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 SEPTEMBER 30, 2005 COMMISSION FILE NO. 000-27308.
AAVID THERMAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 02-0466826
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE EAGLE SQUARE, SUITE 509, CONCORD, NH 03301
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(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]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of outstanding shares of the registrant's Common Stock as of
October 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 September 30, 2005 and December 31, 2004......................... 3
b.) Consolidated Statements of Operations for the quarters and nine months ended September 30, 2005
and 2004........................................................................................... 4
c.) Consolidated Statements of Cash Flows for the nine months ended September 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................................................................................................ 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)
SEPTEMBER 30,
2005 DECEMBER 31,
(UNAUDITED) 2004
------------- ------------
ASSETS
Cash and cash equivalents ...................................................... $ 34,623 $ 28,312
Accounts receivable-trade, less allowance for doubtful accounts ................ 44,795 48,234
Inventories .................................................................... 13,734 12,745
Refundable taxes ............................................................... 476 380
Deferred income taxes .......................................................... 994 1,062
Prepaid and other current assets ............................................... 7,444 5,375
--------- ---------
Total current assets ........................................................ 102,066 96,108
Property, plant and equipment, net ............................................. 26,069 28,296
Goodwill ....................................................................... 40,026 40,026
Developed technology, net ...................................................... 1,705 2,242
Deferred financing fees ........................................................ 1,596 2,451
Deferred income taxes .......................................................... 399 434
Other assets, net .............................................................. 1,945 2,133
--------- ---------
Total assets ................................................................ $ 173,806 $ 171,690
========= =========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' DEFICIT
Accounts payable-trade ......................................................... $ 23,755 $ 19,657
Current portion of long term debt obligations .................................. 11,837 8,948
Income taxes payable ........................................................... 9,671 6,411
Deferred revenue ............................................................... 42,310 43,136
Accrued expenses and other current liabilities ................................. 25,345 30,707
--------- ---------
Total current liabilities ................................................... 112,918 108,859
Long term debt obligations, net of current portion ............................. 123,685 129,519
Deferred income taxes .......................................................... 299 366
--------- ---------
Total liabilities ........................................................... 236,902 238,744
--------- ---------
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 $7,781 at September 30, 2005) ... -- --
Series B Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares
issued and outstanding (Liquidation value of $7,781 at September 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 .............................................. (2,039) (1,066)
Accumulated deficit ............................................................ (253,413) (258,344)
--------- ---------
Total stockholders' deficit ................................................. (63,681) (67,639)
--------- ---------
Total liabilities, minority interests and stockholders' deficit ............. $ 173,806 $ 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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net sales .................................... $ 63,590 $ 55,711 $ 188,360 $ 167,867
Cost of goods sold ........................... 32,365 27,502 93,467 83,913
-------- -------- --------- ---------
Gross profit ............................... 31,225 28,209 94,893 83,954
Selling, general and administrative expenses.. 16,915 17,144 54,015 49,943
Amortization of intangible assets ............ 217 180 651 634
Research and development ..................... 4,863 3,666 13,762 11,762
-------- -------- --------- ---------
Income from operations ..................... 9,230 7,219 26,465 21,615
Interest expense, net ........................ (4,610) (4,552) (13,799) (13,612)
Other income (expense), net .................. 197 244 (215) 373
-------- -------- --------- ---------
Income from operations before income taxes.. 4,817 2,911 12,451 8,376
Income tax expense ........................... (2,083) (1,543) (7,520) (3,563)
-------- -------- --------- ---------
