10-Q 1 b51106ate10vq.txt AAVID THERMAL TECHNOLOGIES, INC. 10-Q 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 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 July 30, 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 June 30, 2004 and December 31, 2003....................................... 3 b.) Consolidated Statements of Operations for the quarter and six months ended June 30, 2004 and June 28, 2003.. 4 c.) Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and June 28, 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)
JUNE 30, 2004 DECEMBER 31, (UNAUDITED) 2003 ----------- ------------ ASSETS Cash and cash equivalents........................................................................... $ 28,254 $ 15,231 Accounts receivable-trade, less allowance for doubtful accounts..................................... 38,306 40,008 Inventories......................................................................................... 7,757 9,583 Refundable taxes.................................................................................... 145 160 Deferred income taxes............................................................................... 1,390 1,172 Prepaid and other current assets.................................................................... 6,325 6,033 --------- --------- Total current assets.............................................................................. 82,177 72,187 Property, plant and equipment, net.................................................................. 26,718 27,102 Goodwill............................................................................................ 39,433 39,433 Developed technology, net........................................................................... 1,074 1,518 Deferred financing fees............................................................................. 2,970 3,480 Deferred income taxes............................................................................... 411 404 Other assets, net................................................................................... 1,655 1,569 --------- --------- Total assets...................................................................................... $ 154,438 $ 145,693 ========= ========= LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' DEFICIT Accounts payable-trade.............................................................................. $ 14,664 $ 12,943 Current portion of long term debt obligations....................................................... 8,597 9,043 Income taxes payable................................................................................ 4,708 3,789 Restructuring charges............................................................................... 209 215 Deferred revenue.................................................................................... 42,566 37,657 Accrued expenses and other current liabilities...................................................... 25,553 26,816 --------- --------- Total current liabilities......................................................................... 96,297 90,463 Long term debt obligations, net of current portion.................................................. 129,731 129,767 Deferred income taxes............................................................................... 212 209 --------- --------- Total liabilities................................................................................. 226,240 220,439 --------- --------- 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 $6,754 at June 30, 2004)........................................ -- -- Series B Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares issued and outstanding (Liquidation value of $6,754 at June 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................................................................... (1,606) (1,105) Accumulated deficit................................................................................. (262,552) (265,997) --------- --------- Total stockholders' deficit....................................................................... (72,387) (75,331) --------- --------- Total liabilities, minority interests and stockholders' deficit................................... $ 154,438 $ 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 SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 28, JUNE 30, JUNE 28, 2004 2003 2004 2003 --------- --------- ---------- ---------- Net sales............................................ $ 56,538 $ 47,590 $ 112,155 $ 91,421 Cost of goods sold................................... 28,622 25,461 56,410 47,914 --------- --------- --------- --------- Gross profit....................................... 27,916 22,129 55,745 43,507 Selling, general and administrative expenses......... 15,751 14,339 32,800 29,519 Amortization of intangible assets.................... 