1
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 27, 1997, 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 X No
----- -----
The number of shares of common stock outstanding as of November 6, 1997, was
7,260,119.
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AAVID THERMAL TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 27, 1997 and December 31,
1996.
Consolidated Statements of Operations for the quarter and nine
months ended September 27, 1997, and September 28, 1996.
Consolidated Statements of Cash Flows for the nine months ended
September 27, 1997, and September 28, 1996.
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
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AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 27, DECEMBER 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
Cash and cash equivalents $ 5,336 $ 4,093
Accounts receivable - trade, less allowance for
doubtful accounts, $479 and $354, respectively 34,078 22,807
Inventories 12,198 9,565
Deferred income taxes 1,686 1,750
Prepaid and other current assets 2,386 1,604
-------- -------
Total current assets 55,684 39,819
Property, plant and equipment, net 38,154 33,528
Other assets, net 8,127 6,874
-------- -------
Total Assets $101,965 $80,221
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations $ 4,553 $ 5,953
Accounts payable - trade 14,136 11,575
Accrued expenses and other current liabilities 16,753 12,917
-------- -------
Total current liabilities 35,442 30,445
Debt obligations, net of current portion 25,700 17,367
Minority interest -- 794
Deferred income taxes 1,598 2,262
-------- -------
Total liabilities 62,740 50,868
-------- -------
Preferred Stock, $0.01 par value; authorized
4,000,000 shares; 0 outstanding at
September 27, 1997 and December 31, 1996. -- --
Common Stock, $0.01 par value; authorized
25,000,000 shares; 7,257,307 and 6,517,131
shares issued and outstanding at September 27,
1997 and December 31, 1996, respectively 73 65
Additional paid-in capital 34,781 30,254
Cumulative translation adjustment (258) 228
Retained earnings (deficit) 4,629 (1,194)
-------- -------
Total stockholders' equity 39,225 29,353
-------- -------
Total liabilities and stockholders' equity $101,965 $80,221
======== =======
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AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 43,695 $ 25,727 $ 115,175 $ 74,762
Cost of goods sold 29,097 15,884 72,769 46,553
--------- --------- --------- ---------
Gross profit 14,598 9,843 42,406 28,209
Selling general and administrative expenses 8,904 6,425 25,845 19,285
Research and development 1,592 1,611 5,109 4,170
Purchased undeveloped technology charge -- -- -- 3,446
--------- --------- --------- ---------
Income from operations 4,102 1,807 11,452 1,308
Interest expense, net (606) (348) (1,603) (1,107)
Other income (expense), net (42) (250) (716) (158)
--------- --------- --------- ---------
Income before income taxes and extraordinary item 3,454 1,209 9,133 43
Income tax (expense) benefit (1,259) (407) (3,310) (1,252)
--------- --------- --------- ---------
Income before extraordinary item 2,195 802 5,823 (1,209)
Extraordinary item, net of tax -- -- -- (171)
--------- --------- --------- ---------
Net income $ 2,195 $ 802 $ 5,823 $ (1,380)
========= ========= ========= =========
Earnings per share available to shareholders: $ 0.25 $ 0.10 $ 0.67 $ (0.20)
From operations $ -- $ -- $ -- $ (0.02)
Extraordinary item $ 0.25 $ 0.10 $ 0.67 $ (0.22)
Net income per share
Weighted average common shares and equivalence 8,858,925 7,818,000 8,684,385 6,161,317
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AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share data)
(Unaudited)
Nine Months ended
Sept. 27, Sept. 28
1997 1996
---- ----
Cash flows provided by (used in) operating activities:
Net income (loss) $ 5,823 $ (1,380)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 4,740 3,141
Purchased undeveloped technology charge -- 3,446
Deferred income taxes (1,397) 2
Minority interest 73 (8)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (10,720) (1,135)
Inventories (2,633) 125
Prepaid and other current assets (733) (19)
Other long term assets (1,148) (1,263)
Accounts payable - trade 2,492 (1,295)
Accrued expenses and other current assets 6,589 (2,582)
-------- --------
Total adjustments (2,737) 412
-------- --------
Net cash provided by (used for) operating activities 3,086 (968)
Cash flows provided by (used in) investing activities:
Payments for acquisitions, net of cash acquired (1,316) (8,204)
Purchase of property, plant & equipment (8,227) (4,599)
Net proceeds from sale of fixed assets -- 12
-------- --------
Net cash used in investing activities (9,543) (12,791)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses 1,932 22,608
Advances under line of credit 83,520 75,169
Repayments of line of credit (78,664) (78,602)
Advances under other debt obligations 6,538 6,640
Principal payments under debt obligations (5,035) (11,763)
-------- --------
Net cash provided by financing activities 8,291 14,052
Foreign exchange rate effect on cash and cash equivalents (591) (94)
Net increase in cash and cash equivalents 1,243 199
Cash and cash equivalents, beginning of period 4,093 4,327
-------- --------
Cash and cash equivalents, end of period $ 5,336 $ 4,526
======== ========
Supplemental disclosure of cash flow information:
Interest paid 1,718 1,124
Income taxes paid 712 491
Supplemental disclosure of non-cash investing activities:
Reconciliation of assets acquired and liabilities assumed in acquisitions
Fair value of assets acquired 913 14,112
Cash paid for assets (191) (9,693)
Issuance of common stock -- (900)
-------- --------
$ 722 $ 3,519
======== ========
See accompanying notes to consolidated financial statements.
