SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2005 COMMISSION FILE NO. 000-27308.
AAVID THERMAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0466826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE EAGLE SQUARE, SUITE 509, CONCORD, NH 03301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 224-1117
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 [ ] No [X](1)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act).
Yes [ ] No [X]
The number of outstanding shares of the registrant's Common Stock as of
July 30, 2005 was 1,018.87 shares of Class A, 1,078.87 shares of Class B and 40
shares of Class H, all of which are owned by Heat Holdings Corp.
- ----------
(1) Although the Company has not been subject to such filing requirements for
the past 90 days, it has filed all reports required to be filed by Section
15(d) of the Securities Exchange Act of 1934 (the "Act") during the
preceding twelve months. Pursuant to Section 15(d) of the Act, the
Company's duty to file reports is automatically suspended as a result of
having fewer than 300 holders of record of its debt securities outstanding,
as of January 1, 2003, but the Company agreed, under the terms of certain
long-term debt covenants, to continue these filings.
AAVID THERMAL TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
a.) Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004................................................. 3
b.) Consolidated Statements of Operations for the quarters and
six months ended June 30, 2005 and 2004........................... 4
c.) Consolidated Statements of Cash Flows for the six months
ended June 30, 2005 and 2004...................................... 5
d.) Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 15
Item 4. Controls and Procedures.......................................... 21
Part II. Other Information
Item 1. Legal Proceedings................................................ 22
Item 6. Exhibits and Reports on Form 8-K................................. 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30,
2005 DECEMBER 31,
(UNAUDITED) 2004
----------- ------------
ASSETS
Cash and cash equivalents ...................................................... $ 36,109 $ 28,312
Accounts receivable-trade, less allowance for doubtful accounts ................ 49,582 48,234
Inventories .................................................................... 12,790 12,745
Refundable taxes ............................................................... 480 380
Deferred income taxes .......................................................... 1,188 1,062
Prepaid and other current assets ............................................... 5,829 5,375
--------- ---------
Total current assets ........................................................ 105,978 96,108
Property, plant and equipment, net ............................................. 27,019 28,296
Goodwill ....................................................................... 40,026 40,026
Developed technology, net ...................................................... 1,884 2,242
Deferred financing fees ........................................................ 1,884 2,451
Deferred income taxes .......................................................... 405 434
Other assets, net .............................................................. 2,004 2,133
--------- ---------
Total assets ................................................................ $ 179,200 $ 171,690
========= =========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' DEFICIT
Accounts payable-trade ......................................................... $ 19,875 $ 19,657
Current portion of long term debt obligations .................................. 10,166 8,948
Income taxes payable ........................................................... 9,684 6,411
Deferred revenue ............................................................... 48,403 43,136
Accrued expenses and other current liabilities ................................. 26,540 30,707
--------- ---------
Total current liabilities ................................................... 114,668 108,859
Long term debt obligations, net of current portion ............................. 129,633 129,519
Deferred income taxes .......................................................... 334 366
--------- ---------
Total liabilities ........................................................... 244,635 238,744
--------- ---------
Minority interests in consolidated subsidiaries ................................ 585 585
Stockholders' deficit:
Series A Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares
issued and outstanding (Liquidation value of $7,565 at June 30, 2005) ....... -- --
Series B Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares
issued and outstanding (Liquidation value of $7,565 at June 30, 2005) ....... -- --
Class A Common Stock, $.0001 par value; authorized 1,400 shares; 1,018.87 shares
issued and outstanding ...................................................... -- --
Class B Common Stock, $.0001 par value; authorized 1,400 shares; 1,078.87 shares
issued and outstanding ...................................................... -- --
Class H Common Stock, $.0001 par value; authorized 200 shares; 40 shares issued
and outstanding ............................................................. -- --
Warrants to purchase 49.52 shares of Class A common stock and 49.52 shares of
Class H common stock ........................................................ 3,764 3,764
Additional paid-in capital ..................................................... 188,007 188,007
Cumulative translation adjustment .............................................. (1,645) (1,066)
Accumulated deficit ............................................................ (256,146) (258,344)
--------- ---------
Total stockholders' deficit ................................................. (66,020) (67,639)
--------- ---------
Total liabilities, minority interests and stockholders' deficit ............. $ 179,200 $ 171,690
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
QUARTER QUARTER SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2004 2005 2004
-------- -------- ---------- ----------
Net sales ...................................... $64,192 $56,538 $124,770 $112,155
Cost of goods sold ............................. 31,929 28,622 61,102 56,410
------- ------- -------- --------
Gross profit ................................ 32,263 27,916 63,668 55,745
Selling, general and administrative expenses ... 18,775 15,751 37,100 32,800
Amortization of intangible assets .............. 218 109 434 453
Research and development ....................... 4,487 4,364 8,899 8,096
------- ------- -------- --------
Income from operations ...................... 8,783 7,692 17,235 14,396
Interest expense, net .......................... (4,611) (4,524) (9,189) (9,060)
Other income (expense), net .................... (44) (309) (412) 130
------- ------- -------- --------
Income from operations before income taxes .. 4,128 2,859 7,634 5,466
Income tax expense ............................. (3,672) (1,147) (5,436) (2,021)
------- ------- -------- --------
Net income ..................................... $ 456 $ 1,712 $ 2,198 $ 3,445
======= ======= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2005 2004
---------- -----------
Cash flows provided by operating activities:
Net income ...................................................................... $ 2,198 $ 3,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation .................................................................... 3,421 3,502
Amortization and accretion ...................................................... 1,451 1,360
Gain on sale of property, plant and equipment ................................... (14) (3)
Deferred income taxes ........................................................... (279) (255)
Changes in assets and liabilities:
Accounts receivable - trade ..................................................... (3,357) 1,392
Inventories ..................................................................... (426) 1,824
Prepaid and other current assets ................................................ (966) (282)
Other long term assets .......................................................... (24) (105)
Accounts payable - trade ........................................................ 649 1,754
Income taxes payable ............................................................ 3,585 931
Deferred revenue ................................................................ 7,544 5,279
Accrued expenses and other current liabilities .................................. (3,307) (1,108)
------- -------
Total adjustments ............................................................ 8,277 14,289
------- -------
Net cash provided by operating activities .................................... 10,475 17,734
Cash flows used in investing activities:
Purchases of property, plant & equipment ........................................ (2,260) (2,408)
Proceeds from sale of property, plant and equipment ............................. 29 13
------- -------
Net cash used in investing activities ........................................ (2,231) (2,395)
Cash flows provided by (used in) financing activities:
Advances (repayments) on line of credit, net .................................... 1,285 (585)
Advances under debt obligations ................................................. 547 --
Principal payments under debt obligations ....................................... (1,291) (1,156)
------- -------
Net cash provided by (used in) financing activities .......................... 541 (1,741)
Foreign exchange rate effect on cash and cash equivalents .......................... (988) (575)
------- -------
Net increase in cash and cash equivalents .......................................... 7,797 13,023
Cash and cash equivalents, beginning of period ..................................... 28,312 15,231
------- -------
Cash and cash equivalents, end of period ........................................... $36,109 $28,254
======= =======
Supplemental disclosure of cash flow information:
Interest paid ................................................................... $ 8,363 $ 8,247
======= =======
Income taxes paid ............................................................... $ 2,333 $ 668
======= =======
The accompanying notes are an internal part of these
consolidated financial statements.
