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 July 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-11406
THERMO FIBERTEK INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1762325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Winter Street
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 30, 1999
Common Stock, $.01 par value 61,171,293
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO FIBERTEK INC.
Consolidated Balance Sheet
(Unaudited)
Assets
July 3, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Assets:
Cash and cash equivalents (includes $74,447 under repurchase agreement $ 41,219 $115,472
with parent company in fiscal 1998)
Advance to affiliate (Note 8) 84,870 -
Available-for-sale investments, at quoted market value (amortized cost 45,987 48,206
of $46,034 and $48,210)
Accounts receivable, less allowances of $2,039 and $2,231 42,531 50,281
Unbilled contract costs and fees 4,514 2,968
Inventories:
Raw materials and supplies 12,277 14,848
Work in process 4,561 5,341
Finished goods 10,709 10,435
Prepaid income taxes 6,819 6,806
Other current assets 894 1,935
-------- --------
254,381 256,292
-------- --------
Property, Plant, and Equipment, at Cost 65,528 68,661
Less: Accumulated depreciation and amortization 35,588 36,925
-------- --------
29,940 31,736
-------- --------
Other Assets (Note 7) 16,310 12,309
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 5) 123,479 126,763
-------- --------
$424,110 $427,100
======== ========
2
THERMO FIBERTEK INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 3, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Liabilities:
Notes payable and current maturities of long-term obligation (Note 5) $ 563 $ -
Accounts payable 17,137 21,548
Accrued payroll and employee benefits 6,952 10,273
Billings in excess of contract costs and fees 2,009 5,846
Accrued warranty costs 4,979 5,830
Customer deposits 2,713 3,154
Accrued income taxes 6,666 2,810
Accrued interest 3,155 3,136
Other accrued expenses (Notes 5 and 6) 10,703 8,970
Due to parent company and affiliated companies 1,200 1,279
-------- --------
56,077 62,846
-------- --------
Deferred Income Taxes and Other Deferred Items 6,319 6,202
-------- --------
Long-term Obligations:
Subordinated convertible debentures 153,000 153,000
Note payable (Note 5) 1,350 -
-------- --------
154,350 153,000
-------- --------
Minority Interest 300 303
-------- --------
Common Stock of Subsidiary Subject to Redemption ($51,311 and 50,178 53,801
$54,762 redemption value)
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 150,000,000 shares authorized; 635 634
63,515,987 and 63,379,337 shares issued
Capital in excess of par value 77,157 78,731
Retained earnings 111,841 100,602
Treasury stock at cost, 2,345,758 and 2,238,830 shares (21,435) (21,286)
Deferred compensation (81) -
Accumulated other comprehensive items (Note 2) (11,231) (7,733)
-------- --------
156,886 150,948
-------- --------
$424,110 $427,100
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO FIBERTEK INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $53,549 $63,583
------- -------
Costs and Operating Expenses:
Cost of revenues 31,485 37,464
Selling, general, and administrative expenses 15,154 15,472
Research and development expenses 1,842 1,757
------- ------
48,481 54,693
------- ------
Operating Income 5,068 8,890
Interest Income 2,041 2,102
Interest Expense (1,845) (1,847)
------- ------
Income Before Provision for Income Taxes and Minority Interest 5,264 9,145
Provision for Income Taxes 2,008 3,552
Minority Interest Expense 245 265
------- ------
Net Income $ 3,011 $5,328
======= ======
Earnings per Share (Note 3):
Basic $ .05 $ .09
======= ======
Diluted $ .05 $ .08
======= ======
Weighted Average Shares (Note 3):
Basic 61,168 61,805
======= ======
Diluted 61,555 75,281
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO FIBERTEK INC.
