<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 September 26, 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 November 4, 1998, was
9,230,900.
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<PAGE> 2
AAVID THERMAL TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets -- September 26, 1998 and
December 31, 1997 ............................................. 3
Consolidated Statements of Operations for the quarters and
nine months ended September 26, 1998 and September 27, 1997 .. 4
Consolidated Statements of Cash Flows for the nine months
ended September 26, 1998 and September 27, 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 ............................. 16
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<PAGE> 3
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 31,
1998 1997
(UNAUDITED)
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,001 $ 6,919
Note receivable 3,459 --
Accounts receivable 36,510 33,766
Inventories 12,698 13,368
Refundable income taxes 502 1,138
Deferred income taxes 8,856 2,365
Prepaid and other current assets 3,661 2,256
--------- ---------
Total current assets 74,687 59,812
Property, plant and equipment, net 42,615 43,155
Other assets, net 6,645 7,829
--------- ---------
Total assets $ 123,947 $ 110,796
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of debt obligations $ 3,716 $ 3,360
Accounts payable - trade 13,892 16,378
Accrued expenses and other current liabilities 24,588 17,778
--------- ---------
Total current liabilities 42,196 37,516
Debt obligations, net of current portion 12,025 20,596
Deferred income taxes 2,133 2,269
--------- ---------
Total liabilities 56,354 60,381
--------- ---------
Preferred Stock, $0.01 par value; authorized 4,000,000 shares;
0 outstanding at September 26, 1998 and December 31, 1997 -- --
Common Stock, $0.01 par value; authorized 25,000,000 shares;
9,230,157 and 7,558,537 shares issued and outstanding at
September 26, 1998 and December 31, 1997, respectively 93 76
Additional paid-in capital 56,081 43,793
Cumulative translation adjustment (1,057) (753)
Retained earnings 12,476 7,299
--------- ---------
Total stockholders' equity 67,593 50,415
--------- ---------
Total liabilities and stockholders' equity $ 123,947 $ 110,796
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 48,837 $ 43,695 $ 158,682 $ 115,175
Cost of goods sold 33,183 29,097 106,222 72,769
---------- ---------- ---------- ----------
Gross profit 15,654 14,598 54,460 42,406
Selling general and administrative
expenses 9,978 8,904 32,224 25,845
Research and development 1,501 1,592 4,846 5,109
Restructuring and buyout of
compensation agreement charges 3,882 - 5,740 -
---------- ---------- ---------- ----------
Income from operations 293 4,102 9,650 11,452
Interest expense, net (340) (606) (1,155) (1,603)
Other expense, net (73) (42) (486) (716)
---------- ---------- ---------- ----------
Income (loss) before income taxes (120) 3,454 8,009 9,133
Income tax benefit (expense) 188 (1,259) (2,832) (3,310)
---------- ---------- ---------- ----------
Net income $ 68 $ 2,195 $ 5,177 $ 5,823
========== ========== ========== ==========
Net income per share, basic $ 0.01 $ 0.31 $ 0.61 $ 0.85
========== ========== ========== ==========
Weighted average common shares 9,115,257 7,117,645 8,468,862 6,813,902
Net income per share, diluted $ 0.01 $ 0.25 $ 0.55 $ 0.69
========== ========== ========== ==========
Weighted average common shares
and equivalents 9,526,593 8,792,947 9,457,437 8,481,246
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
AAVID THERMAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 26, September 27,
1998 1997
----------------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 5,177 $ 5,823
Adjustments to reconcile net income to net cash
Provided by (used for) operating activities:
Depreciation and amortization 7,381 4,740
Loss on sale of property, plant and equipment 37 --
Deferred income taxes (6,624) (1,397)
Minority interest -- 73
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (3,060) (10,720)
Inventories 528 (2,633)
Note receivable (2,307) --
Prepaid and other current assets (797) (733)
Other long term assets 82 (1,148)
Accounts payable - trade (2,168) 2,492
Accrued expenses and other current liabilities 15,548 6,589
--------- --------
Total adjustments 8,620 (2,737)
--------- --------
Net cash provided by operating activities 13,797 3,086
Cash flows provided by (used in) investing activities:
Purchase of property, plant and equipment (7,291) (8,227)
Payments for acquisitions, net of cash acquired -- (1,316)
Net proceeds from sale of fixed assets 24 --
--------- --------
Net cash used in investing activities (7,267) (9,543)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses 3,853 1,932
Advances under line of credit 128,366 83,520
Repayments of line of credit (133,898) (78,664)
Advances under other debt obligations 1,081 6,538
Principal payments under debt obligations (3,901) (5,035)
--------- --------
Net cash provided by (used in) financing activities (4,499) 8,291
Foreign exchange rate effect on cash and cash equivalents 51 (591)
Net increase (decrease) in cash and cash equivalents 2,082 1,243
Cash and cash equivalents, beginning of period 6,919 4,093
--------- --------
Cash and cash equivalents, end of period $ 9,001 $ 5,336
========= ========
Supplemental disclosure of cash flow information:
Interest paid 1,385 1,718
Income taxes paid 1,964 712
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.
