
Thermo Electron has expressed its willingness to lend such funds. The Company
believes its existing resources, together with the funding expected from Thermo
Electron as described above, are sufficient to meet the capital requirements of
its existing operations for the foreseeable future.
Year 2000
The following constitutes a "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act. The Company continues to
assess the potential impact of the year 2000 date recognition issue on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) testing and developing upgrades, if
necessary, for the Company's current products and certain discontinued products;
(iii) assessing the year 2000 readiness of its key suppliers and vendors to
determine their year 2000 compliance status; and (iv) developing a contingency
plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company's efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. The Company is currently in phase two of its
program, during which any material noncompliant information technology systems
or facilities that were identified during phase one are prioritized and
remediated. Based on its evaluations, the Company does not believe it is
required to make any material upgrades to its critical facilities. The Company
is currently upgrading or replacing its material noncompliant information
technology systems, and this process was approximately 70% complete as of April
3, 1999. The Company expects that all of its material information technology
systems and critical facilities will be year 2000 compliant by October 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company
16
Year 2000 (continued)
is continuing to test and evaluate such products. The Company is focusing its
efforts on products that are still under warranty, early in their expected life,
and/or may pose a safety risk. The Company is offering upgrades and/or
identifying potential solutions where reasonably practicable.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and distributed questionnaires relating to year 2000 compliance to its
significant suppliers and vendors. To date, no significant supplier or vendor
has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company has started to follow-up with
significant suppliers and vendors that have not responded to the Company's
questionnaires. The Company has completed the majority of its assessment of
third-party risk, and expects to be substantially completed by August 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $1.4 million as of April 3, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $2.6 million. Of the external costs incurred as of April 3, 1999,
approximately $0.7 million had been spent on testing and upgrading information
technology systems. In fiscal year 1998, approximately 25% of the Company's
total information technology budget was spent on the year 2000 issue. In
addition, as of April 3, 1999, $0.6 million had been spent on testing and
upgrading products and $0.1 million had been spent to test and upgrade
facilities. Year 2000 costs were funded from working capital. All internal costs
and related external costs, other than capital additions related to year 2000
remediation, have been and will continue to be expensed as incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and would be unable to provide materials and services to the Company on time.
The Company's operations could be delayed or temporarily shut down, and it could
be unable to meet its obligations to customers in a timely fashion. The
Company's business, operations, and financial condition could be adversely
affected in amounts that cannot be reasonably estimated at this time. If the
Company believes that any of its key suppliers or vendors may not be year 2000
compliant, it will seek to identify and secure other suppliers or vendors as
part of its contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate
17
Year 2000 (continued)
using, third-party software or hardware. In addition, certain of the Company's
older products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. As discussed above, if any of
the Company's material suppliers or vendors experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected. If
any countries in which the Company operates experience significant year 2000
disruption, the Company could also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a material adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates and interest rates has not changed materially from its exposure
at fiscal year-end 1998.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On March 10, 1999, at the Annual Meeting of Shareholders, the shareholders
elected eight incumbent directors to a one-year term expiring in 2000. The
directors reelected at the meeting were: Marshall J. Armstrong, Frank Borman, J.
Timothy Corcoran, Peter O. Crisp, John N. Hatsopoulos, Brian D. Holt, Donald E.
Noble, and John J. Setnicka. Mr. Armstrong, Mr. Holt, and Mr. Noble each
received 11,508,257 shares voted in favor of his election and 41,153 shares
voted against; Col. Borman and Mr. Hatsopoulos each received 11,508,357 shares
voted in favor of his election and 41,053 shares voted against; Mr. Corcoran
received 11,508,457 shares voted in favor of his election and 40,953 shares
voted against; and Mr. Crisp and Mr. Setnicka each received 11,508,557 shares
voted in favor of his election and 40,853 shares voted against. No abstentions
or broker nonvotes were recorded on the election of directors.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding the exhibits.
(b) Reports on Form 8-K
None.
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 13th day of May 1999.
THERMO POWER CORPORATION
/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
2.1 Agreement and Plan of Merger dated May 5, 1999, by and among
Thermo Electron Corporation, TP Acquisition Corporation, and the
Company.
27 Financial Data Schedule.