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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-8045
------------------------
GENRAD, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1360950
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7 TECHNOLOGY PARK DRIVE
01886-0033
WESTFORD, MASSACHUSETTS (Zip Code)01886-0033
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 589-7000
------------------------
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 / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
28,544,40128,551,636 shares of the Common Stock of GenRad, Inc., $1.00 par value, were
outstanding on MayAugust 9, 2001.
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GENRAD, INC.
QUARTERLY REPORT ON FORM 10-Q
THREE MONTHS ENDED MARCH 31,JUNE 30, 2001
TABLE OF CONTENTS
PAGE
--------
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
1:
Consolidated Statements of Operations for the threeThree and
Six months ended March 31,June 30, 2001 and AprilJuly 1, 2000..................2000......... 1
Consolidated Balance Sheets as of March 31,June 30, 2001 and
April 1, 2000...........................................December 30, 2000....................................... 2
Consolidated Statements of Cash Flows for the threeSix months
ended March 31,June 30, 2001 and AprilJuly 1, 2000..................2000.................... 3
Notes to Consolidated Financial Statements................ 4
Item 2: Management's Discussion and Analysis of Financial Condition
2: and Results of Operations................................. 9Operations................................... 12
PART II. OTHER INFORMATION
Item Exhibits.................................................... 184: Submission of Matters to a Vote of Security Holders......... 23
Item 6: Exhibits and Reports on Form 8-K............................ 23
Signatures.................................................. 1924
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENRAD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED --------------------
MARCH 31, APRILSIX MONTHS ENDED
------------------- -------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 ---------2001 2000
-------- -------- -------- --------
REVENUE:
Products..................................................Products.............................................. $ 46,231 $49,570
Services.................................................. 16,201 16,80339,852 $70,303 $ 86,083 $119,873
Services.............................................. 14,646 17,021 30,847 33,824
-------- ------- -------- --------
Total revenue......................................... 62,432 66,373revenue..................................... 54,498 87,324 116,930 153,697
COST OF REVENUE:
Products.................................................. 32,611 27,256
Services.................................................. 11,728 10,946Products.............................................. 51,669 40,740 84,280 67,996
Services.............................................. 10,640 12,245 22,368 23,191
-------- ------- -------- --------
Total cost of revenue................................. 44,339 38,202revenue............................. 62,309 52,985 106,648 91,187
-------- ------- -------- --------
Gross margin................................................ 18,093 28,171margin.......................................... (7,811) 34,339 10,282 62,510
OPERATING EXPENSES:
Selling, general and administrative....................... 21,858 17,774administrative................... 18,309 20,329 40,167 38,103
Research and development.................................. 7,896 5,754development.............................. 8,249 7,237 16,145 12,991
Amortization of acquisition-related intangible
assets..... 2,248 791assets.............................................. 2,070 2,004 4,318 2,795
Restructuring and other charges....................... -- 4,124 3,058 1,645
Impairment of long-lived assets....................... 21,816 -- 21,816 --
Acquired in-process research and development..............development.......... -- -- -- 500
Restructuring and other charges (benefits)................ 3,058 (2,479)
-------- ------- -------- --------
Total operating expenses.............................. 35,060 22,340expenses.......................... 50,444 33,694 85,504 56,034
-------- ------- -------- --------
Operating income (loss)..................................... (16,967) 5,831............................... (58,255) 645 (75,222) 6,476
OTHER INCOME (EXPENSE):
Interest income........................................... 46 65income....................................... 42 59 88 124
Interest expense.......................................... (2,609) (409)
Other..................................................... 206 42expense...................................... (3,181) (2,326) (5,790) (2,735)
Other................................................. (812) 10 (606) 52
-------- ------- -------- --------
Total other expense................................... (2,357) (302)expense............................... (3,951) (2,257) (6,308) (2,559)
-------- ------- -------- --------
Income (loss) before income taxes........................... (19,324) 5,529taxes..................... (62,206) (1,612) (81,530) 3,917
Income tax benefit.......................................... 7,373 12,549benefit.................................... 23,608 581 30,981 13,130
-------- ------- -------- --------
Net income (loss)........................................... $(11,951) $18,078..................................... $(38,598) $(1,031) $(50,549) $ 17,047
======== ======= ======== ========
NET INCOME (LOSS) PER SHARE:
Basic.....................................................Basic............................................... $ (0.42)(1.35) $ 0.64(0.04) $ (1.77) $ 0.61
======== ======= Diluted...................................................======== ========
Diluted............................................. $ (0.42)(1.35) $ 0.63(0.04) $ (1.77) $ 0.60
======== ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic..................................................... 28,511 28,138Basic............................................... 28,549 28,073 28,530 28,105
======== ======= Diluted................................................... 28,511 28,704======== ========
Diluted............................................. 28,549 28,073 28,530 28,551
======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
GENRAD, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
MARCH 31,JUNE 30, DECEMBER 30,
2001 2000
----------- ------------
(UNAUDITED)(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 14,2605,935 $ 8,321
Accounts receivable, less allowance of $1,300$1,403 and $828...... 83,54966,522 114,355
Inventories................................................. 73,94658,570 65,551
Deferred tax assets......................................... 12,76510,649 12,781
Other current assets........................................ 12,45514,467 8,445
-------- --------
Total current assets.................................. 196,975assets.................................... 156,143 209,453
Property and equipment, net................................. 46,19344,133 47,620
Deferred tax assets......................................... 25,85548,891 18,410
Intangible assets, net...................................... 85,62253,104 91,497
Other assets................................................ 2,4342,200 2,625
-------- --------
Total assets................................................ $357,079$304,471 $369,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................... $ 85,519 $ 48,590
Trade accounts payable...................................... $ 27,235 $28,168 21,427
Accrued liabilities......................................... 13,7879,804 14,766
Deferred revenue............................................ 11,817 10,185
Accrued compensation and employee benefits.................. 6,7658,001 10,645