Net income ................................... $ 2,734 $ 1,368 $ 4,931 $ 4,813
======== ======== ========= =========
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)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
Cash flows provided by operating activities:
Net income ........................................................... $ 4,931 $ 4,813
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ......................................................... 5,011 5,373
Amortization and accretion ........................................... 2,186 2,002
Loss on sale of property, plant and equipment ........................ 54 9
Deferred income taxes ................................................ (122) (56)
Changes in assets and liabilities:
Accounts receivable - trade .......................................... 942 836
Inventories .......................................................... (1,392) (5)
Prepaid and other current assets ..................................... (2,663) (714)
Other long term assets ............................................... (28) (107)
Accounts payable - trade ............................................. 4,350 4,569
Income taxes payable ................................................. 3,644 1,335
Deferred revenue ..................................................... 1,762 1,345
Accrued expenses and other current liabilities ....................... (4,375) (2,180)
-------- --------
Total adjustments ................................................... 9,369 12,407
-------- --------
Net cash provided by operating activities ........................... 14,300 17,220
Cash flows used in investing activities:
Purchases of property, plant & equipment ............................. (2,991) (4,057)
Proceeds from sale of property, plant and equipment .................. 33 14
Payment for acquisition, net of cash acquired ........................ -- (3,035)
-------- --------
Net cash used in investing activities ............................... (2,958) (7,078)
Cash flows used in financing activities:
Advances on line of credit, net ...................................... 1,357 1,305
Advances under debt obligations ...................................... 547 --
Principal payments under debt obligations ............................ (5,986) (1,762)
-------- --------
Net cash used in financing activities ............................... (4,082) (457)
Foreign exchange rate effect on cash and cash equivalents ............... (949) (571)
-------- --------
Net increase in cash and cash equivalents ............................... 6,311 9,114
Cash and cash equivalents, beginning of period .......................... 28,312 15,231
-------- --------
Cash and cash equivalents, end of period ................................ $ 34,623 $ 24,345
======== ========
Supplemental disclosure of cash flow information:
Interest paid ........................................................ $ 16,489 $ 16,300
======== ========
Income taxes paid .................................................... $ 3,767 $ 1,602
======== ========
Supplemental disclosure of non-cash investing activities:
Reconciliation of assets acquired and liabilities assumed in acquisition:
Fair value of assets acquired ........................................ $ -- $ 3,125
Cash paid for assets ................................................. -- (3,082)
-------- --------
Liabilities assumed ................................................ $ -- $ 43
======== ========
The accompanying notes are an integral 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 nine month periods ending
September 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 September 30, 2005 and December 31,
2004 are as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(UNAUDITED)
Accounts receivable ...................... $ 47,799 $ 50,621
Allowance for doubtful accounts .......... (3,004) (2,387)
-------- --------
Net accounts receivable .................. $ 44,795 $ 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 September 30, 2005 and December 31, 2004 are as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(UNAUDITED)
Raw materials ............................. $ 3,962 $ 4,233
Work-in-process ........................... 4,742 4,896
Finished goods ............................ 5,030 3,616
------- -------
$13,734 $12,745
======= =======
(5) COMPREHENSIVE INCOME
The following details comprehensive income for the periods reported
herein:
QUARTER ENDED QUARTER ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------- ------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net income .............................. $ 2,734 $1,368 $ 4,931 $ 4,813
Foreign currency translation adjustment.. (394) 34 (973) (467)
------- ------ ------- -------
Comprehensive income .................... $ 2,340 $1,402 $ 3,958 $ 4,346
======= ====== ======= =======
(6) INCOME TAXES
The Company incurred a tax provision for the third quarter and first nine
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 rate for the third quarter and first nine months of 2005 is higher than the
U.S. federal statutory rate, 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.
The Company has evaluated the provisions of the Jobs Act and has
determined that it will not repatriate foreign earnings under the provisions of
this Act.