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<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 September 26, 1998, and
the results of operations for the quarters and nine months ended September 26,
1998 and September 27, 1997, and the cash flows for the nine months ended
September 26, 1998 and September 27, 1997. The results of operations for the
nine month period ended September 26, 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 September 26, 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)
September 26, December 31,
1998 1997
---- ----
(Unaudited)
Raw materials $ 6,485 $ 6,753
Work-in-process 2,945 3,232
Finished goods 3,268 3,383
------- -------
$12,698 $13,368
======= =======
(3) ACCOUNTS RECEIVABLE
The components of accounts receivable at September 26, 1998 and December
31, 1997 are as follows:
($000)
September 26, December 31
1998 1997
---- ----
(Unaudited)
Accounts receivable $ 37,466 $ 34,604
Allowance for doubtful accounts (956) (838)
-------- --------
Net accounts receivable $ 36,510 $ 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:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------- -----------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
----------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income $ 68 $ 2,195 $ 5,177 $ 5,823
Foreign currency translation
adjustment, net of related tax
Effects (80) (114) (188) (301)
---- ------- ------- -------
Comprehensive Income (loss) $(12) $ 2,081 $ 4,989 $ 5,522
==== ======= ======= =======
</TABLE>
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<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
---------------------
September 26, 1998 September 27, 1997
------------------ ------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income $68 $2,195
=== ======
BASIC EPS:
Income Available to
Common Stockholders $68 $9,115,257 $0.01 $2,195 $7,117,645 $0.31
EFFECT OF DILUTIVE
SECURITIES:
Options and Warrants 411,336 1,675,302
---------- ----------
DILUTED EPS:
Income Available to
Common Stockholders $68 $9,526,593 $0.01 $2,195 $8,792,947 $0.25
=== ========== ===== ====== ========== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------
September 26, 1998 September 27, 1997
------------------ ------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income $5,177 $5,823
====== ======
BASIC EPS:
Income Available to
Common Stockholders $5,177 $8,468,862 $0.61 $5,823 $6,813,902 $0.85
EFFECT OF DILUTIVE
SECURITIES:
Options and Warrants 988,575 1,667,344
---------- ----------
DILUTED EPS:
Income Available to
Common Stockholders $5,177 $9,457,437 $0.55 $5,823 $8,481,246 $0.69
====== ========== ===== ====== ========== =====
</TABLE>
(6) RESTRUCTURING AND BUYOUT OF COMPENSATION AGREEMENT CHARGES
During the first quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $1,858, which related to financial obligations arising from
the Company's restructuring in 1993 and comprised two elements: First, the
Company terminated an arrangement with certain venture investors, under which it
was previously obligated to pay fixed fees until at least the year 2000. Second,
the Company provided to pay a former director a bonus based on 1998 profits in
excess of certain thresholds.