Consolidated Statement of Income
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $113,772 $125,913
-------- --------
Costs and Operating Expenses:
Cost of revenues 68,272 74,516
Selling, general, and administrative expenses 30,651 31,716
Research and development expenses 3,660 3,624
Gain on sale of business (Note 5) (11,099) -
Restructuring and nonrecurring costs (Note 6) 3,383 -
-------- --------
94,867 109,856
-------- --------
Operating Income 18,905 16,057
Interest Income 4,007 4,084
Interest Expense (3,695) (3,708)
-------- --------
Income Before Provision for Income Taxes and Minority Interest 19,217 16,433
Provision for Income Taxes 7,493 6,386
Minority Interest Expense 485 468
-------- --------
Net Income $ 11,239 $ 9,579
======== ========
Earnings per Share (Note 3):
Basic $ .18 $ .16
======== ========
Diluted $ .18 $ .15
======== ========
Weighted Average Shares (Note 3):
Basic 61,185 61,683
======== ========
Diluted 74,237 62,638
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO FIBERTEK INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 11,239 $ 9,579
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,710 4,447
Provision for losses on accounts receivable 5 59
Minority interest expense 485 468
Gain on sale of business (Note 5) (11,099) -
Noncash restructuring and nonrecurring costs (Note 6) 470 -
Other noncash items 17 207
Changes in current accounts, excluding the effects of acquisition:
Accounts receivable 3,619 5,497
Inventories and unbilled contract costs and fees (944) (630)
Prepaid income taxes and other current assets 663 1,239
Accounts payable (2,949) (3,823)
Other current liabilities (445) (299)
-------- -------
Net cash provided by operating activities 5,771 16,744
-------- -------
Investing Activities:
Acquisition, net of cash acquired (Note 5) (2,447) -
Proceeds from sale of business, net of cash divested (Note 5) 13,537 -
Refund of acquisition purchase price (Note 5) 377 -
Advances to affiliate, net (Note 8) (84,870) -
Purchases of available-for-sale investments (56,325) (23,150)
Proceeds from sale and maturities of available-for-sale investments 57,827 23,311
Purchases of property, plant, and equipment (1,878) (4,534)
Advances under notes receivable - (2,910)
Other 243 174
-------- -------
Net cash used in investing activities (73,536) (7,109)
-------- -------
Financing Activities:
Purchases of Company and subsidiary common stock (4,109) -
Purchases of subsidiary common stock from Thermo Electron (2,227) -
Net proceeds from issuance of Company common stock 417 272
-------- -------
Net cash provided by (used in) financing activities $ (5,919) $ 272
-------- -------
6
THERMO FIBERTEK INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Exchange Rate Effect on Cash $ (569) $ (462)
-------- -------
Increase (Decrease) in Cash and Cash Equivalents (74,253) 9,445
Cash and Cash Equivalents at Beginning of Period 115,472 111,648
-------- -------
Cash and Cash Equivalents at End of Period $ 41,219 $121,093
======== ========
Noncash Activities (Note 5):
Fair value of assets of acquired company $ 4,700 $ -
Cash paid for acquired company (2,500) -
Note payable for acquired company (1,730) -
-------- -------
Liabilities assumed of acquired company $ 470 $ -
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Fibertek Inc. (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at July 3, 1999, the results of
operations for the three- and six-month periods ended July 3, 1999, and July 4,
1998, and the cash flows for the six-month periods ended July 3, 1999, and July
4, 1998. Interim results are not necessarily indicative of results for a full
year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the second quarter of 1999 and 1998, the
Company had comprehensive income of $1,095,000 and $5,209,000, respectively.
During the first six months of 1999 and 1998, the Company had comprehensive
income of $7,748,000 and $8,854,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $3,011 $ 5,328 $11,239 $ 9,579
------ ------- ------- -------
Weighted Average Shares 61,168 61,805 61,185 61,683
------ ------- ------ -------
Basic Earnings per Share $ .05 $ .09 $ .18 $ .16
====== ======= ====== =======
8
3. Earnings per Share (continued)
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Diluted
Net Income $3,011 $ 5,328 $11,239 $ 9,579
Effect of:
Convertible obligations - 1,033 2,066 -
Majority-owned subsidiary's dilutive securities (15) - (40) (9)
------ ------- ------- -------
Income Available to Common Shareholders, as Adjusted $2,996 $ 6,361 $13,265 $ 9,570
------ ------- ------- -------
Weighted Average Shares 61,168 61,805 61,185 61,683
Effect of:
Convertible obligations - 12,645 12,645 -
Stock options 387 831 407 955
------ ------- ------ -------
Weighted Average Shares, as Adjusted 61,555 75,281 74,237 62,638
------ ------- ------ -------
Diluted Earnings per Share $ .05 $ .08 $ .18 $ .15
====== ======= ====== =======
The computation of diluted earnings per share for all periods excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of July 3, 1999, there were 894,000 of such
options outstanding, with exercise prices ranging from $7.46 to $14.32 per
share.