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AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting only of normal
adjustments, necessary to present fairly the financial position of Aavid Thermal
Technologies, Inc. and its consolidated subsidiaries at September 27, 1997, and
the results of operations for the quarter and nine-months ended September 27,
1997 and September 28, 1996, and the cash flows for the nine-months ended
September 27, 1997 and September 28, 1996. The results of operations for the
three- and nine-month periods ended September 27, 1997 should not necessarily be
taken as indicative of the results of operations that may be expected for the
entire year 1997.
The financial information as of September 27, 1997 should be read in
conjunction with the financial statements contained in the Company's Form 10-K
Annual Report for 1996.
(2) INVENTORIES
Inventories are valued at the lower of cost or market with cost
determined on the last-in, first-out (LIFO) method for stock inventory items
and on the average cost method for job order work-in-process and finished goods.
The cost of inventories of foreign subsidiaries are valued on the first-in,
first-out basis.
($000)
September 27 December 31
1997 1996
---- ----
(Unaudited)
Raw materials $ 4,310 $4,924
Work-in-process 2,903 1,511
Finished goods 4,985 3,130
------- ------
$12,198 $9,565
The excess of current costs over the carrying value using the LIFO
method was approximately $362,000 and $273,000 at September 27, 1997 and
December 31, 1996, respectively.
(3) EARNINGS PER SHARE
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share," which specified a new computation for earnings per share. SFAS 128 is
effective for periods ending after December 15, 1997. Had SFAS 128 been adopted
as of January 1, 1996, unaudited basic and diluted earnings per share for the
quarter and nine-month periods ended September 27, 1997 and September 28, 1996
would have been as follows:
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QUARTER ENDED NINE MONTHS ENDED
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
---- ---- ---- ----
Basic $0.31 $0.12 $0.87 ($0.22)
===== ===== ===== ======
Diluted $0.25 $0.10 $0.67 ($0.22)
===== ===== ===== ======
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Item 2. Management's Discussion and Analysis of financial Condition and Results
of Operations
This Report contains certain forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
below and in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Aavid Thermal Technologies, Inc. (the "Company") is a leading provider
of thermal management solutions for microprocessors and integrated circuits
(IC's) for digital and power applications. The Company operates in two distinct
markets: thermal management solutions and computational fluid dynamics
software. Thermal management solutions include products and services for
problems associated with the dissipation of unwanted heat in electronic and
electrical components and systems. Computational fluid dynamics (CFD) software
involves developing software for computer modeling and flow analysis of products
and processes that would otherwise require time consuming and expensive physical
models and the facilities to test them.
Ongoing increases in silicon and system integration, higher processing
speeds and frequencies, smaller form factors, more sophisticated power
requirements and other advances in chip technology create excessive heat in
microprocessors and IC's (semiconductors) in electronic and electrical
components and systems. Microprocessors and integrated circuits operate
efficiently only in a narrow temperature band. The excessive heat generated by
these semiconductors not only harms their own performance but degrades system
performance and reliability and can cause system failure. These negative
effects are exacerbated by the increasingly wide range of environmental
conditions, including temperature extremes, in which electronic systems are
expected to operate. The use of Aavid's thermal solutions helps maintain device
and system performance and reliability and helps avoid premature component and
system failure.
RESULTS OF OPERATIONS
THIRD QUARTER 1997 COMPARED WITH THIRD QUARTER 1996
Sales in the third quarter of 1997 were $43.7 million, an increase of
$18.0 million, or 70%, compared with the third quarter of last year. This
increase was mostly due to higher sales of thermal products, which increased to
83% of Company sales for the third quarter 1997 from 75% of Company sales in the
third quarter of 1996. International sales also increased to 43% of sales in the
third quarter of 1997, from 24% of sales in the third quarter of 1996. Sales to
Intel Corp. including its foreign subsidiaries accounted for 19% of total sales
for the quarter.