7
(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 nine months ending September 30, 2005 and 2004:
REVENUES SEGMENT
FROM INCOME (LOSS) ASSETS (NET OF
EXTERNAL BEFORE INTERCOMPANY
CUSTOMERS TAXES BALANCES)
----------- ------------- --------------
Quarter Ended September 30, 2005
Thermal Products ................. $ 34,355 $ (1,984) $ 69,471
CFD Software ..................... 29,235 6,890 119,317
Corporate Office ................. -- (89) (14,982)
----------- ----------- -----------
Total ............................ $ 63,590 $ 4,817 $ 173,806
=========== =========== ===========
Quarter Ended September 30, 2004
Thermal Products ................ $ 30,594 $ (2,067) $ 63,217
CFD Software .................... 25,117 5,137 103,520
Corporate Office ................ -- (159) (10,588)
----------- ----------- -----------
Total ........................... $ 55,711 $ 2,911 $ 156,149
=========== =========== ===========
REVENUES SEGMENT
FROM INCOME (LOSS)
EXTERNAL BEFORE
CUSTOMERS TAXES
------------ -------------
Nine Months Ended September 30, 2005
Thermal Products ................. $ 98,665 $ (8,673)
CFD Software ..................... 89,695 21,536
Corporate Office ................. -- (412)
----------- -----------
Total ............................ $ 188,360 $ 12,451
=========== ===========
Nine Months Ended September 30, 2004
Thermal Products ................ $ 91,855 $ (6,755)
CFD Software .................... 76,012 15,147
Corporate Office ................ -- (16)
----------- -----------
Total ........................... $ 167,867 $ 8,376
=========== ===========
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 billed from. Long-lived assets are attributable to a location based
on physical location.
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
FOR THE QUARTER ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
--------------------------- ---------------------------- ----------------------------
SEPTEMBER SEPTEMBER LONG-LIVED LONG-LIVED
30, 2005 30, 2004 ASSETS ASSETS
AS OF PERIOD AS OF PERIOD
REVENUES REVENUES REVENUES END REVENUES END
------------ ------------ ------------ ------------ ------------ ------------
United States ........... $ 31,284 $ 28,283 $ 89,877 $ 58,389 $ 84,520 $ 60,206
Taiwan .................. 5,659 5,203 14,543 3,264 14,596 3,456
China ................... 11,669 8,598 30,685 837 19,544 591
United Kingdom .......... 7,859 5,708 22,000 1,932 18,387 2,341
Italy ................... 4,509 6,024 15,212 1,722 17,220 2,559
Japan ................... 5,426 4,241 17,462 1,666 12,515 1,617
Singapore ............... 5,300 2,306 13,392 143 7,157 129
Mexico .................. 1,852 2,130 5,853 210 7,005 374
Other International ..... 10,701 9,688 33,969 3,935 30,235 3,997
Intercompany eliminations (20,669) (16,470) (54,633) (358) (43,312) (358)
----------- ----------- ----------- ----------- ----------- -----------
Total ................... $ 63,590 $ 55,711 $ 188,360 $ 71,740 $ 167,867 $ 74,912
=========== =========== =========== =========== =========== ===========
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 SEPTEMBER 30, 2005 (UNAUDITED)
--------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents .............................. $ 855 $ 2,732 $ 31,036 $ -- $ 34,623
Accounts receivable-trade, net ......................... -- 12,361 32,387 47 44,795
Inventories ............................................ -- 4,944 9,131 (341) 13,734
Due (to) from affiliate, net ........................... 100,467 (99,741) 35,314 (36,040) --
Refundable taxes ....................................... (347) -- 643 180 476
Deferred income taxes .................................. (4,169) 13,124 994 (8,955) 994
Prepaid and other current assets ....................... 166 1,930 5,719 (371) 7,444
----------- ----------- ----------- ----------- -----------
Total current assets ................................... 96,972 (64,650) 115,224 (45,480) 102,066
Property, plant and equipment, net ..................... 5 15,432 10,528 104 26,069
Investment in subsidiaries ............................. (37,554) 7,266 -- 30,288 --
Deferred income taxes .................................. 282 -- 399 (282) 399
Other assets, net ...................................... 1,985 40,489 2,782 16 45,272
----------- ----------- ----------- ----------- -----------
Total assets ........................................... $ 61,690 $ (1,463) $ 128,933 $ (15,354) $ 173,806