109 850 453 1,697 Research and development............................. 4,364 4,256 8,096 8,098 --------- --------- --------- --------- Income from operations............................. 7,692 2,684 14,396 4,193 Interest expense, net................................ (4,524) (4,540) (9,060) (9,128) Other income (expense), net.......................... (309) 1,127 130 1,360 --------- --------- --------- --------- Income (loss) from operations before income taxes.. 2,859 (729) 5,466 (3,575) Income tax expense................................... (1,147) (767) (2,021) (1,363) --------- --------- --------- --------- Net income (loss).................................... $ 1,712 $ (1,496) $ 3,445 $ (4,938) ========= ========= ========= =========
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)
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 28, 2004 2003 ---------- ---------- Cash flows provided by operating activities: Net income (loss)........................................ $ 3,445 $ (4,938) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation............................................. 3,502 3,936 Amortization and accretion............................... 1,360 2,506 (Gain) loss on sale of property, plant and equipment..... (3) 170 Deferred income taxes.................................... (255) (308) Changes in assets and liabilities: Accounts receivable - trade.............................. 1,392 (843) Inventories.............................................. 1,824 766 Prepaid and other current assets......................... (282) 171 Notes receivable......................................... -- 82 Other long term assets................................... (105) (18) Accounts payable - trade................................. 1,754 1,403 Income taxes payable..................................... 931 217 Deferred revenue......................................... 5,279 6,525 Accrued expenses and other current liabilities........... (1,108) (9) -------- -------- Total adjustments..................................... 14,289 14,598 -------- -------- Net cash provided by operating activities............. 17,734 9,660 Cash flows used in investing activities: Purchases of property, plant & equipment................. (2,408) (2,246) Proceeds from sale of property, plant and equipment...... 13 160 -------- -------- Net cash used in investing activities................. (2,395) (2,086) Cash flows used in financing activities: Repayments on line of credit, net........................ (585) (975) Principal payments under debt obligations................ (1,156) (1,099) -------- -------- Net cash used in financing activities................. (1,741) (2,074) Foreign exchange rate effect on cash and cash equivalents.. (575) (1,867) -------- -------- Net increase in cash and cash equivalents.................. 13,023 3,633 Cash and cash equivalents, beginning of period............. 15,231 12,297 -------- -------- Cash and cash equivalents, end of period................... $ 28,254 $ 15,930 ======== ======== Supplemental disclosure of cash flow information: Interest paid............................................ $ 8,247 $ 8,366 ======== ======== Income taxes paid........................................ $ 668 $ 1,366 ======== ========
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 six month periods ending June 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. (3) ACCOUNTS RECEIVABLE The components of accounts receivable at June 30, 2004 and December 31, 2003 are as follows:
JUNE 30, DECEMBER 31, 2004 2003 ----------- ------------ (UNAUDITED) Accounts receivable................. $ 40,775 $ 42,209 Allowance for doubtful accounts..... (2,469) (2,201) --------- --------- Net accounts receivable............. $ 38,306 $ 40,008 ========= =========
6 (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 June 30, 2004 and December 31, 2003 are as follows:
JUNE 30, DECEMBER 31, 2004 2003 ----------- ------------ (UNAUDITED) Raw materials.......... $ 2,425 $ 2,065 Work-in-process........ 3,458 4,123 Finished goods......... 1,874 3,395 --------- -------- $ 7,757 $ 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 SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 28, JUNE 30, JUNE 28, 2004 2003 2004 2003 ------------- ------------- ---------------- ---------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net income (loss)........................ $ 1,712 $(1,496) $ 3,445 $(4,938) Foreign currency translation adjustment.. (142) (539) (501) (805) ------- ------- ------- ------- Comprehensive income (loss).............. $ 1,570 $(2,035) $ 2,944 $(5,743) ======= ======= ======= =======
(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 June 30, 2004:
CHARGES AGAINST RESTRUCTURING RESERVES FOR THE RESTRUCTURING RESERVES BALANCE QUARTER ENDED RESERVES BALANCE AT MARCH 31, JUNE 30, AT JUNE 30, 2004 2004 2004 ---------------- ---------------- ---------------- Lease terminations and leasehold improvements reserve..... $ 2 $ (2) $ -- Employee separation....................................... 200 -- 200 Other..................................................... 13 (4) 9 ------ ---- ------ Total..................................................... $ 215 $ (6) $ 209 ====== ==== ======
(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. 7 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 six months ending June 30, 2004 and June 28, 2003:
REVENUES SEGMENT FROM INCOME (LOSS) ASSETS (NET OF EXTERNAL BEFORE INTERCOMPANY CUSTOMERS TAXES BALANCES) --------- ------------- -------------- Quarter Ended June 30, 2004 Thermal Products................... $ 30,907 $ (2,403) $ 54,257 CFD Software....................... 25,631 5,196 110,493 Corporate Office................... -- 66 (10,312) ---------- --------- ----------- Total.............................. $ 56,538 $ 2,859 $ 154,438 ========== ========= ========== Quarter Ended June 28, 2003 Thermal Products................... $ 26,473 $ (2,509) $ 25,134 CFD Software....................... 21,117 1,876 95,351 Corporate Office................... -- (96) 20,523 ---------- --------- ---------- Total $ 47,590 $ (729) $ 141,008 ========== ========= ==========
REVENUES SEGMENT FROM INCOME (LOSS) EXTERNAL BEFORE CUSTOMERS TAXES --------- ------------- Six Months Ended June 30, 2004 Thermal Products................... $ 61,260 $ (4,688) CFD Software....................... 50,895 10,010 Corporate Office................... -- 144 ---------- --------- Total.............................. $ 112,155 $ 5,466 ========== ========= Six Months Ended June 28, 2003 Thermal Products................... $ 50,984 $ (5,692) CFD Software....................... 40,437 2,580 Corporate Office................... -- (463) ---------- --------- Total $ 91,421 $ (3,575) ========== =========
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 SIX MONTHS ENDED FOR THE SIX MONTHS ENDED FOR THE QUARTER ENDED JUNE 30, 2004 JUNE 28, 2003 ----------------------------- ---------------------------- -------------------------- JUNE 30, 2004 JUNE 28, 2003 LONG-LIVED LONG-LIVED ASSETS ASSETS AS OF PERIOD AS OF PERIOD REVENUES REVENUES REVENUES END REVENUES END ------------- ------------- ------------ ------------- ----------- ------------ United States............... $ 28,864 $ 26,245 $ 56,237 $ 60,479 $ 50,945 $ 65,458 Taiwan...................... 4,667 3,485 9,393 582 5,818 586 China....................... 5,839 5,689 10,946 579 11,110 1,432 United Kingdom.............. 6,053 5,483 12,679 2,340 11,191 2,214 Italy....................... 6,157 4,277 11,196 2,542 8,048 2,713 Mexico...................... 2,548 2,215 4,875 427 4,657 739 Other International......... 16,607 13,370 33,671 5,670 25,277 4,327 Intercompany eliminations... (14,197) (13,174) (26,842) (358) (25,625) (358) ---------- ---------- ---------- ---------- ---------- ---------- Total....................... $ 56,538 $ 47,590 $ 112,155 $ 72,261 $ 91,421 $ 77,111 ========== ========== ========== ========== ========== ==========
8 (8) SUBSEQUENT EVENT On July 23, 2004, the Company entered into a purchase and sale agreement to acquire 100% of the outstanding stock of a small manufacturing company located in Taiwan. The total purchase price of the acquired company is $4,800, consisting of $3,000 cash paid upon closing and contingent consideration of $1,800 payable within two years of the closing date upon the satisfaction of certain conditions. (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 JUNE 30, 2004 (UNAUDITED) ------------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- -------------- ------------- ------------ ------------ ASSETS Cash and cash equivalents............. $ 108 $ 7,944 $ 20,202 $ -- $ 28,254 Accounts receivable-trade, net........ -- 11,775 26,522 9 38,306 Inventories........................... -- 2,606 5,334 (183) 7,757 Due (to) from affiliate, net.......... 84,378 (84,037) 21,240 (21,581) -- Refundable taxes...................... (239) 228 (24) 180 145 Deferred income taxes................. (27) 8,982 1,390 (8,955) 1,390 Prepaid and other current assets...... 153 1,268 4,904 -- 6,325 --------- --------- --------- --------- --------- Total current assets.................. 84,373 (51,234) 79,568 (30,530) 82,177 Property, plant and equipment, net.... 6 15,850 10,758 104 26,718 Investment in subsidiaries............ (27,908) -- -- 27,908 -- Deferred income taxes................. 282 -- 411 (282) 411 Other assets, net..................... 3,107 41,038 971 16 45,132 --------- --------- --------- --------- --------- Total assets.......................... $ 59,860 $ 5,654 $ 91,708 $ (2,784) $ 154,438 ========= ========= ========= ========= ========= LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' DEFICIT Accounts payable-trade................ $ 10 $ 2,074 $ 12,617 $ (37) $ 14,664 Current portion of debt obligations... -- 6,278 2,319 -- 8,597 Income taxes payable.................. 1,724 1,750 2,352 (1,118) 4,708 Deferred revenue...................... -- 19,642 22,924 -- 42,566 Accrued expenses and other current liabilities......................... 7,315 8,289 10,145 13 25,762 --------- --------- --------- --------- --------- Total current liabilities............. 9,049 38,033 50,357 (1,142) 96,297 --------- --------- --------- --------- --------- Debt obligations, net of current portion............................. 121,373 7,985 373 -- 129,731 Deferred income taxes................. 1,238 3,398 212 (4,636) 212 --------- --------- --------- --------- --------- Total liabilities..................... 131,660 49,416 50,942 (5,778) 226,240 --------- --------- --------- --------- --------- Minority interests.................... 587 -- -- (2) 585 Stockholders' (deficit) equity: Preferred stock, par value............ -- 76,407 5,000 (81,407) -- Common stock, par value............... -- 3 4,507 (4,510) -- Warrants.............................. 3,764 -- -- -- 3,764 Additional paid-in capital............ 188,007 126,192 7,307 (133,499) 188,007 Cumulative translation adjustment..... (1,606) 738 5,561 (6,299) (1,606) Retained earnings (deficit)........... (262,552) (247,102) 18,391 228,711 (262,552) --------- --------- --------- --------- --------- Total stockholders' (deficit) equity.. (72,387) (43,762) 40,766 2,996 (72,387) --------- --------- --------- --------- --------- Total liabilities, minority interests and stockholders' (deficit) equity.................... $ 59,860 $ 5,654 $ 91,708 $ (2,784) $ 154,438 ========= ========= ========= ========= =========
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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 ========= ========= ========= ========= =========
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2004 (UNAUDITED) ----------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------------- ------------- ------------ ------------ Net sales....................................... $ -- $ 29,269 $ 41,872 $ (14,603) $ 56,538 Cost of goods sold.............................. -- 13,448 23,048 (7,874) 28,622 ------- -------- -------- --------- -------- Gross profit.................................... -- 15,821 18,824 (6,729) 27,916 Selling, general and administrative expenses.... (7) 9,006 9,051 (2,190) 15,860 Research and development........................ -- 4,410 4,493 (4,539) 4,364 ------- -------- -------- --------- -------- Income from operations.......................... 7 2,405 5,280 -- 7,692 Interest income (expense), net.................. 60 (4,468) (125) 9 (4,524) Other income (expense), net..................... (1) 132 (298) (142) (309) Equity in income (loss) of subsidiaries......... 665 -- -- (665) -- ------- -------- -------- --------- -------- Income (loss) before income taxes............... 731 (1,931) 4,857 (798) 2,859 Income tax benefit (expense).................... 981 (1,360) (768) -- (1,147) ------- -------- -------- --------- -------- Net income (loss)............................... $ 1,712 $ (3,291) $ 4,089 $ (798) $ 1,712 ======= ======== ======== ========= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED JUNE 28, 2003 (UNAUDITED) ----------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------------- ------------- ------------ ------------ Net sales....................................... $ -- $ 26,664 $ 34,519 $ (13,593) $ 47,590 Cost of goods sold.............................. -- 12,330 20,285 (7,154) 25,461 -------- -------- -------- --------- -------- Gross profit.................................... -- 14,334 14,234 (6,439) 22,129 Selling, general and administrative expenses.... (89) 10,086 7,894 (2,702) 15,189 Research and development........................ -- 3,964 4,078 (3,786) 4,256 -------- -------- -------- --------- -------- Income from operations.......................... 89 284 2,262 49 2,684 Interest income (expense), net.................. (230) (4,261) (63) 14 (4,540) Other income (expense), net..................... 45 1,960 2,597 (3,475) 1,127 Equity in income (loss) of subsidiaries......... (2,598) -- -- 2,598 -- -------- -------- -------- --------- -------- Income (loss) before income taxes............... (2,694) (2,017) 4,796 (814) (729) Income tax benefit (expense).................... 1,198 (1,576) (389) -- (767) -------- -------- -------- --------- -------- Net income (loss)............................... $ (1,496) $ (3,593) $ 4,407 $ (814) $ (1,496) ======== ======== ======== ========= ========