5
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(1) BACKGROUND
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is a leading
global provider of thermal management solutions for electronic products and the
leading developer and marketer of computational fluid dynamics ("CFD") software.
Each of these businesses has an established reputation for high product quality,
service excellence and engineering innovation in its market. Aavid designs,
manufactures and distributes on a worldwide basis thermal management products
that dissipate unwanted heat, which can degrade system performance and
reliability, from microprocessors and industrial electronics products. Aavid's
products, which include heat sinks, interface materials and attachment
accessories, fans, heat spreaders and liquid cooling and phase change devices
that it configures to meet customer-specific needs, serve the critical function
of conducting, convecting and radiating away unwanted heat. CFD software is used
in complex computer-generated modeling of fluid flows, heat and mass transfer
and chemical reactions. Aavid's CFD software is used in a variety of industries,
including the automotive, aerospace, chemical processing, power generation,
material processing, electronics and HVAC industries.
Overall, the Company services a highly diversified base of more than 3,000
national and international customers including OEMs, distributors, and contract
manufacturers through a highly integrated network of software, development,
manufacturing, sales and distribution locations throughout North America,
Europe, and the Far East.
The Company has been privately held since February 2, 2000, when it was
acquired by Heat Holdings Corp., a corporation formed by Willis Stein & Partners
II, L.P and other investors. Heat Holdings II Corp., an affiliate of Heat
Holdings, owns 89% of the common equity of Aavid Thermalloy LLC, the thermal
management hardware business. The Company controls Aavid Thermalloy LLC through
a preferred equity interest and holds a 5% common equity interest and, thus,
consolidates Aavid Thermalloy LLC in its results within the accompanying
financial statements. The investment by Heat Holdings II Corp. has been recorded
as minority interest within the accompanying financial statements.
(2) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ending June 30,
2005 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the audited
financial statements at that date but does not include all of the footnotes
required by generally accepted accounting principles for complete financial
statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Aavid Thermal Technologies, Inc. annual report
on Form 10-K for the year ended December 31, 2004.
6
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable at June 30, 2005 and December 31, 2004 are
as follows:
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED)
Accounts receivable................................ $52,652 $50,621
Allowance for doubtful accounts.................... (3,070) (2,387)
------- -------
Net accounts receivable............................ $49,582 $48,234
======= =======
(4) INVENTORIES
Inventories are valued at the lower of cost or market (first-in,
first-out), and consist of materials, labor and overhead. The components of
inventories at June 30, 2005 and December 31, 2004 are as follows:
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED)
Raw materials...................................... $ 3,686 $ 4,233
Work-in-process.................................... 4,574 4,896
Finished goods..................................... 4,530 3,616
------- -------
$12,790 $12,745
======= =======
(5) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which specifies the presentation and
disclosure requirements for comprehensive income. The following details
comprehensive income for the periods reported herein:
QUARTER ENDED QUARTER ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2004 2005 2004
------------- ------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net income.................... $ 456 $1,712 $2,198 $3,445
Foreign currency translation
adjustment................. (444) (142) (579) (501)
----- ------ ------ ------
Comprehensive income.......... $ 12 $1,570 $1,619 $2,944
===== ====== ====== ======
(6) INCOME TAXES
The Company incurred a tax provision for the second quarter and first six
months of 2005 despite having operating losses in the United States because of
state tax provisions on applicable state components of U.S. income and foreign
tax provisions on foreign earnings. The Company incurred losses in the United
States and the Company only benefits from U.S. losses to the extent of foreign
earnings, which are expected to be repatriated in the United States. Because the
Company is in a net operating loss position for U.S. tax purposes, the Company
will not receive any tax benefit from foreign tax credits. Accordingly, there is
no net benefit recorded for the United States losses, resulting in an overall
tax provision for foreign taxes. The Company's effective tax rates of 89.0% and
71.2%, respectively, in the second quarter and first six months of 2005,
compares to effective tax rates of 40.1% and 37.0% for the comparable periods of
2004. The increase in effective tax rates in 2005 is due primarily to improved
profitability of the Company's foreign subsidiaries located in higher tax rate
jurisdictions.
The American Jobs Creation Act of 2004 (the "Jobs Act"), enacted on October
24, 2004, provides for a temporary 85% dividends received deduction on certain
foreign earnings repatriated by the end of 2005. To qualify for the deduction,
the earnings must be reinvested in the United States pursuant to a domestic
reinvestment plan established by the chief executive officer and approved by the
board of directors. Certain other criteria must be satisfied as well.
7
The Company is in the process of evaluating whether it will repatriate
foreign earnings under the provisions of the Jobs Act. The Company expects to
determine the amounts and sources of foreign earnings to be repatriated, if any,
during 2005.
The Company is not in a position to determine the impact of a qualifying
repatriation, should it choose to make one, on its income tax expense for 2005.
(7) SEGMENT REPORTING
The Company consists of two distinct reportable segments: (1) thermal
management products and (2) computational fluid dynamics ("CFD") software.
Aavid's thermal management products consist of products and services that solve
problems associated with the dissipation of unwanted heat in electronic and
electrical components and systems. The Company develops and offers CFD software
for computer modeling and fluid flow analysis of products and processes that
reduce time and expense associated with physical models and the facilities to
test them.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as disclosed in the Company's
Form 10-K for the year ended December 31, 2004.
The Company accounts for inter-segment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.
Aavid's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different marketing and sales strategies.