=========== =========== =========== =========== ===========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' DEFICIT
Accounts payable-trade ................................. $ 104 $ 2,908 $ 20,782 $ (39) $ 23,755
Current portion of debt obligations .................... -- 9,555 2,282 -- 11,837
Income taxes payable ................................... 1,046 4,053 6,944 (2,372) 9,671
Deferred revenue ....................................... -- 18,334 23,976 -- 42,310
Accrued expenses and other current liabilities ......... 3,471 10,522 11,628 (276) 25,345
----------- ----------- ----------- ----------- -----------
Total current liabilities .............................. 4,621 45,372 65,612 (2,687) 112,918
----------- ----------- ----------- ----------- -----------
Debt obligations, net of current portion ............... 122,457 462 766 -- 123,685
Deferred income taxes .................................. (2,294) 6,978 251 (4,636) 299
----------- ----------- ----------- ----------- -----------
Total liabilities ...................................... 124,784 52,812 66,629 (7,323) 236,902
----------- ----------- ----------- ----------- -----------
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 9,056 (135,248) 188,007
Cumulative translation adjustment ...................... (2,039) 639 3,684 (4,323) (2,039)
Retained earnings (deficit) ............................ (253,413) (267,331) 34,460 232,871 (253,413)
----------- ----------- ----------- ----------- -----------
Total stockholders' (deficit) equity ................... (63,681) (54,275) 62,304 (8,029) (63,681)
----------- ----------- ----------- ----------- -----------
Total liabilities, minority interests and stockholders'
(deficit) equity ..................................... $ 61,690 $ (1,463) $ 128,933 $ (15,354) $ 173,806
=========== =========== =========== =========== ===========
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 SEPTEMBER 30, 2005 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------ ------------
Net sales.............................................. $ -- $ 31,501 $ 52,975 $ (20,886) $ 63,590
Cost of goods sold..................................... -- 13,603 31,713 (12,951) 32,365
------------ ------------- ------------ ----------- -----------
Gross profit........................................... -- 17,898 21,262 (7,935) 31,225
Selling, general and administrative expenses........... (99) 9,713 9,835 (2,317) 17,132
Research and development............................... -- 4,797 5,311 (5,245) 4,863
------------ ------------- ------------ ----------- -----------
Income (loss) from operations.......................... 99 3,388 6,116 (373) 9,230
Interest expense, net.................................. (187) (4,416) (6) (1) (4,610)
Other income (expense), net............................ -- (69) 206 60 197
Equity in income (loss) of subsidiaries. 1,516 -- -- (1,516) --
------------ ------------- ------------ ----------- -----------
Income (loss) before income taxes...................... 1,428 (1,097) 6,316 (1,830) 4,817
Income tax benefit (expense)........................... 1,306 (1,714) (2,929) 1,254 (2,083)
------------ ------------- ------------ ----------- -----------
Net income (loss)...................................... $ 2,734 $ (2,811) $ 3,387 $ (576) $ 2,734
============ ============= ============ =========== ===========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------ ------------
Net sales.............................................. $ -- $ 28,635 $ 43,898 $ (16,822) $ 55,711
Cost of goods sold..................................... -- 12,711 25,188 (10,397) 27,502
------------ ------------- ------------ ----------- -----------
Gross profit........................................... -- 15,924 18,710 (6,425) 28,209
Selling, general and administrative expenses........... 41 10,240 9,179 (2,136) 17,324
Research and development............................... -- 3,564 4,349 (4,247) 3,666
------------ ------------- ------------ ----------- -----------
Income (loss) from operations.......................... (41) 2,120 5,182 (42) 7,219
Interest income (expense), net......................... (118) (4,325) (128) 19 (4,552)
Other income (expense), net............................ -- 78 287 (121) 244
Equity in income (loss) of subsidiaries. 914 -- -- (914) --
------------ ------------- ------------ ----------- -----------