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Thermal product sales were $36.1 million in the third quarter of 1997,
an increase of $16.7 million, or 86%, compared with the third quarter of 1996.
This growth was primarily the result of increasing heat dissipation problems
associated with computer electronics components, resulting in higher domestic
and overseas sales. Power electronics product sales were also higher due to
underlying market growth.
Fluent software sales of $7.5 million in the third quarter of 1997 were
$1.1 million, or 17% , higher compared to the third quarter of 1996. In
general, the increase was seen in all product offerings and was due to the
overall growth in the market for CAE design software.
Gross profit was $14.6 million, an increase of $4.8 million, or 48%
over the third quarter of 1996. Gross margin as a percentage of sales decreased
from 38.3% in the third quarter of 1996 to 33.4% for the third quarter of 1997.
Approximately two-thirds of the change in gross margin percentage was due to the
change in relative sales mix between Aavid Thermal Products (75% of total sales
in 1996, versus 83% in 1997) and Fluent (25% of total sales in 1996 versus 17%
in 1997). Fluent sales have significantly higher gross margins than Aavid
Thermal Products Sales. The remaining one-third change in gross margin was
predominantly the result of higher sales volume of lower margin computer
electronic products within Aavid Thermal Products.
Operating Income of $4.1 million in the third quarter of 1997 increased
by $2.3 million or 127% compared with last year's third quarter. Operating
margins as a percentage of sales increased to 9.4% for the third quarter of
1997, compared with 7.0% for the same quarter last year. This change largely
reflects the significant improvement at Aavid Thermal Products where the growth
in sales and gross profit has exceeded the increased in selling, general and
administrative and research and development expenses.
Interest charges of $0.6 million in the third quarter of 1997 increased
74% from the third quarter of 1996, reflecting higher levels of debt. The
effective tax rate in the third quarter of 1997 was 36.4 %, compared with 33.7%
in 1996. The change is principally due to increased profits from countries
with higher effective tax rates.
Net income of $2.2 million, or $0.25 per share, in the third quarter of
1997 was 174% higher than last year's net income, or $0.10 per share. A
discussion of the operations of the Company's three operating subsidiaries
follows.
NET INCOME
----------
THIRD QUARTER
-----------------------------------------
1997 1996 INCREASE
---- ---- --------
Aavid Thermal Products $1.8 $0.5 $1.3
Fluent 0.4 0.3 0.1
Applied Thermal Technologies 0.0 -- 0.0
---- ---- ---
$2.2 $0.8 $1.4
==== ==== ====
Aavid Thermal Products net income for 1997 improved to $1.8 million from
the 1996 net income of $0.5 million, an increase of $1.3 million, or 260%.
Strong sales growth with significantly reduced sales, general and
administrative costs as well as research and development expenditures as a
percentage
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of sales, more than offset some reduction in gross margins and resulted in
substantially higher net income.
Fluent's net income for 1997 increased to $0.4 million from $0.3
million, a 33% increase. Although the level of expenses increased over the
period, this was more than offset by the efficiency gains from the continuing
integration of Fluid Dynamics International Inc. ("FDI"), the Company's design
and validation services subsidiary, following its acquisition in the second
quarter of 1996.
Applied Thermal Technologies ("Applied") had a break-even net income.
This was Applied's third quarter of operations, and increased its total number
of thermal solution development contracts to 50 from 20 last quarter.
NINE MONTHS 1997 COMPARED WITH NINE MONTHS 1996
Sales for the first nine months of 1997 totaled $115.2 million, an
increase of $40.4 million, or 54%, compared with the first nine months of 1996.
85% of this increase was generated by additional Aavid Thermal Products
business. Sales to Intel Corp. accounted for 11% of total sales for the first
nine months of the year.
Aavid Thermal Products sales of $91.1 million in the first nine months
of 1997 increased $34.3 million or 60%, compared with the first nine months of
1996. Quarterly sequential sales growth for the first three quarters of 1997
over the respective quarters of 1996 were 26%, 73%, and 86%, respectively. The
accelerated growth over the second and third quarters reflects the significant
domestic and overseas demand for thermal products within the computer
electronics components market.
Fluent software sales in the first nine months of 1997 increased $5.7
million, or 31%, compared with the first nine months of 1996. Approximately half
of the increase is related to the acquisitions of FDI and Polyflow.
Gross margin as a percentage of sales for the Company decreased from
37.7% in the first nine months of 1996, to 36.8% in the first nine months of
1997. Substantially all of the change in this period was the result of higher
growth rates in Aavid Thermal Products sales than Fluent sales, where software
sales have significantly higher gross margins.