In addition, the computation of diluted earnings per share for the three
months ended July 3, 1999, and the six months ended July 4, 1998, excludes the
effect of assuming the conversion of the Company's $153,000,000 principal amount
of 4 1/2% subordinated convertible debentures, convertible at $12.10 per share,
because the effect would be antidilutive.
4. Business Segment Information
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
Pulp and Papermaking Equipment and Systems $ 51,296 $ 56,791 $107,694 $112,172
Dryers and Pollution-control Equipment (a) - 5,818 1,802 11,836
Water- and Fiber-recovery Services and Products 2,253 1,317 4,327 2,660
Intersegment sales elimination (b) - (343) (51) (755)
-------- --------- ------- --------
$ 53,549 $ 63,583 $113,772 $125,913
======== ========= ======== ========
9
4. Business Segment Information (continued)
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Income Before Provision for Income Taxes and Minority
Interest:
Pulp and Papermaking Equipment and Systems (c) $ 6,558 $ 9,790 $10,515 $ 17,891
Dryers and Pollution-control Equipment (d) - 862 11,554 1,667
Water- and Fiber-recovery Services and Products (189) (783) (408) (1,440)
Corporate (e) (1,301) (979) (2,756) (2,061)
-------- --------- ------- --------
Total operating income 5,068 8,890 18,905 16,057
Interest income, net 196 255 312 376
-------- --------- ------- --------
$ 5,264 $ 9,145 $19,217 $ 16,433
======== ========= ======= ========
(a) The Company sold this segment in February 1999 (Note 5).
(b) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(c) Includes $3,383,000 of restructuring and nonrecurring costs in the first six
months of 1999 (Note 6).
(d) Includes $11,099,000 gain on sale of business in the first six months of
1999 (Note 5).
(e) Primarily general and administrative expenses.
5. Acquisitions and Dispositions
In May 1999, the Company acquired the outstanding stock of Arcline
Products, a manufacturer of shower oscillation systems, for $2,500,000 in cash
and $2,000,000 payable in equal annual installments over five years, subject to
a post-closing adjustment. The liability has been recorded at its net present
value of $1,730,000 in the accompanying balance sheet. To date, no information
has been gathered that would cause the Company to believe that the post-closing
adjustment will be material.
This acquisition has been accounted for using the purchase method of
accounting and its results have been included in the Company's results from the
date of acquisition. The cost of this acquisition approximated the estimated
fair value of the acquired net assets. Allocation of the purchase price for this
acquisition was based on an estimate of the fair value of the net assets
acquired and is subject to adjustment upon finalization of the purchase price
allocation. The Company has gathered no information that indicates the final
allocation will differ materially from the preliminary estimates. Pro forma
results have not been presented, as the results of the acquired business were
not material to the Company's results of operations.
In February 1999, the Company sold its Thermo Wisconsin, Inc. subsidiary
for $13,576,000 in cash, resulting in a pretax gain of $11,099,000. In the third
quarter of 1999, a post-closing adjustment resulted in a nominal increase in the
sales price. Thermo Wisconsin, a manufacturer and marketer of dryers and
pollution-control equipment, had unaudited revenues to external customers and
net income in 1998 of $18,877,000 and $1,547,000, respectively.
During the first quarter of 1999, the Company received $377,000 for a
post-closing purchase price adjustment related to the 1998 acquisition of Goslin
Birmingham. The Company recorded this amount as a reduction of cost in excess of
net assets of acquired companies.
10
5. Acquisitions and Dispositions (continued)
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and acquired overmarket leases, for
which the Company established reserves as part of the cost of acquisitions. In
accordance with EITF 95-3, the Company finalizes its restructuring plans no
later than one year from the respective dates of the acquisitions. A summary of
the changes in accrued acquisition expenses, which represent ongoing payments
for severance and are included in other accrued expenses in the accompanying
balance sheet, follows:
(In thousands) Total
- ----------------------------------------------------------------------------- -------------- -------------
Balance at January 2, 1999 $149
Usage (59)
----
Balance at July 3, 1999 $ 90
====
6. Restructuring and Nonrecurring Costs
During the first quarter of 1999, the Company recorded restructuring and
nonrecurring costs of $3,383,000. Restructuring costs of $2,257,000, which were
accounted for in accordance with EITF 94-3, include severance costs of
$1,283,000 for 24 employees across all functions at the Company's E. & M.
