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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 COMMISSION FILE NO. 000-27308.
AAVID THERMAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 02-0466826
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE EAGLE SQUARE, SUITE 509, CONCORD, NH 03301
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 224-1117
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X](1)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act).
Yes [ ] No [X]
The number of outstanding shares of the registrant's Common Stock as of October
31, 2004 was 1,018.87 shares of Class A, 1,078.87 shares of Class B and 40
shares of Class H, all of which are owned by Heat Holdings Corp. On February 2,
2000, a wholly-owned subsidiary of Heat Holdings Corp. was merged with and into
the Registrant with the Registrant becoming a wholly-owned subsidiary of Heat
Holdings Corp. and each share of Registrant's then outstanding common stock was
converted into $25.50 in cash. The Registrant's Common Stock is no longer
publicly traded.
- ---------
(1) Although the Company has not been subject to such filing requirements for
the past 90 days, it has filed all reports required to be filed by Section 15(d)
of the Securities Exchange Act of 1934 (the "Act") during the preceding twelve
months. Pursuant to Section 15(d) of the Act, the Company's duty to file reports
is automatically suspended as a result of having fewer than 300 holders of
record of its debt securities outstanding, as of January 1, 2003, but the
Company agreed under the terms of certain long-term debt covenants to continue
these filings.
AAVID THERMAL TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
a.) Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 ................................................... 3
b.) Consolidated Statements of Operations for the quarter and
nine months ended September 30, 2004 and September 27, 2003 ......... 4
c.) Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and September 27, 2003 ..................... 5
d.) Notes to Consolidated Financial Statements .......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 15
Item 4. Controls and Procedures ............................................. 20
Part II. Other Information
Item 1. Legal Proceedings ................................................... 21
Item 6. Exhibits and Reports on Form 8-K .................................... 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
------------ -----------
ASSETS
Cash and cash equivalents ...................................................... .. $ 24,345 $ 15,231
Accounts receivable-trade, less allowance for doubtful accounts .................. 39,079 40,008
Inventories ...................................................................... 9,680 9,583
Refundable taxes ................................................................. 87 160
Deferred income taxes ............................................................ 1,211 1,172
Prepaid and other current assets ................................................. 6,835 6,033
--------- ---------
Total current assets ........................................................... 81,237 72,187
Property, plant and equipment, net ............................................... 27,474 27,102
Goodwill ......................................................................... 40,021 39,433
Developed technology, net ........................................................ 2,420 1,518
Deferred financing fees .......................................................... 2,710 3,480
Deferred income taxes ............................................................ 410 404
Other assets, net ................................................................ 1,877 1,569
--------- ---------
Total assets ................................................................... $ 156,149 $ 145,693
========= =========
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' DEFICIT
Accounts payable-trade ........................................................... $ 17,569 $ 12,943
Current portion of long term debt obligations .................................... 10,649 9,043
Income taxes payable ............................................................. 5,114 3,789
Restructuring charges ............................................................ 209 215
Deferred revenue ................................................................. 38,745 37,657
Accrued expenses and other current liabilities ................................... 24,605 26,816
--------- ---------
Total current liabilities ...................................................... 96,891 90,463
Long term debt obligations, net of current portion ............................... 129,447 129,767
Deferred income taxes ............................................................ 211 209
--------- ---------
Total liabilities .............................................................. 226,549 220,439
--------- ---------
Minority interests in consolidated subsidiaries .................................. 585 585
Stockholders' deficit:
Series A Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares
issued and outstanding (Liquidation value of $6,947 at September 30, 2004) ..... -- --
Series B Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares
issued and outstanding (Liquidation value of $6,947 at September 30, 2004) ..... -- --
Class A Common Stock, $.0001 par value; authorized 1,400 shares; 1,018.87 shares
issued and outstanding ......................................................... -- --
Class B Common Stock, $.0001 par value; authorized 1,400 shares; 1,078.87 shares
issued and outstanding ......................................................... -- --
Class H Common Stock, $.0001 par value; authorized 200 shares; 40 shares issued
and outstanding ................................................................ -- --
Warrants to purchase 49.52 shares of Class A common stock and 49.52 shares of
Class H common stock ........................................................... 3,764 3,764
Additional paid-in capital ....................................................... 188,007 188,007
Cumulative translation adjustment ................................................ (1,572) (1,105)
Accumulated deficit .............................................................. (261,184) (265,997)
--------- ---------
Total stockholders' deficit .................................................... (70,985) (75,331)
--------- ---------
Total liabilities, minority interests and stockholders' deficit ................ $ 156,149 $ 145,693
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
QUARTER QUARTER NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 30, SEPTEMBER 27,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales ......................................... $ 55,711 $ 44,164 $ 167,867 $ 135,584
Cost of goods sold ................................ 27,502 22,326 83,913 70,240
--------- --------- --------- ---------
Gross profit .................................... 28,209 21,838 83,954 65,344
Selling, general and administrative expenses ...... 17,144 14,166 49,943 43,685
Amortization of intangible assets ................. 180 948 634 2,644
Research and development .......................... 3,666 3,798 11,762 11,896
--------- --------- --------- ---------
Income from operations .......................... 7,219 2,926 21,615 7,119
Interest expense, net ............................. (4,552) (4,530) (13,612) (13,658)
Other income, net ................................. 244 86 373 1,446
--------- --------- --------- ---------
Income (loss) from operations before income taxes 2,911 (1,518) 8,376 (5,093)
Income tax expense ................................ (1,543) (62) (3,563) (1,425)
--------- --------- --------- ---------
Net income (loss) ................................. $ 1,368 $ (1,580) $ 4,813 $ (6,518)
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 27,
2004 2003
------------ ------------
Cash flows provided by operating activities:
Net income (loss) ...................................................... $ 4,813 $ (6,518)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation ........................................................... 5,373 5,954
Amortization and accretion ............................................. 2,002 3,866
Loss on sale of property, plant and equipment .......................... 9 192
Deferred income taxes .................................................. (56) (184)
Changes in assets and liabilities:
Accounts receivable - trade ............................................ 836 5,339
Inventories ............................................................ (5) (1,470)
Prepaid and other current assets ....................................... (714) (694)
Notes receivable ....................................................... -- 82
Other long term assets ................................................. (107) (19)
Accounts payable - trade ............................................... 4,569 1,672
Income taxes payable ................................................... 1,335 (445)
Deferred revenue ....................................................... 1,345 2,866
Accrued expenses and other current liabilities ......................... (2,180) (1,317)
-------- --------
Total adjustments ..................................................... 12,407 15,842
-------- --------
Net cash provided by operating activities ............................. 17,220 9,324
Cash flows used in investing activities:
Purchases of property, plant & equipment ............................... (4,057) (2,999)
Proceeds from sale of property, plant and equipment .................... 14 161
Payment for acquisition, net of cash acquired .......................... (3,035) --
-------- --------
Net cash used in investing activities ................................. (7,078) (2,838)
Cash flows used in financing activities:
Advances (repayments) on line of credit, net ........................... 1,305 (1,301)
Principal payments under debt obligations .............................. (1,762) (1,615)
-------- --------
Net cash used in financing activities ................................. (457) (2,916)
Foreign exchange rate effect on cash and cash equivalents ................ (571) (1,886)
-------- --------
Net increase in cash and cash equivalents ................................ 9,114 1,684
Cash and cash equivalents, beginning of period ........................... 15,231 12,297
-------- --------
Cash and cash equivalents, end of period ................................. $ 24,345 $ 13,981
======== ========
Supplemental disclosure of cash flow information:
Interest paid .......................................................... $ 16,300 $ 16,458
======== ========
Income taxes paid ...................................................... $ 1,602 $ 1,926
======== ========
Supplemental disclosure of non-cash investing activities:
Reconciliation of assets acquired and liabilities assumed in acquisitions:
Fair value of assets acquired .......................................... $ 3,125 $ --
Cash paid for assets ................................................... (3,082) --
-------- --------
Liabilities assumed .................................................. $ 43 $ --
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(1) BACKGROUND
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is a leading
global provider of thermal management solutions for electronic products and the
leading developer and marketer of computational fluid dynamics ("CFD") software.