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHDS ENDED JUNE 30, 2004 (UNAUDITED) ----------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------------- ------------- ------------ ------------ Net sales....................................... $ -- $ 56,905 $ 82,761 $ (27,511) $112,155 Cost of goods sold.............................. -- 26,799 45,185 (15,574) 56,410 -------- -------- -------- --------- -------- Gross profit.................................... -- 30,106 37,576 (11,937) 55,745 Selling, general and administrative expenses.... 14 18,993 17,863 (3,617) 33,253 Research and development........................ -- 8,003 8,370 (8,277) 8,096 -------- -------- -------- --------- -------- Income (loss) from operations................... (14) 3,110 11,343 (43) 14,396 Interest income (expense), net.................. 159 (8,975) (260) 16 (9,060) Other income (expense), net..................... (1) 1,151 (176) (844) 130 Equity in income (loss) of subsidiaries......... 2,045 -- -- (2,045) -- -------- -------- -------- ---------- -------- Income (loss) before income taxes............... 2,189 (4,714) 10,907 (2,916) 5,466 Income tax benefit (expense).................... 1,256 (2,027) (1,250) -- (2,021) -------- -------- -------- --------- -------- Net income (loss)............................... $ 3,445 $ (6,741) $ 9,657 $ (2,916) $ 3,445 ======== ======== ======== ========= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 28, 2003 (UNAUDITED) ----------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------------- ------------- ------------ ------------ Net sales....................................... $ -- $ 51,650 $ 66,101 $ (26,330) $ 91,421 Cost of goods sold.............................. -- 23,242 38,522 (13,850) 47,914 -------- -------- -------- --------- -------- Gross profit.................................... -- 28,408 27,579 (12,480) 43,507 Selling, general and administrative expenses.... (99) 20,454 15,641 (4,780) 31,216 Research and development........................ -- 7,694 8,202 (7,798) 8,098 -------- -------- -------- --------- -------- Income from operations.......................... 99 260 3,736 98 4,193 Interest income (expense), net.................. (602) (8,441) (96) 11 (9,128) Other income (expense), net..................... 44 1,716 2,533 (2,933) 1,360 Equity in income (loss) of subsidiaries......... (6,766) -- -- 6,766 -- -------- -------- -------- --------- -------- Income (loss) before income taxes............... (7,225) (6,465) 6,173 3,942 (3,575) Income tax benefit (expense).................... 2,287 (2,675) (975) -- (1,363) -------- -------- -------- --------- -------- Net income (loss)............................... $ (4,938) $ (9,140) $ 5,198 $ 3,942 $ (4,938) ======== ======== ======== ========= ========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) ----------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------------- ------------- ------------ ------------ Net cash provided by operating activities....... $ 512 $ 5,113 $ 11,690 $ 419 $ 17,734 Cash flows used in investing activities: Purchases of property, plant and equipment...... -- (708) (1,700) -- (2,408) Proceeds from sale of property, plant and equipment..................................... -- 10 3 -- 13 ------ ------- -------- ------ -------- Net cash used in investing activities........... -- (698) (1,697) -- (2,395) Cash flows provided by (used in) financing activities: Advances (repayments) on line of credit, net.... -- (907) 322 -- (585) Principal payments under debt obligations....... -- (1,050) (106) -- (1,156) ------ ------- -------- ------ -------- Net cash provided by (used in) financing activities.................................... -- (1,957) 216 -- (1,741) Foreign exchange effect on cash and cash equivalents................................... (501) 405 (60) (419) (575) ------ ------- -------- ------ -------- Net increase in cash and cash equivalents....... 11 2,863 10,149 -- 13,023 Cash and cash equivalents, beginning of period.. 97 5,081 10,053 -- 15,231 ------ ------- -------- ------ -------- Cash and cash equivalents, end of period........ $ 108 $ 7,944 $ 20,202 $ -- $ 28,254 ====== ======= ======== ====== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 28, 2003 (UNAUDITED) ----------------------------------------------------------------------- U.S. GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------------- ------------- ------------ ------------ Net cash provided by operating activities....... $ 630 $ 4,215 $ 4,002 $ 813 $ 9,660 Cash flows used in investing activities: Purchases of property, plant and equipment...... (2) (814) (1,430) -- (2,246) Proceeds from sale of property, plant and equipment..................................... -- -- 160 -- 160 ------- ------- -------- ------ -------- Net cash used in investing activities........... (2) (814) (1,270) -- (2,086) Cash flows provided by (used in) financing activities: Advances (repayments) on line of credit, net.... -- (1,649) 674 -- (975) Principal payments under debt obligations....... -- (952) (147) -- (1,099) ------- ------- -------- ------ -------- Net cash provided by (used in) financing activities.................................... -- (2,601) 527 -- (2,074) Foreign exchange effect on cash and cash equivalents................................... (805) (61) (188) (813) (1,867) ------- ------- -------- ------ -------- Net (decrease) increase in cash and cash equivalents................................... (177) 739 3,071 -- 3,633 Cash and cash equivalents, beginning of period.. 1,422 2,440 8,435 -- 12,297 ------- ------- -------- ------ -------- Cash and cash equivalents, end of period........ $ 1,245 $ 3,179 $ 11,506 $ -- $ 15,930 ======= ======= ======== ====== ========
