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 April 3, 1999, Commission File No. 000-27308
AAVID THERMAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-466826
(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 May 3, 1999 was
9,284,070.
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AAVID THERMAL TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
a.) Consolidated Balance Sheets
as of April 3, 1999 and March 28, 1998.................... 3
b.) Consolidated Statements of Income
for the three months ended April 3, 1999
and March 28, 1998........................................ 4
c.) Consolidated Statements of Cash Flows
for the three months ended April 3, 1999
and March 28, 1998........................................ 5
d.) Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 11
Part II. Other Information
Item 1. Legal Proceedings..................................... 17
Item 6. Exhibits and Reports on Form 8-K...................... 18
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 3, DECEMBER 31,
1999 1998
(UNAUDITED)
----------- ------------
ASSETS
Cash and cash equivalents $20,619 $20,027
Notes receivable -- 1,459
Accounts receivable 34,387 31,158
Inventories 14,051 15,283
Refundable income taxes 370 370
Deferred income taxes 9,110 9,072
Prepaid and other current assets 2,900 2,897
----------- ------------
Total current assets 81,437 80,266
Property, plant and equipment, net 42,045 42,497
Other assets, net 6,851 6,321
----------- ------------
Total Assets $130,333 $129,084
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations $3,612 $3,442
Accounts payable - trade 14,060 17,377
Accrued expenses and other current liabilities 25,433 23,488
----------- ------------
Total current liabilities 43,105 44,307
Debt obligations, net of current portion 10,354 11,208
Deferred income taxes 2,189 2,218
----------- ------------
Total liabilities 55,648 57,733
----------- ------------
Commitments and Contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value; authorized
4,000,000 shares; 0 outstanding at
April 3, 1999 and December 31, 1998
Common Stock, $0.01 par value; authorized
25,000,000 shares; 9,274,524 and 9,251,391
shares issued and outstanding at April 3,
1999 and December 31, 1998,respectively 93 93
Additional paid-in capital 57,079 56,740
Cumulative translation adjustment (1,075) (902)
Retained earnings 18,588 15,420
----------- ------------
Total stockholders' equity 74,685 71,351
----------- ------------
Total liabilities and stockholders' equity $130,333 $129,084
=========== ============
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AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
QUARTER ENDED
APRIL 3, MARCH 28,
1999 1998
-------- ---------
Net sales $ 49,841 $ 55,558
Cost of goods sold 31,360 37,170
---------- ----------
Gross profit 18,481 18,388
Selling general and administrative expenses 11,367 11,007
Research and development 1,729 1,690
Buyout of compensation arrangements -- 1,858
---------- ----------
Income from operations 5,385 3,833
Interest expense, net (115) (459)
Other expense, net (243) (322)
---------- ----------
Income before income taxes 5,027 3,052
Income tax expense (1,859) (1,136)
---------- ----------
Net income $ 3,168 $ 1,916
========== ==========
Net income per share, basic $ 0.34 $ 0.25
========== ==========
Weighted average common shares 9,271,273 7,800,402
Net income per share, diluted $ 0.33 $ 0.21
========== ==========
Weighted average common shares and equivalents 9,609,023 9,346,565
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AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share data)
(Unaudited)
QUARTER ENDED
APRIL 3, MARCH 28,
1999 1998
-------- ---------
Cash flows provided by (used in) operating activities:
Net income $ 3,168 $ 1,916
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,022 2,278
(Gain) loss on sale of property, plant and equipment (52) 15
Deferred income taxes (201) (17)
Changes in assets and liabilities:
Accounts receivable (3,391) (4,634)
Note receivable 1,459 --
Inventories 1,456 (316)
Prepaid and other current assets (516) (1,810)
Other long term assets 189 (201)
Accounts payable - trade (3,581) 1,065
Accrued expenses and other current assets 1,596 5,068
-------- ---------
Total adjustments (1,019) 1,448
-------- ---------
Net cash provided by operating activities 2,149 3,364
Cash flows used in investing activities:
Purchase of property, plant & equipment (1,181) (3,413)
Net proceeds from sale of fixed assets 60 2
-------- ---------
Net cash used in investing activities (1,121) (3,411)
Cash flows used in financing activities:
Issuance of common stock, net of expenses 340 1,143
Advances under line of credit -- 37,789
Repayments of line of credit -- (39,464)
Advances under other debt obligations 199 206
Principal payments under debt obligations (849) (688)
-------- ---------
Net cash used in financing activities (310) (1,014)
Foreign exchange rate effect on cash and cash equivalents (126) 21
Net increase (decrease) in cash and cash equivalents 592 (1,040)
Cash and cash equivalents, beginning of period 20,027 6,919
-------- ---------
Cash and cash equivalents, end of period $ 20,619 $ 5,879
======== ---------
Supplemental disclosure of cash flow information:
Interest paid $ 204 $ 506
======== =========
Income taxes paid $ 416 $ 167
======== =========
See accompanying notes to consolidated financial statements.
