<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 27, 1998, Commission File No. 000-27308
AAVID THERMAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0466826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Eagle Square, Suite 509, Concord, NH 03301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 224-1117
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock outstanding as of August 4, 1998, was
9,215,517.
-1-
<PAGE> 2
AAVID THERMAL TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 27, 1998 and December 31, 1997...... 3
Consolidated Statements of Operations for the quarters and
six months ended June 27, 1998 and June 28, 1997....................... 4
Consolidated Statements of Cash Flows for the six months
ended June 27, 1998 and June 28, 1997.................................. 5
Notes to Consolidated Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................................... 14
</TABLE>
-2-
<PAGE> 3
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 27, DECEMBER 31,
1998 1997
(UNAUDITED)
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,224 $ 6,919
Notes receivable 1,152 --
Accounts receivable 38,197 33,766
Inventories 12,975 13,368
Refundable income taxes 2,865 1,138
Deferred income taxes 2,530 2,365
Prepaid and other current assets 4,472 2,256
--------- ---------
Total current assets 65,415 59,812
Property, plant and equipment, net 43,541 43,155
Other assets, net 7,150 7,829
--------- ---------
Total assets $ 116,106 $ 110,796
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations $ 4,017 $ 3,360
Accounts payable - trade 14,113 16,378
Accrued expenses and other current liabilities 18,925 17,778
--------- ---------
Total current liabilities 37,055 37,516
Debt obligations, net of current portion 13,267 20,596
Deferred income taxes 2,298 2,269
--------- ---------
Total liabilities 52,620 60,381
--------- ---------
Preferred Stock, $0.01 par value; authorized
4,000,000 shares; 0 outstanding at
June 27, 1998 and December 31, 1997 -- --
Common Stock, $0.01 par value; authorized
25,000,000 shares; 8,745,842 and 7,558,537
shares issued and outstanding at June 27,
1998 and December 31, 1997, respectively 88 76
Additional paid-in capital 51,914 43,793
Cumulative translation adjustment (928) (753)
Retained earnings 12,412 7,299
--------- ---------
Total stockholders' equity 63,486 50,415
--------- ---------
Total liabilities and stockholders' equity $ 116,106 $ 110,796
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 4
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 54,287 $ 37,082 $ 109,845 $ 71,480
Cost of goods sold 35,869 23,040 73,039 43,672
---------- ---------- ---------- ----------
Gross profit 18,418 14,042 36,806 27,808
Selling general and administrative expenses 11,239 8,641 22,246 16,945
Research and development 1,655 1,709 3,345 3,517
Buyout of compensation arrangements - - 1,858 -
---------- ---------- ---------- ----------
Income from operations 5,524 3,692 9,357 7,346
Interest expense, net (356) (524) (815) (997)
Other expense, net (91) (202) (413) (670)
---------- ---------- ---------- ----------
Income before income taxes 5,077 2,966 8,129 5,679
Income tax expense (1,880) (1,027) (3,016) (2,051)
---------- ---------- ---------- ----------
Net income $ 3,197 $ 1,939 $ 5,113 $ 3,628
========== ========== ========== ==========
Net income per share, basic $ 0.38 $ 0.29 $ 0.63 $ 0.54
========== ========== ========== ==========
Weighted average common shares 8,459,447 6,741,928 8,138,622 6,662,730
Net income per share, diluted $ 0.34 $ 0.23 $ 0.54 $ 0.44
========== ========== ========== ==========
Weighted average common shares and equivalents 9,491,602 8,314,195 9,419,478 8,253,248
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
AAVID THERMAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 5,113 $ 3,628
Adjustments to reconcile net income to net cash
Provided by (used for) operating activities:
Depreciation and amortization 4,919 2,984
Deferred income taxes (2,435) (566)
Minority interest -- 73
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (4,735) (4,743)