Each of these businesses has an established reputation for high product quality,
service excellence and engineering innovation in its market. Aavid designs,
manufactures and distributes on a worldwide basis thermal management products
that dissipate unwanted heat, which can degrade system performance and
reliability, from microprocessors and industrial electronics products. Aavid's
products, which include heat sinks, interface materials and attachment
accessories, fans, heat spreaders and liquid cooling and phase change devices
that it configures to meet customer-specific needs, serve the critical function
of conducting, convecting and radiating away unwanted heat. CFD software is used
in complex computer-generated modeling of fluid flows, heat and mass transfer
and chemical reactions. Aavid's CFD software is used in a variety of industries,
including the automotive, aerospace, chemical processing, power generation,
material processing, electronics and HVAC industries.
Overall, the Company services a highly diversified base of more than 3,500
national and international customers including OEMs, distributors, and contract
manufacturers through a highly integrated network of software, development,
manufacturing, sales and distribution locations throughout North America,
Europe, and the Far East.
The Company has been privately held since February 2, 2000, when it was
acquired by Heat Holdings Corp., a corporation formed by Willis Stein & Partners
II, L.P and other investors. Heat Holdings II Corp., an affiliate of Heat
Holdings, owns 89% of the common equity of Aavid Thermalloy LLC, the thermal
management hardware business. The Company controls Aavid Thermalloy LLC through
a preferred equity interest and holds a 5% common equity interest and, thus,
consolidates Aavid Thermalloy LLC in its results within the accompanying
financial statements. The investment by Heat Holdings II Corp. has been recorded
as minority interest within the accompanying financial statements.
(2) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ending
September 30, 2004 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004.
The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the footnotes
required by generally accepted accounting principles for complete financial
statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Aavid Thermal Technologies, Inc. annual report
on Form 10-K for the year ended December 31, 2003.
6
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable at September 30, 2004 and December
31, 2003 are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
(UNAUDITED)
Accounts receivable...................................................... $ 41,592 $ 42,209
Allowance for doubtful accounts.......................................... (2,513) (2,201)
-------- --------
Net accounts receivable.................................................. $ 39,079 $ 40,008
======== ========
(4) INVENTORIES
Inventories are valued at the lower of cost or market (first-in,
first-out), and consist of materials, labor and overhead. The components of
inventories at September 30, 2004 and December 31, 2003 are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
(UNAUDITED)
Raw materials.......................................................... $ 2,706 $ 2,065
Work-in-process........................................................ 4,432 4,123
Finished goods......................................................... 2,542 3,395
--------- --------
$ 9,680 $ 9,583
========= ========
(5) COMPREHENSIVE INCOME (LOSS)
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 (loss) for the periods reported herein:
QUARTER ENDED QUARTER ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 27, SEPTEMBER 30, SEPTEMBER 27,
2004 2003 2004 2003
------------- ------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net income (loss).................. $ 1,368 $ (1,580) $ 4,813 $ (6,518)
Foreign currency translation
adjustment....................... 34 (105) (467) (910)
--------- --------- -------- ----------
Comprehensive income (loss)........ $ 1,402 $ (1,685) $ 4,346 $ (7,428)
========= ========= ======== ==========
(6) RESTRUCTURING CHARGES AND RESERVES
Approximately $2,130 of restructuring charges were recorded in connection
with the Company's October 1999 acquisition of Thermalloy, the thermal
management business of Bowthorpe plc. The restructuring plan included
initiatives to integrate the operations of the Company and Thermalloy and reduce
overhead. The primary components of these plans related to (a) the closure of
duplicative Thermalloy operations in Hong Kong and the United Kingdom, (b) the
elimination of duplicative selling, general and administration functions of
Thermalloy on a global basis and (c) the termination of certain contractual
obligations. During the year ended December 31, 2000, 136 individuals were
terminated under the restructuring plan. The following amounts have been charged
against the Thermalloy restructuring reserves during the quarter ended September
30, 2004:
CHARGES AGAINST
RESTRUCTURING RESERVES FOR THE RESTRUCTURING
RESERVES BALANCE QUARTER ENDED RESERVES BALANCE
AT JUNE 30, SEPTEMBER 30, AT SEPTEMBER 30,
2004 2004 2004
---------------- ---------------- ----------------
Employee separation........................... $ 200 $ -- $ 200
Other......................................... 9 -- 9
------ ---- ------
Total......................................... $ 209 $ -- $ 209
====== ==== ======
7
(7) SEGMENT REPORTING
The Company consists of two distinct reportable segments: (1) thermal
management products and (2) computational fluid dynamics ("CFD") software.
Aavid's thermal management products consist of products and services that solve
problems associated with the dissipation of unwanted heat in electronic and
electrical components and systems. The Company develops and offers CFD software
for computer modeling and fluid flow analysis of products and processes that
reduce time and expense associated with physical models and the facilities to
test them.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as disclosed in the Company's
Form 10-K for the year ended December 31, 2003.