Lamort, S.A. subsidiary, 5 of whom were terminated as of July 3, 1999, and
$974,000 to terminate distributor agreements. As of August 4, 1999, 15
additional employees had been terminated. Nonrecurring charges of $1,126,000
include $526,000 for the expected settlement of a legal dispute; $470,000 for
asset write-downs, consisting of $270,000 for impairment of a building held for
disposal, which was sold in July 1999, and $200,000 for impairment of a note
receivable; and $130,000 for facility-closure costs. A summary of the changes in
accrued restructuring costs, which are included in other accrued expenses in the
accompanying balance sheet, follows:
(In thousands) Severance Other Total
- ----------------------------------------------------------------- ------------- ------------- ------------
Balance at January 2, 1999 $ - $ 34 $ 34
Provision charged to expense 1,283 974 2,257
Usage (140) (34) (174)
Currency translation (117) (88) (205)
------ ------ ------
Balance at July 3, 1999 $1,026 $ 886 $1,912
====== ====== ======
7. Note Receivable
During 1996, the Company loaned $6,000,000 to Tree-Free Fiber Company,
LLC in connection with a proposed engineering, procurement, and construction
project. This project was delayed due to weakness in pulp prices, and will not
proceed as a result of Tree-Free's insolvency. Tree-Free was unable to repay the
note upon its original maturity. The note is secured by pari-passu liens on a
tissue mill in Maine and related assets. In December 1997, the Superior Court of
Maine appointed a receiver to preserve and protect the collateral for the loans
made by the Company and other lenders to Tree-Free. In May 1998, the Company
purchased an assignment of Tree-Free's secured indebtedness to the other
pari-passu lender for $2,910,000. In June 1998, the Company conducted a
foreclosure sale of the tissue mill, at which it was the successful bidder, and
executed a purchase and sale agreement. In October 1998, the stock of a mill
located in Mexico, which had also secured the note, was sold and the proceeds of
$1,250,000 were paid to the Company and recorded as a reduction of the carrying
value of the note. During the second quarter of 1999,
11
7. Note Receivable (continued)
the Company entered into a nonbinding letter of intent to assign its right under
the purchase and sale agreement to purchase certain assets of Tree-Free. The
proposed purchase price, net of amounts owed by Tree-Free to a lender with liens
on certain assets that are senior to the pari-passu liens, approximates the
carrying amount of the note, net of established reserves. The proposed
transaction is subject to numerous conditions, including the obtainment of state
regulatory approvals, including permits; completion of environmental due
diligence by the buyer; the execution of a definitive assignment and assumption
agreement; and approval by the Company's and the buyer's Boards of Directors.
8. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company operates in three segments: Pulp and Papermaking Equipment and
Systems, Dryers and Pollution-control Equipment, and Water- and Fiber-recovery
Services and Products. The Company's Pulp and Papermaking Equipment and Systems
(Papermaking Equipment) segment designs and manufactures stock-preparation
equipment, accessories, and water-management systems for the paper and paper
recycling industries. Principal products manufactured by this segment include
custom-engineered systems and equipment for the preparation of wastepaper for
conversion into recycled paper; accessory equipment and related consumables
important to the efficient operation of papermaking machines; and
water-management systems essential for draining, purifying, and recycling
process water. In May 1999, this segment acquired the outstanding stock of
Arcline Products, a manufacturer of shower and doctor oscillation systems (Note
5).
The Dryers and Pollution-control Equipment segment, which consisted of the
Company's Thermo Wisconsin, Inc. subsidiary, manufactures and markets dryers and
pollution-control equipment for the printing, papermaking, and converting
industries. In February 1999, the Company sold its Thermo Wisconsin subsidiary
for $13.6 million in cash. Thermo Wisconsin's unaudited revenues to external
customers and net income for fiscal 1998 were $18.9 million and $1.5 million,
respectively.