The following summarizes the operations of each reportable segment for the
quarter and six months ending June 30, 2005 and 2004:
REVENUES SEGMENT
FROM INCOME (LOSS) ASSETS (NET OF
EXTERNAL BEFORE INTERCOMPANY
CUSTOMERS TAXES BALANCES)
--------- ------------- --------------
Quarter Ended June 30, 2005
Thermal Products ........... $33,539 $(3,089) $ 65,428
CFD Software ............... 30,653 7,361 125,562
Corporate Office ........... -- (144) (11,790)
------- ------- --------
Total ...................... $64,192 $ 4,128 $179,200
======= ======= ========
Quarter Ended June 30, 2004
Thermal Products ........... $30,907 $(2,403) $ 54,257
CFD Software ............... 25,631 5,196 110,493
Corporate Office ........... -- 66 (10,312)
------- ------- --------
Total ...................... $56,538 $ 2,859 $154,438
======= ======= ========
REVENUES SEGMENT
FROM INCOME (LOSS)
EXTERNAL BEFORE
CUSTOMERS TAXES
--------- -------------
Six Months Ended June 30, 2005
Thermal Products .............. $ 64,310 $(6,689)
CFD Software .................. 60,460 14,646
Corporate Office .............. -- (323)
-------- -------
Total ......................... $124,770 $ 7,634
======== =======
Six Months Ended June 30, 2004
Thermal Products .............. $ 61,260 $(4,688)
CFD Software .................. 50,895 10,010
Corporate Office .............. -- 144
-------- -------
Total ......................... $112,155 $ 5,466
======== =======
8
The following table provides geographic information about the Company's
operations. Revenues are attributable to an operation based on the location the
product was shipped from. Long-lived assets are attributable to a location based
on physical location.
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
------------------------ ------------------------
FOR THE QUARTER ENDED LONG-LIVED LONG-LIVED
JUNE 30, 2005 JUNE 30, 2004 ASSETS ASSETS
--------------------------- AS OF PERIOD AS OF PERIOD
REVENUES REVENUES REVENUES END REVENUES END
-------- -------- -------- ------------ -------- ------------
United States ............... $29,441 $28,864 $ 58,593 $59,202 $ 56,237 $60,479
Taiwan ...................... 5,044 4,667 8,883 3,467 9,393 582
China ....................... 11,907 5,839 19,016 920 10,946 579
United Kingdom .............. 7,455 6,053 14,142 2,037 12,679 2,340
Italy ....................... 5,571 6,157 10,703 1,824 11,196 2,542
Japan ....................... 6,186 4,145 12,035 1,748 8,274 1,669
Mexico ...................... 1,958 2,548 4,001 243 4,875 427
Other International ......... 16,412 12,462 31,360 4,139 25,397 4,001
Intercompany eliminations ... (19,782) (14,197) (33,963) (358) (26,842) (358)
-------- ------- -------- -------- -------- -------
Total ....................... $64,192 $56,538 $124,770 $73,222 $112,155 $72,261
======== ======= ======== ======== ======== =======
9
(8) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (UNAUDITED)
The Company's wholly-owned domestic subsidiaries have jointly and severally
guaranteed, on a senior subordinated basis, the principal amount of the
Company's 12 3/4% Senior Subordinated Notes, due 2007. The guarantors include
the combined domestic operations of Aavid Thermalloy, LLC and Fluent, Inc. and
the Company's subsidiary Applied Thermal Technologies, Inc. The non-guarantors
include the combined foreign operations of Aavid Thermalloy, LLC and Fluent,
Inc. The consolidating condensed financial statements of the Company depict
Aavid Thermal Technologies, Inc., (the "Parent"), carrying its investment in
subsidiaries under the equity method and the guarantor and non-guarantor
subsidiaries are presented on a combined basis. Management believes that there
are no significant restrictions on the Parent's and guarantors' ability to
obtain funds from their subsidiaries by dividend or loan. The principal
elimination entries eliminate investment in subsidiaries and intercompany
balances and transactions.
CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2005 (UNAUDITED)
------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents .................... $ 3,708 $ 7,616 $ 24,785 $ -- $ 36,109
Accounts receivable-trade, net ............... -- 14,504 35,069 9 49,582
Inventories .................................. -- 5,185 7,906 (301) 12,790
Due (to) from affiliate, net ................. 101,068 (99,783) 35,045 (36,330) --
Refundable taxes ............................. (348) -- 648 180 480
Deferred income taxes ........................ (4,169) 13,124 1,188 (8,955) 1,188
Prepaid and other current assets ............. 229 1,066 4,534 -- 5,829
--------- --------- -------- --------- ---------
Total current assets ......................... 100,488 (58,288) 109,175 (45,397) 105,978
Property, plant and equipment, net ........... 6 15,854 11,055 104 27,019
Investment in subsidiaries ................... (38,745) 7,065 -- 31,680 --
Deferred income taxes ........................ 282 -- 405 (282) 405
Other assets, net ............................ 2,223 40,641 2,918 16 45,798
--------- --------- -------- --------- ---------
Total assets ................................. $ 64,254 $ 5,272 $123,553 $ (13,879) $ 179,200
========= ========= ======== ========= =========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' DEFICIT
Accounts payable-trade ....................... $ 126 $ 2,330 $ 17,419 $ -- $ 19,875
Current portion of debt obligations .......... -- 7,925 2,241 -- 10,166
Income taxes payable ......................... 2,456 2,651 5,695 (1,118) 9,684
Deferred revenue ............................. -- 21,013 27,390 -- 48,403
Accrued expenses and other current
liabilities ................................ 7,172 9,209 10,310 (151) 26,540
--------- --------- -------- --------- ---------
Total current liabilities .................... 9,754 43,128 63,055 (1,269) 114,668
--------- --------- -------- --------- ---------
Debt obligations, net of current portion ..... 122,227 6,613 793 -- 129,633
Deferred income taxes ........................ (2,294) 7,011 253 (4,636) 334
--------- --------- -------- --------- ---------
Total liabilities ............................ 129,687 56,752 64,101 (5,905) 244,635
--------- --------- -------- --------- ---------
Minority interests ........................... 587 -- -- (2) 585
Stockholders' (deficit) equity:
Preferred stock, par value ................... -- 86,222 8,837 (95,059) --
Common stock, par value ...................... -- 3 6,267 (6,270) --
Warrants ..................................... 3,764 -- -- -- 3,764
Additional paid-in capital ................... 188,007 126,192 8,855 (135,047) 188,007
Cumulative translation adjustment ............ (1,645) 623 4,637 (5,260) (1,645)
Retained earnings (deficit) .................. (256,146) (264,520) 30,856 233,664 (256,146)
--------- --------- -------- --------- ---------
Total stockholders' (deficit) equity ......... (66,020) (51,480) 59,452 (7,972) (66,020)
--------- --------- -------- --------- ---------
Total liabilities, minority interests and
stockholders' (deficit) equity ............ $ 64,254 $ 5,272 $123,553 $ (13,879) $ 179,200