Inventories 254 (1,284)
Prepaid and other current assets (1,666) (770)
Other long term assets 36 312
Accounts payable - trade (1,979) (991)
Accrued expenses and other current liabilities 7,048 1,301
-------- --------
Total adjustments 1,441 (3,684)
-------- --------
Net cash provided by (used for) operating activities 6,554 (56)
Cash flows provided by (used in) investing activities:
Purchase of property, plant & equipment (5,881) (3,646)
Payments for acquisitions, net of cash acquired -- (191)
Net proceeds from sale of fixed assets 29 3
-------- --------
Net cash used in investing activities (5,852) (3,834)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses 2,438 1,313
Advances under line of credit 78,560 53,346
Repayments of line of credit (84,614) (49,117)
Advances under other debt obligations 1,054 --
Principal payments under debt obligations (1,628) (821)
-------- --------
Net cash provided by (used in) financing activities (4,190) 4,721
Foreign exchange rate effect on cash and cash equivalents (207) (335)
Net increase (decrease) in cash and cash equivalents (3,695) 496
Cash and cash equivalents, beginning of period 6,919 4,093
-------- --------
Cash and cash equivalents, end of period $ 3,224 $ 4,589
======== ========
Supplemental disclosure of cash flow information:
Interest paid 471 980
Income taxes paid 562 667
Supplemental disclosure of non-cash investing activities:
Reconciliation of assets acquired and liabilities assumed in acquisitions
Fair value of assets acquired -- 913
Cash paid for assets -- (191)
-------- --------
Liabilities assumed $ -- $ 722
======== ========
Sale of equipment in exchange for note receivable 1,152 --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 6
AAVID THERMAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting only of normal
adjustments, necessary to present fairly the financial position of Aavid Thermal
Technologies, Inc. and its consolidated subsidiaries at June 27, 1998, and the
results of operations for the quarters and six months ended June 27, 1998 and
June 28, 1997, and the cash flows for the six months ended June 27, 1998 and
June 28, 1997. The results of operations for the six month period ended June 27,
1998 should not necessarily be taken as indicative of the results of operations
that may be expected for the entire year 1998.
The financial information as of June 27, 1998 should be read in
conjunction with the financial statements contained in the Company's Form 10-K
Annual Report for 1997.
(2) INVENTORIES
Inventories are valued at the lower of cost or market with cost
determined on the first-in, first-out (FIFO) method for stock inventory items
and on the average cost method for job order work-in-process and finished goods.
($000)
JUNE 27, DECEMBER 31,
1998 1997
-------- ------------
(UNAUDITED)
Raw materials $ 6,118 $ 6,753
Work-in-process 3,529 3,232
Finished goods 3,328 3,383
------- -------
$12,975 $13,368
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable at June 27, 1998 and
December 31, 1997 are as follows:
($000)
JUNE 27, DECEMBER 31,
1998 1997
-------- ------------
(UNAUDITED)
Accounts receivable $39,033 $34,604
Allowance for doubtful accounts (836) (838)
------- -------
Net accounts receivable $38,197 $33,766
(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. SFAS No. 130 became effective
for fiscal years beginning after December 15, 1997. The Company adopted FAS 130
effective January 1, 1998. The following details comprehensive income for the
periods reported herein:
QUARTER ENDED SIX MONTHS ENDED
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net Income $ 3,197 $ 1,939 $ 5,113 $ 3,628
Foreign currency
translation adjustment,
net of related tax effects (306) (143) (109) (188)
======= ======= ======= =======
Comprehensive Income $ 2,891 $ 1,796 $ 5,004 $ 3,440
======= ======= ======= =======
-6-
<PAGE> 7
(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") and became effective
for both interim and annual periods ending after December 15, 1997. All prior
period EPS data has been restated to conform with the provisions of SFAS No.