12
Overview (continued)
The Water- and Fiber-recovery Services and Products segment, which
consists of the Company's Thermo Fibergen subsidiary, designs, builds, owns, and
operates plants to help pulp and paper mill customers close the loop in their
water and solids systems on a long-term contract basis. The plants clean and
recycle water and long fiber for reuse in the papermaking process. In July 1998,
the Company completed construction of, and began operating, its first plant. In
addition, through its GranTek subsidiary, Thermo Fibergen employs patented
technology to produce absorbing granules from papermaking byproducts. These
granules are used as agricultural carriers, oil- and grease-absorbents, and cat
box fillers.
The Company's manufacturing facilities are principally located in the
United States and France. The manufacturing facility in France is located at the
Company's E. & M. Lamort, S.A. subsidiary, which manufactures stock-preparation
equipment, accessories, and water-management systems.
During 1998, approximately 48% of the Company's sales were to customers
outside the United States, principally in Europe. The Company generally seeks to
charge its customers in the same currency as its operating costs. However, the
Company's financial performance and competitive position can be affected by
currency exchange rate fluctuations affecting the relationship between the U.S.
dollar and foreign currencies. The Company reduces its exposure to currency
fluctuations through the use of forward contracts. The Company may enter into
forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than its subsidiaries' local currencies. These
contracts principally hedge transactions denominated in U.S. dollars, French
francs, British pounds sterling, and Canadian dollars. The purpose of the
Company's foreign currency hedging activities is to protect the Company's local
currency cash flows related to these commitments from fluctuations in foreign
exchange rates. Because the Company's forward contracts are entered into as
hedges against existing foreign currency exposures, there generally is no effect
on the income statement since gains or losses on the customer contract offset
gains or losses on the forward contract.
The Company's sales to customers in Asia were approximately 5% of the
Company's total sales in 1998, a substantial portion of which were sales to
China. Asia, excluding China, is experiencing a severe economic crisis, which
has been characterized by sharply reduced economic activity and liquidity,
highly volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's sales to Asia have been adversely affected by the
unstable economic conditions in that region.
The Company's products are primarily sold to the paper industry.
Generally, the financial condition of the paper industry corresponds to changes
in the general economy and to a number of other factors, including paper and
pulp production capacity. The paper industry entered a severe downcycle in early
1996 and has not recovered. This cyclical downturn, which began adversely
affecting the Company's business during the second half of 1996, continues to
have an adverse effect on the Company's business. In addition, the unstable
economic conditions in Asia, and weakened currencies in that region, have
resulted in increased low-cost imports of pulp and paper in North America and
Europe, resulting in reduced pricing. These factors have also resulted in a
decline in paper and pulp exports from North America and Europe to Asia. The
timing of the recovery of the financial condition of the paper industry cannot
be predicted.
Results of Operations
Second Quarter 1999 Compared With Second Quarter 1998
Excluding the results of Thermo Wisconsin, which was sold in February
1999, revenues decreased to $53.5 million in the second quarter of 1999 from
$57.9 million in the second quarter of 1998. Thermo Wisconsin's revenues to
external customers were $5.7 million in the second quarter of 1998. Revenues at
the Company's Papermaking Equipment segment decreased $5.5 million, primarily
due to lower revenues from the stock-preparation equipment
13
Second Quarter 1999 Compared With Second Quarter 1998 (continued)
product line in Europe and North America and the accessories product line in
North America, due to lower demand. The Water- and Fiber-recovery Services
segment revenues increased $0.9 million due to sales of its recently introduced
cat box filler product, increased demand for cellulose-based products, and the
inclusion of $0.3 million of revenues from its fiber-recovery and
water-clarification facility, which began operations in July 1998. The
unfavorable effects of currency translation due to the strengthening in value of
the U.S. dollar relative to foreign currencies in countries in which the Company
operates decreased revenues by $0.4 million in the second quarter of 1999.
The gross profit margin was unchanged at 41% in the second quarter of 1999
and 1998. An increase in gross profit margin resulting from the absence of
lower-margin sales following the sale of Thermo Wisconsin was offset by lower
gross margins at the Papermaking Equipment segment, primarily due to competitive
pricing pressures at the Company's Lamort subsidiary and a greater percentage of
sales under low-margin contracts at the Company's Lamort and AES subsidiaries.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the second quarter of 1999 from 24% in the second quarter of
1998. The increase was primarily at the Papermaking Equipment segment, due to
decreased revenues and the inclusion of results from Goslin Birmingham, which
was acquired in July 1998. The increase in selling, general, and administrative
expenses as a percentage of revenues also resulted from the sale of Thermo
Wisconsin, for which such costs represented 13% of its revenues in the 1998
period. These increases were offset in part by the impact of increased revenues
at the Water- and Fiber-recovery Services segment.