The Company accounts for inter-segment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.
Aavid's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different marketing and sales strategies.
The following summarizes the operations of each reportable segment for the
quarter and nine months ending September 30, 2004 and September 27, 2003:
REVENUES SEGMENT
FROM INCOME (LOSS) ASSETS (NET OF
EXTERNAL BEFORE INTERCOMPANY
CUSTOMERS TAXES BALANCES)
--------- ------------ --------------
Quarter Ended September 30, 2004
Thermal Products..................................... $ 30,594 $ (2,067) $ 63,217
CFD Software......................................... 25,117 5,137 103,520
Corporate Office..................................... -- (159) (10,588)
---------- --------- ----------
Total................................................ $ 55,711 $ 2,911 $ 156,149
========== ========= ==========
Quarter Ended September 27, 2003
Thermal Products..................................... $ 22,541 $ (3,672) $ 23,073
CFD Software......................................... 21,623 2,165 91,229
Corporate Office..................................... -- (11) 19,742
---------- --------- ----------
Total $ 44,164 $ (1,518) $ 134,044
========== ========= ==========
REVENUES SEGMENT
FROM INCOME (LOSS)
EXTERNAL BEFORE
CUSTOMERS TAXES
---------- ------------
Nine Months Ended September 30, 2004
Thermal Products...................................................... $ 91,855 $ (6,755)
CFD Software.......................................................... 76,012 15,147
Corporate Office...................................................... -- (16)
---------- ---------
Total................................................................. $ 167,867 $ 8,376
========== =========
Nine Months Ended September 27, 2003
Thermal Products...................................................... $ 73,525 $ (8,618)
CFD Software.......................................................... 62,059 3,999
Corporate Office...................................................... -- (474)
---------- ---------
Total $ 135,584 $ (5,093)
========== =========
8
The following table provides geographic information about the Company's
operations. Revenues are attributable to an operation based on the location the
product was shipped from. Long-lived assets are attributable to a location based
on physical location.
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 SEPTEMBER 27, 2003
---------------------------- -------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 27, LONG-LIVED LONG-LIVED
2004 2003 ASSETS ASSETS
AS OF PERIOD AS OF PERIOD
REVENUES REVENUES REVENUES END REVENUES END
------------ ------------ ---------- ------------ ---------- ------------
United States........... $ 28,283 $ 25,554 $ 84,520 $ 60,206 $ 76,499 $ 63,166
Taiwan.................. 5,203 2,809 14,596 3,456 8,627 626
China................... 8,598 6,578 19,544 591 17,688 1,199
United Kingdom.......... 5,708 5,095 18,387 2,341 16,287 2,298
Italy................... 6,024 3,399 17,220 2,559 11,446 2,727
Mexico.................. 2,130 1,746 7,005 374 6,403 702
Other International..... 16,235 13,753 49,907 5,743 39,030 4,547
Intercompany
eliminations.......... (16,470) (14,770) (43,312) (358) (40,396) (358)
--------- --------- --------- -------- --------- --------
Total................... $ 55,711 $ 44,164 $ 167,867 $ 74,912 $ 135,584 $ 74,907
========= ========= ========= ======== ========= ========
(8) ACQUISITION
On July 30, 2004, the Company acquired 100% of the outstanding stock of a
small manufacturing company located in Taiwan. The total purchase price of the
acquired company is $4,882, consisting of $3,082 cash paid upon closing and
contingent consideration of $1,800 payable within two years of the closing date
upon the satisfaction of certain conditions. The results of operations of the
acquired company since July 30, 2004, are included in the consolidated
statements of operations of the Company for the quarter and nine months ended
September 30, 2004. The fair value of assets acquired and liabilities assumed at
July 30, 2004, is as follows:
Cash............................................................................... $ 47
Accounts receivable................................................................ 38
Inventory.......................................................................... 46
Prepaids and other current assets.................................................. 2
Property, plant and equipment, net................................................. 650
Goodwill........................................................................... 588
Developed technology............................................................... 1,500
Other long-term assets............................................................. 254
Accounts payable................................................................... (14)
Accrued expenses and other current liabilities..................................... (29)
---------
Total $ 3,082
=========
(9) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS (UNAUDITED)
The Company's wholly-owned domestic subsidiaries have jointly and severally
guaranteed, on a senior subordinated basis, the principal amount of the
Company's 12 3/4% Senior Subordinated Notes, due 2007. The guarantors include
the combined domestic operations of Aavid Thermalloy, LLC and Fluent, Inc. and
the Company's subsidiary Applied Thermal Technologies, Inc. The non-guarantors
include the combined foreign operations of Aavid Thermalloy, LLC and Fluent,
Inc. The consolidating condensed financial statements of the Company depict
Aavid Thermal Technologies, Inc., (the "Parent"), carrying its investment in
subsidiaries under the equity method and the guarantor and non-guarantor
subsidiaries are presented on a combined basis. Management believes that there
are no significant restrictions on the Parent's and guarantors' ability to
obtain funds from their subsidiaries by dividend or loan. The principal
elimination entries eliminate investment in subsidiaries and intercompany
balances and transactions.