Current portion of long-term debt........................... 94,135 48,590Deferred revenue............................................ 11,834 10,185
-------- --------
Total current liabilities............................. 153,739liabilities............................... 143,326 105,613
LONG-TERM LIABILITIES:
Long-term debt.............................................. 4745 45,050
Deferred revenue............................................ 1,042951 1,232
Deferred tax liabilities.................................... 3,167-- 3,412
Other long-term liabilities................................. 13,34213,273 13,541
-------- --------
Total long-term liabilities........................... 17,598liabilities............................. 14,269 63,235
-------- --------
Total liabilities........................................... $171,337$157,595 $168,848
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 60,000 shares authorized;
30,42930,437 and 28,54528,553 issued and outstanding, respectively at
March 31,June 30, 2001 and 30,394 and 28,510 issued and
outstanding, respectively at December 30, 2000............ 30,42930,437 30,394
Additional paid-in capital.................................. 226,086226,186 225,738
Treasury stock, 1,884 shares at March 31,June 30, 2001 and December
30, 2000.................................................. (31,292) (31,292)
Accumulated deficit......................................... (34,370)(72,968) (22,419)
Accumulated other comprehensive loss........................ (5,111)(5,487) (1,664)
-------- --------
Total stockholders' equity............................ 185,742equity.............................. 146,876 200,757
-------- --------
Total liabilities and stockholders' equity.................. $357,079$304,471 $369,605
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
GENRAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREESIX MONTHS ENDED
--------------------
MARCH 31, APRIL-------------------
JUNE 30, JULY 1,
2001 2000
----------------- --------
OPERATING ACTIVITIES:
Net income (loss)........................................... $(11,951) $ 18,078$(50,549) $17,047
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................... 7,424 4,33814,290 10,614
Deferred income tax benefit................................. (7,445) (13,102)(31,436) --
Impairment of long-lived assets............................. 28,190 --
All other non-cash adjustments.............................. 5,354 (1,550)
Increase (decrease)17,840 (15,586)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable......................................... 28,978 5,33245,041 (6,581)
Inventories................................................. (10,050) (14,597)(7,483) (16,876)
All other operating assets and liabilities changes.......... (3,758) (734)(6,943) (1,122)
-------- ---------------
Net cash provided by (used in) operating activities......... 8,552 (2,235)8,950 (12,504)
INVESTING ACTIVITIES:
Purchases of property and equipment......................... (2,715) (8,799)(4,523) (12,782)
Proceeds from sale of property and equipment................ 921 --
Purchase of subsidiaries, net of cash acquired.............. -- (42,021)(69,185)
Development of intangible assets............................ (595) (887)(1,083) (1,619)
-------- ---------------
Net cash used in investing activities....................... (3,310) (51,707)(4,685) (83,586)
FINANCING ACTIVITIES:
Proceeds from (repayments of) credit facility, net.......................... (957) 57,770net.......... (9,404) 99,224
Proceeds from employee stock plans.......................... 237 584268 818
Purchase of treasury stock.................................. -- (2,275)
-------- ---------------
Net cash (used in) provided by financing activities......... (720) 56,079(9,136) 97,767
Effect of exchange rates on cash and cash equivalents....... 1,417 6372,485 3,011
-------- --------
Increase-------
(Decrease) increase in cash and cash equivalents....................... 5,939 2,774equivalents............ (2,386) 4,688
Cash and cash equivalents at beginning of period............ 8,321 6,951
-------- ---------------
Cash and cash equivalents at end of period.................. $ 14,260 $ 9,7255,935 $11,639
======== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
3
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
GenRad, Inc. ("GenRad" or "the Company") should be read in conjunction with the
Company's consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 30, 2000. In
the opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments,
considered necessary to present fairly the consolidated financial position at
March 31,June 30, 2001 and December 30, 2000, and the results of operations for the three and
six months ended June 30, 2001 and July 1, 2000, and cash flows for the threesix
months ended March 31,June 30, 2001 and AprilJuly 1, 2000. Interim results are not necessarily
indicative of the results for the full fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Certain prior period balances have been reclassified to conform to
the current presentation.
EARNINGS PER SHARE
Basic EPSearnings per share ("EPS") is calculated by dividing net income (loss)
by the weighted average number of shares outstanding during the period. Diluted
EPS is calculated by dividing net income (loss) by the weighted average number
of shares outstanding plus the dilutive effect, if any, of outstanding stock
options using the "treasury stock" method. The following table presents the
calculation for both basic and diluted EPS for the three and six months ended
March 31,June 30, 2001 and AprilJuly 1, 2000 (in thousands, except per share amounts):
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31,JUNE 30, 2001 APRILJULY 1, 2000
------------------------------ ------------------------------
PER PER
SHARE SHARE
LOSS SHARES AMOUNT LOSS SHARES AMOUNT
-------- -------- -------- -------- -------- --------
BASIC:
Net loss......................................... $(38,598) 28,549 $(1.35) $(1,031) 28,073 $(0.04)
Dilutive effect of stock options................. -- -- -- -- -- --
-------- ------ ------ ------- ------ ------
DILUTED:
Net loss......................................... $(38,598) 28,549 $(1.35) $(1,031) 28,073 $(0.04)
======== ====== ====== ======= ====== ======
SIX MONTHS ENDED
---------------------------------------------------------------
JUNE 30, 2001 JULY 1, 2000
------------------------------ ------------------------------
PER PER
SHARE SHARE
LOSS SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- -------- -------- -------- --------
BASIC:
IncomeNet income (loss) available to common stockholders... $(11,951) 28,511 $(0.42) $18,078 28,138 $0.64................................ $(50,549) 28,530 $(1.77) $17,047 28,105 $ 0.61
Dilutive effect of stock options................. -- -- -- -- 566 (0.01)446 $(0.01)
-------- ------ ------ ------- ------ -----------
DILUTED:
IncomeNet income (loss) available to common stockholders... $(11,951) 28,511 $(0.42) $18,078 28,704 $0.63................................ $(50,549) 28,530 $(1.77) $17,047 28,551 $ 0.60
======== ====== ====== ======= ====== ===========
4
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Options to purchase 4.14.6 million shares for the threesix months ended AprilJuly 1, 2000
were outstanding but were not included in the computationscomputation of diluted EPS because
the price of the options was greater than the average market price of the common
stock for the period reported. There is no difference between basic and diluted
earnings per share in 2001 sinceor the three months ended July 1, 2000 as the Company
is in a loss position and therefore potential common shares from the exercise of
stock options are anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of two components, net income (loss)
and other comprehensive income (loss). Other comprehensive income (loss) refers
to revenue, expenses, gains and losses that under generally accepted accounting
