-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JYPpioM85k8K2WhpfWl+VrrFsHpoexWgFVC0X+J1JthjvrvIE1Q8tr41NqC9ldj2 F4u6BEf+tZTGi7sag/j6iw== 0000796038-99-000020.txt : 19991111 0000796038-99-000020.hdr.sgml : 19991111 ACCESSION NUMBER: 0000796038-99-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMO TERRATECH INC CENTRAL INDEX KEY: 0000796038 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 042925807 STATE OF INCORPORATION: DE FISCAL YEAR END: 0403 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09549 FILM NUMBER: 99745886 BUSINESS ADDRESS: STREET 1: 85 FIRST AVENUE STREET 2: P O BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02454-9046 BUSINESS PHONE: 7813701640 MAIL ADDRESS: STREET 1: 85 WYMAN STREET STREET 2: P O BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02454-9046 FORMER COMPANY: FORMER CONFORMED NAME: THERMO PROCESS SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-Q 1 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 October 2, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-9549 THERMO TERRATECH INC. (Exact name of Registrant as specified in its charter) Delaware 04-2925807 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 81 Wyman Street, P.O. Box 9046 Waltham, Massachusetts 02454-9046 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at October 29, 1999 Common Stock, $.10 par value 19,072,133 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMO TERRATECH INC. Consolidated Balance Sheet (Unaudited) Assets
October 2, April 3, (In thousands) 1999 1999 - ----------------------------------------------------------------------------------- ----------- ---------- Current Assets: Cash and cash equivalents (includes $41,667 under repurchase $ 3,888 $ 43,013 agreements with parent company in fiscal 1999) Advance to affiliate (Note 7) 49,265 - Accounts receivable, less allowances of $3,327 and $3,577 54,672 58,933 Unbilled contract costs and fees 23,357 19,974 Inventories 2,359 1,869 Prepaid and refundable income taxes 6,828 6,946 Other current assets 4,102 3,640 -------- -------- 144,471 134,375 -------- -------- Property, Plant, and Equipment, at Cost (Note 5) 135,248 151,219 Less: Accumulated depreciation and amortization 62,850 59,705 -------- -------- 72,398 91,514 -------- -------- Other Assets (Note 5) 11,930 15,949 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Notes 5 and 6) 90,367 108,627 -------- -------- $319,166 $350,465 ======== ======== 2 THERMO TERRATECH INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment October 2, April 3, (In thousands except share amounts) 1999 1999 - ----------------------------------------------------------------------------------- ----------- ---------- Current Liabilities: Short-term obligations and current maturities of long-term obligations $ 20,437 $ 17,618 (includes $9,228 under overdraft facility with related party in fiscal 1999) Subordinated convertible debentures (includes $4,300 of related-party 37,950 - debt) Accounts payable 17,289 17,404 Accrued payroll and employee benefits 12,856 12,771 Accrued restructuring costs (Note 5) 9,008 1,719 Deferred revenue 3,912 2,675 Other accrued expenses 16,387 12,623 Due to parent company and affiliated companies 2,586 2,522 -------- -------- 120,425 67,332 -------- -------- Deferred Income Taxes 3,027 3,538 -------- -------- Other Deferred Items 1,119 1,076 -------- -------- Long-term Obligations: Subordinated convertible debentures (includes $515 118,849 156,799 and $4,695 of related-party debt) Other 1,702 1,818 -------- -------- 120,551 158,617 -------- -------- Minority Interest 24,371 27,745 -------- -------- Shareholders' Investment: Common stock, $.10 par value, 75,000,000 shares 1,958 1,958 authorized; 19,583,773 shares issued Capital in excess of par value 70,405 70,633 Retained earnings (accumulated deficit) (17,989) 25,898 Treasury stock at cost, 511,640 and 543,319 shares (3,890) (4,130) Deferred compensation (243) (252) Accumulated other comprehensive items (Note 2) (568) (1,950) -------- -------- 49,673 92,157 -------- -------- $319,166 $350,465 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3 THERMO TERRATECH INC. Consolidated Statement of Operations (Unaudited) Three Months Ended October 2, October 3, (In thousands except per share amounts) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Revenues $78,036 $77,177 ------- ------- Costs and Operating Expenses: Cost of revenues (Note 5) 61,616 62,034 Selling, general, and administrative expenses 10,737 10,723 Restructuring costs (Note 5) 120 10,217 ------- ------- 72,473 82,974 ------- ------- Operating Income (Loss) 5,563 (5,797) Interest Income 723 511 Interest Expense (includes $58 and $40 to related party) (2,326) (2,205) ------- ------- Income (Loss) Before Income Taxes and Minority Interest 3,960 (7,491) Income Tax (Provision) Benefit (Note 5) (2,226) 2,108 Minority Interest Income (Expense) (527) 1,687 ------- ------- Net Income (Loss) $ 1,207 $(3,696) ======= ======= Basic and Diluted Earnings (Loss) per Share (Note 3) $ .06 $ (.19) ======= ======= Weighted Average Shares (Note 3): Basic 19,070 19,513 ======= ======= Diluted 19,346 19,513 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4 THERMO TERRATECH INC. Consolidated Statement of Operations (Unaudited) Six Months Ended October 2, October 3, (In thousands except per share amounts) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Revenues $153,944 $153,870 -------- -------- Costs and Operating Expenses: Cost of revenues (Note 5) 121,830 123,079 Selling, general, and administrative expenses 21,978 22,298 Restructuring costs (Note 5) 54,317 10,217 -------- -------- 