1
DRAFT
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 July 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 August 3, 1999 was
9,599,828.
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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 July 3, 1999 and December 31, 1998.................. 3
b.) Consolidated Statements of Income
for the quarter and six months ended
July 3,1999 and June 27,1998.............................. 4
c.) Consolidated Statements of Cash Flows
for the six months ended July 3, 1999
and June 27, 1998......................................... 5
d.) Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 12
Part II. Other Information
Item 1. Legal Proceedings..................................... 19
Item 6. Exhibits and Reports on Form 8-K...................... 20
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JULY 3, DECEMBER 31,
1999 1998
(Unaudited)
----------- ------------
ASSETS
Cash and cash equivalents $ 24,715 $ 20,027
Notes receivable -- 1,459
Accounts receivable 34,113 31,158
Inventories 14,839 15,283
Refundable income taxes 370 370
Deferred income taxes 9,257 9,072
Prepaid and other current assets 2,995 2,897
--------- ---------
Total current assets 86,289 80,266
Property, plant and equipment, net 40,397 42,497
Other assets, net 7,261 6,321
--------- ---------
Total Assets $ 133,947 $ 129,084
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations $ 3,639 $ 3,442
Accounts payable - trade 13,992 17,377
Accrued expenses and other current liabilities 26,180 23,488
--------- ---------
Total current liabilities 43,811 44,307
Debt obligations, net of current portion 9,917 11,208
Deferred income taxes 2,189 2,218
--------- ---------
Total liabilities 55,917 57,733
--------- ---------
Commitments and Contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value; authorized
4,000,000 shares; 0 outstanding at July 3,
1999 and December 31, 1998 -- --
Common Stock, $0.01 par value; authorized
25,000,000 shares; 9,307,097 and 9,251,391
shares issued and outstanding at July 3,
1999 and December 31, 1998,respectively 93 93
Additional paid-in capital 57,569 56,740
Cumulative translation adjustment (1,374) (902)
Retained earnings 21,742 15,420
--------- ---------
Total stockholders' equity 78,030 71,351
--------- ---------
Total liabilities and stockholders' equity $ 133,947 $ 129,084
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
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AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
QUARTER ENDED SIX MONTHS ENDED
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales $ 47,787 $ 54,287 $ 97,628 $ 109,845
Cost of goods sold 29,147 35,869 60,507 73,039
----------- ----------- ----------- -----------
Gross profit 18,640 18,418 37,121 36,806
Selling general and administrative expenses 11,713 11,239 23,080 22,246
Research and development 1,736 1,655 3,465 3,345
Buyout of compensation arrangements -- -- -- 1,858
----------- ----------- ----------- -----------
Income from operations 5,191 5,524 10,576 9,357
Interest expense, net (71) (356) (186) (815)
Other expense, net (246) (91) (489) (413)
----------- ----------- ----------- -----------
Income before income taxes 4,874 5,077 9,901 8,129
Income tax expense (1,741) (1,880) (3,600) (3,016)
----------- ----------- ----------- -----------
Net income $ 3,133 $ 3,197 $ 6,301 $ 5,113
=========== =========== =========== ===========
Net income per share, basic $ 0.34 $ 0.38 $ 0.68 $ 0.63
=========== =========== =========== ===========
Weighted average common shares 9,288,339 8,459,447 9,279,795 8,138,622
Net income per share, diluted $ 0.32 $ 0.34 $ 0.65 $ 0.54
=========== =========== =========== ===========
Weighted average common shares and equivalents 9,765,119 9,491,602 9,684,246 9,419,478
The accompanying notes are an integral part of these consolidated
financial statements.