Research and development expenses were unchanged at $1.8 million in the
second quarter of 1999 and 1998.
Interest income and expense were relatively unchanged in the second
quarter of 1999 and 1998.
The effective tax rate was 38% in the second quarter of 1999, compared
with 39% in the second quarter of 1998. The effective tax rates exceeded the
statutory federal income tax rate primarily due to the impact of state income
taxes.
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
During 1996, the Company loaned $6.0 million to Tree-Free Fiber Company,
LLC in connection with a proposed engineering, procurement, and construction
project. This project was delayed due to weakness in pulp prices, and will not
proceed as a result of Tree-Free's recent insolvency. Tree-Free was unable to
repay the note upon its original maturity. The note is secured by pari-passu
liens on a tissue mill in Maine and related assets. In December 1997, the
Superior Court of Maine appointed a receiver to preserve and protect the
collateral for the loans made by the Company and other lenders to Tree-Free. In
May 1998, the Company purchased an assignment of Tree-Free's secured
indebtedness to the other pari-passu lender for $2.9 million. In June 1998, the
Company conducted a foreclosure sale of the tissue mill, at which it was the
successful bidder, and executed a purchase and sale agreement. In October 1998,
the stock of a mill located in Mexico, which had also secured the note, was sold
and the proceeds of $1.3 million were paid to the Company and recorded as a
reduction of the carrying value of the note. During the second quarter of 1999,
the Company entered into a nonbinding letter of intent to assign its right under
the purchase and sale agreement to purchase certain assets of Tree-Free. The
proposed purchase price, net of amounts owed by Tree-Free to a lender with liens
on certain assets that are senior to the pari-passu liens, approximates the
carrying amount of the note, net of established reserves. The proposed
transaction is subject to numerous conditions, including the obtainment of state
regulatory approvals, including permits; completion of environmental due
diligence by the buyer; the execution of a definitive assignment and assumption
agreement; and approval by the Company's and the buyer's Boards of Directors.
There can be no assurance that the proposed transaction will occur.
14
First Six Months 1999 Compared With First Six Months 1998
Excluding the results of Thermo Wisconsin, revenues decreased to $112.0
million in the first six months of 1999 from $114.4 million in the first six
months of 1998. Thermo Wisconsin's revenues to external customers were $1.8
million and $11.5 million in the first six months of 1999 and 1998,
respectively. Increased revenues at the Papermaking Equipment segment's
water-management product line in North America were more than offset by
decreases in revenues from the stock-preparation equipment and accessories
product lines in North America. The Water- and Fiber-recovery Services segment
revenues increased $1.7 million due to increased demand for cellulose-based
products, sales of its recently introduced cat box filler product, and the
inclusion of $0.7 million of revenues from its fiber-recovery and
water-clarification facility, which began operations in July 1998. The favorable
effects of currency translation due to the weakening in value of the U.S. dollar
relative to foreign currencies in countries in which the Company operates
increased revenues by $0.1 million in the first six months of 1999.
The gross profit margin decreased to 40% in the first six months of 1999
from 41% in the first six months of 1998. The gross profit margin at the
Papermaking Equipment segment decreased, primarily as a result of competitive
pricing pressures at the Company's Lamort subsidiary.
Selling, general, and administrative expenses as a percentage of revenues
increased to 27% in the first six months of 1999 from 25% in the first six
months of 1998, primarily due to the decline in revenues and the effect of the
sale of Thermo Wisconsin, for which such costs represented 13% of its revenues
in the 1998 period.
Research and development expenses were relatively unchanged at $3.7
million and $3.6 million in the first six months of 1999 and 1998, respectively.
During the first quarter of 1999, the Company sold its Thermo Wisconsin
subsidiary for $13.6 million in cash, subject to a post-closing adjustment,
resulting in a pretax gain of $11.1 million (Note 5).