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AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
(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 April 3, 1999, and the
results of operations for the quarter ended April 3, 1999 and March 28, 1998,
and the cash flows for the three-months ended April 3, 1999 and March 28, 1998.
The results of operations for the three-month period ended April 3, 1999 should
not necessarily be taken as indicative of the results of operations that may be
expected for the entire year 1999.
The financial information as of April 3, 1999 should be read in conjunction
with the financial statements contained in the Company's Form 10-K Annual Report
for 1998.
(2) ACCOUNTS RECEIVABLE
The components of accounts receivable at April 3, 1999 and December 31,
1998 are as follows:
April 3, December 31,
1999 1998
----------- ------------
(Unaudited)
Accounts receivable $35,309 $31,895
Allowance for doubtful accounts (922) (737)
---------- ------------
Net accounts receivable $34,387 $31,158
========== ============
(3) INVENTORIES
Inventories are valued at the lower of cost or market with cost determined
principally on the average cost method. The cost of inventories of foreign
subsidiaries are valued on the first-in, first-out basis.
April 3, December 31,
1999 1998
-------- ------------
(Unaudited)
Raw materials $9,726 $9,987
Work-in-process 2,246 2,364
Finished goods 2,079 2,932
-------------- --------------
$14,051 $15,283
============== ==============
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(4) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which specifies the presentation, and
disclosure requirements for comprehensive income. The following details
comprehensive income for the periods reported herein:
April 3, March 28,
1999 1998
-------- ---------
(Unaudited) (Unaudited)
Net Income $3,168 $1,916
Foreign currency translation adjustment (173) 318
-------- ---------
Comprehensive Income $2,995 $2,234
======== =========
(5) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS"). Basic earnings per share
excludes dilution and is computed by dividing net earnings by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share is computed based upon the weighted average number of common shares
outstanding and dilative common stock equivalents. For purposes of this
calculation, outstanding options are considered common stock equivalents (using
the treasury stock method).
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The following is a reconciliation of the numerators and denominators used
to calculate earnings per share in the Consolidated Statements of Operations:
For the Quarter Ended
April 3, 1999 March 28, 1998
--------------------------------------------- -----------------------------------------
PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
Net Income $3,168 $1,916
====== ======
BASIC EPS:
Income Available to
Common Stockholders
$3,168 9,271,273 $ 0.34 1,916 7,800,402 $ 0.25
EFFECT OF DILUTIVE
SECURITIES:
Options and Warrants
337,750 1,546,163
------- ---------
DILUTED EPS:
Income Available to
Common Stockholders
$3,168 9,609,023 $ 0.33 $1,916 $9,346,565 $ 0.21
====== ========= ====== ====== ========== ======
(6) NON-RECURRING CHARGES AND RESTRUCTURING RESERVES
During the first quarter of 1998, the Company recorded a non-recurring
re-tax charge of $1.858 million, which related to financial obligations arising
from the Company's restructuring in 1993 and comprised two elements: First, the
Company terminated an arrangement with certain venture investors, under which it
was obligated to pay fixed fees until at least the year 2000. Second, the
Company provided for an obligation to pay a former director a bonus based on
profits in excess of certain thresholds.
During the third quarter of 1998, the company recorded a non-recurring
pre-tax charge of $4.882 million reflecting the costs associated with the
closure of the Company's Manchester, New Hampshire, facility. This facility was
dedicated to manufacturing a specific large volume product for a single
customer. Following a change in product design by the customer, demand
significantly decreased during the fourth quarter of 1998 to $8.6 million, from
a level of $15 million in the second quarter of 1998. The restructuring is
expected to be concluded by the second half of 1999.