198,125 155,594 -------- -------- Operating Loss (44,181) (1,724) Interest Income 1,314 1,155 Interest Expense (includes $116 and $76 to related party) (4,465) (4,462) -------- -------- Loss Before Income Taxes and Minority Interest (47,332) (5,031) Income Tax (Provision) Benefit (Note 5) (241) 809 Minority Interest Income 3,686 1,527 -------- -------- Net Loss $(43,887) $ (2,695) ======== ======== Basic and Diluted Loss per Share (Note 3) $ (2.30) $ (.14) ======== ======== Basic and Diluted Weighted Average Shares (Note 3) 19,060 19,514 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 THERMO TERRATECH INC. Consolidated Statement of Cash Flows (Unaudited) Six Months Ended October 2, October 3, (In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Operating Activities: Net loss $(43,887) $ (2,695) Adjustments to reconcile net loss to net cash provided by operating activities: Noncash restructuring costs (Note 5) 46,594 8,105 Change in deferred income taxes (2,841) - Depreciation and amortization 6,976 8,340 Minority interest income (3,686) (1,527) Provision for losses on accounts receivable 217 628 Other noncash items 2,087 152 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 4,638 (5,224) Inventories and unbilled contract costs and fees (4,530) (2,094) Other current assets (460) (3,647) Accounts payable (374) (1,223) Other current liabilities 9,530 3,524 -------- -------- Net cash provided by operating activities 14,264 4,339 -------- -------- Investing Activities: Acquisitions, net of cash acquired (Note 6) (2,016) (576) Advances to affiliate, net (Note 7) (49,265) - Proceeds from sale and maturities of available-for-sale investments - 14,065 Purchases of property, plant, and equipment (6,317) (10,373) Proceeds from sale of property, plant, and equipment 324 187 Purchase of other assets (167) (1,284) Other - (48) -------- -------- Net cash provided by (used in) investing activities (57,441) 1,971 -------- -------- Financing Activities: Increase in short-term obligations to fund an acquisition (Note 6) 2,286 - Repayment of notes payable and long-term obligations (217) (14,292) Repayment of long-term notes receivable 2,535 537 Proceeds from issuance of Company and subsidiary's common stock 161 45 Repurchase of Company common stock - (210) Dividends paid by subsidiary to minority shareholders (469) (463) Other 101 (7) -------- -------- Net cash provided by (used in) financing activities 4,397 (14,390) -------- -------- Exchange Rate Effect on Cash (345) (204) -------- -------- Decrease in Cash and Cash Equivalents (39,125) (8,284) Cash and Cash Equivalents at Beginning of Period 43,013 34,711 -------- -------- Cash and Cash Equivalents at End of Period $ 3,888 $ 26,427 ======== ======== 6 THERMO TERRATECH INC. Consolidated Statement of Cash Flows (continued) (Unaudited) Six Months Ended October 2, October 3, (In thousands) 1999 1998 - ----------------------------------------------------------------------------------- ----------- ---------- Noncash Activities: Fair value of assets of acquired companies $ 3,328 $ 576 Cash paid for acquired companies (2,286) (576) Issuance of subsidiary common stock for acquired company (384) - -------- -------- Liabilities assumed of acquired companies $ 658 $ - ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 7 THERMO TERRATECH INC. Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermo TerraTech Inc. (the Company) without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at October 2, 1999, the results of operations for the three- and six-month periods ended October 2, 1999, and October 3, 1998, and the cash flows for the six-month periods ended October 2, 1999, and October 3, 1998. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of April 3, 1999, has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. Certain amounts in fiscal 1999 have been reclassified to conform to the presentation in the fiscal 2000 financial statements. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended April 3, 1999, filed with the Securities and Exchange Commission.
2. Comprehensive Income Comprehensive income combines net income (loss) and "other comprehensive items," which represents certain items that are reported as components of shareholders' investment in the accompanying balance sheet, including foreign currency translation adjustments and unrealized net of tax gains or losses from available-for-sale investments. During the second quarter of fiscal 2000 and 1999, the Company had comprehensive income of $978,000 and a comprehensive loss of $3,308,000, respectively. During the first six months of fiscal 2000 and 1999, the Company had comprehensive losses of $42,854,000 and $2,229,000, respectively. 3. Earnings (Loss) per Share Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Six Months Ended October 2, October 3, October 2, October 3, (In thousands except per share amounts) 1999 1998 1999 1998 - ------------------------------------------------------------- ---------- ----------- ---------- ---------- Basic Net Income (Loss) $ 1,207 $ (3,696) $(43,887) $ (2,695) ------- -------- -------- -------- Weighted Average Shares 19,070 19,513 19,060 19,514 ------- -------- -------- -------- Basic Earnings (Loss) per Share $ .06 $ (.19) $ (2.30) $ (.14) ======= ======== ======= ======== Diluted Net Income (Loss) $ 1,207 $ (3,696) $(43,887) $ (2,695) Effect of Majority-owned Subsidiaries' Dilutive (19) - - (2) ------- -------- -------- -------- Securities Income (Loss) Available to Common Shareholders, $ 1,188 $ (3,696) $(43,887) $ (2,697) as Adjusted ------- -------- -------- -------- Weighted Average Shares 19,070 