========= ========= ======== ========= =========
10
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2004
------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents .................. $ 601 $ 3,910 $ 23,801 $ -- $ 28,312
Accounts receivable-trade, net ............. -- 18,383 29,860 (9) 48,234
Inventories ................................ -- 5,666 7,338 (259) 12,745
Due (to) from affiliate, net ............... 103,066 (95,776) 29,627 (36,917) --
Refundable taxes ........................... (348) -- 548 180 380
Deferred income taxes ...................... (4,168) 13,124 1,062 (8,956) 1,062
Prepaid and other current assets ........... 75 1,253 4,047 -- 5,375
--------- --------- -------- --------- ---------
Total current assets ....................... 99,226 (53,440) 96,283 (45,961) 96,108
Property, plant and equipment, net ......... 7 16,559 11,626 104 28,296
Investment in subsidiaries ................. (38,833) 6,925 -- 31,908 --
Deferred income taxes ...................... 282 -- 434 (282) 434
Other assets, net .......................... 2,689 40,930 3,217 16 46,852
--------- --------- -------- --------- ---------
Total assets ............................... $ 63,371 $ 10,974 $111,560 $ (14,215) $ 171,690
========= ========= ======== ========= =========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' DEFICIT
Accounts payable-trade ..................... $ 203 $ 2,666 $ 16,788 $ -- $ 19,657
Current portion of debt obligations ........ -- 7,036 1,912 -- 8,948
Income taxes payable ....................... 3,172 (210) 4,567 (1,118) 6,411
Deferred revenue ........................... -- 21,247 21,889 -- 43,136
Accrued expenses and other current
liabilities ............................. 7,565 11,260 12,086 (204) 30,707
--------- --------- -------- --------- ---------
Total current liabilities .................. 10,940 41,999 57,242 (1,322) 108,859
--------- --------- -------- --------- ---------
Debt obligations, net of current portion ... 121,777 7,400 342 -- 129,519
Deferred income taxes ...................... (2,294) 6,930 366 (4,636) 366
--------- --------- -------- --------- ---------
Total liabilities .......................... 130,423 56,329 57,950 (5,958) 238,744
--------- --------- -------- --------- ---------
Minority interests ......................... 587 -- -- (2) 585
Stockholders' (deficit) equity:
Common stock ............................... -- 3 6,267 (6,270) --
Preferred stock ............................ -- 86,222 8,837 (95,059) --
Warrants ................................... 3,764 -- -- -- 3,764
Additional paid-in capital ................. 188,007 126,192 8,715 (134,907) 188,007
Cumulative translation adjustment .......... (1,066) 548 8,574 (9,122) (1,066)
Accumulated deficit ........................ (258,344) (258,320) 21,217 237,103 (258,344)
--------- --------- -------- --------- ---------
Total stockholders' (deficit) equity ....... (67,639) (45,355) 53,610 (8,255) (67,639)
--------- --------- -------- --------- ---------
Total liabilities, minority interests
and stockholders' (deficit) equity ...... $ 63,371 $ 10,974 $111,560 $ (14,215) $ 171,690
========= ========= ======== ========= =========
11
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2005 (UNAUDITED)
------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------------- ------------- ------------ ------------
Net sales .................................. $ -- $29,604 $54,533 $(19,945) $64,192
Cost of goods sold ......................... -- 13,855 31,685 (13,611) 31,929
------- ------- ------- -------- -------
Gross profit ............................... -- 15,749 22,848 (6,334) 32,263
Selling, general and administrative
expenses ................................ 9 10,048 10,971 (2,035) 18,993
Research and development ................... -- 4,754 4,023 (4,290) 4,487
------- ------- ------- -------- -------
Income from operations ..................... (9) 947 7,854 (9) 8,783
Interest expense, net ...................... (135) (4,443) (24) (9) (4,611)
Other income (expense), net ................ -- 439 (807) 324 (44)
Equity in income (loss) of subsidiaries .... 1,635 -- -- (1,635) --
------- ------- ------- -------- -------
Income (loss) before income taxes .......... 1,491 (3,057) 7,023 (1,329) 4,128
Income tax benefit (expense) ............... (1,035) (983) (1,654) -- (3,672)
------- ------- ------- -------- -------
Net income (loss) .......................... $ 456 $(4,040) $ 5,369 $ (1,329) $ 456
======= ======= ======= ======== =======
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2004 (UNAUDITED)
------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------------- ------------- ------------ ------------
Net sales .................................. $ -- $29,269 $41,872 $(14,603) $56,538
Cost of goods sold ......................... -- 13,448 23,048 (7,874) 28,622
------ ------- ------- -------- -------
Gross profit ............................... -- 15,821 18,824 (6,729) 27,916
Selling, general and administrative
expenses ................................. (7) 9,006 9,051 (2,190) 15,860
Research and development ................... -- 4,410 4,493 (4,539) 4,364
------ ------- ------- -------- -------
Income from operations ..................... 7 2,405 5,280 -- 7,692
Interest income (expense), net ............. 60 (4,468) (125) 9 (4,524)
Other income (expense), net ................ (1) 132 (298) (142) (309)
Equity in income (loss) of subsidiaries .... 665 -- -- (665) --
------ ------- ------- -------- -------
Income (loss) before income taxes .......... 731 (1,931) 4,857 (798) 2,859
Income tax benefit (expense) ............... 981 (1,360) (768) -- (1,147)
------ ------- ------- -------- -------
Net income (loss) .......................... $1,712 $(3,291) $ 4,089 $ (798) $ 1,712
====== ======= ======= ======== =======
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
---------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ -------------- ------------- ------------ ------------
Net sales ................................. $ -- $59,163 $100,141 $(34,534) $24,770
Cost of goods sold ........................ -- 27,736 55,822 (22,456) 61,102
------ ------- -------- -------- -------
Gross profit .............................. -- 31,427 44,319 (12,078) 63,668
Selling, general and administrative
expenses ............................... 48 20,259 21,064 (3,837) 37,534
Research and development .................. -- 8,645 8,438 (8,184) 8,899
------ ------- -------- -------- -------
Income (loss) from operations ............. (48) 2,523 14,817 (57) 17,235
Interest income (expense), net ............ (276) (8,851) (65) 3 (9,189)
Other income (expense), net ............... -- 3,082 1,531 (5,025) (412)
Equity in income (loss) of subsidiaries ... 2,087 -- -- (2,087) --
------ ------- -------- -------- -------
Income (loss) before income taxes ......... 1,763 (3,246) 16,283 (7,166) 7,634
Income tax benefit (expense) .............. 435 (2,955) (2,916) -- (5,436)
------ ------- -------- -------- -------