The costs associated with the closure of the Manchester facility include
the write-down and disposal of surplus equipment, totaling $2.823 million,
settlement of certain purchase commitments of $1.127 million, provisions for
leased property expenses of $0.382 million, and employee separation costs of
$0.550 million. While the number of employees has been significantly reduced
through natural attrition, the plan included the termination of 120 employees
comprised of 90 direct and 30 indirect employees. The charge is offset by a $1.0
million reduction in the previous estimate of obligations to pay a former
director a bonus, paid on profits in excess of certain thresholds.
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The following amounts have been charged against the Manchester
restructuring reserves during the quarter ending April 3, 1999:
Restructuring
Charges Against Reserves
Restructuring Reserves for the Balance at
Reserves Balance at Three Months Ended April 3,
December 31, 1998 April 3, 1999 1999
--------------------- ---------------------- -----------------
Surplus equipment $2,823 $ -- $2,823
Purchase commitments 691 (610) 81
Lease terminations and
Leasehold improvements
reserve 328 (86) 242
Employee separation 327 (19) 308
------ ----- ------
Total $4,169 $(715) $3,454
====== ====== ======
(7) SEGMENT REPORTING
Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for digital and power applications. The Company
consists of three distinct reportable segments: thermal management products,
computational fluid dynamics ("CFD") software, and thermal design services.
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 Company also provides thermal design services to customers who
choose to outsource their thermal design needs.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
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.
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The following summarizes the operations of each reportable segment for the
Quarters ending April 3, 1999 and March 28, 1998:
SEGMENT
REVENUES INCOME BEFORE
FROM TAXES AND ASSETS(NET OF
EXTERNAL EXTRAORDINARY INTERCOMPANY
CUSTOMERS ITEMS BALANCES)
--------- ------------- -------------
Apr 3, 1999
Thermal Products $ 36,746 $ 2,385 $ 91,937
CFD Software 12,798 2,626 29,503
Thermal Design
Services 297 16 556
Corporate Office -- -- 8,337
------- ------ --------
Total 49,841 5,027 130,333
Mar 28, 1998
Thermal Products 45,113 1,217 90,790
CFD Software 10,178 1,811 24,160
Thermal Design
Services 267 24 611
Corporate Office -- -- 2,434
------- ------ --------
Total $55,558 $3,052 $117,995
======= ====== ========
The following table provides geographic information about the Company's
operations. Revenues are attributable to a location based on shipment source.
Long-lived assets are attributable to a location based on physical location.
Quarter Ending,
Apr 3, 1999 Mar 28, 1998
----------------------------- ------------------------------
Long-Lived Long-Lived
Revenues Assets Revenues Assets
United States $ 33,317 $ 39,542 $ 48,058 $45,120
Taiwan 4,702 1,290 5,575 1,295
China 5,853 1,561 1,314 985
United Kingdom 4,663 2,458 4,558 2,264
Other International 10,833 4,045 4,454 2,622
Intercompany eliminations (9,527) -- (8,401) --
-------- -------- -------- -------
Consolidated Revenue $ 49,841 $ 48,896 $ 55,558 $52,286
======== ======== ======== =======
Revenues from one customer of Aavid's thermal products division represents
approximately $12.6 million of the Company's consolidated revenues for the
quarter ending March 28, 1998.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, 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, 1998.
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is the leading
provider of thermal management solutions for digital and industrial electronics
applications. In today's electronic equipment environment, microprocessors and
their associated power supplies, hard drives, advanced video chips, and other
peripheral devices, draw large amounts of power, and consequently, dissipate a
significant amount of heat. The same heat generation occurs in power
semiconductors and integrated circuits in motor controls, telecommunications
switches and other smart electronics. Since microprocessors and power
semiconductors operate efficiently only in narrow temperature bands, heat is an
absolute constraint in electronic system design. The excessive heat generated
within the component not only degrades semiconductor and system performance and
reliability, but can also cause semiconductor and system failure.