9
CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2004 (UNAUDITED)
-----------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents................. $ 107 $ 2,460 $ 21,686 $ 92 $ 24,345
Accounts receivable-trade, net............ -- 13,034 26,036 9 39,079
Inventories............................... -- 4,069 5,844 (233) 9,680
Due (to) from affiliate, net.............. 81,026 (83,663) 24,400 (21,763) --
Refundable taxes.......................... (239) 228 (82) 180 87
Deferred income taxes..................... (27) 8,982 1,211 (8,955) 1,211
Prepaid and other current assets.......... 95 2,009 4,731 -- 6,835
---------- ---------- -------- ---------- ----------
Total current assets...................... 80,962 (52,881) 83,826 (30,670) 81,237
Property, plant and equipment, net........ 5 15,911 11,454 104 27,474
Investment in subsidiaries................ (27,018) 3,082 -- 23,936 --
Deferred income taxes..................... 282 -- 410 (282) 410
Other assets, net......................... 2,898 40,913 3,201 16 47,028
---------- ---------- -------- ---------- ----------
Total assets.............................. $ 57,129 $ 7,025 $ 98,891 $ (6,896) $ 156,149
========== ========== ======== ========== ==========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' DEFICIT
Accounts payable-trade.................... $ 152 $ 3,484 $ 13,933 $ -- $ 17,569
Current portion of debt obligations....... -- 9,058 1,591 -- 10,649
Income taxes payable...................... 1,090 2,751 2,391 (1,118) 5,114
Deferred revenue.......................... -- 17,879 20,866 -- 38,745
Accrued expenses and other current
liabilities............................. 3,472 9,899 11,413 30 24,814
---------- ---------- -------- ---------- ----------
Total current liabilities................. 4,714 43,071 50,194 (1,088) 96,891
---------- ---------- -------- ---------- ----------
Debt obligations, net of current portion.. 121,575 7,531 341 -- 129,447
Deferred income taxes..................... 1,238 3,398 211 (4,636) 211
---------- ---------- -------- ---------- ----------
Total liabilities......................... 127,527 54,000 50,746 (5,724) 226,549
---------- ---------- -------- ---------- ----------
Minority interests........................ 587 -- -- (2) 585
Stockholders' (deficit) equity:
Preferred stock, par value................ -- 76,407 5,000 (81,407) --
Common stock, par value................... -- 3 6,272 (6,275) --
Warrants.................................. 3,764 -- -- -- 3,764
Additional paid-in capital................ 188,007 126,192 8,622 (134,814) 188,007
Cumulative translation adjustment......... (1,572) 744 5,591 (6,335) (1,572)
Retained earnings (deficit) .............. (261,184) (250,321) 22,660 227,661 (261,184)
---------- ---------- -------- ---------- ----------
Total stockholders' (deficit) equity...... (70,985) (46,975) 48,145 (1,170) (70,985)
---------- ---------- -------- ---------- ----------
Total liabilities, minority interests and
stockholders' (deficit) equity.......... $ 57,129 $ 7,025 $ 98,891 $ (6,896) $ 156,149
========== ========== ======== ========== ==========
10
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2003
----------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents...................... $ 97 $ 5,081 $ 10,053 $ -- $ 15,231
Accounts receivable-trade, net................. -- 15,800 24,199 9 40,008
Inventories.................................... -- 5,098 4,548 (63) 9,583
Due (to) from affiliate, net................... 64,552 (63,135) 19,074 (20,491) --
Refundable taxes............................... (239) 228 (9) 180 160
Deferred income taxes.......................... (263) 9,218 1,172 (8,955) 1,172
Prepaid and other current assets............... 96 1,390 4,547 -- 6,033
---------- ---------- -------- ---------- ----------
Total current assets........................... 64,243 (26,320) 63,584 (29,320) 72,187
Property, plant and equipment, net............. 5 16,286 10,707 104 27,102
Investment in subsidiaries..................... (30,402) -- -- 30,402 --
Deferred income taxes.......................... 1,384 -- 404 (1,384) 404
Other assets, net.............................. 586 44,459 939 16 46,000
---------- ---------- -------- ---------- ----------
Total assets................................... $ 35,816 $ 34,425 $ 75,634 $ (182) $ 145,693
========== ========== ======== ========== ==========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' DEFICIT
Accounts payable-trade......................... $ 88 $ 1,833 $ 11,022 $ -- $ 12,943
Current portion of debt obligations............ -- 6,993 2,050 -- 9,043
Income taxes payable........................... (534) 3,790 1,651 (1,118) 3,789
Deferred revenue............................... -- 19,313 18,344 -- 37,657
Accrued expenses and other current liabilities. 7,450 9,437 10,114 30 27,031
---------- ---------- -------- ---------- ----------
Total current liabilities...................... 7,004 41,366 43,181 (1,088) 90,463
---------- ---------- -------- ---------- ----------
Debt obligations, net of current portion....... 120,977 8,443 347 -- 129,767
Deferred income taxes.......................... (17,422) 22,057 210 (4,636) 209
---------- ---------- -------- ---------- ----------
Total liabilities.............................. 110,559 71,866 43,738 (5,724) 220,439
---------- ---------- -------- ---------- ----------
Minority interests............................. 588 -- -- (3) 585
Stockholders' (deficit) equity:
Preferred stock, par value..................... -- 67,703 5,000 (72,703) --
Common stock, par value........................ -- -- 4,506 (4,506) --
Warrants....................................... 3,764 -- -- -- 3,764
Additional paid-in capital..................... 188,007 126,191 7,311 (133,502) 188,007
Cumulative translation adjustment.............. (1,105) 333 5,547 (5,880) (1,105)
Retained earnings (deficit).................... (265,997) (231,668) 9,532 222,136 (265,997)
---------- ---------- -------- ---------- ----------
Total stockholders' (deficit) equity........... (75,331) (37,441) 31,896 5,545 (75,331)
---------- ---------- -------- ---------- ----------
Total liabilities, minority interests and
stockholders' (deficit) equity............... $ 35,816 $ 34,425 $ 75,634 $ (182) $ 145,693
========== ========== ======== ========== ==========
11
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 (UNAUDITED)
----------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Net sales............................... $ -- $ 28,635 $ 43,898 $ (16,822) $ 55,711
Cost of goods sold...................... -- 12,711 25,188 (10,397) 27,502
------- -------- -------- --------- --------
Gross profit............................ -- 15,924 18,710 (6,425) 28,209
Selling, general and administrative
expenses.............................. 41 10,240 9,179 (2,136) 17,324
Research and development................ -- 3,564 4,349 (4,247) 3,666
------- -------- -------- --------- --------
Income (loss) from operations........... (41) 2,120 5,182 (42) 7,219
Interest income (expense), net.......... (118) (4,325) (128) 19 (4,552)
Other income (expense), net............. -- 78 287 (121) 244
Equity in income (loss) of subsidiaries. 914 -- -- (914) --
------- -------- -------- --------- --------
Income (loss) before income taxes....... 755 (2,127) 5,341 (1,058) 2,911
Income tax benefit (expense)............ 613 (1,092) (1,048) (16) (1,543)
------- -------- -------- --------- --------
Net income (loss)....................... $ 1,368 $ (3,219) $ 4,293 $ (1,074) $ 1,368