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 Six Months Ended June 30, 2004 Compared With The Quarter and Six Months Ended June 28, 2003:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ---------------------------- ----------------------------- JUNE 30, JUNE 28, JUNE 30, JUNE 28, SALES (DOLLARS IN MILLIONS) 2004 2003 CHANGE 2004 2003 CHANGE ------------------------------------------------- -------- -------- ------ --------- -------- ------ Computer, networking and industrial electronics.. $ 30.6 $ 26.2 16.8% $ 60.7 $ 50.5 20.2% Consulting and design services (Applied)......... 0.3 0.3 0.0% 0.6 0.5 20.0% ------- ------- ---- ------- ------- ---- Total Aavid Thermalloy........................... 30.9 26.5 16.7% 61.3 51.0 20.2% Total Fluent..................................... 25.6 21.1 21.4% 50.9 40.4 25.9% ------- ------- ---- ------- ------- ---- Total Company.................................... $ 56.5 $ 47.6 18.8% $ 112.2 $ 91.4 22.7% ======= ======= ==== ======= ======= ====
Aavid's sales in the second quarter of 2004 were $56.5 million, an increase of $8.9 million, or 18.8%, from the comparable period of 2003. Aavid's sales in the first six months of 2004 were $112.2 million, an increase of $20.7 million, or 22.7%, 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 $25.6 million in the second quarter of 2004 were $4.5 million, or 21.4%, higher than the second quarter of 2003. Fluent's sales in the first six months of 2004 were $50.9 million, an increase of $10.5 million, or 25.9%, 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 $30.9 million in the second quarter of 2004, an increase of $4.4 million, or 16.7%, over the second quarter of 2003. Aavid Thermalloy's sales in the first six months of 2004 were $61.3 million, an increase of $10.3 million, or 20.2%, 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 lower revenues in the third quarter of 2004 when compared with the second quarter of 2004. The Company's international sales (which include U.S. exports) increased to 56.0% of sales for the second quarter of 2004 compared with 54.0% in the second quarter of 2003. No customer generated greater than 10% of the Company's revenues in the second quarter or first six months of 2004 or 2003. The Company's gross profit for the second quarter of 2004 was $27.9 million compared with $22.1 million in the comparable period from 2003. Gross margin as a percentage of sales was 49.4% and 49.7%, respectively, for the second quarter and first six months of 2004. This compares with 46.5% and 47.6%, respectively, for the second quarter and first six months of 2003. Aavid Thermalloy's gross margin was 22.4% and 22.5%, respectively, for the second quarter and first six months of 2004, compared to 20.6% and 22.6% for the comparable periods of 2003. Gross margin at Fluent was 82.0% and 82.6%, respectively, for the second quarter and first six months of 2004. This compares with 79.3% and 79.5%, respectively, for the second quarter and first six months of 2003. In the second quarter of 2004, the Company's operating income of $7.7 million compares with operating income of $2.7 million in the second quarter of 2003. Operating income for the first six months of 2004 was $14.4 million, compared with operating income of $4.2 million from the comparable period of 2003. Aavid Thermalloy saw improvements of $1.4 million and $2.2 million, respectively, in operating income from the second quarter and first six months of 2003 to the second quarter and first six months of 2004. Fluent's operating income improved $3.6 million and $8.0 million, respectively, in the second quarter and first six months of 2004 as compared to the comparable periods in the prior year, with higher gross profit partially offset by higher operating expenses. Corporate headquarters experienced a decline in operating income of $0.1 million for the quarter and six months ended June 30, 2004, compared to the second quarter and first six months of 2003. Net interest charges, including cash interest expense and income, deferred financing fee amortization and bond discount amortization, for the Company were $4.5 million and $9.1 million, respectively, in the second quarter and first six months of 2004 which compares with $4.5 million and $9.1 million for the comparable periods of 2003. 