Income (loss) before income taxes...................... 755 (2,127) 5,341 (1,058) 2,911
Income tax benefit (expense)........................... 613 (1,092) (1,048) (16) (1,543)
------------ ------------- ------------ ----------- -----------
Net income (loss)...................................... $ 1,368 $ (3,219) $ 4,293 $ (1,074) $ 1,368
============ ============= ============ =========== ===========
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------ ------------
Net sales.............................................. $ -- $ 90,664 $ 153,116 $ (55,420) $ 188,360
Cost of goods sold..................................... -- 41,338 87,535 (35,406) 93,467
------------ ------------- ------------ ----------- -----------
Gross profit........................................... -- 49,326 65,581 (20,014) 94,893
Selling, general and administrative expenses........... (51) 29,971 30,900 (6,154) 54,666
Research and development............................... -- 13,443 13,749 (13,430) 13,762
------------ ------------- ------------ ----------- -----------
Income (loss) from operations.......................... 51 5,912 20,932 (430) 26,465
Interest income (expense), net......................... (463) (13,267) (71) 2 (13,799)
Other income (expense), net............................ -- 3,013 1,738 (4,966) (215)
Equity in income (loss) of subsidiaries. 3,602 -- -- (3,602) --
------------ ------------- ------------ ----------- -----------
Income (loss) before income taxes...................... 3,190 (4,342) 22,599 (8,996) 12,451
Income tax benefit (expense)........................... 1,741 (4,669) (5,846) 1,254 (7,520)
------------ ------------- ------------ ----------- -----------
Net income (loss)...................................... $ 4,931 $ (9,011) $ 16,753 $ (7,742) $ 4,931
============ ============= ============ =========== ===========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------ ------------
Net sales.............................................. $ -- $ 85,541 $ 126,659 $ (44,333) $ 167,867
Cost of goods sold..................................... -- 39,510 70,374 (25,971) 83,913
------------ ------------- ------------ ----------- -----------
Gross profit........................................... -- 46,031 56,285 (18,362) 83,954
Selling, general and administrative expenses........... 56 29,233 27,041 (5,753) 50,577
Research and development............................... -- 11,566 12,720 (12,524) 11,762
------------ ------------- ------------ ----------- -----------
Income (loss) from operations.......................... (56) 5,232 16,524 (85) 21,615
Interest income (expense), net......................... 41 (13,301) (387) 35 (13,612)
Other income (expense), net............................ (1) 1,228 111 (965) 373
Equity in income (loss) of subsidiaries. 2,959 -- -- (2,959) --
------------ ------------- ------------ ----------- -----------
Income (loss) before income taxes...................... 2,943 (6,841) 16,248 (3,974) 8,376
Income tax benefit (expense)........................... 1,870 (3,119) (2,298) (16) (3,563)
------------ ------------- ------------ ----------- -----------
Net income (loss)...................................... $ 4,813 $ (9,960) $ 13,950 $ (3,990) $ 4,813
============ ============= ============ =========== ===========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------ ------------
Net cash provided by operating activities.............. $ 1,227 $ 4,596 $ 13,275 $ (4,798) $ 14,300
Cash flows used in investing activities:
Purchases of property, plant and equipment............. -- (882) (2,109) -- (2,991)
Proceeds from sale of property, plant and equipment.... -- 5 28 -- 33
------------ ------------- ------------ ----------- -----------
Net cash used in investing activities.................. -- (877) (2,081) -- (2,958)
Cash flows provided by (used in) financing
activities:
Advances on line of credit, net -- 930 427 -- 1,357
Advances under debt obligations -- -- 547 -- 547
Principal payments under debt obligations.............. -- (5,919) (67) -- (5,986)
------------ ------------- ------------ ----------- -----------
Net cash provided by (used in) financing activities.... -- (4,989) 907 -- (4,082)
Foreign exchange effect on cash and cash equivalents... (973) 92 (4,866) 4,798 (949)
------------ ------------- ------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents... 254 (1,178) 7,235 -- 6,311