During the third quarter of 1998, the company recorded a net non-recurring
pre-tax charge of $3,882 reflecting the net costs associated with the closure in
the fourth quarter of the Company's Manchester, New Hampshire, facility. This
facility was dedicated to manufacturing a
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<PAGE> 8
specific large volume product for a single customer. Following a change in
product design by the customer, demand is expected to cease during the fourth
quarter of 1998 and thereafter, from a level of $15,000 in the second quarter of
1998.
The costs associated with the closure of the Manchester facility include
the write-down of surplus equipment of $2,823, settlement of certain purchase
and inventory commitments of $1,127, provisions for leased property expenses of
$382, and employee separation costs of $550. While the number of employees has
been significantly reduced through natural attrition, the plan includes the
termination of 120 employees comprised of 90 direct and 30 indirect employees.
The charge is offset by a reduction in the previous estimate of obligations to
pay a former director a bonus, paid on profits in excess of certain thresholds.
It is anticipated that the exit plan will be completed by December 31, 1998.
There have been no payments made relative to this plant closure as of September
26, 1998.
(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 22% and 24% of net sales for the quarter and
nine months ended September 26, 1998, respectively. One customer accounted for
19% and 11% of net sales for the quarter and nine months ended September 27,
1997, respectively.
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<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. The
heat generated is an absolute constraint in electronic system design, since
microprocessors and ICs operate efficiently only in a narrow temperature band.
The excessive heat 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
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<PAGE> 10
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").
* 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,
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<PAGE> 11
Apple, 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.
Year 2000:
The Company is currently engaged in a comprehensive project to upgrade its
information, technology, manufacturing, and facilities computer hardware and
software programs to address the Year 2000 issue at its domestic and
international businesses. Many of the Company's systems include new hardware and
packaged software recently purchased from vendors who have represented that
these systems are already Year 2000 compliant.
As part of this project, the Company is in the process of formally
communicating with its significant suppliers, vendors, and large customers to
determine the extent to which the Company is vulnerable to those parties'
failures to correct their own Year 2000 issues. Responses received as of
September 26, 1998, generally indicate that these parties will be Year 2000
compliant.
The Company has completed an inventory and assessment of its information
technology systems. Both internal and external resources are being utilized to
test the Company's software for Year 2000 compliance and, where necessary, the
systems are being remediated through upgrading, replacement, or reprogramming.
Also, the Company is taking an inventory of its non-information technology
(embedded) systems, prioritizing the impact of each of these systems on the
Company's ability to conduct its operations and, as necessary, is obtaining
vendor verification and/or remediation of those systems. The process of
analyzing, prioritizing, remediating and testing will be an iterative process
until all systems are Year 2000 compliant.
The estimated cost for this project is projected to range between $125,000
and $200,000, which is being funded through operating cash flows. The Company
has spent approximately $65,000 as of September 26, 1998, on this project, most
of which has been for internal remediation efforts. The Company believes that
90% of its systems will be Year 2000 compliant by December 31, 1998, with the
remainder by mid-year 1999.
Based upon currently available information and considering the Company's
diversified business base, decentralized systems and Year 2000 efforts,
management believes that the most reasonably likely worst case scenario could
result in minor short-term business interruptions. The Company is preparing
contingency plans which include alternative sourcing to minimize any
disruptions to its business resulting from a vendor or supplier not being Year
2000 compliant; however, failure by the company and/or vendors and customers to
complete Year 2000 compliance work in a timely manner could have a material
adverse effect on certain of the Company's operations. The Company's exposure
could increase or its timetable for Year 2000 compliance could be delayed as a
result of any new acquisitions.
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<PAGE> 12
RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 26, 1998 COMPARED WITH QUARTER AND NINE
MONTHS ENDED SEPTEMBER 27, 1997
The Company:
Sales in the third quarter of 1998 were $48.8 million, an increase of $5.1
million, or 12%, compared with the third quarter of last year. Sales for the
nine months ended September 26, 1998 were $158.7 million, an increase of $43.5
million, or 38%, compared with the same period in 1997.