16 The Company incurred a tax provision for the second quarter and first six months of 2004 despite having operating losses in the United States because of state tax provisions on applicable state components of U.S. income and foreign tax provisions on foreign earnings. The Company incurred significant losses in the United States and the Company only benefits the U.S. 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 U.S. 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 $1.7 million and $3.4 million, respectively, for the quarter and six months ended June 30, 2004, compared to net losses of $1.5 million and $4.9 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 $10.6 million and $23.5 million, respectively, for the second quarter and first six months of 2004, compared with $9.7 million and $18.8 million for the comparable period in 2003. A reconciliation of net income (loss) to EBITDA is as follows:
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED ------------------- ------------------- JUNE 30, JUNE 28, JUNE 30, JUNE 28, (DOLLARS IN MILLIONS) 2004 2003 2004 2003 ------------------------------------------------- -------- -------- -------- -------- Net income (loss)................................ $ 1.7 $ (1.5) $ 3.4 $ (4.9) Cash interest expense............................ 4.1 4.2 8.3 8.4 Bond discount amortization....................... 0.2 0.2 0.4 0.3 Deferred financing fee amortization.............. 0.3 0.2 0.5 0.5 Provision for income taxes....................... 1.1 0.8 2.0 1.4 Depreciation..................................... 1.7 2.0 3.5 3.9 Intangible asset amortization.................... 0.1 0.8 0.5 1.7 Deferred revenue change during period(1)......... 1.4 3.0 4.9 7.3 Loss on disposal of fixed assets................. -- -- -- 0.2 ------- ------- ------- ------- EBITDA........................................... $ 10.6 $ 9.7 $ 23.5 $ 18.8 ======= ======= ======= =======
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 six months of 2004, the Company generated $17.7 million of cash from operations, versus $9.7 million of cash from operations generated in the first half of 2003. During the first six months of 2004, the Company used $2.4 million of cash in connection with investing activities versus using $2.1 million in the comparable period of 2003. The Company used $2.4 million for capital expenditures in the first six months of 2004 versus $2.2 million in the comparable period of 2003. The Company used $1.7 million of cash in connection with financing activities for the first half of 2004, compared with using $2.1 million of cash from financing activities for the comparable period in 2003. ------------ (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 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 June 30, 2004, the interest rates on the Loan and Security Agreement ranged from 3.80% to 4.50%. Availability under the revolving line of credit was $14.6 million at June 30, 2004, of which $6.4 million had been drawn. Debt classified as long term in the accompanying balance sheet as of June 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 $0.6 million at June 30, 2004. The Company has entered into various long-term debt, capital lease and operating lease arrangements. The future payments required by these arrangements at June 30, 2004, are as follows:
PAYMENTS DUE BY PERIOD ($ IN THOUSANDS) --------------------------------------------------- 1 YR TOTAL OR LESS 1-3 YRS 4-5 YRS 5+ YRS --------- -------- --------- ------- ------- Long-term debt and capital leases.... $ 138,328 $ 8,597 $ 129,585 $ 55 $ 91 Operating leases..................... 20,071 5,459 7,245 3,702 3,665 --------- -------- --------- ------- ------- Total contractual obligations $ 158,399 $ 14,056 $ 136,830 $ 3,757 $ 3,756 ========= ======== ========= ======= =======
During the second quarter of 2004, inventory turns were 11.9, which compares to 12.1 during the second quarter of 2003. At June 30, 2004, accounts receivable days sales outstanding ("DSO") were 60 days, which compares with 64 days at December 31, 2003. On July 23, 2004, the Company entered into a purchase and sale agreement to acquire 100% of the outstanding stock of a small manufacturing company located in Taiwan. The total purchase price of the acquired company is $4.8 million, consisting of $3.0 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 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. 18 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 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. 19 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 June 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 June 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 changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to June 30, 2004. 20 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: August 10, 2004 AAVID THERMAL TECHNOLOGIES, INC. By: /s/ Brian A. Byrne ------------------------------------------ Vice President and Chief Financial Officer (Principal Financial Officer) 21