Cash and cash equivalents, beginning of period......... 601 3,910 23,801 -- 28,312
------------ ------------- ------------ ----------- -----------
Cash and cash equivalents, end of period............... $ 855 $ 2,732 $ 31,036 $ -- $ 34,623
============ ============= ============ =========== ===========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------ ------------
Net cash provided by operating activities.............. $ 477 $ 1,403 $ 14,793 $ 547 $ 17,220
Cash flows used in investing activities:
Purchases of property, plant and equipment............. -- (1,461) (2,596) -- (4,057)
Proceeds from sale of property, plant and equipment.... -- 11 3 -- 14
Payment for acquisition, net of cash acquired -- (3,082) 47 -- (3,035)
------------ ------------- ------------ ----------- -----------
Net cash used in investing activities.................. -- (4,532) (2,546) -- (7,078)
Cash flows provided by (used in) financing
activities:
Advances (repayments) on line of credit, net -- 1,701 (396) -- 1,305
Principal payments under debt obligations.............. -- (1,604) (158) -- (1,762)
------------ ------------- ------------ ----------- -----------
Net cash provided by (used in) financing activities.... -- 97 (554) -- (457)
Foreign exchange effect on cash and cash equivalents... (467) 411 (60) (455) (571)
------------ ------------- ------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents... 10 (2,621) 11,633 92 9,114
Cash and cash equivalents, beginning of period......... 97 5,081 10,053 -- 15,231
------------ ------------- ------------ ----------- -----------
Cash and cash equivalents, end of period............... $ 107 $ 2,460 $ 21,686 $ 92 $ 24,345
============ ============= ============ =========== ===========
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 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 Nine Months Ended September 30, 2005 Compared With The
Quarter and Nine Months Ended September 30, 2004:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------------ ------------------------------------
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
SALES (DOLLARS IN MILLIONS) 2005 2004 CHANGE 2005 2004 CHANGE
- ----------------------------------------------- --------- --------- ---------- --------- --------- ----------
Computer, networking and industrial electronics $ 34.0 $ 30.3 12.2% $ 97.6 $ 91.0 7.3%
Consulting and design services (Applied) ...... 0.4 0.3 33.3% 1.1 0.9 22.2%
--------- --------- --------- --------- --------- ---------
Total Aavid Thermalloy ........................ 34.4 30.6 12.3% 98.7 91.9 7.4%
Total Fluent .................................. 29.2 25.1 16.4% 89.7 76.0 18.0%
--------- --------- --------- --------- --------- ---------
Total Company ................................. $ 63.6 $ 55.7 14.1% $ 188.4 $ 167.9 12.2%
========= ========= ========= ========= ========= =========
Aavid's sales in the third quarter of 2005 were $63.6 million, an increase
of $7.9 million, or 14.1%, from the comparable period of 2004. Aavid's sales in
the first nine months of 2005 were $188.4 million, an increase of $20.5 million,
or 12.2%, 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 $29.2 million in the third quarter of 2005 were
$4.1 million, or 16.4%, higher than the third quarter of 2004. Fluent's sales in
the first nine months of 2005 were $89.7 million, an increase of $13.7 million,
or 18.0%, 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 $34.4 million in the third quarter of 2005,
an increase of $3.8 million, or 12.3%, over the third quarter of 2004. Aavid
Thermalloy's sales in the first nine months of 2005 were $98.7 million, an
increase of $6.8 million, or 7.4%, 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.
The Company's international sales (which include U.S. exports) increased
to 57.8% of sales for the third quarter of 2005 compared with 56.1% in the third
quarter of 2004.
The Company's gross profit for the third quarter of 2005 was $31.2 million
compared with $28.2 million in the comparable period from 2004. Gross margin as
a percentage of sales was 49.1% and 50.4%, respectively, for the third quarter
and first nine months of 2005. This compares with 50.6% and 50.0%, respectively,
for the third quarter and first nine months of 2004. Aavid Thermalloy's gross
margin was 23.1% and 22.5%, respectively, for the third quarter and first nine
months of 2005, compared to 23.6% and 22.9% for the comparable periods of 2004.