principles are recorded as an element of shareholders' equity but are excluded
from net income. The Company's other comprehensive income (loss) is comprised of
foreign currency translation adjustments from those subsidiaries not using the
U.S. dollar as their functional 4
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
currency and changes in the fair value of
financial instruments designated as cash flow hedges. Comprehensive income
(loss) for the three and six months ended March
31,June 30, 2001 and AprilJuly 1, 2000 are as
follows (in thousands):
THREE MONTHS ENDED
------------------------------
MARCH 31,----------------------------
JUNE 30, 2001 APRILJULY 1, 2000
-------------- ------------- ------------
Net income (loss)........................................... $(11,951) $18,078loss.................................................... $(38,598) $(1,031)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax of
$667$213 and $(70).......................................... (1,089) 125$(108)......................................... (347) 192
Unrealized lossesgain on derivatives, net of tax of $642...... (1,048)$70......... 114 --
-------- -------
Total other comprehensive income (loss)..................... (2,137) 125(233) 192
-------- -------
Comprehensive loss.......................................... $(38,831) $ (839)
======== =======
SIX MONTHS ENDED
----------------------------
JUNE 30, 2001 JULY 1, 2000
------------- ------------
Net income (loss)........................................... $(50,549) $17,047
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax of
$880 and $(178)......................................... (1,436) 316
Unrealized loss on derivatives, net of tax of $572........ (934) --
-------- -------
Total other comprehensive income (loss)..................... (2,370) 316
-------- -------
Comprehensive income (loss)................................. $(14,088) $18,203$(52,919) $17,363
======== =======
NOTE 2: RESTRUCTURING AND OTHER CHARGES (BENEFITS)
2001 CHARGES
In February 2001, the Company implemented a restructuring plan in an effort
to improve operating efficiencies. The plan involves outsourcing all printed
circuit board manufacturing, exiting certain unprofitable product lines and
consolidating certain manufacturing and administrative operations. The plan
included a workforce reduction of approximately 140 employees primarily in the
areas of manufacturing, engineering, service and administration. Total
anticipated annual savings from the plan will be approximately $10 million. In
accordance with EITF 94-3, "Liability Recognition for
5
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Certain Employee Termination Benefits and Other Costs to Exit an Activity" the
Company recorded a restructuring charge during the first quarter of 2001 of
$3.1 million. The Company estimates that payments related to the restructuring
will be completed by the second quarter of 2002. A summary of these charges and
the activity through March 31,June 30, 2001 is as follows (in thousands):
RESERVE AS
ORIGINAL 2001 OF MARCH 31,
RESERVE ACTIVITY 2001SEVERANCE FACILITIES OTHER TOTAL
--------- ---------- -------- -------- ------------
Severance...................................................
Original reserve........................................... $2,579 ($488) $2,091
Facilities..................................................$80 $399 $3,058
Payments in the three months ended March 31, 2001.......... (488) -- (399) (887)
------ --- ---- ------
Remaining reserve as of March 31, 2001..................... 2,091 80 -- 80
Other....................................................... 399 (399)2,171
Payments in the three months ended June 30, 2001........... (943) (29) -- (972)
------ -------- ---- ------
Totals...................................................... $3,058 $(887) $2,171Remaining reserve as of June 30, 2001...................... $1,148 $51 -- $1,199
====== ======== ==== ======
2000 CHARGES
During the firstsecond quarter of 2000, the Company implemented a restructuringreorganization
plan involving closurein connection with the election of Robert M. Dutkowsky as Chairman,
President and Chief Executive Officer (collectively "CEO"). As a result, the
Company's Portland, Oregon office and aemployment of certain members of management, restructuringincluding the then current CEO, was
terminated. A charge of the Diagnostic Solutions segment in the Manchester, UK
facility. The plan resulted in a workforce reduction of approximately 25
employees, mainly consisting of engineering, marketing and training functions
and facility closure costs. For$4.1 million for severance costs to be completed during
fiscal 2001 was recorded during the three months ended AprilJuly 1, 2000. As of
July 1, 2000, payments of $3.1 million were made against the reserve. As of
June 30, 2001 the remaining balance was $0.1 million.
NOTE 3: IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company recorded a restructuring chargerecords
impairment losses on long-lived assets to be held and used or to be disposed of
$1.0 million which included severancewhen indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the asset's carrying
amount.
In accordance with SFAS No. 86, "Accounting for Costs of Computer Software
to be Sold, Leased or Otherwise Marketed," the Company records impairment losses
on capitalized computer software costs when indicators of $0.7 millionimpairment are present
and facility closure coststhe estimated value of $0.3 million. Asthe assets is less than the assets' carrying amount.
During the second quarter of March
31, 2001, the planCompany performed a review of the
carrying value of goodwill and other long lived assets pertaining to the
Diagnostic Solutions ("DS") operating segment in accordance with SFAS No. 121
and SFAS No. 86. The goodwill and other long-lived assets involved in the review
related principally to the acquisitions of Autodiagnos in April 2000 and
Mastertech in December 1999. This review was substantially complete. Additionally during the first
quarter of 2000, the Company completed the extension of a sublease entered into
at a facility in Maidenhead, England to include the Company's remaining lease
obligation through 2013. Asperformed as a result of several
indicators specific to the second quarter of 2001 that an impairment of such
assets had occurred. Such indicators included a continued deterioration of
market conditions, together with management's approval and subsequent execution
of a plan to discontinue the development of the GTE3200 automotive diagnostics
aftermarket product.
Following this extension,review management concluded that a significant impairment of
the Company reversedgoodwill and other long lived assets had occurred because the estimated fair
value (determined on a charge recordeddiscounted cash flow basis using management's most recent
projections) was less than the carrying value of these assets. This difference
between the fair value and the carrying value of the assets resulted in a
prior year for excess facility reserves. This restructuring
charge included accruals
5$28.2 million
6
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
relatedimpairment charge, of which $16.1 million relates to acquired goodwill and
$12.1 million relates to other identifiable intangible assets.
In the lease costsCompany's consolidated statements of the facility. The sublet of the facility resulted
in the reversal of approximately $3.5operations, $21.8 million of the
restructuring accrual.impairment charge relating to the write down of the carrying value of goodwill
and certain other intangibles has been recorded as a separate line item within
operating expenses; $6.4 million is included in cost of revenue as it relates to
the write down of $1.8 million of software costs previously capitalized under
SFAS 86; and $4.6 million of hardware and software technology purchased as part
of the Autodiagnos acquisition.