======= ======== ======== ========= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 27, 2003 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Net sales............................... $ -- $ 25,876 $ 33,380 $ (15,092) $ 44,164
Cost of goods sold...................... -- 10,661 19,660 (7,995) 22,326
-------- -------- -------- --------- --------
Gross profit............................ -- 15,215 13,720 (7,097) 21,838
Selling, general and administrative
expenses.............................. (263) 10,331 7,613 (2,567) 15,114
Research and development................ -- 3,441 4,937 (4,580) 3,798
-------- -------- -------- --------- --------
Income from operations.................. 263 1,443 1,170 50 2,926
Interest income (expense), net.......... (278) (4,360) 98 10 (4,530)
Other income (expense), net............. -- 263 (124) (53) 86
Equity in income (loss) of subsidiaries. (506) -- -- 506 --
-------- -------- -------- --------- --------
Income (loss) before income taxes....... (521) (2,654) 1,144 513 (1,518)
Income tax benefit (expense)............ (1,059) 1,275 (278) -- (62)
-------- -------- -------- --------- --------
Net income (loss)....................... $ (1,580) $ (1,379) $ 866 $ 513 $ (1,580)
======== ======== ======== ========= ========
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHDS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Net sales............................... $ -- $ 85,541 $126,659 $ (44,333) $ 167,867
Cost of goods sold...................... -- 39,510 70,374 (25,971) 83,913
------- -------- -------- --------- ---------
Gross profit............................ -- 46,031 56,285 (18,362) 83,954
Selling, general and administrative
expenses.............................. 56 29,233 27,041 (5,753) 50,577
Research and development................ -- 11,566 12,720 (12,524) 11,762
------- -------- -------- --------- ---------
Income (loss) from operations........... (56) 5,232 16,524 (85) 21,615
Interest income (expense), net.......... 41 (13,301) (387) 35 (13,612)
Other income (expense), net............. (1) 1,228 111 (965) 373
Equity in income (loss) of subsidiaries. 2,959 -- -- (2,959) --
------- -------- -------- --------- ---------
Income (loss) before income taxes....... 2,943 (6,841) 16,248 (3,974) 8,376
Income tax benefit (expense)............ 1,870 (3,119) (2,298) (16) (3,563)
------- -------- -------- --------- ---------
Net income (loss)....................... $ 4,813 $ (9,960) $ 13,950 $ (3,990) $ 4,813
======= ======== ======== ========= =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2003 (UNAUDITED)
---------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Net sales............................... $ -- $ 77,526 $ 99,481 $ (41,423) $135,584
Cost of goods sold...................... -- 33,904 58,182 (21,846) 70,240
-------- -------- -------- --------- --------
Gross profit............................ -- 43,622 41,299 (19,577) 65,344
Selling, general and administrative
expenses.............................. (362) 30,785 23,253 (7,347) 46,329
Research and development................ -- 11,135 13,139 (12,378) 11,896
-------- -------- -------- --------- --------
Income from operations.................. 362 1,702 4,907 148 7,119
Interest income (expense), net.......... (881) (12,801) 3 21 (13,658)
Other income (expense), net............. 45 1,979 2,408 (2,986) 1,446
Equity in income (loss) of subsidiaries. (7,272) -- -- 7,272 --
-------- -------- -------- --------- --------
Income (loss) before income taxes....... (7,746) (9,120) 7,318 4,455 (5,093)
Income tax benefit (expense)............ 1,228 (1,399) (1,254) -- (1,425)
-------- -------- -------- --------- --------
Net income (loss)....................... $ (6,518) $(10,519) $ 6,064 $ 4,455 $ (6,518)
======== ======== ======== ========= ========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
-------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Net cash provided by operating activities... $ 477 $ 1,403 $ 14,793 $ 547 $ 17,220
Cash flows used in investing activities:
Purchases of property, plant and equipment.. -- (1,461) (2,596) -- (4,057)
Proceeds from sale of property, plant and
equipment................................. -- 11 3 -- 14
Payment for acquisition, net of cash acquired -- (3,082) 47 -- (3,035)
------ ------- -------- ------ --------
Net cash used in investing activities....... -- (4,532) (2,546) -- (7,078)
Cash flows provided by (used in) financing
activities:
Advances (repayments) on line of credit, net -- 1,701 (396) -- 1,305
Principal payments under debt obligations... -- (1,604) (158) -- (1,762)
------ ------- -------- ------ --------
Net cash provided by (used in) financing
activities................................ -- 97 (554) -- (457)
Foreign exchange effect on cash and cash
equivalents............................... (467) 411 (60) (455) (571)
------ ------- -------- ------ --------
Net increase in cash and cash equivalents... 10 (2,621) 11,633 92 9,114
Cash and cash equivalents, beginning of
period.................................... 97 5,081 10,053 -- 15,231
------ ------- -------- ------ --------
Cash and cash equivalents, end of period.... $ 107 $ 2,460 $ 21,686 $ 92 $ 24,345
====== ======= ======== ====== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2003 (UNAUDITED)
-------------------------------------------------------------------------
U.S. GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Net cash provided by (used in) operating
activities................................ $ (375) $ 3,976 $ 4,746 $ 977 $ 9,324
Cash flows used in investing activities:
Purchases of property, plant and equipment.. (2) (723) (2,274) -- (2,999)
Proceeds from sale of property, plant and
equipment................................. -- -- 161 -- 161
------- ------- -------- ------ --------
Net cash used in investing activities....... (2) (723) (2,113) -- (2,838)
Cash flows used in financing activities:
Repayments on line of credit, net........... -- (1,198) (103) -- (1,301)
Principal payments under debt obligations... -- (1,424) (191) -- (1,615)
------- ------- -------- ------ --------
Net cash used in financing activities....... -- (2,622) (294) -- (2,916)
Foreign exchange effect on cash and cash
equivalents............................... (909) (77) 77 (977) (1,886)
------- ------- -------- ------ --------
Net (decrease) increase in cash and cash
equivalents............................... (1,286) 554 2,416 -- 1,684
Cash and cash equivalents, beginning of
period.................................... 1,422 2,440 8,435 -- 12,297
------- ------- -------- ------ --------
Cash and cash equivalents, end of period.... $ 136 $ 2,994 $ 10,851 $ -- $ 13,981
======= ======= ======== ====== ========
14
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, the Company's substantial indebtedness and general
economic conditions, as well as other risks detailed in the Company's filings
with the Securities and Exchange Commission, including the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
The Company undertakes no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
OVERVIEW
We are a leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of CFD software.
Prior to February 2, 2000 we were a publicly traded company, listed on the
NASDAQ National Market under the trading symbol "AATT". Since February 2, 2000,
we have been a privately held company, owned by Heat Holdings Corp., a
corporation formed by Willis Stein and other investors. Our acquisition by
Willis Stein was accounted for under the purchase method of accounting and was
financed through a combination of 12 3/4% senior subordinated notes and senior
bank debt.