Restructuring and nonrecurring costs of $3.4 million in the first six
months of 1999 represents severance, termination of distributor agreements, the
expected settlement of a legal dispute, write-downs for impairment of assets,
and facility-closure costs (Note 6). The Company expects to pay the remaining
balance of accrued restructuring costs of $1.9 million primarily during 1999.
Interest income and expense were relatively unchanged in the first six
months of 1999 and 1998.
The effective tax rate was unchanged at 39% in the first six months of
1999 and 1998. The effective tax rate exceeded the statutory federal income tax
rate primarily due to the impact of state income taxes.
Minority interest expense primarily represents accretion of Thermo
Fibergen's common stock subject to redemption.
Liquidity and Capital Resources
Consolidated working capital was $198.3 million at July 3, 1999, compared
with $193.4 million at January 2, 1999. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $87.2 million at July 3,
1999, compared with $163.7 million at January 2, 1999. In addition, as of July
3, 1999, the Company had $84.9 million invested in an advance to affiliate.
Prior to the use of a new domestic cash management arrangement between the
Company and Thermo Electron Corporation (Note 8), which became effective June 1,
1999, amounts invested with Thermo Electron were included in cash and cash
equivalents. Of the total cash, cash equivalents, and available-for-sale
investments, $46.1 million was held by Thermo Fibergen and the remainder was
held by the Company and its wholly owned subsidiaries. Of the total advance to
affiliate, $5.3 million was advanced by Thermo
15
Liquidity and Capital Resources (continued)
Fibergen, $7.0 million was advanced by the Company's Thermo Fiberprep
subsidiary, and the balance was advanced by the Company and its wholly owned
subsidiaries. At July 3, 1999, $40.1 million of the Company's cash and cash
equivalents was held by its foreign subsidiaries. Repatriation of this cash into
the United States would be subject to foreign withholding taxes and could also
be subject to a U.S.
tax.
During the first six months of 1999, $5.8 million of cash was provided by
operating activities. A decrease in accounts receivable, which was primarily
related to the decline in sales at the Company's Lamort subsidiary, provided
$3.6 million of cash. The Company used $2.9 million of cash to reduce accounts
payable, primarily at Lamort. The Company expects to pay the remaining balance
of accrued restructuring costs of $1.9 million primarily during 1999.
During the first six months of 1999, the Company's investing activities,
excluding available-for-sale investments and advance to affiliate activity (Note
8), provided $9.8 million of cash. The Company received proceeds of $13.5
million from the sale of Thermo Wisconsin and used $2.5 million to purchase the
assets of Arcline (Note 5). In addition, the Company purchased property, plant,
and equipment for $1.9 million and received $0.4 related to the acquisition of
Goslin Birmingham (Note 5).
During the first six months of 1999, the Company's financing activities
used $5.9 million of cash. The Company used $2.5 million to purchase Company
common stock and Thermo Fibergen used $1.6 million to purchase its common stock
in open market transactions. In addition, Thermo Fibergen used $2.2 million to
purchase its common stock at fair market value from Thermo Electron. These
purchases were made pursuant to authorizations by the Company's and Thermo
Fibergen's Boards of Directors. As of July 3, 1999, the Company had a remaining
authorization to purchase $8.3 million of Company common stock, outstanding
convertible debentures, or Thermo Fibergen common stock in open market or
negotiated transactions through January 2000 and Thermo Fibergen had a remaining
authorization to purchase $3.4 million of its common stock in open market or
negotiated transactions through March 2000. Any such purchases are funded from
working capital.
Thermo Fibergen's common stock is subject to redemption in September 2000
or September 2001, the redemption value of which is $51.3 million.
At July 3, 1999, the Company had $65.1 million of undistributed foreign
earnings that could be subject to tax if remitted to the U.S. The Company does
not intend to repatriate undistributed foreign earnings into the U.S., and does
not expect that this will have a material adverse effect on the Company's
current liquidity.
During the remainder of 1999, the Company plans to make expenditures for
property, plant, and equipment of approximately $1.5 million. In addition,
Thermo Fibergen may make capital expenditures for the construction of additional
fiber-recovery and water-clarification facilities. Construction of such
facilities is dependent upon Thermo Fibergen entering into long-term contracts
with pulp and paper mills, under which Thermo Fibergen will charge fees to
process the mills' papermaking byproducts. There is no assurance that Thermo
Fibergen will be able to obtain such additional contracts. The Company believes
that its existing resources are sufficient to meet the capital requirements of
its existing operations for the foreseeable future.