NOTE 3:4: INVENTORY
Inventory consists of the following at March 31,June 30, 2001 and December 30, 2000,
respectively (in thousands):
MARCH 31,JUNE 30, DECEMBER 30,
2001 2000
----------------- ------------
Raw materials......................................... $24,560materials.......................................... $14,653 $22,704
Work in process....................................... 37,156process........................................ 28,435 31,378
Finished goods........................................ 12,230goods......................................... 15,482 11,469
------- -------
$73,946$58,570 $65,551
======= =======
Part of the decrease in the inventory balance is a result of recording an
additional excess and obsolete inventory provision of $11.9 million in 2001. The
additional provision was a result of two main factors, being the Company's
decision to discontinue its GTE3200 automotive aftermarket product within the DS
line of business and the current and projected softness in the electronics
manufacturing market sector impacting all lines of business.
NOTE 4:5: OPERATING SEGMENTS
The Company elected to change the reporting of its operating segments
effective the third quarter of 2000. Prior period operating results have been
restated to conform to current period presentation.
The Company is comprised of the following four lines of business:
- Process Solutions ("PS") focuses on in-circuit test, imaging and re-work
solutions as well as plant and line management solutions for electronic
product manufacturers.
- Functional Solutions ("FS") focuses on functional test platforms for
manufacturers of telecommunications, computer and automotive electronics.
- Diagnostic Solutions ("DS") focuses on service bay and manufacturing
solutions for transportation OEMs and independent service providers.
- Support and Services ("SS") focuses on maintenance programs, on-site and
remote support, programming services and training to help customers
optimize their hardware and software solutions.
The following table illustrates, (in thousands), each of the Company's
operating segments' operating income (loss) for the three and six months ended
March 31,June 30, 2001 and AprilJuly 1, 2000. The amounts provided herein are those utilized
by senior management, in allocating resources and evaluating performance.
GenRad's 6chief operating decision makers do not utilize, nor does GenRad
7
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
chief operating decision makers do not utilize, nor does GenRad
maintain, asset information or capital expenditures by segment, accordingly,
such information is not presented herein.
PS FS DS SS TOTAL
-------- -------- -------- -------- --------
THREE MONTHS ENDED MARCH 31,JUNE 30, 2001:
Revenue:
Products................................... $24,239Products................................. $ 6,001 $13,82520,857 $ 2,166 $46,231
Services...................................2,996 $ 14,915 $ 1,084 $ 39,852
Services................................. -- -- -- 16,201 16,20114,646 14,646
-------- ------- -------- ------- ------- ------- ---------------
Total revenue............................ $24,239revenue.......................... $ 6,001 $13,825 $18,367 $62,43220,857 $ 2,996 $ 14,915 $15,730 $ 54,498
======== ======= ======== ======= ======= ======= ===============
Operating income (loss)...................... $(6,972)$(12,754) $(4,474) $(37,404) $ (640) $(2,227) $ 4,707 $(5,132)4,017 $(50,615)
======== ======= ======== ======= ======= ======= ===============
THREE MONTHS ENDED APRILJULY 1, 2000:
Revenue:
Products................................... $31,930Products................................. $ 3,031 $12,73546,953 $ 1,874 $49,570
Services...................................3,350 $ 17,771 $ 2,229 $ 70,303
Services................................. -- -- -- 16,803 16,803$17,021 $ 17,021
-------- ------- -------- ------- ------- ------- ---------------
Total revenue............................ $31,930revenue.......................... $ 3,031 $12,735 $18,677 $66,37346,953 $ 3,350 $ 17,771 $19,250 $ 87,324
======== ======= ======== ======= ======= ======= ===============
Operating income (loss)...................... $ 8,311 $(1,227) $(2,134)10,366 $ 5,969 $10,919(799) $ (2,018) $ 4,851 $ 12,400
PS FS DS SS TOTAL
-------- -------- -------- -------- --------
SIX MONTHS ENDED JUNE 30, 2001:
Revenue:
Products................................. $ 45,096 $ 8,997 $ 28,740 $ 3,250 $ 86,083
Services................................. -- -- -- 30,847 30,847
-------- ------- -------- ------- --------
Total revenue.......................... $ 45,096 $ 8,997 $ 28,740 $34,097 $116,930
======== ======= ======== ======= ========
Operating income (loss)...................... $(19,726) $(5,113) $(39,631) $ 8,723 $(55,747)
======== ======= ======== ======= ========
SIX MONTHS ENDED JULY 1, 2000:
Revenue:
Products................................. $ 78,883 $ 6,381 $ 30,506 $ 4,103 $119,873
Services................................. -- -- -- 33,824 33,824
-------- ------- -------- ------- --------
Total revenue.......................... $ 78,883 $ 6,381 $ 30,506 $37,927 $153,697
======== ======= ======== ======= ========
Operating income (loss)...................... $ 16,163 $(1,565) $ (4,877) $10,815 $ 20,536
======== ======= ======== ======= ========
8
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
A reconciliation of the totals reported for the operating segments to income
(loss) before income taxes in the condensed consolidated statements of
operations is as follows:
THREE MONTHS ENDED ------------------------------
MARCH 31,SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, 2001 APRILJULY 1, 2000 --------------JUNE 30, 2001 JULY 1, 2000
------------- ------------ ------------- ------------
Operating income (loss):
Total for reportable segments.............................segments............. $(50,615) $12,400 $(55,747) $ (5,132) $10,91920,536
Corporate expenses (a).................................... (8,777) (7,067).................... (7,640) (7,631) (16,417) (11,915)
Acquired in-process research and
development..............development............................. -- -- -- (500)
Restructuring and other (charges) benefits................charges........... -- (4,124) (3,058) 2,479(1,645)
-------- ------- -------- --------
Operating income (loss)................................... (16,967) 5,831................... (58,255) 645 (75,222) 6,476
Other expense............................................. (2,357) (302)expense............................. (3,951) (2,257) (6,308) (2,559)
-------- ------- -------- --------
Income (loss) before income taxes........................... $(19,324)taxes........... $(62,206) $(1,612) $(81,530) $ 5,5293,917
======== ======= ======== ========
- ------------------------
(a) Includes amortization of capitalized software, corporate research and
development and other charges.