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AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share data)
(Unaudited)
SIX MONTHS ENDED
JULY 3, JUNE 27,
1999 1998
-------- --------
Cash flows provided by (used in) operating activities:
Net income $ 6,301 $ 5,113
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,993 4,919
Loss on sale of property, plant and equipment 91 --
Deferred income taxes (211) (2,435)
Changes in assets and liabilities:
Accounts receivable (3,255) (4,735)
Note receivable 1,459 --
Inventories 738 254
Prepaid and other current assets (501) (1,666)
Other long term assets 200 36
Accounts payable - trade (3,586) (1,979)
Accrued expenses and other current assets 3,444 7,048
-------- --------
Total adjustments 2,372 1,441
-------- --------
Net cash provided by operating activities 8,673 6,554
Cash flows used in investing activities:
Purchase of property, plant & equipment (3,541) (5,881)
Net proceeds from sale of fixed assets 61 29
-------- --------
Net cash used in investing activities (3,480) (5,852)
Cash flows used in financing activities:
Issuance of common stock, net of expenses 829 2,438
Advances under line of credit -- 78,560
Repayments of line of credit -- (84,614)
Advances under other debt obligations 202 1,054
Principal payments under debt obligations (1,490) (1,628)
-------- --------
Net cash used in financing activities (459) (4,190)
Foreign exchange rate effect on cash and cash equivalents (46) (207)
Net increase (decrease) in cash and cash equivalents 4,688 (3,695)
Cash and cash equivalents, beginning of period 20,027 6,919
-------- --------
Cash and cash equivalents, end of period $ 24,715 $ 3,224
======== --------
Supplemental disclosure of cash flow information:
Interest paid $ 323 $ 471
======== ========
Income taxes paid $ 1,126 $ 562
======== ========
Supplemental disclosure of non-cash investing activities:
Sale of equipment in exchange for note receivable -- 1,152
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and 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 July 3, 1999, and the
results of operations for the quarters and six months ended July 3, 1999 and
June 27, 1998, and the cash flows for the six months ended July 3, 1999 and June
27, 1998. The results of operations for the six months ended July 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 and for the periods ended July 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 July 3, 1999 and December 31, 1998
are as follows:
July 3, December 31,
1999 1998
---- ----
(Unaudited)
Accounts receivable $ 35,061 $ 31,895
Allowance for doubtful accounts (948) (737)
-------- --------
Net accounts receivable $ 34,113 $ 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.
July 3, December 31,
1999 1998
---- ----
(Unaudited)
Raw materials $ 9,098 $ 9,987
Work-in-process 2,349 2,364
Finished goods 3,392 2,932
------- -------
$14,839 $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:
QUARTER ENDED SIX MONTHS ENDED
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Income $ 3,133 $ 3,197 $ 6,301 $ 5,113
Foreign currency translation
adjustment (299) (493) (472) (175)
------- ------- ------- -------
Comprehensive Income $ 2,834 $ 2,704 $ 5,829 $ 4,938
======= ======= ======= =======
(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 dilutive 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
----------------------------------------------------------------------------------------
July 3, 1999 June 27, 1998
--------------------------------------- --------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Net Income $3,133 $3,197
====== ======
BASIC EPS:
Income Available to
Common Stockholders
$3,133 9,288,339 $ 0.34 3,197 8,459,447 $ 0.38
EFFECT OF DILUTIVE
SECURITIES:
Options and Warrants
476,780 1,032,155
------- ---------
DILUTED EPS:
Income Available to
Common Stockholders
$3,133 9,765,119 $ 0.32 $3,197 $9,491,602 $ 0.34
====== ========= ====== ====== ========== ======
FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------------------------
July 3, 1999 June 27, 1998
--------------------------------------- -------------------------------------
Per- Per-
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Net Income $6,301 $5,113
====== ======
BASIC EPS:
Income Available to
Common Stockholders
$6,301 9,279,795 $ 0.68 5,113 8,138,622 $ 0.63
EFFECT OF DILUTIVE
SECURITIES:
Options and Warrants
404,451 1,280,856
------- ---------
DILUTED EPS:
Income Available to
Common Stockholders
$6,301 9,684,246 $ 0.65 $5,133 $9,419,478 $ 0.54
====== ========= ====== ====== ========== ======
(6) NON-RECURRING CHARGES AND RESTRUCTURING RESERVES
During the first quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $1.9 million, which related to financial obligations arising
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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 $4.9 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 in 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 $2.8 million,
settlement of certain purchase commitments of $1.1 million, provisions for
leased property expenses of $0.4 million, and employee separation costs of $0.6
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 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 six months ended July 3, 1999:
Restructuring Charges Against Restructuring
Reserves Balance at Reserves for the Reserves Balance
December 31, Six Months Ended at July 3,
1998 July 3, 1999 1999
------------------- ------------------ ----------------
Surplus equipment $2,823 $(2,195) $628
Purchase commitments 691 (666) 25
Lease terminations and
leasehold improvements
reserve
328 (79) 249
Employee separation 327 (21) 306
------ -------- ------
Total $4,169 $(2,961) $1,208
====== ======== ======
(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 as disclosed in the Company's
Form 10-K for the year ending December 31, 1998.