Increasingly, neither externally supplied off-the-shelf thermal management
products, nor internally designed and produced parts, have been able to
effectively address the expanding complexity of thermal management problems
resulting from increasing silicon integration and system integration. The
complexity of thermal management problems has been intensified by the increasing
amounts of power to be dissipated, reductions in system size, shorter
time-to-market, shorter product life cycles, and more demanding temperature
operating requirements.
Many electronics manufacturers do not have the internal resources to solve
these challenges and are turning to third parties to design thermal solutions.
Additionally, the increasing number of electronics systems manufactured outside
the United States, and the need for fast ramp-up of high volume production
capabilities, has forced these manufacturers to seek a highly integrated,
worldwide provider of thermal management solutions.
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Aavid, through its three subsidiaries, approaches these thermal challenges
from different perspectives. Fluent Inc.'s ("Fluent") sophisticated
computational fluid dynamics ("CFD") software models and analyzes heat transfer,
air and other fluid flows for virtual prototyping of products, processes, and
systems. This greatly reduces development time and expenses associated with
physical models and the facilities to test them.
Applied Thermal Technologies, Inc. ("Applied") designs integrated thermal
solutions at the component-, board-, and system-levels. Applied works as an
extension of its clients' product design team, leveraging on technical and
manufacturing capabilities gained from both Fluent and Aavid Thermal Products to
develop, test, and validate thermal solutions.
Aavid Thermal Products, Inc. manufactures thermal products and supports
customer applications around the globe.
Using its design, analysis, and manufacturing strengths, the Company
intends to capitalize on the two principal trends in the electronics industry:
first, the trend to develop products which incorporate microprocessors and power
semiconductors with increasingly complex thermal dissipation problems, and
second, the trend to outsource development of thermal management solutions. Key
elements of the Company's strategy to provide "The Total Integrated Solution for
Cooling Electronics" globally are: (i) leverage the nearly 100 Ph.D.'s and 250
engineers, to expand its technological leadership; and (ii) grow its market
leadership by expanding its manufacturing, software, consulting, design, sales
and distribution activities, both domestically and overseas, through internal
growth and selective acquisitions.
Currently the Company counts Apple, Intel, HP, Silicon Graphics, Compaq,
AT&T, DEC, Ericsson, GE, Harris, IBM, Lockheed Martin, Lucent, Motorola, Square
D, and Zenith among the customers shared between the Company's subsidiaries. In
addition, Applied works with a number of companies for whom the thermal
challenge is emerging, or who are investigating outsourcing their thermal design
efforts. These customers include Bay Networks, Cisco Systems, and Sun
Microsystems.
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.
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
THE COMPANY
Sales in the first quarter of 1999 were $49.8 million, a decrease of $5.8
million, or 10.3%, compared with the first quarter of 1998. This decrease was
the result of the impact of the reduction in sales volume of a Special Product
being manufactured for Intel Corporation (the "Intel Special Product"). Company
sales, excluding sales to Intel Corporation, however, increased 9.8%
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over the same period in the prior year.
International sales (which include North American exports) decreased to 41%
of sales for 1999 compared with 46% in 1998. This decrease in the level of
international sales is primarily the result of the reduction in sales of the
Intel Special Product, which, as previously disclosed, declined from a per
quarter level of $15 million in the second quarter of 1998 to $2.6 million in
the first quarter of 1999. The majority of the Intel Special Product was shipped
to locations outside the United States.
Intel Corporation was the only customer that generated more than 10% of the
Company's sales in the first quarter of 1998. For 1998, sales to Intel
Corporation, including its foreign subsidiaries, accounted for 23%, of total
Company sales. No customer generated more than 10% of the Company's sales in the
first quarter of 1999.
The Company's gross profit for the first quarter of 1999 was $18.5 million,
an increase of $0.1 million, or 0.5% higher than the first quarter of 1998.
Gross margin as a percentage of sales increased from 33.1% in the first quarter
of 1998 to 37.1% for the first quarter of 1999. This increase resulted from an
increase in the percentage of overall gross margin derived from Fluent, which
generally has higher overall gross margin percentages than Aavid Thermal
Products.