Net income (loss) ......................... $2,198 $(6,201) $ 13,367 $ (7,166) $ 2,198
====== ======= ======== ======== =======
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
---------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ -------------- ------------- ------------ ------------
Net sales ................................. $ -- $56,905 $82,761 $(27,511) $112,155
Cost of goods sold ........................ -- 26,799 45,185 (15,574) 56,410
------ ------- ------- -------- --------
Gross profit .............................. -- 30,106 37,576 (11,937) 55,745
Selling, general and administrative
expenses ............................... 14 18,993 17,863 (3,617) 33,253
Research and development .................. -- 8,003 8,370 (8,277) 8,096
------ ------- ------- -------- --------
Income (loss) from operations ............. (14) 3,110 11,343 (43) 14,396
Interest income (expense), net ............ 159 (8,975) (260) 16 (9,060)
Other income (expense), net ............... (1) 1,151 (176) (844) 130
Equity in income (loss) of subsidiaries ... 2,045 -- -- (2,045) --
------ ------- ------- -------- --------
Income (loss) before income taxes ......... 2,189 (4,714) 10,907 (2,916) 5,466
Income tax benefit (expense) .............. 1,256 (2,027) (1,250) -- (2,021)
------ ------- ------- -------- --------
Net income (loss) ......................... $3,445 $(6,741) $ 9,657 $ (2,916) $ 3,445
====== ======= ======= ======== ========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
---------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ -------------- ------------- ------------ ------------
Net cash provided by operating activities ..... $3,685 $ 4,677 $ 5,974 $(3,861) $10,475
Cash flows used in investing activities:
Purchases of property, plant and equipment .... -- (706) (1,554) -- (2,260)
Proceeds from sale of property, plant and
equipment .................................. -- 5 24 -- 29
------ ------- ------- ------- -------
Net cash used in investing activities ......... -- (701) (1,530) -- (2,231)
Cash flows provided by (used in) financing
activities:
Advances on line of credit, net ............... -- 900 385 -- 1,285
Advances under debt obligations ............... -- -- 547 -- 547
Principal payments under debt obligations ..... -- (1,246) (45) -- (1,291)
------ ------- ------- ------- -------
Net cash provided by (used in) financing
activities ................................. -- (346) 887 -- 541
Foreign exchange effect on cash and cash
equivalents ................................ (578) 76 (4,347) 3,861 (988)
------ ------- ------- ------- -------
Net increase in cash and cash equivalents ..... 3,107 3,706 984 -- 7,797
Cash and cash equivalents, beginning of
period ..................................... 601 3,910 23,801 -- 28,312
------ ------- ------- ------- -------
Cash and cash equivalents, end of period ...... $3,708 $ 7,616 $24,785 $ -- $36,109
====== ======= ======= ======= =======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
---------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ -------------- ------------- ------------ ------------
Net cash provided by operating activities ..... $ 512 $ 5,113 $11,690 $ 419 $17,734
Cash flows used in investing activities:
Purchases of property, plant and equipment .... -- (708) (1,700) -- (2,408)
Proceeds from sale of property, plant and
equipment .................................. -- 10 3 -- 13
----- ------- ------- ----- -------
Net cash used in investing activities ......... -- (698) (1,697) -- (2,395)
Cash flows provided by (used in) financing
activities:
Advances (repayments) on line of credit, net .. -- (907) 322 -- (585)
Principal payments under debt obligations ..... -- (1,050) (106) -- (1,156)
----- ------- ------- ----- -------
Net cash provided by (used in) financing
activities ................................. -- (1,957) 216 -- (1,741)
Foreign exchange effect on cash and cash
equivalents ................................ (501) 405 (60) (419) (575)
----- ------- ------- ----- -------
Net increase in cash and cash equivalents ..... 11 2,863 10,149 -- 13,023
Cash and cash equivalents, beginning of
period ..................................... 97 5,081 10,053 -- 15,231
----- ------- ------- ----- -------
Cash and cash equivalents, end of period ...... $ 108 $ 7,944 $20,202 $ -- $28,254
===== ======= ======= ===== =======
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read together with our Consolidated
Financial Statements and the accompanying notes included in this Quarterly
Report. Statements in this Quarterly Report on Form 10-Q concerning the
Company's business outlook or future economic performance; anticipated
profitability, revenues, expenses or other financial items; introductions and
advancements in development of products, and plans and objectives related
thereto; and statements concerning assumptions made or expectations as to any
future events, conditions, performance or other matters, are "forward-looking
statements" as that term is defined under the Federal Securities Laws.
Forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from those stated in such
statements. Such risks, uncertainties and factors include, but are not limited
to, changes in the Company's markets, particularly the potentially volatile
semiconductor market, changes in and delays in product development plans and
schedules, customer acceptance of new products, changes in pricing or other
actions by competitors, patents owned by the Company and its competitors, risk
of foreign operations and markets, the Company's substantial indebtedness and
general economic conditions, as well as other risks detailed in the Company's
filings with the Securities and Exchange Commission, including the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
The Company undertakes no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
OVERVIEW
We are a leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of CFD software.
Prior to February 2, 2000 we were a publicly traded company, listed on the
NASDAQ National Market under the trading symbol "AATT". Since February 2, 2000,
we have been a privately held company, owned by Heat Holdings Corp., a
corporation formed by Willis Stein and other investors. Our acquisition by
Willis Stein was accounted for under the purchase method of accounting and was
financed through a combination of 12 3/4% senior subordinated notes and senior
bank debt.
We are organized as two operating units known as Aavid Thermalloy and
Fluent. Aavid Thermalloy designs, manufactures and distributes thermal
management products that dissipate unwanted heat from microprocessors and
industrial electronics products. Fluent develops and markets CFD software that
is used in complex computer-generated modeling of fluid flows, heat and mass
transfer and chemical reactions. These two business units, while complementary,
are quite different from each other and as a result, Aavid Thermalloy and Fluent
will be discussed separately when analyzing performance and industry trends.