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 July 3, 1999 and June 27, 1998:
FOR THE QUARTER ENDING
-------------------------------------------------------------------------------------------
Segment
Revenues Income Before
From Taxes And Assets(Net Of
External Extraordinary Intercompany
Customers Items Balances)
--------- ------------- ------------
July 3, 1999
Thermal Products $35,355 $3,014 $ 94,937
CFD Software 12,042 1,829 29,413
Thermal Design
Services 390 31 631
Corporate Office -- -- 8,966
------- ------ --------
Total................ $47,787 $4,874 $133,947
======= ====== ========
June 27, 1998
Thermal Products 44,816 3,681 88,375
CFD Software 9,124 1,354 22,790
Thermal Design
Services 347 42 640
Corporate Office -- -- 4,301
------- ------ --------
Total................ $54,287 $5,077 $116,106
======= ====== ========
FOR THE SIX MONTHS ENDING
-------------------------------------------------------------------------------------------
Segment
Revenues Income Before
From Taxes And
External Extraordinary
Customers Items
--------- -------------
July 3, 1999
Thermal Products $72,101 $5,399
CFD Software 24,943 4,455
Thermal Design
Services 584 47
Corporate Office -- --
------- ------
Total................ $97,628 $9,901
======= ======
June 27, 1998
Thermal Products 89,929 4,898
CFD Software 19,337 3,165
Thermal Design
Services 579 66
Corporate Office -- --
-------- ------
Total................ $109,845 $8,129
======== ======
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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.
July 3, 1999 June 27, 1998
-------------------------------------------- -------------------------------------------
Long-Lived Long-Lived
Revenues Assets Revenues Assets
For the For the Six For the For the Six
Quarter Ended Months Ended As of Period Quarter Months Ended As of
End Ended Period End
United States $ 34,862 $ 68,179 $ 37,767 $ 44,500 $ 92,558 $43,084
Taiwan 4,585 9,287 1,345 3,233 8,808 1,354
China 6,757 12,610 1,830 2,264 3,578 990
United Kingdom 4,261 8,924 2,263 4,256 8,814 2,673
Other International 8,672 19,505 4,453 5,029 9,483 2,590
Intercompany eliminations (11,350) (20,877) -- (4,995) (13,396) --
-------- -------- -------- -------- -------- -------
Consolidated Revenue $ 47,787 $ 97,628 $ 47,658 $ 54,287 $109,845 $50,691
======== ======== ======== ======== ======== =======
Revenues from one customer of Aavid's thermal products division represents
approximately $15.0 million of the Company's consolidated revenues for the
quarter ending July 3, 1999, and $27.7 million for the six months then ended.
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,
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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.