NOTE 5:6: INDEBTEDNESS
In March 2000, the Company re-negotiated its existing $50.0 million credit
facility, increasing the total borrowings available to $125.0 million (the "new
line"). The new line is supported by a syndicated group of banks and providesin
March 2000 provided for a term loan of up to $75.0 million to be utilized for
acquisitions and a revolving line of credit of $50.0 million to be used for
general working capital purposes. The new line requires the Company to maintain
certain leverage, operating cash flow and operating income covenants as well as
non-financial operating covenants, as defined, and expires in March 2004. If the Company is
not in compliance with its covenants and other obligations under the new line,
the lenders may refuse to allow the Company to draw down funds under the
revolving line of credit. The
new line is collaterized by substantially all of the Company's assets. Certain
borrowings on the line, primarily related to acquisitions, are payable quarterly
7
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
while the remaining borrowings are payable on demand. The new line bears
interest at the lesser of the banks' prime rate plus 1.0%2.75% or LIBOR plus 2.0%3.75%,
as determined from time to time by the banks. The interest rates on the new line
at March 31,June 30, 2001 ranged from 8.44% to 9.50%. Under the terms of the new line,
the Company is required to pay a commitment fee on the unused portion of the
line of 0.75% of the total unused portion of the line dependent on the Company's
operating performance. At March 31,June 30, 2001, borrowings outstanding under the line
totaled $92.3$83.9 million, of which $60.0$53.7 million was related to acquisitions and
$32.3$30.2 million related to general working capital.
As of March 31, 2001, the Company was not in compliance with thecertain
financial covenants ofunder the new line, but subsequently obtained a waiver from
the banks through June 15, 2001. With effect from June 15, 2001, the Company
obtained an additional waiver from the banks. The additional waiver extends
through September 28, 2001 and carries certain conditions which the Company must
satisfy. These conditions included the achievement of certain revenue levels for
the second quarter, which the Company has satisfied at June 30, 2001. The waiver
includesalso included a reduction in the maximum availability of the revolving line of
credit to $38.0 million through July 12, 2001, to $40.0 million from July 13,
2001 through August 5, 2001 and to $43.0 million after August 5, 2001, provided
that the Company had achieved certain benchmarks. With the execution of the
definitive merger agreement signed on August 1, 2001, as described in Note 9,
the Company has achieved those benchmarks.
9
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
In connection with the waiver, the Company paid the banks fees of $483,000
in the second quarter and agreed to pay the banks an additional fee of $483,000
on September 20, 2001, plus an additional fee of $50,000 when the Company's
borrowings under the revolving line of credit exceed $38 million. Fees paid to
date have been included within interest expense in the profit and loss account.
As of June 30, 2001, the interest rates applicable to the new line increased two
percentage points.
The Company is
currentlylikely will not be in discussioncompliance with its bankers to renegotiate the termsfinancial covenants of the
new line. Additionally,line when the existing waiver expires on September 28, 2001 and will need to
seek a further waiver at that date. In the past, the Company has begunobtained
waivers from its banks for similar covenant defaults, however, there can be no
assurance that the banks will grant any additional waivers in the future. If the
Company is in default with the financial covenants on September 28, 2001 and the
banks do not waive the default, the banks may demand immediate payment of the
full outstanding balance under the new line and prohibit new borrowings under
the revolving line of credit. If this were to explore alternative financing
sources, howeveroccur, the outcomeCompany would have no
ability to satisfy the demand for payment or fund continuing operations without
access to the revolving line of this course of action is uncertain.credit. The Company currently has no plans to
obtain additional financing. The Company has classified all amounts outstanding
under the new line at March 31,June 30, 2001 as due within one year in thethese financial
statements.
On August 1, 2001, the Company entered into a merger agreement with
Teradyne, Inc. pursuant to which Teradyne will acquire the Company in a merger
(see Note 9). Following the completion of the merger, Teradyne has agreed to
repay the outstanding balance under the new line.
The accompanying financial statements have been prepared on a going concern
basis which assumes that the Company will continue as a going concern and,
accordingly, the statements do not reflect any adjustments that would be
necessary should the Company not be able to continue as a going concern. The
Company's ability to continue as a going concern is uncertain.
NOTE 6:7: FINANCIAL INSTRUMENTS
In 2000, the Company entered into three interest rate swaps to mitigate
fluctuations in the variable interest rates related to the credit facility. The
swaps were designated for the first $22.5 million, second $22.5 million and next
$15.0 million of the outstanding principal of the credit facility with fixed
interest rates of 6.99%, 7.0% and 6.93%, respectively. The maturity dates of the
agreements match that of the underlying credit facility which is March 2004. In
accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities", which the Company implemented at the beginning of 2001, changes in
the fair value of the derivative are to be carried in accumulated other
comprehensive income (expense)(loss) over the life of the agreements. On maturity of the
agreements, the appropriate gain or loss of the swaps is to be reclassified from
accumulated other comprehensive income (loss) to the income statement in other
income (expense).
As of March 31,June 30, 2001, the Company has recorded $1.7$1.5 million to accumulated
other comprehensive loss, which represents a cumulative-effect-type adjustment
of $1.0 million, $0.6 million net of tax, related to the unrealized loss on the
derivatives as of the beginning of the first quarter of 2001, and an adjustment
of $0.7$0.5 million, $0.4$0.3 million net of tax, to recognize a reduction in the fair
value of its swaps during the current quarter.year. The Company anticipates over the
next twelve months that $0.6 million will be reclassedreclassified to other expense.
10
GENRAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 7: TREASURY STOCK8: IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
will be effective for fiscal years beginning after December 15, 2001, and will
thus be adopted by the Company, as required, in fiscal year 2002. The impact of
SFAS No. 141 and SFAS No. 142 on the Company's reported financial results of
operations and balance sheet has not yet been determined.
NOTE 9: SUBSEQUENT EVENTS
On August 1, 2001, the Company announced the signing of a definitive merger
agreement to be acquired by Teradyne, Inc. ("Teradyne"). Under the terms of the
proposed acquisition, each outstanding share of the Company's common stock would
be converted into 0.1733 shares of Teradyne common stock. The acquisition is
subject to approval by the Company's shareholders, expiration of the
Hart-Scott-Rodino waiting period and other closing conditions.
Additionally, on August 1, 2001, the Company announced it had received an
offer to purchase its Diagnostic Solutions business unit, headquartered in
Manchester, UK. The Company has received an offer from a stock repurchase program whereby it will purchase inBritish investment
consortium. The offer is under consideration by management and Board of
Directors. The potential sale transaction would be subject to the open market sharescustomary
process of its stock. The Company intends to buy back its stock at
times whendue diligence and the market pricenegotiation of a definitive agreement.
Completion of the stock presents opportunitiessale of the Diagnostics Solutions business unit is not a
condition to do so, and
depending on the Company's other cash requirements. The Company's stock
repurchase plan is intended as a means to partially mitigate the dilutive impact
of stock options. Through March 31, 2001 and April 1, 2000, the Company had
utilized $36.0 million, cumulatively, to repurchase 2,195,600 shares of its
common stock. Through March 31, 2001 and April 1, 2000 the Company had reissued
312,000 shares of treasury stock repurchased.