Gross margin at Fluent was 79.8% and 81.1%, respectively, for the third quarter
and first nine months of 2005. This compares with 83.8% and 83.0%, respectively,
for the third quarter and first nine months of 2004. The decrease in gross
margin at Fluent is due largely to an increase in consulting revenues, which
have a lower margin than Fluent's software revenues.
In the third quarter of 2005, the Company's operating income of $9.2
million compares with operating income of $7.2 million in the third quarter of
2004. Operating income for the first nine months of 2005 was $26.5 million,
compared with operating income of $21.6 million from the comparable period of
2004. Aavid Thermalloy saw an improvement of $0.8 million and $0.4 million,
respectively, in operating income from the third quarter and first nine months
of 2004 to the third quarter and first nine months of 2005. Fluent's operating
income improved $1.2 million and $4.4 million, respectively, in the third
quarter and first nine 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 ended September 30, 2005, compared to the third quarter of 2004, and
an improvement of $0.1 million for the nine months ended September 30, 2005,
compared to the first nine months of 2004.
16
Foreign exchange gains, which are included in other income, were $0.2
million in the third quarter of 2005 and 2004. Net foreign exchange losses were
$0.4 million in the first nine months of 2005, compared to net foreign exchange
gains of $0.3 million in the first nine months of 2004. The increase in net
foreign exchange losses in the first nine months 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 nine months 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 $13.8 million, respectively, in the third quarter and first
nine months of 2005 which compares with $4.6 million and $13.6 million for the
comparable periods of 2004. The slight increase in interest expense for the
first nine months of 2005 is due to higher interest rates on the Company's
senior bank debt as compared to the same period in 2004.
The Company incurred a tax provision for the third quarter and first nine
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 43.2% and 60.4%, respectively, in the third quarter and first nine
months of 2005, compares to effective tax rates of 53.0% and 42.5% for the
comparable periods of 2004. The increase in the effective tax rate for the first
nine months of 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 $2.7 million and $4.9 million, respectively,
for the quarter and nine months ended September 30, 2005, compared to net income
of $1.4 million and $4.8 million for the comparable periods of 2004. The modest
increase in net income for the quarter and nine months ended September 30, 2005,
compared to the quarter and nine months ended September 30, 2004 reflects
improvements in operating income being impacted by 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 $5.3 million and $31.4 million, respectively,
for the third quarter and first nine months of 2005, compared with $5.8 million
and $29.2 million for the comparable periods in 2004. EBITDA is a non-GAAP
financial measure that the Company believes is relevant to potential readers of
our financial statements as it is the primary measure of performance and
compliance with the Fixed Charge Coverage Ratio financial covenant utilized by
our lenders. A reconciliation of net income to EBITDA is as follows:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
----------------------- -----------------------
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
(DOLLARS IN MILLIONS) 2005 2004 2005 2004
- ------------------------------------------ --------- --------- --------- ---------
Net income ............................... $ 2.7 $ 1.4 $ 4.9 $ 4.8
Cash interest expense .................... 4.2 4.1 12.5 12.4
Bond discount amortization ............... 0.2 0.2 0.7 0.6
Deferred financing fee amortization ...... 0.3 0.3 0.8 0.7
Provision for income taxes ............... 2.1 1.5 7.5 3.6
Depreciation ............................. 1.6 1.9 5.0 5.4
Intangible asset amortization ............ 0.2 0.2 0.7 0.6
Deferred revenue change during period(1).. (6.1) (3.8) (0.8) 1.1
Loss on disposal of fixed assets ......... 0.1 -- 0.1 --
--------- --------- --------- ---------
EBITDA ................................... $ 5.3 $ 5.8 $ 31.4 $ 29.2
========= ========= ========= =========
Under the terms of our Loan and Security Agreement, we cannot permit the
ratio of EBITDA to Fixed Charges to be less than 1.0 to 1.0, as measured at the
end of each fiscal month. If this ratio falls below 1.0 to 1.0, this would
constitute an Event of Default. If such a default occurs, the lenders under the
Loan and Security Agreement will be entitled to accelerate the amounts due under
the Loan and Security Agreement and may require all such amounts to be
immediately paid in full. The lenders under the Loan and Security Agreement may
also take all remedies permitted to be taken by a secured creditor under the
security documents entered into to secure the Loan and Security Agreement and
the Uniform Commercial Code. The Company was in compliance with all financial
covenants under its Loan and Security Agreement for the quarters and nine months
ended September 30, 2005 and 2004, respectively.