19,513 19,060 19,514 Effect of: Stock options 67 - - - Put options 209 - - - ------- -------- -------- -------- Weighted Average Shares, as Adjusted 19,346 19,513 19,060 19,514 ------- -------- -------- -------- Diluted Earnings (Loss) per Share $ .06 $ (.19) $ (2.30) $ (.14) ======= ======== ======== ======== 8 3. Earnings (Loss) per Share (continued) The computation of diluted earnings (loss) per share for each period excludes the effect of assuming the exercise of certain outstanding stock options, warrants, and put rights because the effect would be antidilutive. As of October 2, 1999, there were 634,000 of such options outstanding, with exercise prices ranging from $6.34 to $10.40 per share. As of October 2, 1999, put rights with respect to an aggregate of 423,854 shares were outstanding. The put rights obligate the Company, at the holders' option, to purchase shares of the Company's common stock for $8.00 per share. In addition, the computation of diluted earnings (loss) per share for each period excludes the effect of assuming the conversion of $111,850,000 principal amount of 4 5/8% subordinated convertible debentures, convertible at $15.90 per share, because the effect would be antidilutive. 4. Business Segment Information Three Months Ended Six Months Ended October 2, October 3, October 2, October 3, (In thousands) 1999 1998 1999 1998 - ---------------------------------------------------------- ----------- ----------- ----------- ----------- Revenues: Environmental-liability Management $ 42,492 $ 38,969 $81,357 $ 78,685 Engineering and Design 21,018 23,765 42,923 46,540 Laboratory Testing 10,594 9,901 21,578 19,572 Metal Treating 4,021 4,797 8,379 9,504 Intersegment sales elimination (a) (89) (255) (293) (431) -------- -------- -------- -------- $ 78,036 $ 77,177 $153,944 $153,870 ======== ======== ======== ======== Income (Loss) Before Income Taxes and Minority Interest: Environmental-liability Management (b) $ 2,729 $(7,407) $(34,359) $ (5,994) Engineering and Design (c) 1,738 370 (12,219) 1,803 Laboratory Testing 1,629 1,230 3,253 2,491 Metal Treating 198 570 639 1,182 Corporate (d) (731) (560) (1,495) (1,206) -------- ------- -------- -------- Total operating income (loss) 5,563 (5,797) (44,181) (1,724) Interest expense, net (1,603) (1,694) (3,151) (3,307) -------- ------- -------- -------- $ 3,960 $(7,491) $(47,332) $ (5,031) ======== ======= ======== ========
(a) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated parties. (b) Includes restructuring and related costs of $39.2 million in the first six months of fiscal 2000 and restructuring costs of $9.2 million in the fiscal 1999 periods. (c) Includes restructuring costs of $15.7 million in the first six months of fiscal 2000 and $1.0 million in the fiscal 1999 periods. (d) Primarily general and administrative expenses. 5. Restructuring and Related Costs In May 1999, the Company announced that its majority-owned subsidiaries plan to sell several businesses. The businesses proposed to be sold include the used-oil processing operation of Thermo EuroTech, N.V.; three soil-recycling facilities of ThermoRetec Corporation, in addition to the sites previously announced; and the Randers division, BAC Killam Inc., and E3-Killam Inc. businesses of The Randers Killam Group Inc. In connection with these actions, the Company recorded $56,030,000 of restructuring and related costs during the first six months of fiscal 9 5. Restructuring and Related Costs (continued) 2000, including restructuring costs of $54,317,000, a tax asset write-off of $1,055,000, and an inventory provision of $658,000. In the accompanying statement of operations, the tax write-off is included in income tax (provision) benefit and the inventory provision is included in cost of revenues. Restructuring costs include a $22,192,000 write-down of cost in excess of net assets of acquired companies to reduce the carrying value of the businesses proposed to be sold to the estimated proceeds from their sale; a $20,266,000 write-down of fixed assets to their estimated disposal value; $4,555,000 for ongoing lease costs for facilities that will be exited in connection with the sale of certain businesses; $2,494,000 for estimated land reclamation costs; a $1,905,000 charge for the cumulative foreign translation adjustment related to Thermo EuroTech's used-oil processing business; a $1,788,000 write-off of intangible assets related to license acquisition costs at the used-oil processing business; $638,000 for severance costs for 42 employees across all functions, 9 of whom were terminated in the first six months of fiscal 2000; a $443,000 write-off of other current assets associated with the businesses; and $36,000 for retention bonuses paid. The tax write-off represents a deferred tax asset that will not be realized as a result of selling Thermo EuroTech's used-oil processing business. The inventory provision also relates to exiting this business. The write-down of fixed assets principally relates to special-purpose equipment in the used-oil processing and soil-recycling businesses. The effects of these charges reduced depreciation and amortization expense, thereby increasing the Company's pretax operating income by approximately $1,000,000 in the second quarter of fiscal 2000 and reducing the Company's pretax operating loss by approximately $2,000,000 during the first six months of fiscal 2000. During fiscal 1999, the Company recorded restructuring costs, primarily related to the closure or sale of two soil-recycling facilities by ThermoRetec. The Company closed one soil-recycling facility in March 1999 and is actively seeking a buyer for