8acquisition by Teradyne.
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical information contained in this document, the
discussion in this Report on Form 10-Q contains forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Report on
Form 10-Q should be read as being applicable to all related forward-looking
statements whenever they appear in this Report on Form 10-Q. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include those discussed in Item 1
"Business" of the Company's Annual Report on Form 10-K for the year ended
December 30, 2000 as well as those discussed in this section and elsewhere in
this Quarterly Report on Form 10-Q.
OVERVIEW
GenRad develops, manufactures and markets advanced performance-assurance
technologies. GenRad's primary global markets for OEM and contract manufacturers
include computers, advanced telecommunications for e-commerce and Internet
services, and diagnostic systems for the transportation/automotive industry. The
Company operates primarily in the United States, Western Europe and Southeast
Asia.
GenRad operates as four lines of business bringing to market integrated
hardware, software and service solutions that empower always-on services and
un-interruptable business applications. The Company considers each line of
business a reportable segment:
- Process Solutions ("PS") focuses on in-circuit test, imaging and re-work
solutions as well as plant and line management solutions for electronic
product manufacturers.
- Functional Solutions ("FS") focuses on functional test platforms for
manufacturers of telecommunications, computers and automotive electronics.
- Diagnostic Solutions ("DS") focuses on service bay and manufacturing
solutions for transportation OEMs and independent service providers.
- Support and Services ("SS") focuses on maintenance programs, on-site and
remote support, and training to help customers optimize their hardware and
software solutions.
RESULTS OF OPERATIONS
While first quartersThe second quarter and year to date results are traditionally weak for the Company, this first
quarter has been especially difficult and is a direct reflection of weak
global demand and the dramatic slowdown in our customers' businesses. Regardless of these
challenges, we are working through this extraordinaryThe
current cyclical downturn by investingas first seen in and enhancing our products and services solutions that help our customers gain
productivity, competitiveness and profitability. The Company began experiencing
the downturn late last year and implemented cost and expense reduction
initiatives including work force downsizing, out-sourcing printed circuit board
production and business consolidations to temper the impact of the broad
economic slowdown.
While we cannot minimize the impactfirst quarter of this slowdown, the Company is a
global enterprise providing us with a degree of resiliency. The business is
equally distributed between our North America and Europe-Asia operations; our
customers are well balanced between original equipment and contract
manufacturers;
9
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and in 2001 no one customer is expected to account for more than eight percent
of our business. This business diversity becomes an even greater strength in
times of economic uncertainty.
The Company now believes there is a cyclical downturn in the industry.year
continues. There is uncertainty as to if and when the next cyclical growth phase will
occur. Until such time as we returnthe general economy returns to a period of growth, period, we
expect a continued weakness in orders and therefore expect that the secondthird
quarter's revenue will not improve from the levels experienced by the Company
during the firstsecond quarter of 2001. In light of that belief, the Company
has expandedcontinues to expand the cost reduction initiatives including the curtailment of all discretionary expenses.strategies previously initiated.
12
The following table sets forth, for the periods indicated, the percentage of
net sales represented by certain items in the Company's consolidated statements
of operations.
THREE MONTHS ENDED ----------------------
MARCH 31, APRILSIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 2001 JULY 1, 2000 JUNE 30, 2001 JULY 1, 2000
---------- ---------------------- ------------ ------------- ------------
Total revenue...............................................revenue............................. 100.0% 100.0% 100.0% 100.00%
Cost of revenue............................................. 71.0% 57.5%
------- -------revenue........................... 114.3% 60.7% 91.2% 59.3%
--------- -------- --------- ---------
Gross margin................................................ 29.0% 42.5%margin.............................. (14.3)% 39.3% 8.8% 40.7%
Selling, general and administrative......................... 35.0% 26.8%administrative....... 33.6% 23.3% 34.3% 24.8%
Research and development.................................... 12.6% 8.7%development.................. 15.1% 8.3% 13.8% 8.5%
Amortization of acquisition-related
intangible assets....... 3.6% 1.2%assets....................... 3.8% 2.3% 3.7% 1.8%
Restructuring and other charges........... -- 4.7% 2.6% 1.1%
Impairment of long-lived assets........... 40.0% -- 18.7% --
Acquired in-process research and
development................development............................. --% 0.7%
Restructuring and other charges (benefits).................. 4.9% (3.7)%
------- ------- -- -- 0.3%
--------- -------- --------- ---------
Total operating expenses.................................... 56.2% 33.7%
------- -------expenses.................. 92.5% 38.6% 73.1% 36.5%
--------- -------- --------- ---------
Operating income (loss)..................................... (27.2)................... (106.8)% 8.8%0.7% (64.3)% 4.2%
Other expense............................................... (3.8)expense............................. (7.3)% (0.5)(2.6)% (5.4)% (1.6)%
--------- -------- --------- ---------
Income tax benefit.......................................... 11.8% 18.9%
------- -------benefit........................ 43.3% 0.7% 26.5% 8.5%
--------- -------- --------- ---------
Net income (loss)........................................... (19.1)......................... (70.8)% 27.2%
======= =======(1.2)% (43.2)% 11.1%
========= ======== ========= =========
THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JULY 1, 2000
ORDERS AND BACKLOG
Orders for the Company's products and services decreased to $64.1$48.5 million
for the three months ended March 31,June 30, 2001 ("2001") from $80.1$78.8 million for the
three months ended AprilJuly 1, 2000 ("2000"). Excluding orders from the
acquisitions of Nicolet Imaging Systems and Sierra Research Technology
(collectively "NIS") and Autodiagnos AB ("Autodiagnos"), which were completed on
March 24, 2000 and April 12, 2000, respectively,PS orders totaled $59.0$21.3 million for
2001 compared to $78.8 million for 2000. PS orders totaled $20.1 million for
2001 compared to $31.8 million for 2000. Excluding NIS, PS orders totaled $16.0
for 2001 compared to $30.5$45.3 million for 2000. FS orders totaled $3.0$1.8 million for 2001
compared to $4.1$5.3 million for 2000. DS orders totaled $20.0$10.7 million for 2001
compared to $25.0$8.6 million for 2000. Excluding orders from the acquisition of
Autodiagnos, DS orders totaled $19.0 million for 2001. SS orders totaled $21.0$14.7 million for 2001
compared to $19.2$19.6 million for 2000.