Income from operations in the first nine months of 1996 included a $3.4
million charge for purchased undeveloped technology (special charge) acquired
in the FDI Acquisition.
Income from operations of $11.5 million in the first nine months of 1997
increased $6.7 million or 41%, compared with the first nine months of last year
(excluding the 1996 special charge). Operating margins as a percentage of sales
increased from 6.4% (excluding the 1996 special charge) in the first nine months
of 1996 to 9.9% in the first nine months of 1997. The increase in operating
income and operating margins was principally due to sales volumes at Aavid
Thermal Products, growing at a higher rate than the increase in selling, general
and administrative, and research and development expense.
Interest charges of $1.6 million in the first nine months of 1997
increased $0.5 million, or 45%, from the prior year's first nine months
reflecting higher levels of debt.
The effective tax rate for the first nine months of 1997 was 36.2%. The
effective tax rate for the first nine months of 1996 is not comparable because
of the one time charges for Purchased undeveloped technology and the
extraordinary item. The effective tax rate for the first nine months of 1996,
excluding the one time charges, was 35.9%.
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Net income of $5.8 million, or $0.67 per share, in the first nine
months of 1997 compares with $2.2 million, or $0.30 per share, in the same
period last year (after adjusting for special and extraordinary items).
A discussion of the operations of the three subsidiaries follows.
Adjusted net income (see table below) for the businesses excludes the 1996
impact of special and extraordinary charges.
NET INCOME
-----------------
NINE MONTHS ENDED
------------------------------------------------
September 27 September 28
1997 1996 INCREASE
---- ---- --------
Aavid Thermal Products $4.1 $0.6 $3.5
Fluent 1.9 1.6 0.3
Applied Thermal Technologies (0.2) -- (0.2)
---- ---- ----
$5.8 $2.2 $3.6
==== ==== ====
Aavid Thermal Products' net income for 1997 improved to $4.1 million
from the 1996 adjusted net income of $0.6 million, an increase of $3.5 million,
or 583%. The increase reflects significant domestic and overseas growth in
demand for computer electronics thermal products combined with a recovery in the
power components market following weak demand experienced in early 1996.
Fluent's net income increased to $1.9 million, 19% ahead of 1996.
ICEPACK and MAXIM, Fluent's new software product for vertical market segments,
have been well received and progress has been made with the integration of the
FDI and Polyflow acquisitions. In the second quarter of 1996 Fluent incurred a
special charge of $3.4 million for purchased undeveloped technology relating to
the FDI acquisition.
Applied Thermal Technologies ("Applied") net loss for 1997 was $(0.2)
million. Applied started operations in the first quarter 1997 and in the third
quarter met its initial objective of providing advanced research and testing
services which are fully funded by its customers.
FINANCIAL CONDITION
SEPTEMBER 27, 1997 COMPARED WITH DECEMBER 31, 1996
On September 27, 1997 the Company had $5.3 million in cash or cash
equivalents compared with $4.1 million at year end. The current ratio at
September 27, 1997 was 6x, up from 1.3 x at year end. This increase was
primarily the result of increased overseas sales which historically have higher
receivables days outstanding than domestic sales.
The Company's total debt of $30.3 million on September 27, 1997 compares
with $23.3 million at year-end. Total debt as a percent of stockholders' equity
at September 27, 1997 was 77.1%, slightly lower than 79.4% at year-end. Long
term debt on September 27, 1997 was $25.7 million, an increase of $8.3 million,
compared with year-end. Borrowings under the revolving line of credit were
approximately $11.6 million on September 27, 1997 compared with $6.3 million at
year-end.
The Company has reached an agreement in principle with its current
senior lenders to restructure its existing term and revolving credit facility.
The proposed revisions to the agreement would increase the company's revolving
line of credit from approximately $20 million to $29 million. Existing term
loans with the senior lenders of approximately $11 million would be rescheduled
and amortized over the five year term of the agreement.
There can be no assurance that the Company will enter into the revised
credit agreement on the foregoing terms, on different terms or at all.
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During the first nine months of 1997, the Company spent $8.2 million
for capital expenditures compared with $4.6 million in the corresponding period
in 1996. The higher level of expenditure was necessitated by the significant
growth in the Company's computer products business. Spending for the first nine
months of 1997 was as follows: Thermal Products $6.2 million, Fluent $1.7
million, Applied Thermal Technologies $0.1 million, and Other $0.2 million.
On July 17, 1997 the Company purchased the outstanding 49% minority
interest in its Taiwanese joint venture - Aavid Taiwan. The purchase price was
$2.25 million consisting of 75,000 shares of Common Stock and $1.125 million in
cash.
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