the second soil-recycling facility. If no buyer is found, ThermoRetec will close the facility. In addition, the Company recorded restructuring costs for abandoned-facility payments relating to the consolidation of the facilities of another business. In connection with these restructuring activities, the Company established reserves, primarily for ongoing lease costs and severance for 13 employees, 6 of whom were terminated as of October 2, 1999. All businesses proposed to be sold, including those announced in fiscal 1999, reported unaudited aggregate revenues and operating income, prior to restructuring and related costs, of $21,030,000 and $1,143,000, respectively, in the first six months of fiscal 2000 and $54,015,000 and $225,000, respectively, in fiscal 1999. Substantially all of the restructuring and related costs to date have been noncash charges except for amounts recorded as accrued restructuring costs. A summary of the changes in accrued restructuring costs, which the Company expects to pay primarily during the remainder of fiscal 2000, is as follows:
Severance Facility- Land Other Total (In thousands) closing Reclamation Costs - ------------------------------------ ------------- ------------- -------------- ------------- ------------ Fiscal 1999 Plan Balance at April 3, 1999 $ 112 $1,607 $ - $ - $1,719 Usage (71) (101) - - (172) ------ ------ ------ ------ ------ Balance at October 2, 1999 $ 41 $1,506 $ - $ - $1,547 ====== ====== ====== ====== ====== Fiscal 2000 Plan Balance at April 3, 1999 $ - $ - $ - $ - $ - Provision charged to expense 638 4,555 2,494 36 7,723 Usage (133) (110) - (36) (279) Currency Translation - 7 10 - 17 ------ ------ ------ ------ ------ Balance at October 2, 1999 $ 505 $4,452 $2,504 $ - $7,461 ====== ====== ====== ====== ======
10 5. Restructuring and Related Costs (continued) The Company expects to incur additional restructuring costs of approximately $3,000,000, primarily during the remainder of fiscal 2000, for severance, employee retention, and relocation expenses. Pursuant to the requirements of Emerging Issues Task Force Pronouncement 94-3, these costs are not permitted as charges until they are incurred. 6. Acquisition In August 1999, a subsidiary of the Company acquired the outstanding stock of Dempsey Drums Limited for $2,286,000 in cash and 1,605 shares of the subsidiary's common stock valued at $384,000. Dempsey Drums is an Ireland-based service provider in the supply, disposal, and reconditioning of steel and plastic drums and the supply of specialized packaging. This acquisition has been accounted for using the purchase method of accounting and its results have been included in the Company's results from the date of acquisition. The cost of this acquisition exceeded the estimated fair value of the acquired net assets by $1,538,000, which is being amortized over 20 years. Allocation of the purchase price for this acquisition was based on an estimate of the fair value of the net assets acquired and is subject to adjustment upon finalization of the purchase price allocation. The Company has gathered no information that indicates the final allocation will differ materially from the preliminary estimates. Pro forma results have not been presented, as the results of the acquired business were not material to the Company's results of operations. 7. Cash Management Arrangement Effective June 1, 1999, the Company and Thermo Electron Corporation commenced use of a new domestic cash management arrangement. Under the new arrangement, amounts advanced to Thermo Electron by the Company for domestic cash management purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points, set at the beginning of each month. Thermo Electron is contractually required to maintain cash, cash equivalents, and/or immediately available bank lines of credit equal to at least 50% of all funds invested under this cash management arrangement by all Thermo Electron subsidiaries other than wholly owned subsidiaries. The Company has the contractual right to withdraw its funds invested in the cash management arrangement upon 30 days' prior notice. Amounts invested in this arrangement are included in "advance to affiliate" in the accompanying balance sheet. In addition, under the new domestic cash management arrangement, amounts borrowed from Thermo Electron for domestic cash management purposes bear interest at the 30-day Dealer Commercial Paper Rate plus 150 basis points, set at the beginning of each month. The Company has no borrowings under this arrangement at October 2, 1999. 8. Proposed Merger On October 19, 1999, the Company entered into a definitive agreement and plan of merger with Thermo Electron pursuant to which Thermo Electron would acquire all of the outstanding shares of Company common stock held by shareholders other than Thermo Electron in exchange for Thermo Electron Common Stock worth between $7.25 and $9.25 per share of Company Common Stock. At the same time, the Company's two publicly traded subsidiaries, ThermoRetec and Randers Killam, entered into merger agreements with Thermo Electron pursuant to which all of the shares of common stock of those companies held by stockholders other than the Company and Thermo Electron would be acquired for cash. The Board of Directors of the Company approved the merger agreement based on a recommendation by a special committee of the Board of Directors, consisting of an independent director of the Company. The completion of this merger is subject to certain conditions, including shareholder approval of the merger agreement and the completion of review by the Securities and Exchange Commission of certain required filings. Thermo Electron intends to vote all of its shares of common stock of the Company in favor of approval of the merger agreement and, therefore, approval of the merger agreement is assured. This merger is expected to be completed in the fourth quarter of fiscal 2000. Following the merger, the Company's common stock would cease to be publicly traded. 