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
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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
QUARTER AND SIX MONTHS ENDED JULY 3, 1999 COMPARED WITH QUARTER AND SIX MONTHS
ENDED JUNE 27, 1998
THE COMPANY
Sales in the second quarter of 1999 were $47.8 million, a decrease of $6.5
million, or 12%, compared with the second quarter of 1998. Sales for the six
months ended July 3, 1999 were $97.6 million, a decrease of $12.2 million or
11.1%. The reduction in sales for both the quarter and six month period 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
for the six month period ending July 3, 1999, excluding sales to Intel
Corporation, however, increased 15.6% over the same period in the prior year.
International sales (which include North American exports) decreased to 35%
of sales for the second quarter of 1999 compared with 54% in the second quarter
of 1998. This decrease in the level of international sales is primarily the
result of the reduction in sales of the Intel Special Product, which declined
from a per quarter level of $15 million in the second quarter of 1998 to none in
the second 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 second quarter of 1998 and the six months ended June 27,
1998. Sales to Intel Corporation, including its foreign subsidiaries, accounted
for 27% and 25%, of total Company sales for the quarter and six months ended
June 27, 1998. No customer generated more than 10% of the Company's sales in the
second quarter or six months ended July 3, 1999.
The Company's gross profit for the second quarter of 1999 was $18.6
million, an increase of $0.2 million, or 1.2% higher than the second quarter of
1998. Gross margin as a percentage of sales increased from 33.9% in the second
quarter of 1998 to 39.0% for the second quarter of 1999. This increase resulted
from a decrease in the percentage of overall gross margin derived from the Intel
Special Product (which had a lower gross margin than the Company's other
products) and 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 second quarter 1999 operating income of $5.2 million was $0.3
million or 6.0% lower than the second quarter of 1998. The Company's operating
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margins, as a percentage of sales, for the second quarter of 1999 were 10.9% as
compared with 10.2% for the second quarter of 1998. This improvement in margin
percentage is the result of an increase in the percentage of overall operating
profit derived from Fluent.
Interest charges for the Company were $0.1 million in the second quarter of
1999, which compares with $0.4 million for the second quarter of 1998 reflecting
lower levels of indebtedness. The effective tax rate in the second quarter of
1999 was 35.7%, compared with 37.1% in the second quarter of 1998. The decrease
in tax rate resulted from a shift of product mix to foreign lower tax
jurisdictions.
The Company's net income for the second quarter of 1999 was $3.1 million,
or $0.32 per share, compared with the second quarter of 1998 of $3.2 million, or
$0.34 per share.
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 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
was 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 included
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 $3
million of payments and write-downs made relative to this plant closure during
the six months ending July 3, 1999.
THE SUBSIDIARIES
A discussion of the operations of the Company's three operating
subsidiaries excluding one-time charges, follows:
Net Income Net Income
($ Million) ($ Million)
Second Quarter Six Months Ended
----------------------------------- -------------------------------
1999 1998 Increase 1999 1998 Increase
---- ---- -------- ---- ---- --------
Fluent $1.1 $ 0.9 $ 0.2 $ 2.7 $2.0 $ 0.7
Applied Thermal Technologies 0.0 0.0 -- 0.0 0.0 --
Aavid Thermal Products 2.0 2.3 (0.3) 3.6 4.3 (0.7)
---- ----- ----- ------ ---- -----
$3.1 $ 3.2 $(0.1) $ 6.3 $6.3 $ --
==== ===== ======== ====== ===== =====
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Fluent software sales of $12.0 million in the second quarter of 1999 were
$2.8 million, or 30.9% higher than the second quarter of 1998. Of this increase,
approximately 40% of it was the result of sales increases resulting from the
Company's new subsidiary in Japan, which became operational in the first
quarter of 1999. The remainder of the increase was spread among 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's net income for the second quarter of 1999 increased to $1.1
million from $0.9 million for the second quarter of 1998, a 31.3% increase.
Operating margins decreased to 15.7% for the second quarter of 1999, compared
with 16.4% in the second quarter of 1998. Net margins were consistent at 9.3% of
revenues for the second quarter of 1999 and 1998.