Aavid Thermalloy is a global manufacturing business. Revenues are generated
through the sale of fabricated and purchased thermal management products and
components. Our thermal management products are used in a wide variety of
computer, networking and industrial electronics applications, including computer
systems (desktops, laptops, workstations and server products, disk drives,
printers and peripheral cards), network devices (servers, routers, set top boxes
and local area networks), telecommunications equipment (wireless base stations,
satellite stations and PBXs), instrumentation (semiconductor test equipment,
medical equipment and power supplies), transportation and motor drives (braking
and traction systems) and consumer electronics (stereo systems and video games).
We have manufacturing operations in the U.S., Canada, Mexico, U.K., Italy and
China. Additionally, we have several other sales offices throughout the world,
as well as engineering and design service centers in New Hampshire, California
and India.
Fluent's CFD software is used for a wide variety of computer-based
analyses, including the design of electronic components and systems, automotive
design, combustion systems modeling and process plant troubleshooting. Fluent's
software is used in a variety of industries including, among others, the
automotive, aerospace, chemical processing, power generation, material
processing, electronics and HVAC industries. Fluent develops and markets
15
its CFD software products worldwide and currently maintains sales, support and
design centers in North America, Europe and Asia.
RESULTS OF OPERATIONS
For The Quarter and Six Months Ended June 30, 2005 Compared With The
Quarter and Six Months Ended June 30, 2004:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
SALES (DOLLARS IN MILLIONS) 2005 2004 CHANGE 2005 2004 CHANGE
- --------------------------- -------- -------- ------ -------- -------- ------
Computer, networking and
industrial electronics ....... $33.2 $30.6 8.5% $ 63.6 $ 60.7 4.8%
Consulting and design services
(Applied) .................... 0.3 0.3 0.0% 0.7 0.6 16.7%
----- ----- ---- ------ ------ ----
Total Aavid Thermalloy .......... 33.5 30.9 8.5% 64.3 61.3 5.0%
Total Fluent .................... 30.7 25.6 19.6% 60.5 50.9 18.8%
----- ----- ---- ------ ------ ----
Total Company ................... $64.2 $56.5 13.5% $124.8 $112.2 11.2%
===== ===== ==== ====== ====== ====
Aavid's sales in the second quarter of 2005 were $64.2 million, an increase
of $7.7 million, or 13.5%, from the comparable period of 2004. Aavid's sales in
the first six months of 2005 were $124.8 million, an increase of $12.6 million,
or 11.2%, from the comparable period of 2004. The overall increase in sales is a
combination of an improvement in Aavid Thermalloy, driven by moderate
improvement experienced by the electronics industry, combined with an increase
in revenues experienced by Fluent, driven by new software sales.
Fluent software sales of $30.7 million in the second quarter of 2005 were
$5.0 million, or 19.6%, higher than the second quarter of 2004. Fluent's sales
in the first six months of 2005 were $60.5 million, an increase of $9.6 million,
or 18.8%, from the comparable period of 2004. The increase in sales can be
attributed to stronger revenues experienced by Fluent's European and Asian
operations.
Aavid Thermalloy's sales were $33.5 million in the second quarter of 2005,
an increase of $2.6 million, or 8.5%, over the second quarter of 2004. Aavid
Thermalloy's sales in the first six months of 2005 were $64.3 million, an
increase of $3.1 million, or 5.0%, from the comparable period of 2004. As
discussed above, this was the result of moderate improvement in the overall
industry in which Aavid Thermalloy's customers operate. Based on the current
booking activity, management expects to see moderately lower revenues in the
third quarter of 2005 when compared with the second quarter of 2005.
The Company's international sales (which include U.S. exports) increased to
59.0% of sales for the second quarter of 2005 compared with 56.0% in the second
quarter of 2004.
No customer generated greater than 10% of the Company's revenues in the
second quarter or first six months of 2005 or 2004.
The Company's gross profit for the second quarter of 2005 was $32.3 million
compared with $27.9 million in the comparable period from 2004. Gross margin as
a percentage of sales was 50.3% and 51.0%, respectively, for the second quarter
and first six months of 2005. This compares with 49.4% and 49.7%, respectively,
for the second quarter and first six months of 2004. Aavid Thermalloy's gross
margin was 22.4% and 22.2%, respectively, for the second quarter and first six
months of 2005, compared to 22.4% and 22.5% for the comparable periods of 2004.
Gross margin at Fluent was 80.8% and 81.8%, respectively, for the second quarter
and first six months of 2005. This compares with 82.0% and 82.6%, respectively,
for the second quarter and first six months of 2004.
In the second quarter of 2005, the Company's operating income of $8.8
million compares with operating income of $7.7 million in the second quarter of
2004. Operating income for the first six months of 2005 was $17.2 million,
compared with operating income of $14.4 million from the comparable period of
2004. Aavid Thermalloy saw an improvement of $0.2 million and a decline of $0.5
million, respectively, in operating income from the second quarter and first six
months of 2004 to the second quarter and first six months of 2005. The decline
in Aavid Thermalloy's operating income for the first half of 2005 compared to
the first half of 2004 reflects economic softness experienced by the Company's
European operations in the first half of 2005. Fluent's operating income
16
improved $0.9 million and $3.3 million, respectively, in the second quarter and
first six months of 2005 as compared to the comparable periods in the prior
year, with higher gross profit partially offset by higher operating expenses.
Corporate headquarters experienced no change in operating income for the quarter
and six months ended June 30, 2005, compared to the second quarter and first six
months of 2004.
Foreign exchange losses, which are included in other expense, were $0.2
million in the second quarter of 2005, compared to $0.3 million in the second
quarter of 2004. Net foreign exchange losses were $0.6 million in the first half
of 2005, compared to net foreign exchange gains of $0.1 million in the first
half of 2004. The increase in net foreign exchange losses in the first half of
2005 is due primarily to foreign exchange losses on long-term intercompany notes
due to certain U.S. locations from certain foreign locations. These net foreign
exchange losses result primarily from the strengthening of the U.S. dollar
versus the British Pound and Euro during the first half of 2005.
Net interest charges, including cash interest expense and income, deferred
financing fee amortization and bond discount amortization, for the Company were
$4.6 million and $9.2 million, respectively, in the second quarter and first six
months of 2005 which compares with $4.5 million and $9.1 million for the
comparable periods of 2004. The slight increase in interest expense for the
second quarter and first six months of 2005 is due to higher interest rates on
the Company's senior bank debt as compared to the same periods in 2004.
The Company incurred a tax provision for the second quarter and first six
months of 2005 despite having operating losses in the United States because of
state tax provisions on applicable state components of U.S. income and foreign
tax provisions on foreign earnings. The Company incurred significant losses in
the United States and the Company only benefits from U.S. losses to the extent
of foreign earnings, which are expected to be repatriated in the United States.