International sales (which include North American exports) increased to 53%
of sales for the third quarter of 1998 compared with 44% in the same quarter in
1997. For the nine months ended September 26, 1998 international revenue was 51%
of sales, which compares with 37% for the same period in 1997
Intel Corporation is the only customer that generates more than 10% of the
Company's sales. For the quarter, sales to Intel Corporation, including its
foreign subsidiaries, accounted for 22% or $10.8 million of total sales and for
the nine months ended September 26, 1998 24% or $38.4 million of total sales.
Most recent forecasts for product shipments to Intel indicate that sales will be
lower in the second half of the year than the first half, and those forecasts
call for sales to Intel to be significantly less than 10% of total revenues in
1999.
The Company's gross profit for the quarter was $15.7 million, an increase
of $1.1 million, or 7% higher than the third quarter of 1997. Gross margin as a
percentage of sales decreased from 33.4% in the third quarter of 1997 to 32.1%
for the third 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 than at Fluent. Fluent has significantly higher gross margins than
Aavid Thermal Products. The other 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.
Prior to the non-recurring charge, the Company's third quarter 1998
operating income of $4.2 million was $0.1 million or 3% higher than the third
quarter of 1997. Prior to the non-recurring charge, the Company's operating
margins, as a percentage of sales, for the third quarter of 1998 were 8.5% as
compared with 9.4% for the same quarter last year. Prior to non-recurring
charges, the Company's operating income in the first nine months of 1998 was
$15.4 million, an increase of $3.9 million or 34% compared with the same period
last year. Prior to the non-recurring charge, the Company's overall operating
margin decreased slightly to 9.7% for the first nine months of 1998 from 10.0%
for the first nine months of 1997, due to a higher growth rate of the lower
margin Aavid Thermal Products business than the higher margin Fluent business.
Interest charges for the Company were $0.3 million in the third quarter of
1998, which compared with $0.6 million for the third quarter of 1997. The
effective tax rate in the third quarter of 1998 was 34.9%, compared with 36.5%
in 1997. The change in tax rate was principally due to increased profits from
countries with lower effective tax rates.
The Company's net income for the quarter prior to non-recurring charges was
$2.5 million, or $0.26 per share, 14% higher than last year's net income
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<PAGE> 13
of $2.2 million, and $0.25 per share. The Company's net income in the first nine
months of 1998, prior to non-recurring charges was $8.7 million, or $0.92 per
share, 50% higher than last year's net income for the same period of $5.8
million, and $0.69 per share.
During the first quarter of 1998, the Company recorded a non-recurring
after tax charge of $1.2 million, which related to financial obligations arising
from the Company's restructuring in 1993 and comprised two elements: First, the
Company terminated an arrangement with certain venture investors, under which it
was previously obligated to pay fixed fees until at least the year 2000. Second,
the Company provided for an obligation to pay a former director a bonus based on
1998 profits in excess of certain thresholds.
During the third quarter of 1998, the company recorded a non-recurring
after tax charge of $2.4 million (or $0.25 per share) reflecting the net costs
associated with the closure in the fourth quarter of the Company's Manchester,
New Hampshire, facility. This facility was dedicated to manufacturing a specific
large volume product for a single customer. Following a change in product design
by the customer, demand for that product is expected to cease during the fourth
quarter of 1998 and thereafter, from a level of $15 million in the second
quarter of 1998.
The costs associated with the closure of the Manchester facility include
the write-down of surplus equipment of $2.8 million, settlement of certain
purchase and inventory commitments of $1.1 million, provisions for leased
property expenses of $0.4 million, and employee separation costs of $0.6
million. While the number of employees has been significantly reduced through
natural attrition, the plan includes the termination of 120 employees comprised
of 90 direct and 30 indirect employees. The charge is offset by a reduction in
the previous estimate of obligations to pay a former director a bonus, paid on
profits in excess of certain thresholds. It is anticipated that the exit plan
will be completed by December 31, 1998. There have been no payments made
relative to this plant closure as of September 26, 1998.