The decrease in PS orders decreased $14.5 million for 2001as compared to 2000 when excluding
orders of NIS,was driven by weakening
contract manufacturing demand for the segment's in-circuit test products where
orders decreased $12.4$20.9 million. FS orders decreased $1.1$3.5 million for 2001
compared to 2000 driven by decreased demand for Geneva products. DS orders
decreased $5.0increased $2.1 million for 2001 compared to 2000. The decrease
10
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
isThis was attributable to an
increase in orders of $3.9 million in the Advanced Diagnostic Systems ("ADS")
product line, partially offset by a decrease of $1.2 million in orders of the
Ford WDS 3500 product. In 2001,
$10.0SS orders decreased $4.9 million of such orders were received comparedlargely due to $16.3 milliona
reduction in 2000.
This was partially offset by an increase in orders of $1.9 million in the
Advanced Manufacturing Systems ("AMS") product line.orders.
North American orders totaled $26.8$21.5 million for 2001 compared to
$35.0$44.4 million for 2000, a decrease of $8.2 million. Excluding orders of NIS, orders
decreased $10.4$22.9 million. PS orders totaled
$10.3$10.4 million for 2001 compared to $18.4$26.8 million for 2000, whichthe decrease is
mainly attributable to a $8.3$14.6 million decrease in the demand for the segment's
in-circuit test products. FS orders decreased $2.6 million to $1.6 million in
2001 from $4.2 million in 2000 largely due to a decrease in demand for Geneva
products. DS orders decreased to $1.2$0.7 million in 2001 compared to $3.4$2.2 million
in 2000 principally due to the
reductionfrom a weakening demand in WDS orders.all product areas.
European orders totaled $29.1$18.1 million for 2001 compared to $39.8$24.8 million for
2000, a decrease of $10.7 million. Excluding orders of NIS and Autodiagnos,
orders decreased $11.9$6.7 million. This decrease iswas primarily attributable to
reduced demand for in-circuit test products of $4.4$6.3 million in PS and a decrease
of $1.0 million in FS product orders.PS. In addition,
DS product orders included a $5.4$3.3 million decreaseincrease in orders of the ADS product line, which was
offset by a corresponding decrease in service orders.
13
Asian orders totaled $8.9 million for 2001 compared to $9.6 million for
2000, a decrease of $0.7 million. This decrease was attributable to reduced
demand for the Ford WDS 3500 product, which wasand Geneva products, partially offset by an
increase in orders of $2.3 million of AMS products.
Asian orders totaled $8.2 million for 2001 compared to $5.3 million for
2000, an increase of $2.9 million. Excluding orders of NIS, orders increased
$2.5 million. This increase is attributable to improved demand in all lines of
business in this region. Specifically, orders for products in PS increased $0.6
million, orders for products in FS increased $0.5 millionservices and orders of the Ford
WDS 3500ADS product in DS increased $1.5 million.line.
Backlog, represented by those orders received which are backed by a purchase
order, at June 30, 2001 was $38.0 million compared to $44.0 million and
$42.3 million at March 31, 2001 was $44.0 million compared to $42.3 million atand December 30, 2000. Most2000, respectively.
Historically, most orders have been historically fulfilled within three months of receipt.
Although orders are subject to cancellation or deferral, GenRad's experience
has beendemonstrates that losses resulting from cancellations are not material, however,
refer to "Factors That May Affect Future Results".
REVENUE
Total revenue decreased to $62.4$54.5 million for 2001 from $66.4$87.3 million for
2000. Excluding revenue of NIS and Autodiagnos,PS revenue totaled $57.4$20.9 million for 2001 compared to $64.5 for 2000. PS revenue totaled $24.2 million for 2001
compared to $31.9 million for 2000. Excluding revenue of NIS, PS revenue totaled
$20.2 million in 2001 compared to $30.1$47.0 million for
2000. FS revenue totaled $6.0$3.0 million for 2001 compared to $3.0$3.3 million for
2000. DS revenue totaled $13.8$14.9 million for 2001 compared to $12.8$17.8 million for
2000. Excluding revenue of
Autodiagnos, DS revenue totaled $12.8 million for 2001. SS revenue totaled $18.4$15.7 million for 2001 compared to $18.7$19.2 million for
2000.
PS revenue decreased $9.9$26.1 million for 2001 compared to 2000 when excluding
revenue of NIS.2000. The decrease
was primarily due to $9.1$20.4 million in lower revenues related to in-circuit test
products, principally related to the global economic slowdown and a weakening
contract manufacturing demand. FS revenue increased $3.0decreased $0.3 million in 2001
compared to 2000 asdue to a result of
higherreduction in demand for Geneva product shipments of $3.0 million.products. DS revenue
remained stable when excluding revenue of Autodiagnos.decreased $2.9 million for 2001 compared to 2000. This iswas primarily
attributable to a $1.7$3.3 million increase in ADS revenue and $1.1 million in AMS,
offset by a decrease in revenue related to the WDS 3500
product, which was $2.7
million lower during 2001. In 2001,as the Company shipped 1,0531,190 WDS units in 2001 compared with 1,3961,471
units in 2000. 11
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis decrease was partially offset by an increase in Advanced
Manufacturing Systems ("AMS") revenue. SS revenue decreased $0.3$3.5 million for
2001 compared to 2000. Service revenue
for PS totaled $7.6There was a $1.2 million for 2001 compared to $7.9 million for 2000. Service
revenue for FS products totaled $0.8 million for 2001 compared to $0.7 million
for 2000. Servicedecrease in service revenue for
DS products totaled $5.5 million for 2001 compared
to $6.7 million for 2000, a $1.2 million decrease principally driven by reduced demand for services related to ADS.
Revenue from international markets was $37.7$36.9 million, or 60.5%68% of revenue for
2001 compared to $39.3$46.2 million, or 59.2%53% of revenue for 2000. The decrease in
international mixrevenue in dollars and the increase as a percentage of total
revenue reflects the Company's revenues remained consistent from year to
yearoverall worldwide decline in revenue, with reduced international revenues following the worldwide revenue
decline.largest
impact being on U.S. in-circuit test revenue. Revenues from international
markets are subject to the risk of currency fluctuations.