Because the Company is in a net operating loss position for U.S. tax purposes,
the Company will not receive any tax benefit from foreign tax credits.
Accordingly, there is no net benefit recorded for the United States losses,
resulting in an overall tax provision for foreign taxes. The Company's
effective tax rates of 89.0% and 71.2%, respectively, in the second quarter and
first six months of 2005, compares to effective tax rates of 40.1% and 37.0%
for the comparable periods of 2004. The increase in effective tax rates in 2005
is due primarily to improved profitability of the Company's foreign
subsidiaries located in higher tax rate jurisdictions.
The Company's net income was $0.5 million and $2.2 million, respectively,
for the quarter and six months ended June 30, 2005, compared to net income of
$1.7 million and $3.4 million for the comparable periods of 2004. The higher
gross profit in the second quarter and first six months of 2005 was offset by
higher operating expenses, combined with higher effective tax rates in 2005 as
compared to 2004.
17
The Company's EBITDA, as defined in the Loan and Security Agreement with
the Company's senior lenders, was $13.1 million and $26.1 million, respectively,
for the second quarter and first six months of 2005, compared with $10.6 million
and $23.5 million for the comparable periods in 2004. A reconciliation of net
income to EBITDA is as follows:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(DOLLARS IN MILLIONS) 2005 2004 2005 2004
- --------------------- -------- -------- -------- --------
Net income ................................... $ 0.5 $ 1.7 $ 2.2 $ 3.4
Cash interest expense ........................ 4.2 4.1 8.4 8.3
Bond discount amortization ................... 0.2 0.2 0.4 0.4
Deferred financing fee amortization .......... 0.3 0.3 0.6 0.5
Provision for income taxes ................... 3.6 1.1 5.4 2.0
Depreciation ................................. 1.7 1.7 3.4 3.5
Intangible asset amortization ................ 0.2 0.1 0.4 0.5
Deferred revenue change during period(1) ..... 2.4 1.4 5.3 4.9
Loss on disposal of fixed assets ............. -- -- -- --
----- ----- ----- -----
EBITDA ....................................... $13.1 $10.6 $26.1 $23.5
===== ===== ===== =====
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company used internally generated funds and proceeds from
financing activities to meet its working capital and capital expenditure
requirements. The Company has significant cash requirements for debt service
relating to its senior subordinated notes and its bank debt. The Company
currently uses amounts available under its Loan and Security Agreement, debt and
equity financings and internally generated funds to finance its working capital
requirements, capital expenditures and potential acquisitions.
During the first six months of 2005, the Company generated $10.5 million of
cash from operations, versus $17.7 million of cash from operations generated in
the first half of 2004. During the first six months of 2005, the Company used
$2.2 million of cash in connection with investing activities versus using $2.4
million in the comparable period of 2004. The Company used $2.3 million for
capital expenditures in the first six months of 2005 versus $2.4 million in the
comparable period of 2004. The Company was provided with $0.5 million of cash in
connection with financing activities for the first half of 2005, compared with
using $1.7 million of cash from financing activities for the comparable period
in 2004.
The Company's current bank credit facility (the "Loan and Security
Agreement") is a $27.5 million asset based facility. The facility consists of a
term loan component secured by certain United States real estate and machinery
and equipment and requires quarterly principal payments of $0.4 million, which
commenced November 1, 2002. The Loan and Security Agreement also consists of a
revolving line of credit component secured by inventory in the United States and
accounts receivable in the United States and the United Kingdom. Availability
under the line of credit component is determined by a borrowing base of 85% of
eligible accounts receivable and 50% of eligible inventory, as defined in the
Loan and Security Agreement. Debt outstanding under the Loan and Security
Agreement bears interest at a rate equal to, at the Company's option, either (1)
in the case of LIBOR rate loans, the sum of the offered rate for deposits in
United states dollars for a period equal to such interest period as it appears
on Telerate page 3750 as of 11:00 a.m. London time and a margin of between 2.5%
and 2.85% or (2) the sum of LaSalle Business Credit's prime rate plus a margin
of between .25% and .50%. At June 30, 2005, the interest rates on the Loan and
Security Agreement ranged from 5.81% to 6.75%. Availability under the revolving
line of credit was $18.1 million at June 30, 2005, of which $7.7 million had
been drawn.
- ----------
(1) Change in deferred revenue as defined in the Loan and Security Agreement
represents the net change in deferred revenue found on the Company's
balance sheet from the beginning of the applicable reporting period to the
end of the applicable reporting period. An increase in deferred revenue
during the period will create an addition to EBITDA. A decrease in deferred
revenue during the period creates a subtraction from EBITDA, as defined.
18
Debt classified as long term in the accompanying balance sheet as of June
30, 2005, consists of the long term portion of the term loan component of the
Loan and Security Agreement, long term portion of capital leases, long term
portion of foreign debt obligations and all of the 12 3/4% senior subordinated
notes.
The Company has obligations to purchase minimum quantities of raw materials
from two of its key suppliers. The Company believes that purchasing these raw
materials from a few key suppliers is necessary to achieve consistently low
tolerances, design, delivery flexibility, and price stability. Under the terms
of these agreements the Company has agreed to purchase certain minimum
quantities which approximate $0.7 million at June 30, 2005.
The Company has entered into various long-term debt, capital lease and
operating lease arrangements. The future payments required by these arrangements
at June 30, 2005, are as follows:
PAYMENTS DUE BY PERIOD ($ IN THOUSANDS)
--------------------------------------------------
LESS THAN
TOTAL 1 YR 1-3 YRS 4-5 YRS 5+ YRS
-------- --------- -------- ------- ------
Long-term debt and capital leases .. $139,799 $10,166 $129,075 $ 140 $ 418
Operating leases ................... 19,570 5,872 7,074 4,115 2,509
-------- ------- -------- ------ ------
Total contractual obligations ... $159,369 $16,038 $136,149 $4,255 $2,927
======== ======= ======== ====== ======
During the second quarter of 2005, inventory turns were 8.5, which compares
to 11.9 during the second quarter of 2004. The Company manufactures and ships
product from Asia via sea to a number of customers who maintain hubs throughout
the world. The Company is required to maintain a minimum of two weeks of
inventory in these hubs. Increased cycle time to convert finished goods to
accounts receivable is a natural extension of this business cycle. Over the last
18 months, the Company has seen significant growth in this facet of its
business, causing a build up of inventory and corresponding decrease in
inventory turns.