128. 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). The following is a reconciliation
of the numerators and denominators used to calculate earnings per share in the
Consolidated Statements of Operations:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------------------------------------------------------
JUNE 27, 1998 JUNE 28, 1997
---------------------------------------------------------------------
INCOME SHARES INCOME SHARES
(NUM- (DENOM- PER SHARE (NUM- (DENOM- PER-SHARE
ERATOR) INATOR) AMOUNT ERATOR) INATOR) AMOUNT
------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income $3,197 $1,939
====== ======
BASIC EPS:
Income Available to
Common Stockholders $3,197 8,459,447 $0.38 $1,939 6,741,928 $0.29
EFFECT OF DILUTIVE
SECURITIES:
Options and Warrants 1,032,155 1,572,267
---------- ---------
DILUTED EPS:
Income Available to
Common Stockholders $3,197 $9,491,602 $0.34 $1,939 8,314,195 $0.23
====== ========== ===== ====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------------------------------------------------
JUNE 27, 1998 JUNE 28, 1997
---------------------------------------------------------------------
INCOME SHARES INCOME SHARES
(NUM- (DENOM- PER SHARE (NUM- (DENOM- PER-SHARE
ERATOR) INATOR) AMOUNT ERATOR) INATOR) AMOUNT
------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income $5,113 $3,628
====== ======
BASIC EPS:
Income Available to
Common Stockholders $5,113 8,138,622 $0.63 $3,628 6,662,730 $0.54
EFFECT OF DILUTIVE
SECURITIES:
Options and Warrants 1,280,856 1,590,518
---------- ---------
DILUTED EPS:
Income Available to
Common Stockholders $5,113 $9,419,478 $0.54 $3,628 8,253,248 $0.44
====== ========== ===== ====== ========= =====
</TABLE>
-7-
<PAGE> 8
(6) BUYOUT OF COMPENSATION ARRANGEMENTS
During the first quarter of 1998 the Company recorded a one-time,
non-recurring charge of $1,858. This charge related to financial obligations
arising from the Company's restructuring in 1993 and comprised two elements:
First, the Company terminated an arrangement with certain venture investors,
under which it was obligated to pay fixed fees until at least the year 2000.
Second, the Company has provided for an obligation to pay a former director a
bonus based on profits in excess of certain thresholds.
(7) OPTIONS
On June 19, 1998 the stockholders approved an amendment to the
Company's 1994 Stock Option Plan to increase the number of shares of Common
Stock which may be issued thereunder from 900,000 to 1,400,000 shares and an
amendment to the Company's 1995 Stock Option Plan for Non-Employee Directors to
increase the number of shares of Common Stock which may be issued thereunder
from 100,000 to 200,000 shares.
(8) SIGNIFICANT CUSTOMER
One customer accounted for 27% and 25% of net sales for the quarter and
six months ended June 27, 1998, respectively.
-8-
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements in this Quarterly Report on Form 10-Q which concern 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, 1997.
Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is a leading
provider of thermal management solutions for microprocessors and integrated
circuits ("ICs") for digital and power applications. Aavid's thermal management
solutions include 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 Computational Fluid Dynamics ("CFD")
software for "virtual prototyping" computer modeling and flow analysis of
products and processes that reduce time and expense associated with physical
models and the facilities to test them.
Ongoing increases in silicon and system integration, higher processing
speeds and frequencies, smaller form factors, more sophisticated power
requirements and other advances in chip technology create excessive heat in
microprocessors and ICs in electronic and electrical components and systems.
Heat is an absolute constraint in electronic system design, since
microprocessors and ICs operate efficiently only in a narrow temperature band.
The excessive heat generated within the component not only degrades
semiconductor and system performance and reliability, but can also cause
semiconductor and system failure. These negative effects are exacerbated by the
increasingly wide range of environmental conditions, including temperature
extremes, in which electronic systems are expected to operate.
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.