The Subsidiaries:
A discussion of the operations of the Company's three operating
subsidiaries excluding one-time charges, follows:
<TABLE>
<CAPTION>
NET INCOME
----------
THIRD QUARTER NINE MONTHS ENDED
------------- -----------------
---------------------------- ----------------------------
1998 1997 INCREASE 1998 1997 INCREASE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Aavid Thermal Products $1.9 $1.7 $0.2 $6.1 $3.9 $2.2
Fluent 0.6 0.5 0.1 2.6 1.9 0.7
Applied Thermal Technologies 0.0 0.0 0.0 0.0 0.0 0.0
---- ---- ---- ---- ---- ----
$2.5 $2.2 $0.3 $8.7 $5.8 $2.9
==== ==== ==== ==== ==== ====
</TABLE>
Aavid Thermal Products net income for the third quarter 1998 improved to
$1.9 million from the 1997 net income of $1.7 million, an increase of $0.2
million, or 12%. Strong sales growth of 11%, accompanied by reduced sales,
general and administrative costs more than offset some reduction in gross
margins and resulted in higher net income.
Sales for Aavid Thermal Products were $40.1 million in the third quarter of
1998, an increase of $4.0 million, or 11%, compared with the third
- 13 -
<PAGE> 14
quarter of 1997. This growth was primarily the result of increasing sales of
computer and network thermal management products for the overseas market. Sales
in the power electronics markets were lower in the third quarter of 1998 than
the third quarter of 1997 due primarily to customer inventory reductions,
reflecting less favorable economic conditions. A breakdown of the sales of Aavid
Thermal Products for the third quarter of 1998 as compared to the third quarter
of 1997 is shown below.
<TABLE>
<CAPTION>
$ MILLION
---------
Q3 1998 Q3 1997 INCREASE
------- ------- --------
<S> <C> <C> <C>
Computers and Network - Intel $10.8 $ 8.1 33%
Computers and Network - Other 16.3 13.0 25%
----- ----- ---
Total Computers and Network 27.1 21.1 28%
Power Electronics 13.0 15.0 -13%
----- ----- ---
Total Aavid Thermal Products $40.1 $36.1 11%
===== ===== ===
</TABLE>
For the first nine months of 1998, revenue in Aavid Thermal Products
computer and network markets increased 34%, and power electronics increased 5%
over the same prior year period. Growth in non-Intel Corporation revenue for the
first nine months of 1998 was 18% over the same period last year. Operating
margins at Aavid Thermal Products for the first nine months of 1998 were
consistent with the first nine months of 1997.
Fluent's net income for the third quarter of 1998 increased to $0.6 million
from $0.5 million from the third quarter of 1997, a 20% increase, while
operating margins improved slightly from 12.8% in the third quarter of 1997 to
13.0% in the third quarter of 1998. Operating margins at Fluent during the first
nine months of 1998 were consistent with the first nine months of 1997.
Fluent software sales of $8.6 million in the third quarter of 1998 were
$1.1 million, or 15%, higher than the third quarter of 1997. For the first nine
months of 1998, revenues were 17% higher than the corresponding prior year
period. In general, increases have been seen in all product offerings due to
overall growth in the market for computational fluid dynamics design software,
as well as the success of the market for application specific products, such as
"Icepak".
Applied Thermal Technologies ("Applied") generated a small net income for
the third quarter of 1998. This was Applied's sixth full quarter of operation,
and it has now successfully established itself as Silicon Valley's premier
thermal design, validation and consulting service.
- 14 -
<PAGE> 15
FINANCIAL CONDITION
SEPTEMBER 26, 1998 COMPARED WITH DECEMBER 31, 1997
Strong operating cash flows and significantly lower debt leverage leave the
Company well positioned to pursue its strategic growth and productivity goals.
During the first nine months of 1998, the Company spent $7.3 million for
capital expenditures compared with $8.2 million in the corresponding period in
1997. The 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 September 26, 1998, the amount of working capital (excluding cash, debt,
and taxation provisions) required to support each $1.00 of sales was $0.100,
which compares favorably with $0.114 a year earlier. This improvement in working
capital reflects improvements in receivable days sales outstanding (71 days to
68 days) and inventory turns (8.9 to 9.6) over the year.
