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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended April 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-11406
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 April 30, 1999
Common Stock, $.01 par value 61,184,729
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO FIBERTEK INC.
Consolidated Balance Sheet
(Unaudited)
Assets
April 3, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents (includes $83,536 and $74,447 under $128,792 $115,472
repurchase agreement with parent company)
Available-for-sale investments, at quoted market value (amortized cost 40,378 48,206
of $40,365 and $48,210)
Accounts receivable, less allowances of $2,060 and $2,231 44,210 50,281
Unbilled contract costs and fees 7,326 2,968
Inventories:
Raw materials and supplies 13,996 14,848
Work in process 7,245 5,341
Finished goods 8,801 10,435
Prepaid income taxes 7,005 6,806
Other current assets 1,465 1,935
-------- --------
259,218 256,292
-------- --------
Property, Plant, and Equipment, at Cost 65,250 68,661
Less: Accumulated depreciation and amortization 35,291 36,925
-------- --------
29,959 31,736
-------- --------
Other Assets (Note 7) 11,942 12,309
-------- --------
Cost in Excess of Net Assets of Acquired Companies 124,831 126,763
-------- --------
$425,950 $427,100
======== ========
2
THERMO FIBERTEK INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Accounts payable $ 22,700 $ 21,548
Accrued payroll and employee benefits 6,514 10,273
Billings in excess of contract costs and fees 1,138 5,846
Accrued warranty costs 5,410 5,830
Customer deposits 3,265 3,154
Other accrued expenses (Notes 5 and 6) 18,301 14,916
Due to parent company and affiliated companies 1,539 1,279
-------- --------
58,867 62,846
-------- --------
Deferred Income Taxes and Other Deferred Items 6,355 6,202
-------- --------
Subordinated Convertible Debentures 153,000 153,000
-------- --------
Minority Interest 288 303
-------- --------
Common Stock of Subsidiary Subject to Redemption ($52,344 and 50,946 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 77,765 78,731
Retained earnings 108,830 100,602
Treasury stock at cost, 2,331,258 and 2,238,830 shares (21,342) (21,286)
Deferred compensation (89) -
Accumulated other comprehensive items (Note 2) (9,305) (7,733)
-------- --------
156,494 150,948
-------- --------
$425,950 $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
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $60,223 $62,330
------- -------
Costs and Operating Expenses:
Cost of revenues 36,787 37,052
Selling, general, and administrative expenses 15,497 16,244
Research and development expenses 1,818 1,867
Gain on sale of business (Note 5) (11,099) -
Restructuring and nonrecurring costs (Note 6) 3,383 -
------- -------
46,386 55,163
------- -------
Operating Income 13,837 7,167
Interest Income 1,966 1,982
Interest Expense (1,850) (1,861)
------- -------
Income Before Provision for Income Taxes and Minority Interest 13,953 7,288
Provision for Income Taxes 5,485 2,834
Minority Interest Expense 240 203
------- -------
Net Income $ 8,228 $ 4,251
======= =======
Earnings per Share (Note 3):
Basic $ .13 $ .07
======= =======
Diluted $ .12 $ .07
======= =======
Weighted Average Shares (Note 3):
Basic 61,202 61,562
======= =======
Diluted 74,275 62,641
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO FIBERTEK INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 8,228 $ 4,251
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,347 2,236
Provision for losses on accounts receivable 1 55
Minority interest expense 240 203
Gain on sale of business (Note 5) (11,099) -
Noncash restructuring and nonrecurring costs (Note 6) 470 -
Other noncash items 5 8
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 2,157 6,291
Inventories and unbilled contract costs and fees (6,053) (2,576)
Prepaid income taxes and other current assets (39) 866
Accounts payable 2,685 (2,962)
Other current liabilities (3,069) (4,752)
-------- --------
Net cash provided by (used in) operating activities (4,127) 3,620
-------- --------
Investing Activities:
Proceeds from sale of business, net of cash divested (Note 5) 13,537 -
Refund of acquisition purchase price (Note 5) 377 -
Purchases of available-for-sale investments (25,325) (2,500)
Proceeds from sale and maturities of available-for-sale investments 33,002 9,311
Purchases of property, plant, and equipment (433) (1,359)
Other 260 81
-------- --------
Net cash provided by investing activities 21,418 5,533
-------- --------
Financing Activities:
Purchase of Company common stock (2,377) -
Purchases of subsidiary common stock from Thermo Electron (2,227) -
Net proceeds from issuance of Company common stock 390 -
Other - (169)
-------- --------
Net cash used in financing activities (4,214) (169)
-------- --------
Exchange Rate Effect on Cash 243 (181)
-------- --------
Increase in Cash and Cash Equivalents 13,320 8,803
Cash and Cash Equivalents at Beginning of Period 115,472 111,648
-------- --------
Cash and Cash Equivalents at End of Period $128,792 $120,451
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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 April 3, 1999, and the results of
operations and cash flows for the three-month periods ended April 3, 1999, and
April 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 first quarter of 1999 and 1998, the
Company had comprehensive income of $6,653,000 and $3,645,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Basic
Net Income $ 8,228 $4,251
------- ------
Weighted Average Shares 61,202 61,562
------- ------
Basic Earnings per Share $ .13 $ .07
======= ======
6
3. Earnings per Share (continued)
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Diluted
Net Income $ 8,228 $4,251
Effect of:
Convertible obligations 1,033 -
Majority-owned subsidiary's dilutive securities (23) (9)
------- ------
Income Available to Common Shareholders, as Adjusted $ 9,238 $4,242
------- ------
Weighted Average Shares 61,202 61,562
Effect of:
Convertible obligations 12,644 -
Stock options 429 1,079
------- ------
Weighted Average Shares, as Adjusted 74,275 62,641
------- ------
Diluted Earnings per Share $ .12 $ .07
======= ======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of April 3, 1999, there were 888,000 of such options
outstanding, with exercise prices ranging from $7.54 to $14.32 per share.