The Company's strategy is to capitalize on the two principal trends in the
electronics industry: first, the trend to develop products which incorporate
microprocessors and 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 are to (i) provide "total
solutions" capability for thermal management globally; (ii) expand its
technological leadership by leveraging its approximately 80 Ph.D.'s and 250
engineers; (iii) expand its quick ramp, high-volume manufacturing, design, sales
and distribution activities both domestically and overseas; (iv) form strategic
alliances with customers; and (v) grow its general purpose CFD software
business.
The Company operates its business through three wholly-owned subsidiaries:
Aavid Thermal Products, Inc. ("Aavid Thermal Products"), Fluent, Inc.
("Fluent"), and Applied Thermal Technologies, Inc. ("Applied Thermal
Technologies").
-9-
<PAGE> 10
- - Aavid Thermal Products provides its customers in the digital and power
electronics markets with quick-ramp, high-volume production of thermal
management products and customer support worldwide. Its thermal management
products, which operate by conducting, convecting and radiating away
unwanted heat, help maintain device and system performance and reliability,
and help avoid premature component and system failure. They require
substantial engineering in their design to maximize heat dissipation and
minimize customers' assembly costs. The Company believes it has the
broadest range of products in the thermal management industry. Aavid
Thermal Products' customers include Allen-Bradley, Chrysler, COMPAQ,
General Electric, Hewlett Packard, IBM, Intel, Lucent, Motorola, and
Packard Bell.
- - Fluent develops CFD software and provides problem-solving support services.
Its software enables computer generated modeling and analysis of air and
other fluid flows, heat and mass transfer, chemical reaction, and related
phenomena, which can significantly reduce its customers' time-to-market and
engineering costs, while improving the final product or process design.
Fluent's customers include Boeing, British Aerospace, Ford, Fujitsu, IBM,
Intel, and Motorola.
- - Applied Thermal Technologies' design center integrates the Company's
technical strengths in the thermal solutions business to solicit customer
funded research and development, and to provide consulting and cutting edge
design. Applied Thermal Technologies was formed in the first quarter of
1997 to act as a catalyst for technology and business development for Aavid
Thermal Products and Fluent, and to take advantage of the increasing trend
of its customers to outsource their thermal management solutions
development. Applied Thermal Technologies works as an extension of its
clients' product design team, leveraging on technical capabilities gained
from both Aavid Thermal Products and Fluent to develop, test, and validate
thermal solutions. The Company believes that design centers will enhance
the visibility of the Company as a technology leader, resulting in earlier
and closer ties to existing and new customers. Applied Thermal
Technologies' customers include Silicon Graphics, AMP, General Motors,
Hewlett Packard, Bay Networks, Cisco Systems, Sun Microsystems, and Sony.
The Company services a highly diversified base of more than 4,000 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 JUNE 27, 1998 COMPARED WITH QUARTER AND SIX MONTHS
ENDED 1997
Sales in the second quarter of 1998 were $54.3 million, an increase of
$17.2 million, or 46% compared with the second quarter of last year. Sales for
the six months ended June 27, 1998 were $109.8 million, an increase of $38.4
million, or 54% compared with the same period in 1997. This increase was mostly
due to higher sales of thermal products, which increased to 83% of Company sales
for the second quarter 1998 from 79% of Company sales in the second quarter of
1997 and to 82% for the six months ended June 27, 1998 from 77% for the same
period in 1997.
International sales (which include North American exports) increased to 54%
of sales for the second quarter of 1998 compared with 32% in the same quarter in
1997. For the six months ended June 27, 1998 international revenue was 50% of
sales, which compares with 33% for the same period in 1997
Sales to Intel Corp. including its foreign subsidiaries accounted for 27%
or $15.0 million and 25% or $27.6 million of total sales for the quarter and six
months ended June 27, 1998, respectively. In mid-July 1998, Intel notified the
Company that due to changing product mix and demand, third quarter 1998
forecasts for product shipments to Intel will be reduced from prior quarters. As
a result, the Company expects to see an interruption to its long-term growth
trend in the third and to a lesser extent, the fourth quarter. The Company
intends to take actions to mitigate loss of revenues due to these reductions and
expects to continue to grow its non-Intel related business, but there can be no
assurance that it will be able to do so.