11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended April 3, 1999, filed with the Securities and Exchange Commission. Overview The Company provides industrial outsourcing services and manufacturing support encompassing a broad range of specializations. The Company operates in four segments: environmental-liability management, engineering and design, laboratory testing, and metal treating. Environmental-liability Management The Company's majority-owned ThermoRetec Corporation subsidiary is a national provider of environmental-liability and resource-management services. ThermoRetec offers these and related consulting services in four areas: consulting and engineering, nuclear remediation, soil remediation, and fluids recycling. The Company's majority-owned Thermo EuroTech N.V. subsidiary, located in the Netherlands, specializes in converting "off-spec" and contaminated petroleum fluids into useable oil products. The Company intends to exit this business, as discussed in the results of operations. Thermo EuroTech also provides in-plant waste management and recycling services through its Ireland-based Green Sunrise Holdings Ltd. subsidiary. In August 1999, Green Sunrise acquired the outstanding stock of Dempsey Drums Limited, an Ireland-based service provider in the supply, disposal, and reconditioning of steel and plastic drums and the supply of specialized packaging (Note 6). Engineering and Design The Company's majority-owned The Randers Killam Group Inc. subsidiary provides comprehensive engineering and outsourcing services such as water and wastewater treatment, process engineering and construction, highway and bridge engineering, and infrastructure engineering. The Company intends to exit the Process Engineering and Construction segment and Highway and Bridge Engineering segment of this business, as discussed in the results of operations. The Company's wholly owned Normandeau Associates Inc. subsidiary provides consulting services that address natural resource management issues. Laboratory Testing The Company's wholly owned Thermo Analytical Inc. subsidiary operates analytical laboratories that provide environmental- and pharmaceutical-testing services, primarily to commercial clients throughout the U.S. Metal Treating The Company performs metallurgical processing services using thermal-treatment equipment at locations in California, Minnesota, and Wisconsin. 12 Results of Operations Second Quarter Fiscal 2000 Compared With Second Quarter Fiscal 1999 Total revenues were $78.0 million in the second quarter of fiscal 2000, compared with $77.2 million in the second quarter of fiscal 1999. Revenues from the Environmental-liability Management segment increased to $42.5 million in fiscal 2000 from $39.0 million in fiscal 1999. Excluding intrasegment sales, revenues at ThermoRetec increased to $38.6 million in fiscal 2000 from $35.0 million in fiscal 1999, primarily at its Consulting and Engineering Services segment due to higher revenues from a large remedial-construction contract that is expected to continue through fiscal 2001. Revenues from Thermo EuroTech remained constant at $3.9 million in both fiscal 2000 and 1999. A decrease in revenues relating to a contract to perform soil-remediation services in Europe was offset by $0.6 million of revenues from Dempsey Drums, which was acquired in August 1999 (Note 6). Revenues from the Engineering and Design segment decreased to $21.0 million in fiscal 2000 from $23.8 million in fiscal 1999, primarily due to decreased contract revenue resulting in part from a recession in the chemical industry. Revenues from the Laboratory Testing segment increased to $10.6 million in fiscal 2000 from $9.9 million in fiscal 1999 due to higher demand. Revenues from the Metal Treating segment decreased to $4.0 million in fiscal 2000 from $4.8 million in fiscal 1999 due to weaknesses in the agricultural equipment and commercial aerospace industries. The gross profit margin increased to 21% in the second quarter of fiscal 2000 from 20% in the second quarter of fiscal 1999. The increase was primarily due to a reduction of depreciation expense in fiscal 2000 at the Environmental-liability Management and Engineering and Design segments as a result of certain write-offs (Note 5), which increased the pretax operating income by approximately $0.8 million. The gross profit margin also increased at the Laboratory Testing segment, due to increased revenues and relatively stable overhead costs. These increases were offset in part by lower gross profit margins at the Metal Treating segment as a result of a decrease in revenues. Selling, general, and administrative expenses as a percentage of revenues remained constant at 14% in the second quarters of both fiscal 2000 and 1999. In May 1999, the Company announced that its majority-owned subsidiaries plan to sell several businesses (Note 5). The businesses proposed to be sold include the used-oil processing operation of Thermo EuroTech; three soil-recycling facilities of ThermoRetec, in addition to those proposed to be closed in fiscal 1999 discussed below; and the Randers division, BAC Killam Inc., and E3-Killam Inc. businesses of Randers Killam. In connection with these actions, the Company recorded $119,000 of