We are organized as two operating units: Aavid Thermalloy, LLC and Fluent,
Inc. Aavid Thermalloy designs, manufactures and distributes thermal management
products that dissipate unwanted heat from microprocessors and industrial
electronics products. Fluent develops and markets CFD software that is used in
complex computer-generated modeling of fluid flows, heat and mass transfer and
chemical reactions. These two business units, while complementary, are quite
different from each other and as a result, Aavid Thermalloy and Fluent will be
discussed separately when analyzing performance and industry trends.
Aavid Thermalloy is a global manufacturing business. Revenues are generated
through the sale of fabricated and purchased thermal management products and
components. Our thermal management products are used in a wide variety of
computer, networking and industrial electronics applications, including computer
systems (desktops, laptops, disk drives, printers and peripheral cards), network
devices (servers, routers, set top boxes and local area networks),
telecommunications equipment (wireless base stations, satellite stations and
PBXs), instrumentation (semiconductor test equipment, medical equipment and
power supplies), transportation and motor drives (braking and traction systems)
and consumer electronics (stereo systems and video games). We have manufacturing
operations in the U.S., Canada, Mexico, U.K., Italy and China. Additionally, we
have several other sales offices throughout the world, as well as engineering
and design service centers in New Hampshire, California and India.
Fluent's CFD software is used for a wide variety of computer-based
analyses, including the design of electronic components and systems, automotive
design, combustion systems modeling and process plant troubleshooting. Fluent's
software is used in a variety of industries including, among others, the
automotive, aerospace, chemical processing, power generation, material
processing, electronics and HVAC industries. Fluent develops and markets their
CFD software products worldwide and currently maintains sales, support and
design centers in North America, Europe and Asia.
15
RESULTS OF OPERATIONS
For The Quarter and Nine Months Ended September 30, 2004 Compared With The
Quarter and Nine Months Ended September 27, 2003:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ----------------------------
SEPT 30, SEPT 27, SEPT 30, SEPT 27,
SALES (DOLLARS IN MILLIONS) 2004 2003 CHANGE 2004 2003 CHANGE
- ------------------------------------ ------- ------- ------ ------- ------- ------
Computer, networking and
industrial electronics........... $ 30.3 $ 22.2 36.4% $ 91.0 $ 72.6 25.3%
Consulting and design services
(Applied)........................ 0.3 0.4 (25.0)% 0.9 0.9 0.0%
------- ------- ----- ------- ------- ----
Total Aavid Thermalloy............. 30.6 22.6 35.7% 91.9 73.5 24.9%
Total Fluent....................... 25.1 21.6 16.2% 76.0 62.1 22.5%
------- ------- ----- ------- ------- ----
Total Company...................... $ 55.7 $ 44.2 26.1% $ 167.9 $ 135.6 23.8%
======= ======= ===== ======= ======= ====
Aavid's sales in the third quarter of 2004 were $55.7 million, an increase
of $11.5 million, or 26.1%, from the comparable period of 2003. Aavid's sales in
the first nine months of 2004 were $167.9 million, an increase of $32.3 million,
or 23.8%, from the comparable period of 2003. The overall increase in sales is a
combination of an improvement in Aavid Thermalloy, driven by an increase in
market share and a moderate improvement experienced by the semi-conductor and
electronics industries, combined with an increase in revenues experienced by
Fluent.
Fluent software sales of $25.1 million in the third quarter of 2004 were
$3.5 million, or 16.2%, higher than the third quarter of 2003. Fluent's sales in
the first nine months of 2004 were $76.0 million, an increase of $14.0 million,
or 22.5%, from the comparable period of 2003. 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 continued success of application
specific products, such as "Icepak" and "Airpak".
Aavid Thermalloy's sales were $30.6 million in the third quarter of 2004,
an increase of $8.1 million, or 35.7%, over the third quarter of 2003. Aavid
Thermalloy's sales in the first nine months of 2004 were $91.9 million, an
increase of $18.3 million, or 24.9%, from the comparable period of 2003. As
discussed above, this was the result of both an increase in market share and a
moderate improvement in the overall industry in which Aavid Thermalloy's
customers operate. Based on the current booking activity, management expects to
see moderately higher revenues in the fourth quarter of 2004 when compared with
the third quarter of 2004.
The Company's international sales (which include U.S. exports) increased to
56.1% of sales for the third quarter of 2004 compared with 53.1% in the third
quarter of 2003.
No customer generated greater than 10% of the Company's revenues in the
third quarter or first nine months of 2004 or 2003.
The Company's gross profit for the third quarter of 2004 was $28.2 million
compared with $21.8 million in the comparable period from 2003. Gross margins as
a percentage of sales were 50.6% and 50.0%, respectively, for the third quarter
and first nine months of 2004. This compares with 49.4% and 48.2%, respectively,
for the third quarter and first nine months of 2003. Aavid Thermalloy's gross
margins were 23.6% and 22.9%, respectively, for the third quarter and first nine
months of 2004, compared to 19.7% and 21.7% for the comparable periods of 2003.
Gross margins at Fluent were 83.8% and 83.0%, respectively, for the third
quarter and first nine months of 2004. This compares with 80.7% and 79.9%,
respectively, for the third quarter and first nine months of 2003.
In the third quarter of 2004, the Company's operating income of $7.2
million compares with operating income of $2.9 million in the third quarter of
2003. Operating income for the first nine months of 2004 was $21.6 million,
compared with operating income of $7.1 million from the comparable period of
2003. Aavid Thermalloy saw improvements of $1.9 million and $4.1 million,
respectively, in operating income from the third quarter and first nine months
of 2003 to the third quarter and first nine months of 2004. Fluent's operating
income improved $2.6 million and $10.5 million, respectively, in the third
quarter and first nine months of 2004 as compared to the comparable periods in
the prior year, with higher gross profit partially offset by higher operating
expenses.
16
Corporate headquarters experienced a decline in operating income of $0.3 million
and $0.4 million, respectively, for the quarter and nine months ended September
30, 2004, compared to the third quarter and first nine months of 2003.
Net interest charges, including cash interest expense and income, deferred
financing fee amortization and bond discount amortization, for the Company were
$4.6 million and $13.6 million, respectively, in the third quarter and first
nine months of 2004 which compares with $4.5 million and $13.7 million for the
comparable periods of 2003.