At June 30, 2005, accounts receivable days sales outstanding ("DSO") were
67 days, which compares with 69 days at December 31, 2004.
REVENUE RECOGNITION AND SALES RETURNS AND ALLOWANCES
Thermal Products
Revenue is recognized when products are shipped. We offer certain
distributors limited rights of return and stock rotation rights. Due to these
return rights, we continuously monitor and track product returns and we record a
provision for the estimated future amount of such future returns, based on
historical experience and any notification we receive of pending returns. While
such returns have historically been within our expectations and provisions
established, we cannot guarantee that we will continue to experience the same
return rates that we have in the past. Any significant decrease in product
demand experienced by our distributor customers and the resulting credit returns
could have a material adverse impact on our operating results for the period or
periods in which such returns materialize.
Software
The Company recognizes revenue on its software license and maintenance
arrangements in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition", as amended by SOP 98-9, and related pronouncements. The
pronouncements provide specific industry guidance and stipulate that revenue
recognized from software arrangements is to be allocated to each element of the
arrangement based on relative fair values of the elements, such as software
products, upgrades, enhancements, post-contract customer support ("PCS"),
installation and training.
The Company licenses its software products under both perpetual and annual
license arrangements.
For perpetual license arrangements, the Company uses the residual method to
recognize revenue. Under the residual method, the fair value vendor specific
objective evidence ("VSOE") of the undelivered elements (typically PCS) is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements (software)
19
and is recognized as revenue, assuming all other conditions for revenue
recognition have been satisfied. The Company recognizes revenue from the
undelivered PCS element ratably over the period of the PCS arrangement.
For annual license arrangements, with unbundled PCS, since VSOE of value
for the PCS does not exist, the Company recognizes revenue for both the software
license and the PCS ratably over the 12-month term of the license.
Training and consulting revenues are recognized upon completion of services
or, in certain instances, on the proportional performance method. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit
limits based on payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based on our historical experience and any specific
customer collection issues we have identified. While such credit losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates
we have in the past. In the event that economic or other conditions cause a
change in liquidity or financial condition in multiple customers, there could be
a material adverse effect on our collection of receivables and future results of
operations.
INVENTORIES
We value our inventory, which consists of materials, labor and overhead, at
the lower of the actual cost to purchase and/or manufacture the inventory or the
current estimated market value of the inventory. We regularly review inventory
quantities on hand and record a provision for excess and obsolete inventory
based primarily on our estimated forecast of product demand and production
demand for the next twelve months. As experienced in prior years, demand for our
products can fluctuate significantly. A significant increase in demand for our
products could result in a short-term increase in the cost of inventory
purchases and production costs while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand. In
addition, our industry is characterized by rapid technological change, frequent
new product development and rapid product obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Additionally,
our estimates of future product demand may prove to be inaccurate, in which case
we may have understated or overstated the provision required for excess or
obsolete inventory. In the future, if our inventory is determined to be
overvalued, we would be required to recognize such costs in our cost of goods
sold at the time of determination. Likewise, if our inventory is determined to
be undervalued, we may have over-reported our cost of sales in previous periods
and would be required to recognize such additional operating income at the time
of sale. Therefore, although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of our inventory and reported operating results.
VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
We review goodwill and other intangible assets for impairment annually and
whenever events or changes in circumstances indicate the carrying value of an
asset may not be recoverable in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
The provisions of SFAS No. 142 require that a two-step impairment test be
performed on goodwill. In the first step, we compare the fair value of each
reporting unit to its carrying value. Our reporting units are consistent with
the reportable segments identified in Note (7) of the Consolidated Financial
Statements. We determine the fair value of our reporting units using a
combination of the income approach and the market approach. Under the income
approach, we calculate the fair value of a reporting unit based on the present
value of estimated future cash flows. Under the market approach, we estimate the
fair value based on market multiples of revenues or earnings for comparable
companies. If the fair value of the reporting unit exceeds the carrying value of
the net assets assigned to that unit, goodwill is not impaired and we are not
required to perform further testing. If the carrying value of the net assets
assigned to the reporting
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unit exceeds the fair value of the reporting unit, then we must perform the
second step in order to determine the implied fair value of the reporting unit's
goodwill and compare it to the carrying value of the reporting unit's goodwill.
If the carrying value of a reporting unit's goodwill exceeds its implied fair
value, then we must record an impairment loss equal to the difference. SFAS No.
142 also requires that the fair value of the purchased intangible assets with
indefinite lives be estimated and compared to the carrying value. We estimate
the fair value of these intangible assets using the income approach. We
recognize an impairment loss when the estimated fair value of the intangible
asset is less than the carrying value.
The income approach, which we use to estimate the fair value of our
reporting units and purchased intangible assets, is dependent on a number of
factors including estimates of future market growth and trends, forecasted
revenue and costs, expected periods the assets will be utilized, appropriate
discount rates and other variables. We base our fair value estimates on
assumptions we believe to be reasonable, but which are unpredictable and
inherently uncertain. Actual future results may differ from those estimates. In
addition, we make certain judgments about the selection of comparable companies
used in the market approach in valuing our reporting units, as well as certain
assumptions to allocate shared assets and liabilities to calculate the carrying
values for each of our reporting units.
REGULATORY REPORTING
Although the Company has not been subject to the filing requirements of a
reporting company to the Securities and Exchange Commission ("SEC") for the past
90 days, it has filed all reports required to be filed by Section 15(d) of the
Securities Exchange Act (the "Act") of 1934 during the preceding twelve months.
Pursuant to Section 15(d) of the Act, the Company's duty to file reports is
automatically suspended as a result of having fewer than 300 holders of record
of each class of its debt securities outstanding, as of January 1, 2003, but the
Company agreed, under the terms of certain long-term debt covenants, to continue
these filings. The Company is a non-accelerated filer for purposes of compliance
with SEC rules under the Act that were adopted pursuant to Section 404 of the
Sarbanes-Oxley Act. Accordingly, the Company will not be subject to the
requirements of Section 404 of the Sarbanes-Oxley Act until its fiscal year
ending December 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2005, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of June 30, 2005, in ensuring that material
information relating to the Company is made known to the CEO and CFO by others
within the Company during the period in which the report was being prepared.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
June 30, 2005.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of the Company's business, none of which the Company believes could
reasonably be expected to have a materially adverse effect on the Company's
financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
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.
DATE: August 12, 2005 AAVID THERMAL TECHNOLOGIES, INC.
By: /s/ Brian A. Byrne
------------------------------------
Vice President and Chief Financial
Officer
(Principal Financial Officer)
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