-10-
<PAGE> 11
Sales for Aavid Thermal Products were $44.8 million in the second quarter
of 1998, an increase of $15.6 million, or 53%, compared with the second quarter
of 1997. This growth was primarily the result of increasing heat dissipation
problems within the computer and network market, resulting in higher domestic
and overseas sales. Sales in the telecommunications, industrial controls, and
instrumentation markets were also higher due to underlying market growth. A
breakdown of the increase in sales of Aavid Thermal Products for the second
quarter of 1998 as compared to the second quarter of 1997 is as follows:
$ MILLION
----------------------------
Q2 1998 Q2 1997 INCREASE
------- ------- --------
Computers and Network - Intel $15.0 $ 3.8 295%
Computers and Network - Other 13.3 10.2 30%
----- ----- ---
Total Computers and Network 28.3 14.0 102%
Telecommunications, Industrial
Electronics Instrumentation
and Other 16.5 15.2 9%
----- ----- ---
Total Aavid Thermal Products $44.8 $29.2 53%
===== ===== ===
Fluent software sales of $9.1 million in the second quarter of 1998 were
$1.3 million, or 18%, higher compared to the second quarter of 1997. In general,
the increase was seen in all product offerings and was due to the overall growth
in the market for computational fluid dynamics design software as well as the
success of the market for application specific products, "Icepak" and "Mixim".
Gross profit was $18.4 million, an increase of $4.4 million, or 31% over
the second quarter of 1997. Gross margin as a percentage of sales decreased from
37.9% in the second quarter of 1997 to 33.9% for the second quarter of 1998.
Approximately one-half of this change in gross margin percentage was due to the
faster rate of sales growth at Aavid Thermal Products ( 79% of total sales in
1997 versus 83% in 1998) and Fluent ( 21% of total sales in 1997 versus 17% in
1998). Fluent sales have significantly higher gross margins than Aavid Thermal
Products sales. The remaining one-half change in gross margin was predominantly
the result of higher sales volumes of lower margin computer and network segment
business within Aavid Thermal Products.
Operating income of $5.5 million in the second quarter of 1998 increased by
$1.8 million or 49% compared with last year's second quarter. Operating margins
improved at Fluent and stayed consistent at Aavid Thermal Products in the second
quarter of 1998 over the second quarter of 1997. Operating margins for the
Company, as a percentage of sales, for the second quarter of 1998 were 10.2% as
compared with 10.0% for the same quarter last year.
Prior to a one-time, non-recurring charge, operating income of $11.2
million in the first half of 1998 increased by $3.8 million or 51% compared with
the same period last year. Operating margins improved at Fluent and remained
consistent at Aavid Thermal Products in the first half of 1998 over the first
half of 1997. The Company's overall operating margin also remained consistent,
operating margins for the Company as a percentage of sales for the first half of
1998 and 1997 were both 10.2%.
Interest charges were $0.4 million in the second quarter of 1998, which
compared with $0.5 million for the second quarter of 1997. The effective tax
rate in the first quarter of 1998 was 37.1%, compared with 35.1% in 1997. The
change in tax rate was principally due to increased profits from countries with
higher effective tax rates.
Net income was $3.2 million, or $0.34 per share, in the second quarter of
1998, 65% higher than last year's net income of $1.9 million, and $0.23 per
share. Net income in the first half of 1998, prior to a one-time, non-recurring
charge during the first quarter of 1998, was $6.3 million, or $0.67 per share,
75% higher than last year's net income of $3.6 million, and $0.44 per share.
During the first quarter of 1998, the Company recorded a one-time, non-recurring
after tax charge of $1.2 million, which related to financial obligations arising
from the Company's restructuring in 1993, comprised two elements: First, the
Company terminated an arrangement with certain venture
-11-
<PAGE> 12
investors, under which it was obligated to pay fixed fees until at least the
year 2000. Second, the Company has provided for an obligation to pay a former
director a bonus based on profits in excess of certain thresholds.