The Company incurred a tax provision for the third quarter and first nine
months of 2004 despite having operating losses in the United States because of
state tax provisions on applicable state components of United States income and
foreign tax provisions on foreign earnings. The Company incurred significant
losses in the United States and the Company only benefits the United States
losses to the extent of foreign earnings, which are expected to be repatriated
in the United States. Because the Company is in a net operating loss position
for United States tax purposes, the Company will not receive any tax benefit
from foreign tax credits. Accordingly, there is no net benefit recorded for the
United States losses, resulting in an overall tax provision for foreign taxes.
The Company's net income was $1.4 million and $4.8 million, respectively,
for the quarter and nine months ended September 30, 2004, compared to net losses
of $1.6 million and $6.5 million for the comparable periods of 2003. The primary
reasons for the improvement in net income (loss) from 2003 to 2004 include Aavid
Thermalloy's revenue growth and significant improvements in manufacturing
efficiency through plant shut-downs and other cost savings initiatives.
The Company's EBITDA, as defined in the Loan and Security Agreement with
the Company's senior lenders, was $5.8 million and $29.2 million, respectively,
for the third quarter and first nine months of 2004, compared with $2.8 million
and $21.6 million for the comparable period in 2003. A reconciliation of net
income (loss) to EBITDA is as follows:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
----------------------- --------------------
SEPT 30, SEPT 27, SEPT 30, SEPT 27,
(DOLLARS IN MILLIONS) 2004 2003 2004 2003
- ------------------------------------------------------------------- ----------- ----------- ----------- --------
Net income (loss).................................................. $ 1.4 $ (1.6) $ 4.8 $ (6.5)
Cash interest expense.............................................. 4.1 4.1 12.4 12.5
Bond discount amortization......................................... 0.2 0.2 0.6 0.5
Deferred financing fee amortization................................ 0.3 0.2 0.7 0.7
Provision for income taxes......................................... 1.5 0.1 3.6 1.4
Depreciation....................................................... 1.9 2.0 5.4 6.0
Intangible asset amortization...................................... 0.2 1.0 0.6 2.7
Deferred revenue change during period(1)........................... (3.8) (3.2) 1.1 4.1
Loss on disposal of fixed assets................................... -- -- -- 0.2
------- ------- ------- -------
EBITDA............................................................. $ 5.8 $ 2.8 $ 29.2 $ 21.6
======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company used internally generated funds and proceeds from
financing activities to meet its working capital and capital expenditure
requirements. As a result of the Merger, the Company has significant cash
requirements for debt service relating to its senior subordinated notes and its
bank debt. The Company currently uses amounts available under its Loan and
Security Agreement, debt and equity financings and internally generated funds to
finance its working capital requirements, capital expenditures and potential
acquisitions.
During the first nine months of 2004, the Company generated $17.2 million
of cash from operations, versus $9.3 million of cash from operations generated
in the first nine months of 2003. During the first nine months of 2004, the
Company used $7.1 million of cash in connection with investing activities versus
using $2.8 million in the
- ------------------
(1) Change in deferred revenue as defined in the Loan and Security Agreement
represents the net change in deferred revenue found on the Company's balance
sheet from the beginning of the applicable reporting period to the end of the
applicable reporting period. An increase in deferred revenue during the period
will create an addition to EBITDA. A decrease in deferred revenue during the
period creates a subtraction from EBITDA, as defined.
17
comparable period of 2003. The Company used $4.1 million for capital
expenditures in the first nine months of 2004 versus $3.0 million in the
comparable period of 2003. The Company also used $3.0 million related to the
acquisition of a small manufacturing company located in Taiwan in the third
quarter of 2004. The Company used $0.5 million of cash in connection with
financing activities in the first nine months of 2004, compared with using $2.9
million of cash from financing activities for the comparable period in 2003.
The Company's current bank credit facility (the "Loan and Security
Agreement") is a $27.5 million asset based facility. The facility consists of a
term loan component secured by certain United States real estate and machinery
and equipment and requires quarterly principal payments of $0.4 million
commencing November 1, 2002. The Loan and Security Agreement also consists of a
revolving line of credit component secured by inventory in the United States and
accounts receivable in the United States and the United Kingdom. Availability
under the line of credit component is determined by a borrowing base of 85% of
eligible accounts receivable and 50% of eligible inventory, as defined in the
Loan and Security Agreement. Debt outstanding under the Loan and Security
Agreement bears interest at a rate equal to, at the Company's option, either (1)
in the case of LIBOR rate loans, the sum of the offered rate for deposits in
United states dollars for a period equal to such interest period as it appears
on Telerate page 3750 as of 11:00 am London time and a margin of between 2.5%
and 2.85% or (2) the sum of LaSalle Business Credit's prime rate plus a margin
of between .25% and .50%. At September 30, 2004, the interest rates on the Loan
and Security Agreement ranged from 4.34% to 5.25%. Availability under the
revolving line of credit was $15.3 million at September 30, 2004, of which $8.3
million had been drawn.
Debt classified as long term in the accompanying balance sheet as of
September 30, 2004, consists of the long term portion of the term loan component
of the Loan and Security Agreement, long term portion of capital leases, long
term portion of foreign debt obligations and all of the 12 3/4% senior
subordinated notes.
The Company has obligations to purchase minimum quantities of raw materials
from two of its key suppliers. The Company believes that purchasing these raw
materials from a few key suppliers is necessary to achieve consistently low
tolerances, design, delivery flexibility, and price stability. Under the terms
of these agreements the Company has agreed to purchase certain minimum
quantities which approximate $0.3 million at September 30, 2004.
The Company has entered into various long-term debt, capital lease and
operating lease arrangements. The future payments required by these arrangements
at September 30, 2004, are as follows:
PAYMENTS DUE BY PERIOD ($ IN THOUSANDS)
----------------------------------------------------
1 YR
TOTAL OR LESS 1-3 YRS 4-5 YRS 5+ YRS
--------- -------- --------- ------- -------
Long-term debt and capital leases...................... $140,096 $ 10,649 $ 129,303 $ 69 $ 75
Operating leases....................................... 18,660 4,416 6,556 3,904 3,784
-------- -------- --------- ------- -------
Total contractual obligations........................ $158,756 $ 15,065 $ 135,859 $ 3,973 $ 3,859
======== ======== ========= ======= =======
During the third quarter of 2004, inventory turns were 10.7, which compares
to 9.7 during the third quarter of 2003.
At September 30, 2004, accounts receivable days sales outstanding ("DSO")
were 68 days, which compares with 64 days at December 31, 2003.