Applied Thermal Technologies ("Applied") broke even in the second quarter
of 1999, consistent with the second 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.
Aavid Thermal Products' sales were $35.4 million in the second quarter of
1999, a decrease of $9.4 million, or 21.1%, compared with the second 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 second quarter of 1999 were up $5.6 million or 18.8% over the second quarter
of 1998 reflecting strong growth in sales to Computer and Networking customers
in which second quarter 1999 sales increased 42.9% over the second quarter of
1999. A breakdown of the sales of Aavid Thermal Products for the second quarter
of 1999 as compared to the second quarter of 1998 is shown below.
QUARTER ENDING
SALES
$ Million
------------------------------------
July 3, June 27,
1999 1998 Increase
------- -------- --------
Computers and Network -
"Core" $19.0 $13.3 42.9%
Industrial Electronics 16.4 16.5 (0.6)%
----- ----- -----
35.4 29.8 18.8%
Computers and Network - Intel -- 15.0 (100.0)%
----- ----- -----
Total Aavid Thermal Products $35.4 $44.8 (21.1)%
===== ===== =====
Revenue in Computer and Network related products (excluding Intel) showed
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strong growth in the second quarter of 1999, increasing 42.9% over the same
period in the prior year. Industrial electronics revenues, while down 0.6% from
the second quarter of 1998, are up 6.5% over the first quarter of 1999 and 26.2%
and 23.3% over the third and fourth quarters of 1998, respectively, marking a
strong recovery from the second half of 1998 which were impacted by the Asian
economic slowdown and a sharp correction of customer inventories.
Operating margins at Aavid Thermal Products for the second quarter of 1999 were
9.2%, which compares with 8.9% for the second quarter of 1998 and 7.1% for the
first quarter of 1999. The improvement in margins over the first quarter of 1999
is the result of the continued recovery of the industrial electronics market
following the slowdown during the second half of 1998.
Aavid Thermal Products net income for the second quarter of 1999 decreased
$0.3 million from the second quarter of 1998 to $2.0 million, a decrease of
12.4%. 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 second
quarter of 1999 to 5.7% of revenues from 5.2% in the second quarter of 1998,
primarily due to reduced interest charges and a more favorable tax rate which
resulted from the shift of product mix to foreign lower tax jurisdictions.
FINANCIAL CONDITION
JULY 3, 1999 COMPARED WITH DECEMBER 31, 1998
During the first six months of 1999, the Company generated $8.7 million of
cash from operations. The Company used $1.3 million of cash to reduce
indebtedness and $3.5 million for capital expenditures.
Total indebtedness at July 3, 1999 was $13.6 million, which compares with
$14.7 million at December 31, 1998. Total indebtedness as a percent of
stockholders' equity at July 3, 1999 was 17.4%, an improvement of 3.1% from the
20.5% at December 31, 1998. Long-term debt at July 3, 1999 was $9.9 million, a
decrease of $1.3 million from December 31, 1998. No borrowings were outstanding
under the Company's revolving line of credit on July 3, 1999 or December 31,
1998. Unused borrowing capacity under the Company's financing agreement was
approximately $32.7 million at July 3, 1999, which compares with $29.9 million
at December 31, 1998.
During the second quarter of 1999, the Company's capital expenditures were
$2.3 million compared with $2.4 million in the second quarter of 1998. There
were no material purchase commitments as of July 3, 1999.
At July 3, 1999, inventory turns were 7.0, which compare with 7.7 at
December 31, 1998. This reduction in turns is primarily the result of the
elimination of high turn Intel Special Products business .
At July 3, 1999, accounts receivable days sales outstanding ("DSO")were 65,
which compare with 56 days at December 31, 1998. While the number of days sales
outstanding are up from the end of 1998, 65 days is consistent with the average
DSO of 1998 as a whole.