On September 26, 1998 the Company had $9.0 million in cash or cash
equivalents compared with $6.9 million at the end of 1997. This increase in cash
and cash equivalents reflects the strong operating performance as well as
improved global treasury management controls resulting in lower levels of
unutilized cash. Funds generated have been used to reduce borrowings and to
accumulate cash balances.
Total debt at September 26, 1998 was $15.7 million, which compares with
$24.0 million at the end of 1997. Total debt as a percent of stockholders'
equity at September 26, 1998 was 23%, as compared to the 48% at year end.
Long-term debt at September 26, 1998 was $12 million, a decrease of $9 million
compared with year end. No borrowings were outstanding under the revolving line
of credit on September 26, 1998 compared with $6.2 million at year end. Unused
borrowing capacity under the Company's financing agreement was $37.1 million at
September 26, 1998, which compares with $23.2 million at year end.
The Company had no material commitments for capital expenditures at
September 26, 1998.
During the first nine months of 1998 the Company had a $8.5 million tax
benefit relating to disqualifying dispositions of 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.
The Company has been informed by the NASD-R Market Regulation Department
that it is conducting a review of trading in the Company's common stock
surrounding the July 21, 1998 announcement regarding second quarter 1998
earnings and "recent forecasts which .... indicate that third quarter shipments
will be lower, due to changing product mix and demand." The Company is also
aware that the Securities and Exchange Commission has issued a formal order of
private investigation with respect to such announcements and relating to
whether any person traded in the common stock or options of the Company while
in possession of material non-public information, or communicated such
information to others who thereafter effected transactions in such securities.
The Company has been cooperating with the NASD-R's review and intends to
cooperate with the SEC's investigation. Although the Company cannot at this
time predict what effect, if any, these investigations might have on the
Company, the Company does not believe these matters will have a material
adverse effect on the Company's results of operations or financial condition.
- 15 -
<PAGE> 16
Part II. Other Information
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 September 26, 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 under-signed thereunto duly authorized.
AAVID THERMAL TECHNOLOGIES, INC.
DATE: November 10, 1998 By: /s/ Stephen D. Eldred
----------------- -------------------------
Stephen D. Eldred
Vice President, Treasurer, and
Chief Financial Officer
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-26-1998
<EXCHANGE-RATE> 1
<CASH> 9,001
<SECURITIES> 0
<RECEIVABLES> 37,466
<ALLOWANCES> 956
<INVENTORY> 12,698
<CURRENT-ASSETS> 74,687
<PP&E> 61,518
<DEPRECIATION> 18,903
<TOTAL-ASSETS> 123,947
<CURRENT-LIABILITIES> 42,196
<BONDS> 12,025
0
0
<COMMON> 93
<OTHER-SE> 67,500
<TOTAL-LIABILITY-AND-EQUITY> 123,947
<SALES> 48,837
<TOTAL-REVENUES> 48,837
<CGS> 33,183
<TOTAL-COSTS> 48,544
<OTHER-EXPENSES> 73
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 340
<INCOME-PRETAX> (120)
<INCOME-TAX> 188
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1
<CASH> 5,336
<SECURITIES> 0
<RECEIVABLES> 34,557
<ALLOWANCES> 479
<INVENTORY> 12,198
<CURRENT-ASSETS> 55,684
<PP&E> 49,024
<DEPRECIATION> 10,870
<TOTAL-ASSETS> 101,965
<CURRENT-LIABILITIES> 35,442
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 39,152
<TOTAL-LIABILITY-AND-EQUITY> 101,965
<SALES> 43,695
<TOTAL-REVENUES> 43,695
<CGS> 29,097
<TOTAL-COSTS> 39,593
<OTHER-EXPENSES> 42
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 606
<INCOME-PRETAX> 3,454
<INCOME-TAX> 1,259
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,195
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.25
</TABLE>