The Company's first quarter 1999 operating income of $5.4 million was $0.3
million or 5.4% lower than the first quarter of 1998 when excluding
non-recurring charges. The Company's operating margins, as a percentage of
sales, for the first quarter of 1999 were 10.8% as compared with 10.2% for the
first quarter of the prior year excluding the effect of non-recurring charges.
This improvement in margin percentage is the result of increased operating
profit at Fluent and the reduction of lower margin Intel Special Product
business.
Interest charges for the Company were $0.1 million in the first quarter of
1999, which compares with $0.5 million for the first quarter of 1998 reflecting
lower levels of indebtedness. The effective tax rate in the first quarter of
1999 was 37.0%, compared with 37.2% in the first quarter of 1998.
The Company's net income for the first quarter of 1999 was $3.2 million, or
$0.33 per share, consistent with the first quarter of 1998 of $3.1 million, or
$0.33 per share, excluding the effect of non-recurring charges.
During the first quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $1.9 million (or $0.13 per share), which related to
obligations arising from the Company's financial restructuring in 1993 and
comprised two elements: First, the Company terminated an arrangement with
certain venture investors, under which it was previously obligated to pay fixed
fees until at least the year 2000. Second, the Company provided for an
obligation to pay a former director a bonus based on 1998 profits in excess of
certain thresholds.
During the third quarter of 1998, the company recorded a non-recurring
pre-tax charge of $4.9 million reflecting the costs associated with the closure
in the fourth quarter of the Company's Manchester, New Hampshire facility. This
facility was dedicated to manufacturing the Intel Special Product. The charge is
offset by a $1.0 million reduction in the previous estimate of obligations to
pay a former director a bonus, paid on profits in excess of certain thresholds.
The combination of these two events resulted in a net third quarter
non-recurring pre-tax charge of $3.9 million or $0.25 per share.
The costs associated with the closure of the Manchester facility include
the write-down of surplus equipment of $2.8 million, settlement of certain
purchase commitments of $1.1 million, provisions for leased property expenses of
$0.4 million, and employee separation costs of $0.5 million. There were $0.7
million of payments made relative to this plant closure during the quarter
ending April 3, 1999.
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THE SUBSIDIARIES
A discussion of the operations of the Company's three operating
subsidiaries excluding one-time charges, follows (excluding 1998 non-recurring
charges):
Net Income
($ Million)
FIRST QUARTER
-------------
1999 1998 INCREASE
------ ------ ----------
Fluent $ 1.6 $ 1.1 $ 0.5
Applied Thermal Technologies 0.0 0.0 --
Aavid Thermal Products 1.6 2.0 (0.4)
------ ----- -----
$ 3.2 $ 3.1 $ 0.1
====== ===== =====
Fluent software sales of $12.9 million in the first quarter of 1999 were
$2.7 million, or 26.3% higher than the first quarter of 1998. In general,
increases were seen in all product offerings due to overall growth in the market
for computational fluid dynamics design software, as well as the success of
application specific products, such as "Icepak".
Fluent produced another excellent quarter with net income for the first
quarter of 1999 increasing to $1.6 million from $1.1 million for the first
quarter of 1998, a 37.4% increase. Operating margins improved to 22.0% for the
first quarter of 1999, compared with 18.7% in the first quarter of 1998. Net
margins also improved to 12.1% of revenues for the first quarter of 1999 from
11.1% in the first quarter of 1998.
Applied Thermal Technologies ("Applied") broke even in the first quarter of
1999, consistent with the first quarter of 1998. Applied has established itself
as Silicon Valley's premier thermal design, validation and consulting service,
and has generated significant hardware sales opportunities for Aavid Thermal
Products.
Sales for Aavid Thermal Products were $36.7 million in the first quarter of
1999, a decrease of $8.4 million, or 18.5%, compared with the first quarter of
1998. This decrease was primarily the result of the impact of the reduction in
sales volume of the Intel Special Product. Excluding sales to Intel, sales in
the first quarter of 1999 were up $1.6 million or 4.9% over the first quarter of
1998. A breakdown of the sales of Aavid Thermal Products for the first quarter
of 1999 as compared to the first quarter of 1998 is shown below.