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 nine months of 2005, the Company generated $14.3 million
of cash from operations, versus $17.2 million of cash from operations generated
in the first nine months of 2004. During the first nine months of 2005, the
Company used $3.0 million of cash in connection with investing activities versus
using $7.1 million in the comparable period of 2004. The Company used $3.0
million for capital expenditures in the first nine months of 2005 versus $4.1
million in the comparable period of 2004. During the first nine months of 2004,
the Company also used $3.0 million related to the acquisition of a small
manufacturing company located in Taiwan. The Company used $4.1 million of cash
in connection with financing activities for the first nine months of 2005,
compared with using $0.5 million of cash in financing activities for the
comparable period in 2004. Approximately $4.1 million of the cash used in
financing activities during the first nine months of 2005 pertains to an advance
payment on a portion of the Company's term loans under its current bank credit
facility.
- ----------
(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
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 originally required quarterly principal payments of $0.4
million, which commenced November 1, 2002. In the third quarter of 2005, the
Company prepaid approximately $4.1 million of the term loan component of the
Loan and Security Agreement, reducing required quarterly principal payments to
$0.2 million, commencing November 1, 2005. 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 September 30,
2005, the interest rates on the Loan and Security Agreement ranged from 6.36% to
7.25%. Availability under the revolving line of credit was $16.4 million at
September 30, 2005, of which $7.8 million had been drawn.
Debt classified as long term in the accompanying balance sheet as of
September 30, 2005, includes the long term portion of capital leases, the long
term portion of foreign debt obligations and all of the 12 3/4% senior
subordinated notes. All debt outstanding under the Loan and Security Agreement
has been reclassified as a current liability on the balance sheet as of
September 30, 2005, as this agreement expires on July 31, 2006. The Loan and
Security Agreement renews itself from year to year after July 31, 2006, if, and
only if, the Company and its lenders agree in writing to renew the agreement.
The Company is currently evaluating its renewal option under the agreement.
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 $0.4 million at September 30, 2005.
The Company has entered into various long-term debt, capital lease and
operating lease arrangements. The future payments required by these arrangements
at September 30, 2005, are as follows:
PAYMENTS DUE BY PERIOD ($ IN THOUSANDS)
-----------------------------------------------------------------
LESS THAN
TOTAL 1 YR 1-3 YRS 4-5 YRS 5+ YRS
--------- --------- --------- --------- ---------
Long-term debt and capital leases... $ 135,522 $ 11,837 $ 123,134 $ 136 $ 415
Operating leases ................... 19,065 6,149 6,816 3,962 2,138
--------- --------- --------- --------- ---------
Total contractual obligations .... $ 154,587 $ 17,986 $ 129,950 $ 4,098 $ 2,553
========= ========= ========= ========= =========
During the third quarter of 2005, inventory turns were 7.9, which compares
to 10.7 during the third 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 September 30, 2005, accounts receivable days sales outstanding ("DSO")
were 70 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
19
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) 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
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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 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, 2007.
ITEM 4. CONTROLS AND PROCEDURES
As of September 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 September 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
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changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to September 30, 2005.
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
10.1 Employment Agreement dated August 31, 2005 between Aavid Thermalloy,
LLC and Michael P. Flanders (incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
August 31, 2005).
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
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: November 14, 2005 AAVID THERMAL TECHNOLOGIES, INC.
By: /s/ Brian A. Byrne
------------------------------------------
Vice President and Chief Financial Officer
(Principal Financial Officer)
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