On July 30, 2004, the Company acquired 100% of the outstanding stock of a
small manufacturing company located in Taiwan. The total purchase price of the
acquired company was $4.9 million, consisting of $3.1 million cash paid upon
closing and contingent consideration of $1.8 million payable within two years of
the closing date upon the satisfaction of certain conditions.
REVENUE RECOGNITION AND SALES RETURNS AND ALLOWANCES
Thermal Products
Revenue is recognized when products are shipped. We offer certain
distributors limited rights of return and stock rotation rights. Due to these
return rights, we continuously monitor and track product returns and we record a
18
provision for the estimated future amount of such future returns, based on
historical experience and any notification we receive of pending returns. While
such returns have historically been within our expectations and provisions
established, we cannot guarantee that we will continue to experience the same
return rates that we have in the past. Any significant decrease in product
demand experienced by our distributor customers and the resulting credit returns
could have a material adverse impact on our operating results for the period or
periods in which such returns materialize.
Software
The Company recognizes revenue on its software license and maintenance
arrangements in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition", and related pronouncements. The pronouncements provide
specific industry guidance and stipulate that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on
relative fair values of the elements, such as software products, upgrades,
enhancements, post-contract customer support ("PCS"), installation and training.
The Company licenses its software products under both perpetual and annual
license arrangements.
For perpetual license arrangements, software license revenue is recognized
upon the execution of the license arrangement and shipment of the product,
provided that no significant vendor post-contract support obligations remain
outstanding and collection of the resulting receivable is deemed probable. The
Company recognizes revenue from post-contract support, which consists of
telephone support and the right to software upgrades, ratably over the period of
the PCS arrangement.
For annual license arrangements, with unbundled PCS, since vendor specific
objective evidence ("VSOE") of value for the PCS does not exist, the Company
recognizes revenue for both the software license and the PCS ratably over the
12-month term of the license.
Training and consulting revenues are recognized upon completion of services or,
in certain instances, on the percentage-of-completion method. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based on payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based on our historical experience and any specific
customer collection issues we have identified. While such credit losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates
we have in the past. In the event that economic or other conditions cause a
change in liquidity or financial condition in multiple customers, there could be
a material adverse effect on our collection of receivables and future results of
operations.
INVENTORIES
We value our inventory, which consists of materials, labor and overhead, at
the lower of the actual cost to purchase and/or manufacture the inventory or the
current estimated market value of the inventory. We regularly review inventory
quantities on hand and record a provision for excess and obsolete inventory
based primarily on our estimated forecast of product demand and production
demand for the next twelve months. As demonstrated in 2003 and 2002, demand for
our products can fluctuate significantly. A significant increase in demand for
our products could result in a short-term increase in the cost of inventory
purchases and production costs while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand. In
addition, our industry is characterized by rapid technological change, frequent
new product development and rapid product obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Additionally,
our estimates of future product demand may prove to be inaccurate, in which case
we may have understated or
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overstated the provision required for excess or obsolete inventory. In the
future, if our inventory is determined to be overvalued, we would be required to
recognize such costs in our cost of goods sold at the time of determination.
Likewise, if our inventory is determined to be undervalued, we may have
over-reported our cost of sales in previous periods and would be required to
recognize such additional operating income at the time of sale. Therefore,
although we make every effort to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our inventory and
reported operating results.
VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
We review goodwill and other intangible assets for impairment annually and
whenever events or changes in circumstances indicate the carrying value of an
asset may not be recoverable in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
The provisions of SFAS No. 142 require that a two-step impairment test be
performed on goodwill. In the first step, we compare the fair value of each
reporting unit to its carrying value. Our reporting units are consistent with
the reportable segments identified in Note (7) of the Consolidated Financial
Statements. We determine the fair value of our reporting units using a
combination of the income approach and the market approach. Under the income
approach, we calculate the fair value of a reporting unit based on the present
value of estimated future cash flows. Under the market approach, we estimate the
fair value based on market multiples of revenues or earnings for comparable
companies. If the fair value of the reporting unit exceeds the carrying value of
the net assets assigned to that unit, goodwill is not impaired and we are not
required to perform further testing. If the carrying value of the net assets
assigned to the reporting unit exceeds the fair value of the reporting unit,
then we must perform the second step in order to determine the implied fair
value of the reporting unit's goodwill and compare it to the carrying value of
the reporting unit's goodwill. If the carrying value of a reporting unit's
goodwill exceeds its implied fair value, then we must record an impairment loss
equal to the difference. SFAS No. 142 also requires that the fair value of the
purchased intangible assets with indefinite lives be estimated and compared to
the carrying value. We estimate the fair value of these intangible assets using
the income approach. We recognize an impairment loss when the estimated fair
value of the intangible asset is less than the carrying value.
The income approach, which we use to estimate the fair value of our
reporting units and purchased intangible assets, is dependent on a number of
factors including estimates of future market growth and trends, forecasted
revenue and costs, expected periods the assets will be utilized, appropriate
discount rates and other variables. We base our fair value estimates on
assumptions we believe to be reasonable, but which are unpredictable and
inherently uncertain. Actual future results may differ from those estimates. In
addition, we make certain judgments about the selection of comparable companies
used in the market approach in valuing our reporting units, as well as certain
assumptions to allocate shared assets and liabilities to calculate the carrying
values for each of our reporting units.
REGULATORY REPORTING
Although the Company has not been subject to the filing requirements of a
reporting company to the Securities and Exchange Commission for the past 90
days, it has filed all reports required to be filed by Section 15(d) of the
Securities Exchange Act (the "Act") of 1934 during the preceding twelve months.
Pursuant to Section 15(d) of the Act, the Company's duty to file reports is
automatically suspended as a result of having fewer than 300 holders of record
of each class of its debt securities outstanding, as of January 1, 2003, but the
Company agreed under the terms of certain long-term debt covenants to continue
these filings.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2004, an evaluation was performed under the supervision
and with the participation of the Company's management, including the CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of September 30, 2004, in ensuring
that material information relating to the Company is made known to the CEO and
CFO by others within the Company during the period in which the report was being
prepared. There have been no significant
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changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to September 30, 2004.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of the Company's business, none of which the Company believes could
reasonably be expected to have a materially adverse effect on the Company's
financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
None.
SIGNATURES
DATE: November 12, 2004 AAVID THERMAL TECHNOLOGIES, INC.
By: /s/ Brian A. Byrne
------------------------------
Vice President and Chief
Financial Officer
(Principal Financial Officer)
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