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SALES
$ MILLION
---------
APRIL 3, MARCH 28, INCREASE
-------- --------- --------
1999 1998
---- ----
Computers and Network - "Core" $ 18.7 $ 15.1 23.8%
Industrial Electronics 15.4 17.4 (11.4)%
------- ------- ------
34.1 32.5 4.9%
Computers and Network - Intel 2.6 12.6 (79.4)%
------- ------- ------
Total Aavid Thermal Products $ 36.7 $ 45.1 (18.5)%
======= ======= =======
Revenue in Computer and Network related products (excluding Intel) showed
strong growth in the first quarter of 1999, increasing 23.8% over the same
period in the prior year. Industrial Electronics revenues, while down 11.4% from
the first quarter of 1998, are up 18.5% and 15.8% over the third and fourth
quarters of 1998, respectively, marking a strong recovery from the second half
of 1998 which experienced an Asian economic slowdown and a sharp correction of
customer inventories.
The final shipments of the Intel Special Product were made in the first
quarter of 1999 and totaled approximately $2.6 million. Due to a packaging
design change by Intel in mid 1998, sales of the Intel Special Product declined
from $15.0 million for the second quarter of 1998 to $10.8 million and $8.6
million for the third and fourth quarters of 1998, respectively. Sales to Intel
are expected to be less than 5% of total revenues throughout the remainder of
1999.
Operating margins at Aavid Thermal Products for the first quarter of 1999 were
7.1%, which compares with 8.3% for the first quarter of 1998 and 7.1% for the
fourth quarter of 1998. The reduction in margins that have occurred since the
second quarter of 1998 are the result of lower volume of revenues to Intel.
Aavid Thermal Products net income for the first quarter of 1999 decreased $0.2
million from the first quarter of 1998, excluding one time charges, to $1.6
million, a decrease of 15.1%. This was the direct result of decreased sales due
to the loss of business for the Intel Special Product. Net margins improved
slightly in the first quarter of 1999 to 4.5% of revenues from 4.3% in the first
quarter of 1998, primarily due to reduced interest charges and a more favorable
tax rate which resulted from the shift of certain operations to foreign lower
tax jurisdictions.
FINANCIAL CONDITION
APRIL 3, 1999 COMPARED WITH DECEMBER 31, 1998
During the first quarter of 1999, the Company generated $1.9 million of
cash from operations. The Company used $0.8 million of cash to reduce debt and
$1.2 million for capital expenditures.
Total indebtedness at April 3, 1999 was $14.0 million, which compares with
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$14.7 million at December 31, 1998. Total indebtedness as a percent of
stockholders' equity at April 3, 1999 was 18.7%, an improvement of 1.8% from the
20.5% at December 31, 1998. Long-term debt at April 3, 1999 was $10.3 million, a
decrease of $0.9 million from December 31, 1998. No borrowings were outstanding
under the Company's revolving line of credit on April 3, 1999 or December 31,
1998. Unused borrowing capacity under the Company's financing agreement was
approximately $32.2 million at April 3, 1999, which compares with $29.9 million
at December 31, 1998.
During the first quarter of 1999, the Company's capital expenditures were
$1.2 million compared with $4.4 million in the first quarter of 1998. The level
of quarterly capital expenditures has decreased significantly since the first
quarter of 1998 due to the fact that the level of expenditure in 1998 reflected
the significant increase in production capacity associated with the expansion of
the Manchester, New Hampshire and China facilities. There were no material
purchase commitments as of April 3, 1999.
At April 3, 1999, inventory turns were 8.1, which compare with 7.7 at
December 31, 1998. This improvement in turns is the result of increased shipping
rates of "core" hardware business which more than offset lower levels of high
turn Intel Special Products business .
At April 3, 1999, accounts receivable days sales outstanding were 63, which
compare with 56 days at December 31, 1998. While the number of days sales
outstanding are up from the end of 1998, 63 days is consistent with the average
DSO of 1998 as a whole.
YEAR 2000
The Company is currently engaged in a comprehensive project to upgrade its
information, technology, manufacturing, and facilities computer hardware and
software programs to address the Year 2000 issue at its domestic and
international businesses. Many of the Company's systems include new hardware and
packaged software recently purchased from vendors who have represented that
these systems are already Year 2000 compliant.