In addition, the computation of diluted earnings per share for the 1998
period 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.
7
4. Business Segment Information
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues:
Pulp and Papermaking Equipment and Systems (a) $56,398 $55,381
Dryers and Pollution-control Equipment (b)(c) 1,802 6,018
Water- and Fiber-recovery Services and Products 2,074 1,343
Intersegment sales elimination (d) (51) (412)
------- -------
$60,223 $62,330
======= =======
Income Before Provision for Income Taxes and Minority Interest:
Pulp and Papermaking Equipment and Systems (e) $ 3,957 $8,101
Dryers and Pollution-control Equipment (c) 455 805
Water- and Fiber-recovery Services and Products (219) (657)
Corporate (f) 9,644 (1,082)
------- -------
Total operating income 13,837 7,167
Interest income, net 116 121
------- -------
$13,953 $7,288
======= =======
(a) Includes intersegment sales of $34,000 and $220,000 in 1999 and 1998, respectively.
(b) Includes intersegment sales of $17,000 and $192,000 in 1999 and 1998, respectively.
(c) The Company sold this segment in February 1999 (Note 5).
(d) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(e) Includes $3,383,000 of restructuring and nonrecurring costs in 1999 (Note
6).
(f) Primarily general and administrative expenses, however, the 1999 amount
includes $11,099,000 gain on sale of business (Note 5).
5. Acquisitions and Dispositions
In February 1999, the Company sold its Thermo Wisconsin, Inc. subsidiary
for $13,576,000 in cash, subject to a post-closing adjustment, resulting in a
pretax gain of $11,099,000. Thermo Wisconsin, a manufacturer and marketer of
dryers and pollution-control equipment, had unaudited revenues to external
customers and net income for fiscal 1998 of $18,877,000 and $1,547,000,
respectively.
During the first quarter of 1999, the Company received $377,000 related to
the sale of the property at Goslin Birmingham, which was acquired in 1998. The
Company recorded this amount as a reduction of cost in excess of net assets of
acquired companies.
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. Unresolved
matters at April 3, 1999, included completion of planned severances for an
acquisition completed in the last twelve months.
8
5. Acquisitions and Dispositions (continued)
A summary of the changes in accrued acquisition expenses, which are included in
other accrued expenses in the accompanying balance sheet, is:
(In thousands) Total
- ----------------------------------------------------------------------------- -------------- --------------
Balance at January 2, 1999 $149
Usage (30)
----
Balance at April 3, 1999 $119
====
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 38 employees across all functions at the Company's E. & M.
Lamort, S.A. subsidiary, none of whom were terminated as of April 3, 1999, and
$974,000 to terminate distributor agreements. Nonrecurring charges 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 and $200,000 for impairment of a note receivable; and $130,000 for
facility-closure costs. As of April 3, 1999, the Company had not expended any of
the established reserve. The liability for restructuring costs of $2,161,000, as
adjusted for the impact of currency translation, is included in other accrued
expenses in the accompanying balance sheet as of April 3, 1999, and is expected
to be paid primarily during the remainder of 1999.
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 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 $2,910,000. 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. In April 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.
9
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.
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, which is subject to a post-closing adjustment. Thermo
Wisconsin's unaudited revenues to external customers and net income for fiscal
1998 were $18.9 million and $1.5 million, respectively.
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, and British pounds sterling. 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
10
Overview (continued)
no effect on the income statement since gains or losses on the customer contract
offset gains or losses on the forward contract. In addition, the Company's
results of operations could be adversely affected by possible costs related to
the conversion to the Euro currency, which began in January 1999.