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ACQUISITIONS ANNOUNCEMENT
On June 22, 1999, the Company announced that it is in discussions with
respect to a possible sale of the Company to a private investment firm. The
Company indicated that the discussions are at a preliminary stage, and that any
transaction would be subject to, among other things, satisfactory due diligence,
obtaining of financing, completion of definitive documentation and other
customary conditions, including expiration of applicable Hart-Scott-Rodino
Anti-trust Improvements Act waiting periods, and the Company's receipt of an
opinion of Hambrecht & Quist, its financial advisor, that the consideration to
be paid for the transaction is fair to the Company's stockholders from a
financial point of view. The potential purchaser has indicated that it is
prepared to pay $24.50 in cash per share. There can be no assurance that a
transaction will be completed on these terms, on different terms or at all.
The Company also announced on June 22, 1999 that it had entered into a
non-binding letter of intent for a significant acquisition. This transaction
would also be subject to completion of satisfactory due diligence, obtaining of
financing, completion of definitive documentation and other customary
conditions, including expiration of applicable Hart-Scott-Rodino waiting
periods, and the Company's receipt of an opinion from its financial advisor that
the consideration to be paid in the transaction is fair to the Company's
shareholders from a financial point of view. There can be no assurance that a
transaction will be completed on these terms, on different terms or at all.
The Company does not currently intend to update the status of negotiations
by public announcement until either a definitive agreement is executed or
negotiations cease.
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 July 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
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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
being funded through operating cash flows. The Company has spent approximately
$95,000 as of July 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 July 3, 1999, with the remainder expected to be compliant by the
end of 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, the Company
believes, 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.
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On January 29, 1999, the Grafton County Superior Court granted the
Company's motion to dismiss the Petitioner's Declaratory Judgement petition. The
Petitioners appealed that dismissal then subsequently withdrew that appeal. Mii
has since commenced arbitration of the same issue. 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.
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 Reports on Form 8-K
Exhibit 10.1 "Amendment No. 1 to Employment Agreement" is included
in the electronically filed document as required.
Exhibit 10.2 "Amendment No. 1 to Employment Agreement" is included
in the electronically filed document as required.
Exhibit 10.3 "Employment Agreement" is included in the
electronically filed document as required.
Exhibit 10.4 "Employment Agreement" is included in the
electronically filed document as required.
Exhibit 10.5 "Agreement" is included in the electronically filed
document as required.
Exhibit 10.6 "Agreement" is included in the electronically filed
document as required.
Exhibit 10.7 "Agreement" is included in the electronically filed
document as required.
Exhibit 10.8 "Agreement" is included in the electronically filed
document as required.
Exhibit 10.9 "Agreement" is included in the electronically filed
document as required.
Exhibit 10.10 "Appendix A -- First Amendment to Employment Agreement"
is included in the electronically filed document as
required.
Exhibit 10.11 Notice of Grant of Stock Options
Exhibit 27.98 "Financial Data Schedule" is included in the
electronically filed document as required.
SIGNATURES
AAVID THERMAL TECHNOLOGIES, INC.
DATE: August 13, 1999
By /s/ Stephen D. Eldred
--------------------------------------
Vice President, Treasurer, and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.1 "Amendment No. 1 to Employment Agreement" is included in the
electronically filed document as required.
10.2 "Amendment No. 1 to Employment Agreement" is included in the
electronically filed document as required.
10.3 "Employment Agreement" is included in the electronically filed
document as required.
10.4 "Employment Agreement" is included in the electronically filed
document as required.
10.5 "Agreement" is included in the electronically filed document as
required.
10.6 "Agreement" is included in the electronically filed document as
required.
10.7 "Agreement" is included in the electronically filed document as
required.
10.8 "Agreement" is included in the electronically filed document as
required.
10.9 "Agreement" is included in the electronically filed document as
required.
10.10 "Appendix A -- First Amendment to Employment Agreement" is included in
the electronically filed document as required.
10.11 Notice of Grant of Stock Options
27.98 "Financial Data Schedule" is included in the electronically filed
document as required.