As part of this project, the Company has formally communicated with its
significant suppliers, vendors, and large customers to determine the extent to
which the Company is vulnerable to those parties' failures to correct their own
Year 2000 issues. Responses received as of April 3, 1999, generally indicate
that these parties will be Year 2000 compliant.
The Company has completed an inventory and assessment of its information
technology systems. Both internal and external resources are being utilized to
test the Company's software for Year 2000 compliance and, where necessary, the
systems are being remediated through upgrading, replacement, or reprogramming.
Also, the Company is taking an inventory of its non-information technology
(embedded) systems, prioritizing the impact of each of these systems on the
Company's ability to conduct its operations and, as necessary, is obtaining
vendor verification and/or remediation of those systems. The process of
analyzing, prioritizing, remediating and testing will be an iterative process
until all systems are Year 2000 compliant.
The estimated cost for this project is estimated to be $125,000, which is
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being funded through operating cash flows. The Company has spent approximately
$75,000 as of April 3, 1999, on this project, most of which has been for
internal remediation efforts. The Company believes that 90% of its systems are
Year 2000 compliant as of April 3, 1999, with the remainder expected to be
compliant by the third quarter of 1999.
Based upon currently available information and considering the Company's
diversified business base, decentralized systems and Year 2000 efforts,
management believes that the most reasonably likely worst case scenario could
result in minor short-term business interruptions. The Company is preparing
contingency plans which include alternative sourcing to minimize any disruptions
to its business resulting from a vendor or supplier not being Year 2000
compliant; however, failure by the company and/or vendors and customers to
complete Year 2000 compliance work in a timely manner could have a material
adverse effect on certain of the Company's operations. The Company's exposure
could increase or its timetable for Year 2000 compliance could be delayed as a
result of any new acquisitions.
The Company's software products have a very low dependency on dates, with
possible dependencies being license management, date display, and files
handling. The Company has tested its software products for Year 2000 compliance
and believes that all software products released after June 1998 are Year 2000
compliant, provided they are used with products that are also Year 2000
compliant. The Company has no control over the compliance of third party
products including, but not limited to, hardware, operating system software, and
firmware.
Part II. Other Information
Item 1. Legal Proceedings
On March 4, 1998, Materials Innovation, Inc. of Lebanon, New Hampshire
("Mii") and two of its principals, Alan Beane and Glenn Beane (all three the
"Petitioners"), filed a petition for declaratory judgment against Aavid Thermal
Products, Inc. in Grafton County (New Hampshire) Superior Court. The Petitioners
have asked the court to declare as terminated a contract between Petitioners and
Aavid dated October 14, 1993 (the "Agreement"). Petitioner Alan Beane is a
former Director and Chief Executive Officer of the Company, who beneficially
owns more than 10% of the Company's common stock.
The Agreement grants to Aavid licenses for two patents, one involving a
clamp for attaching heatsinks to semiconductors, and the other involving a
process to make heatsinks by vacuum die casting. The Agreement also provides
Aavid with rights to potential technology of Mii relating to Aavid's thermal
products business, and prohibits Petitioners from competing against Aavid for
the ten-year term of the Agreement. Petitioners claim that Aavid has failed to
pay royalties associated with the vacuum die cast patent. The petition does not
seek monetary damages from Aavid.
Although the Company believes that the termination of the Mii Agreement
would not have a materially adverse effect on its business, results of
operations or financial condition, there can be no assurance it will not have
such a materially adverse effect in the future. On January 29, 1999, the Grafton
County Superior Court granted the Company's motion to dismiss the
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Petitioner's Declaratory Judgement petition. The Petitioners have appealed that
dismissal.
The Company is involved in various other legal proceedings that are
incidental to the conduct of its business, none of which the Company believes
could reasonably be expected to have a materially adverse effect on the
Company's financial condition, liquidity, or results of operations.
Item 6. Exhibits and Report on Form 8-K
a) Exhibit 27.98 -- "Financial Data Schedule" is included in the
electronically filed document as required.
SIGNATURES
AAVID THERMAL TECHNOLOGIES, INC.
DATE: May 18th, 1999
By /s/ Stephen D. Eldred
---------------------------------
Vice President, Treasurer, and
Chief Financial Officer
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