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 both 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
First Quarter 1999 Compared With First Quarter 1998
Excluding the results of Thermo Wisconsin, which was sold in February 1999
(Note 5), revenues increased to $58.4 million in the first quarter of 1999 from
$56.5 million in the first quarter of 1998. Thermo Wisconsin's unaudited
revenues to external customers were $1.8 million and $5.8 million in the first
quarter of 1999 and 1998, respectively. Revenues at the Company's remaining
segments increased slightly, primarily at the Papermaking Equipment segment due
to increased revenues from the stock-preparation equipment and water-management
product lines in Europe and North America, respectively. These increases were
offset in part by decreases in revenues from the stock-preparation equipment and
accessories product lines in North America. 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 $0.6
million in the first quarter of 1999.
The gross profit margin decreased to 39% in the first quarter of 1999 from
41% in the first quarter of 1998, primarily at the Papermaking Equipment segment
as a result of lower gross profit margins at the Company's Lamort subsidiary due
to competitive pricing pressures.
Selling, general, and administrative expenses as a percentage of revenues
were unchanged at 26% in the first quarter of 1999 and 1998.
Research and development expenses were relatively unchanged at $1.8
million and $1.9 million in the first quarter 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).
11
First Quarter 1999 Compared With First Quarter 1998 (continued)
Restructuring and nonrecurring costs of $3.4 million in the first quarter
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
restructuring costs of $2.3 million primarily during the remainder of 1999.
Interest income and expense were unchanged in the first quarter of 1999
and 1998.
The effective tax rate was unchanged at 39% in the first quarter 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.
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. In April 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.
Liquidity and Capital Resources
Consolidated working capital was $200.4 million at April 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 $169.2 million at April
3, 1999, compared with $163.7 million at January 2, 1999. Of the $169.2 million
balance at April 3, 1999, $53.2 million was held by Thermo Fibergen, $6.9
million was held by Fiberprep, and the remainder was held by the Company and its
wholly owned subsidiaries. At April 3, 1999, $38.3 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 quarter of 1999, $4.1 million of cash was used in
operating activities. An increase in inventories and unbilled contract costs and
fees used $6.1 million of cash, primarily due to increased unbilled contract
costs and fees at the Company's Lamort and Thermo Black Clawson U.S.
subsidiaries due to the timing of billings on percentage-of-completion
contracts. The Company used an additional $3.1 million to reduce other current
liabilities, primarily billings in excess of contract costs and fees at Lamort,
as well as accrued payroll and employee benefits.
During the first quarter of 1999, the Company's investing activities,
excluding available-for-sale investments activity, provided $13.7 million of
cash, which primarily represents proceeds of $13.6 million from the sale of
Thermo Wisconsin (Note 5). In addition, the Company purchased property, plant,
and equipment for $0.4 million and received $0.4 million for the sale of
property related to the acquisition of Goslin Birmingham (Note 5).
12
Liquidity and Capital Resources (continued)
During the first quarter of 1999, the Company's financing activities used
$4.2 million of cash. The Company used $2.4 million to purchase Company common
stock in open market transactions and $2.2 million to purchase Thermo Fibergen
common stock at its fair market value from Thermo Electron Corporation, pursuant
to authorizations by the Company's and Thermo Fibergen's Boards of Directors,
respectively. As of April 3, 1999, the Company had a remaining authorization to
purchase $8.4 million of Company common stock, outstanding convertible
debentures, or Thermo Fibergen common stock in open market or negotiated
transactions through January 22, 2000. In March 1999, Thermo Fibergen's Board of
Directors authorized the purchase of up to an additional $5 million of Thermo
Fibergen common stock in open market or negotiated transactions through March
16, 2000. As of April 3, 1999, no purchases had been made under this
authorization. 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 $52.3 million.
At April 3, 1999, the Company had $63.8 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 $2.9 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. Thermo Fibergen currently has only
one such agreement in place and 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.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company's efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. The Company is currently in phase two of its
program, during which any material noncompliant information technology systems
or facilities that were identified during phase one are prioritized and
remediated. Based on its evaluations, the Company does not believe that any
material upgrades are necessary to make its critical facilities year 2000
compliant. The Company is currently upgrading or replacing its material
noncompliant information technology systems, and the majority of this process
was complete as of April 3, 1999. The Company expects that its material
information technology systems and critical facilities will be year 2000
compliant by November 1999.
13
Year 2000 (continued)
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 not completed the majority of its assessment of
third-party risk, but expects to be substantially completed by 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.
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.
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
14
Year 2000 (continued)
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 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.
15
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 11th day of May 1999.
THERMO FIBERTEK INC.
/s/ Paul F. Kelleher
-------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
-------------------------
Theo Melas-Kyriazi
Chief Financial Officer
16
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.