restructuring costs in the second quarter of fiscal 2000, including $63,000 recorded by the Environmental-liability Management segment for retention bonuses and cash costs incurred in connection with the proposed sale of a facility and $56,000 recorded by the Engineering and Design segment for severance costs that were not permitted as charges until they were incurred pursuant to the requirements of Emerging Issues Task Force Pronouncement No. 94-3. During the second quarter of fiscal 1999, the Company recorded $10.2 million of restructuring costs. Of these restructuring costs, $9.2 million was recorded by ThermoRetec in connection with the closure of two soil-recycling facilities. The costs include a write-down of fixed assets to their estimated disposal value and a write-off of intangible assets, including cost in excess of net assets of acquired companies, as well as other closure costs. The closure was in response to changes in market conditions, which have resulted in lower priced soil-recycling alternatives. In addition, the Company recorded $1.0 million of restructuring costs for abandoned-facility payments relating to the consolidation of the facilities of another business. The businesses the Company expects to sell reported unaudited aggregate revenues and operating income, prior to restructuring and related costs, of $21.0 million and $1.1 million, respectively, in the first six months of fiscal 2000 and $54.0 million and $0.2 million, respectively, in fiscal 1999. 13 Second Quarter Fiscal 2000 Compared With Second Quarter Fiscal 1999 (continued) Interest income increased to $0.7 million in the second quarter of fiscal 2000 from $0.5 million in the second quarter of fiscal 1999, primarily as a result of higher average invested cash balances. Interest expense remained relatively constant at $2.3 million in the second quarter of fiscal 2000, compared with $2.2 million in the second quarter of fiscal 1999. The effective tax rate of 56% in the second quarter of fiscal 2000 exceeded the statutory federal income tax rate primarily due to the impact of state income taxes, the nondeductible amortization of cost in excess of net assets of acquired companies, and certain losses for which state tax benefits could not be utilized. The Company recorded a tax benefit in the second quarter of fiscal 1999 at an effective rate below the statutory federal income tax rate primarily due to the write-off of nondeductible cost in excess of net assets of acquired companies. Minority interest expense was $0.5 million in the second quarter of fiscal 2000, compared with minority interest income of $1.7 million in the second quarter of fiscal 1999. The Company recorded minority interest income in fiscal 1999, primarily due to losses incurred by ThermoRetec. First Six Months Fiscal 2000 Compared With First Six Months Fiscal 1999 Total revenues remained constant at $153.9 million in the first six months of fiscal 2000 and 1999. Revenues from the Environmental-liability Management segment increased to $81.4 million in fiscal 2000 from $78.7 million in fiscal 1999. Excluding intrasegment sales, revenues at ThermoRetec increased to $74.4 million in fiscal 2000 from $69.2 million in fiscal 1999, primarily at its Consulting and Engineering Services segment due to higher revenues from a large remedial-construction contract that is expected to continue through fiscal 2001. Revenues from Thermo EuroTech decreased $2.5 million to $6.9 million due to a decrease in sales of useable oil products and a decrease in revenues relating to contracts to perform soil-remediation services overseas and to process oil-based muds. Revenues from the Engineering and Design segment decreased to $42.9 million in fiscal 2000 from $46.5 million in fiscal 1999, primarily due to decreased contract revenue resulting in part from a recession in the chemical industry. Revenues from the Laboratory Testing segment increased to $21.6 million in fiscal 2000 from $19.6 million in fiscal 1999 due to higher demand. Revenues from the Metal Treating segment decreased to $8.4 million in fiscal 2000 from $9.5 million in fiscal 1999 due to weaknesses in the agricultural equipment and commercial aerospace industries. The gross profit margin increased to 21% in the first six months of fiscal 2000 from 20% in the first six months of fiscal 1999. Excluding the effect of a $0.7 million write-off of inventory at the Environmental-liability Management segment (Note 5), the gross profit margin increased primarily due to a reduction of depreciation expense in fiscal 2000 at the Environmental-liability Management and Engineering and Design segments (Note 5), which decreased the pretax operating loss by approximately $1.7 million. The gross profit margin also increased at the Laboratory Testing segment, due to increased revenues and relatively stable overhead costs. Selling, general, and administrative expenses as a percentage of revenues remained constant at 14% in the first six months of both fiscal 2000 and 1999. In connection with the proposed sale of businesses discussed in the results of operations for the second quarter, the Company recorded $54.3 million of restructuring costs in the first six months of fiscal 2000. Of these restructuring costs, $38.6 million was recorded by the Environmental-liability Management segment and $15.7 million was recorded by the Engineering and Design segment. These charges represent the excess of book value of the businesses proposed to be sold over the estimated proceeds from their sale, a write-down of fixed assets to their estimated disposal value, ongoing lease obligations, land reclamation costs, a charge for a cumulative translation adjustment, write-offs of intangible and other assets, and severance costs (Note 5). 