Year 2000
The following information 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) evaluating the compliance
status of the Company's current products and certain discontinued products;
(iii) assessing the year 2000 readiness of its key suppliers and vendors; and
(iv) developing contingency plans.
16
Year 2000 (continued)
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems 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 non-information technology systems, which 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 non-information technology systems that were identified during phase one are
prioritized and remediated. Based on its evaluations, the Company does not
believe that any material upgrades are necessary to make its critical
non-information technology systems year 2000 compliant. The Company is currently
upgrading or replacing its material noncompliant information technology systems,
and this process was approximately 80% complete as of July 3, 1999. The Company
expects that its material information technology systems and critical
non-information technology systems will be year 2000 compliant by November 1999.
The Company has also tested and evaluated the year 2000 readiness of the
material products that it currently manufactures and sells. The Company believes
that all of such material products are either year 2000 compliant or not date
sensitive. Certain of the Company's older products, which it no longer
manufactures or sells, may not be year 2000 compliant.
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 is distributing 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 complete its assessment by the end of September
1999.
Contingency Plan
The Company is developing contingency plans that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
These plans 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,
facilities, and significant suppliers and vendors, it will modify and adjust its
contingency plans as may be required. The Company expects to complete its
contingency plans by November 1999.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
are 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 internal
costs incurred for its year 2000 compliance project. Such costs are principally
the related payroll costs for its information systems group.
17
Year 2000 (continued)
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
ready, 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.
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 impacted. 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 interest rates,
equity prices, and foreign currency exchange rates has not changed materially
from its exposure at year-end 1998.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters of a Vote of Securities
On May 27, 1999, at the Annual Meeting of Shareholders, the shareholders
reelected six incumbent directors to a one-year term expiring in 2000. The
directors elected at the meeting were: Dr. Walter J. Bornhorst, Dr. George N.
Hatsopoulos, Mr. John N. Hatsopoulos, Mr. Francis L. McKone, Mr. Donald E.
Noble, and Mr. William A. Rainville. Dr. Bornhorst received 60,530,467 shares
voted in favor of his election and 49,573 shares voted against; Dr. G.
Hatsopoulos received 60,529,227 shares voted in favor of his election and 50,813
shares voted against; Mr. J. Hatsopoulos received 60,529,050 shares voted in
favor of his election and 50,990 shares voted against; Mr. McKone received
60,530,242 shares voted in favor of his election and 49,798 shares voted
against; and Mr. Noble received 60,529,455 shares voted in favor of his election
and 50,585 shares voted against. Mr. Rainville received 60,529,440 shares voted
in favor of his election and 50,600 shares voted against. No abstentions or
broker nonvotes were recorded on the election of directors.
18
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
19
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 5th day of August 1999.
THERMO FIBERTEK INC.
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
20
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Master Cash Management, Guarantee Reimbursement, and Loan Agreement
dated as of June 1, 1999, between the Registrant and Thermo
Electron Corporation.
10.2 Master Cash Management, Guarantee Reimbursement, and Loan Agreement
dated as of June 1, 1999, between Thermo Fibergen Inc. and Thermo
Electron Corporation (filed as Exhibit 10.1 to Thermo Fibergen
Inc.'s Quarterly Report on Form 10-Q for the period ended July 3,
1999 [File No. 1-12137] and incorporated herein by reference).
10.3 Amended and Restated Equity Incentive Plan of the Registrant.
10.4 Amended and Restated Nonqualified Stock Option Plan of the Registrant.
10.5 Amended and Restated Deferred Compensation Plan for Directors of the
Registrant.
10.6 Amended and Restated Directors Stock Option Plan of the Registrant.
10.7 Amended and Restated Thermo Fibergen Inc. Equity Incentive Plan
(filed as Exhibit 10.4 to Thermo Fibergen Inc.'s Quarterly Report
on Form 10-Q for the period ended July 3, 1999 [File No.
1-12137] and incorporated herein by reference).
10.8 Amended and Restated Thermo Fibertek Inc. - Thermo Fibergen Inc.
Nonqualified Stock Option Plan.
27 Financial Data Schedule.