A discussion of the operations of the Company's three operating
subsidiaries follows. (Excludes one-time charge)
<TABLE>
<CAPTION>
NET INCOME
SECOND QUARTER SIX MONTHS ENDED
---------------------- ----------------------
1998 1997 INCREASE 1998 1997 INCREASE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Aavid Thermal Products $2.3 $1.3 $1.0 $4.3 $2.3 $2.0
Fluent 0.9 0.7 0.2 2.0 1.4 0.6
Applied Thermal Technologies 0.0 (0.1) 0.1 0.0 (0.1) 0.1
---- ---- ---- ---- ---- ----
$3.2 $1.9 $1.3 $6.3 $3.6 $2.7
==== ==== ==== ==== ==== ====
</TABLE>
Aavid Thermal Products net income for the second quarter 1998 improved to
$2.3 million from the 1997 net income of $1.3 million, an increase of
$1.0 million, or 78%. Strong sales growth of 53%, with significantly reduced
sales, general and administrative costs as well as research and development
expenditures as a percentage of sales, more than offset some reduction in gross
margins and resulted in substantially higher net income.
Fluent's net income for the second quarter of 1998 increased to
$0.9 million from $0.7 million, a 29% increase, while operating margins improved
slightly from 16.2% in the second quarter of 1997 to 16.5% in the second quarter
of 1998.
Applied Thermal Technologies ("Applied") generated a small net income for
the second quarter of 1998. This was Applied's fifth full quarter of operation,
and it has now successfully established itself as Silicon Valley's premier
thermal design, validation and consulting service.
FINANCIAL CONDITION
JUNE 27, 1998 COMPARED WITH DECEMBER 31, 1997
Strong operating cash flows and significant improved leverage leave the
Company well positioned to pursue its strategic growth and productivity goals.
During the first half of 1998, the Company spent $5.8 million for capital
expenditures compared with $3.6 million in the corresponding period in 1997. The
higher level of expenditure was necessitated by the significant growth in the
Company's computer products business and principally related to expenditures at
the Manchester, New Hampshire, and China facilities.
At June 27, 1998, the amount of working capital (excluding cash, debt, and
taxation provisions) required to support each $1.00 of sales was $0.116, which
compares favorably with $0.123 a year earlier. This improvement in working
capital reflects improvements in receivable days sales outstanding (69 days to
64 days) and inventory turns (7.8 to 10.4) over the year.
On June 27, 1998 the Company had $3.2 million in cash or cash equivalents
compared with $6.9 million at the end of 1997. This reduction in cash and cash
equivalents reflects improved global treasury management controls resulting in
lower levels of unutilized cash. Cash released through improved treasury
management has been used to reduce borrowings.
Total debt at June 27, 1998 was $17.3 million, which compares with
$24.0 million at the end of 1997. Total debt as a percent of stockholders'
equity at June 27, 1998 was 27%, an improvement of 20.5% from the 47.5% at year
end. Long-term debt at June 27, 1998 was $13 million, a decrease of $8 million
compared with year end. Borrowings under the revolving line of credit were
approximately $0.1 million on June 27, 1998 compared with
-12-
<PAGE> 13
$6.2 million at year end.
The Company had no material commitments for capital expenditures at
June 27, 1998.
During the first half of 1998 the Company had a $5.7 million tax benefit
relating to disqualifying dispositions on incentive stock options and exercises
of non-qualified stock options. Disqualifying dispositions arise because option
holders are taxed when they exercise certain options, thereby creating a tax
deduction for the Company. While disqualifying dispositions and the exercise of
non-qualified stock options provide a cash tax benefit for the Company, this
benefit does not pass through the income statement, but instead is credited to
additional paid-in capital.