14 First Six Months Fiscal 2000 Compared With First Six Months Fiscal 1999 (continued) During the first six months of fiscal 1999, the Company recorded $10.2 million of restructuring costs, as discussed in the results of operations for the second quarter. Interest income increased to $1.3 million in the first six months of fiscal 2000 from $1.2 million in the first six months of fiscal 1999, primarily as the result of higher average invested cash balances. Interest expense remained constant at $4.5 million in the first six months of fiscal 2000 and 1999. The Company recorded a tax provision in the first six months of fiscal 2000 and a tax benefit in the first six months of fiscal 1999. The effective rate in both periods was below the statutory federal income tax rate, primarily due to the write-off of nondeductible cost in excess of net assets of acquired companies. In addition, the tax provision recorded in fiscal 2000 includes a $1.1 million write-off of deferred tax assets (Note 5). The Company recorded minority interest income of $3.7 million and $1.5 million in the first six months of fiscal 2000 and 1999, respectively, primarily due to losses incurred by the Company's majority-owned subsidiaries. Liquidity and Capital Resources Consolidated working capital was $24.0 million at October 2, 1999, compared with $67.0 million at April 3, 1999. Working capital decreased $38.0 million as a result of the reclassification of subordinated convertible debentures due May 2000 to current liabilities. Cash and cash equivalents were $3.9 million at October 2, 1999, compared with $43.0 million at April 3, 1999. In addition, as of October 2, 1999, the Company had $49.3 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 7), which became effective June 1, 1999, amounts invested with Thermo Electron were included in cash and cash equivalents. Of the total cash and cash equivalents, $2.8 million was held by the Company's majority-owned subsidiaries and the balance was held by the Company and its wholly owned subsidiaries. Of the total advance to affiliate, $47.8 million was advanced by the Company's majority-owned subsidiaries and the balance was advanced by the Company and its wholly owned subsidiaries. During the first six months of fiscal 2000, $14.3 million of cash was provided by operating activities. During this period, $9.5 million of cash was provided by an increase in other current liabilities, primarily due to a net $7.3 million increase in accrued restructuring costs, which the Company expects to pay primarily over the next 12 months. A decrease in accounts receivable provided $4.6 million of cash, primarily at ThermoRetec due to the timing of billings and increased collection efforts. This decrease at ThermoRetec was offset in part by increased accounts receivable at the Laboratory Testing and Engineering and Design segments, primarily as a result of the timing of billings and customer payments and increased laboratory testing revenues. An increase in inventories and unbilled contract costs and fees used $4.5 million of cash, primarily due to the timing of billings at ThermoRetec. Excluding advances to affiliate activity (Note 7), the Company's investing activities in the first six months of fiscal 2000 primarily consisted of an acquisition and capital additions. In August 1999, a subsidiary of the Company acquired Dempsey Drums Limited for $2.0 million, net of cash acquired, and the issuance of shares of the subsidiary's common stock valued at $0.4 million (Note 6). The Company expended $6.3 million for purchases of property, plant, and equipment in the first six months of fiscal 2000 and expects to spend approximately $6.0 million for capital additions during the remainder of fiscal 2000. The Company's financing activities provided cash of $4.4 million in the first six months of fiscal 2000 and primarily consisted of $2.5 million received from the repayment of long-term notes receivable and $2.3 million borrowed to finance an acquisition (Note 6). Pursuant to certain put rights on shares issued in connection with an acquisition, the Company has cash obligations aggregating $3.4 million to purchase its common stock through fiscal 2002. 15 Liquidity and Capital Resources (continued) The Company generally expects to have positive cash flow from its existing operations. Although the Company does not presently intend to actively seek to acquire additional businesses in the near future, it may acquire one or more complimentary businesses if they are presented to the Company on terms the Company believes to be attractive. Such acquisitions may require significant amounts of cash. The Company expects that it will finance any such acquisitions through a combination of internal funds and/or short-term borrowings from Thermo Electron, although it has no agreement with Thermo Electron to ensure that funds will be available on acceptable terms, or at all. Thermo Electron has expressed its willingness to advance up to $5 million to the Company for short-term liquidity in the event that the need arises. In addition, ThermoRetec's $38.0 million principal amount 4 7/8% subordinated convertible debentures are due to mature on May 1, 2000. These debentures may be repaid prior to the maturity date if the merger of ThermoRetec with Thermo Electron (Note 8) is completed prior to that time. The merger of ThermoRetec with Thermo Electron is considered a redemption event causing the acceleration of the repayment of the debentures. The maturity of ThermoRetec's debentures could adversely affect the Company's liquidity in the first quarter of fiscal 2001. Year 2000 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, services, and operations. The Company's year 2000 initiatives include (i) testing and upgrading significant information technology systems and facilities; (ii) assessing the year 2000 readiness of its key suppliers and vendors; and (iii) 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 non-information technology systems will be ready for the year 2000. In the first phase of the program, the Company tested and evaluated its critical information technology systems and non-information technology systems for year 2000 compliance, which efforts included testing and evaluating 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 the utility and telecommunications systems at its critical facilities. In phase two of its program, any material noncompliant information technology systems or non-information technology systems that were identified during phase one were prioritized and remediated. Based on its evaluations, the Company concluded that no material upgrades or modifications to its critical non-information technology systems were required. The Company is currently upgrading or replacing its material noncompliant information technology systems, and this process was approximately 90% complete as of October 2, 1999. In many cases, such upgrades or replacements are being made in the ordinary course of business, without accelerating previously scheduled upgrades or replacements. The Company expects that all of its material information technology systems and critical non-information technology systems will be year 2000 compliant by the end of November 1999. The Company has also identified and assessed 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 developed and distributed questionnaires relating to year 2000 compliance to its significant suppliers and vendors. The Company also followed up with significant suppliers and vendors that did not respond to the Company's questionnaires. To date, no significant supplier or vendor has indicated that it believes its business operations will be materially disrupted by the year 2000 issue. As of October 2, 1999, the Company has completed the majority of its assessment of third-party risk. 16 Year 2000 (continued) Contingency Plan The Company has developed a contingency plan that will allow its primary business operations to continue despite disruptions due to year 2000 problems. This plan includes identifying manual or backup systems in the event of a failure of the Company's material information technology systems. The Company may, in the future, modify and adjust its contingency plan as may be required in the event that there are changes in the year 2000 readiness of its business systems and facilities and significant suppliers and vendors. Estimated Costs to Address the Company's Year 2000 Issues The Company had incurred third-party expenses (external costs) related to year 2000 issues of approximately $350,000 as of October 2, 1999. All of the external costs incurred as of October 2, 1999, were spent on testing and upgrading information technology systems. In fiscal 1999 and in the first six months of fiscal 2000, an immaterial amount of the Company's total information technology budget was spent on year 2000 issues. 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 the Company experiences year 2000 problems in its material information technology systems that cause the Company to be unable to access data, to process transactions, and to maintain accurate books and records. In such an event, 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. 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. Some services provided by the Company involve the delivery to clients of third-party software and hardware. In addition, certain older third-party products, which the Company no longer uses in providing its services to clients, may not be year 2000 compliant, which may expose the Company to claims. As discussed above, if any of the Company's key suppliers or vendors experience business disruptions due to year 2000 issues, the Company might 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 Disclosure About Market Risk The Company's exposure to market risk from changes in foreign exchange rates, equity prices, and interest rates has not changed materially from its exposure at fiscal year-end 1999. 17 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on the page immediately preceding exhibits. (b) Reports on Form 8-K 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 10th day of November 1999. THERMO TERRATECH INC. /s/ Paul F. Kelleher Paul F. Kelleher Chief Accounting Officer /s/ Theo Melas-Kyriazi Theo Melas-Kyriazi Chief Financial Officer 19 EXHIBIT INDEX Exhibit Number Description of Exhibit - -------------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger dated as of October 19, 1999, by and among Thermo Electron Corporation, TTT Acquisition Corporation, and Thermo TerraTech Inc. (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K relating to events occurring on October 19, 1999 [File No. 1-9549] and incorporated herein by reference). 27 Financial Data Schedule. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO TERRATECH INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS APR-01-2000 OCT-02-1999 3,888 0 57,999 3,327 2,359 144,471 135,248 62,850 319,166 120,425 120,036 0 0 1,958 47,715 319,166 0 153,944 0 121,830 54,317 217 4,465 (47,332) 241 (43,887) 0 0 0 (43,887) (2.30) (2.30)
-----END PRIVACY-ENHANCED MESSAGE-----