-13-
<PAGE> 14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, at the Company's annual meeting held in
Concord, New Hampshire, on June 19, 1998:
At the annual meeting, proxies were (i) solicited for the Board nominees
pursuant to Regulation 14 under the 1934 Act; (ii) there was no solicitation in
opposition to the management's nominees as listed in the proxy statement; and
(iii) all of such nominees were elected. The nominees elected were:
Ronald F. Borelli
Charles A. Dickinson
M. William Macey, Jr.
Bharatan R. Patel
Frank J. Pipp
David R. A. Steadman
At the annual meeting, the following two additional matters were voted on:
1) Amendment to the 1994 Stock Option Plan to increase the number of shares
which may be granted thereunder;
2) Amendment to the 1995 Non-Employee Director Stock Option Plan to increase
the number of shares which may be granted thereunder.
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C> <C>
1) 3,009,121 2,562,432 18,612
2) 3,250,779 2,319,646 19,740
</TABLE>
Item 5. Other Information
Pursuant to newly adopted rules of the Securities and Exchange Commission,
any stockholder who intends to present a proposal at the Company's 1999 Annual
Meeting of Stockholders without requesting the Company to include such proposal
in the Company's proxy statement should be aware that he must notify the Company
not later than April 1, 1999 of his intention to present the proposal.
Otherwise, the Company may exercise discretionary voting with respect to such
stockholder proposal pursuant to authority conferred on the Company by proxies
to be solicited by the Board of Directors of the Company and delivered to the
Company in connection with the meeting.
Item 6. Exhibits and Report on Form 8-K
a) Exhibit 27.98 -- "Financial Data Schedule" is included in the
electronically filed document as required.
b) Exhibit 27.97 -- "Restated 1997 Financial Data Schedule" is
included in the electronically filed documents
as required.
c) Reports on Form 8-K - There were no reports on Form 8-K filed by the
Company during the quarter ended March 28,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AAVID THERMAL TECHNOLOGIES, INC.
DATE: August 11, 1998
---------------
By /s/ Stephen D. Eldred
--------------------------------
Vice President, Treasurer, and
Chief Financial Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-27-1998
<EXCHANGE-RATE> 1
<CASH> 3,224
<SECURITIES> 0
<RECEIVABLES> 39,033
<ALLOWANCES> 836
<INVENTORY> 12,975
<CURRENT-ASSETS> 65,415
<PP&E> 60,178
<DEPRECIATION> 16,637
<TOTAL-ASSETS> 116,106
<CURRENT-LIABILITIES> 37,055
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 63,398
<TOTAL-LIABILITY-AND-EQUITY> 116,106
<SALES> 54,287
<TOTAL-REVENUES> 54,287
<CGS> 35,869
<TOTAL-COSTS> 48,763
<OTHER-EXPENSES> 91
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 356
<INCOME-PRETAX> 5,077
<INCOME-TAX> 1,880
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,197
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.34
<FN>
<DEBT OBLIGATIONS, NET OF CURRENT> 13,267
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-28-1997
<EXCHANGE-RATE> 1
<CASH> 4,589
<SECURITIES> 0
<RECEIVABLES> 28,364
<ALLOWANCES> 399
<INVENTORY> 10,849
<CURRENT-ASSETS> 47,501
<PP&E> 45,410
<DEPRECIATION> 10,357
<TOTAL-ASSETS> 89,568
<CURRENT-LIABILITIES> 28,986
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 35,416
<TOTAL-LIABILITY-AND-EQUITY> 89,568
<SALES> 37,082
<TOTAL-REVENUES> 37,082
<CGS> 23,040
<TOTAL-COSTS> 33,390
<OTHER-EXPENSES> 202
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 524
<INCOME-PRETAX> 2,966
<INCOME-TAX> 1,027
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,939
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.23
<FN>
<DEBT OBLIGATIONS, NET OF CURRENT> 13,267
</FN>
</TABLE>