GROSS MARGINS
Gross margin was $18.1$(7.8) million, or 29.0%(14.3)%, for 2001 compared to
$28.2$34.3 million, or 42.4%39.3%, for 2000. Product margin decreased $8.7$41.4 million and
service margin decreased $1.4$0.7 million. The decrease in product margin was mainly
attributable to a $24.9 million decrease in the PS line of business which
reflects weakened in-circuit test products margin of $19.5 million due to a
combination of adverse sales volume, mix and pricing factors. Another factor in
the lower gross margins was the recording of an additional excess and obsolete
inventory provision of $11.9 million in 2001 which reduced the product margins
of PS by $5.1 million, FS by $1.6 million and DS $5.2 million. The additional
provision was a result of two main factors, being the Company's decision to
discontinue its GTE3200 automotive aftermarket product within the DS line of
business and the current and projected softness in the electronics manufacturing
market sector impacting all lines of business. The Company also recorded a
$6.4 million charge in 2001, impacting cost of revenue for the write down of
certain capitalized software in the DS segment and hardware and software
technology purchased as part of the Autodiagnos acquisition.
Inventory turnover on an annualized basis for 2001 was 3.1 times, 2.2 times
excluding the additional excess and obsolete inventory provision, as compared to
2.3 times for 2000.
14
OPERATING EXPENSES
Selling, general and administrative expenses decreased to $18.3 million, or
33.6% of total revenue for 2001 from $20.3 million, or 23.3% of total revenue
for 2000. The decrease in selling, general and administrative expenses in
dollars was primarily attributable to the cost savings resulting from the
restructuring program implemented in the first quarter of 2001.
Research and development expenses increased to $8.2 million, or 15.1% of
total revenue for 2001 from $7.2 million, or 8.3% of total revenue for 2000. The
increase in research and development expenses primarily reflects the on-going
new product development efforts in the imaging and software product lines.
Amortization of acquisition-related intangible assets totaled $2.1 million,
or 3.8% of total revenue, for 2001, compared to $2.0 million, or 2.3% of total
revenue, for 2000. For the remainder of 2001, the amount of acquisition-related
intangible assets to be amortized will decrease from the amortization amount in
the second quarter due to the impairment of goodwill and other long lived assets
in the second quarter of 2001 related to the acquisitions of Autodiagnos and
Mastertech. For further discussion refer to "Impairment of Long-Lived Assets."
OTHER EXPENSE
Other expense was $4.0 million for 2001 compared to $2.3 million for 2000,
with the increase primarily related to fees incurred as part of the Company
amending its credit facility agreement.
INCOME TAX BENEFIT
The Company recorded a net income tax benefit of $23.6 million for 2001
compared to a net income tax benefit of $0.6 million for 2000. The recorded net
income tax benefit in 2001 is the result of the pre-tax net loss of
$62.2 million. The recorded net income tax benefit in 2000 is the result of the
pre-tax net loss of $1.6 million.
SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JULY 1, 2000
ORDERS
Orders for the Company's products and services decreased to $112.6 million
for the six months ended June 30, 2001 ("2001") from $158.9 million for the six
months ended July 1, 2000 ("2000"). PS orders totaled $41.4 million for 2001
compared to $77.2 million for 2000. FS orders totaled $4.8 million for 2001
compared to $9.4 million for 2000. DS orders totaled $30.7 million for 2001
compared to $33.5 million for 2000. SS orders totaled $35.7 million for 2001
compared to $38.8 million for 2000.
PS orders decreased $35.8 million for 2001 compared to 2000 driven by
weakening contract manufacturing demand for the segment's in-circuit test
products where orders decreased $33.3 million. FS orders decreased $4.6 million
for 2001 compared to 2000 driven by decreased demand for Geneva products. DS
orders decreased $2.8 million for 2001 compared to 2000. This was attributable
to a decrease in the orders of the Ford WDS 3500 product, partially offset by an
increase in orders in the other product lines in the DS segment. In 2001,
$14.7 million of Ford WDS 3500 product orders were received compared to
$22.1 million in 2000. SS orders decreased $3.1 million largely due to a
reduction in product orders.
North American orders totaled $48.2 million for 2001 compared to
$79.4 million for 2000, a decrease of $31.3 million. PS orders totaled
$20.7 million for 2001 compared to $45.2 million for 2000, which is mainly
attributable to a $10.2$22.8 million decrease in the demand for the segment's
in-circuit test products. FS orders decreased $3.3 million to $3.6 million in
2001 from $6.9 million in 2000, largely
15
due to a decrease in demand for Geneva products. DS orders decreased to
$1.9 million in 2001 compared to $5.6 million in 2000 principally due to the
reduction in WDS orders.
European orders totaled $47.2 million for 2001 compared to $64.6 million for
2000, a decrease of $17.4 million. This decrease was primarily attributable to
reduced demand for in-circuit test products of $10.7 million in PS, a
$5.3 million decrease in orders of the Ford WDS 3500 product and decrease in
service orders of $4.6 million primarily in PS and DS. These decreases were
partially offset by increases in orders related to the other product lines in
the DS segment other than WDS.
Asian orders totaled $17.2 million for 2001 compared to $14.9 million for
2000, an increase of $2.3 million. This was attributable to an increase in DS
orders of $1.7 million and SS orders of $1.0 million, partially offset by
reduced demand for Geneva products.
REVENUE
Total revenue decreased to $116.9 million for 2001 from $153.7 million for
2000. PS revenue totaled $45.1 million for 2001 compared to $78.9 million for
2000. FS revenue totaled $9.0 million for 2001 compared to $6.4 million for
2000. DS revenue totaled $28.7 million for 2001 compared to $30.5 million for
2000. SS revenue totaled $34.1 million for 2001 compared to $37.9 million for
2000.
PS revenue decreased $33.8 million for 2001 compared to 2000, primarily due
to $29.5 million in lower revenues related to in-circuit test products,
principally from the global economic slowdown and a weakening contract
manufacturing demand. FS revenue increased $2.6 million in 2001 compared to 2000
due to strong Geneva sales during the first quarter of 2001. Revenues for Geneva
were relatively flat in the second quarter of 2001 as compared to 2000,
reflecting the decrease in demand. DS revenue decreased $1.8 million for 2001
compared to 2000. This was primarily attributable to a $6.0 million decrease in
revenue related to the WDS 3500 product. In 2001, the Company shipped 2,243 WDS
units compared with 2,867 units in 2000. The decrease in WDS revenue was
partially offset by an increase in revenues for the other product lines in the
DS segment. SS revenue decreased $3.8 million for 2001 compared to 2000. This
was primarily attributable to a $2.4 million decrease in service revenue related
to DS products principally driven by reduced demand for services related to ADS.
Revenue from international markets was $74.2 million, or 63% of revenue for
2001 compared to $85.6 million, or 56% of revenue for 2000. The decrease in
international revenue in dollars and the increase as a percentage of total
revenue, reflects the overall worldwide decline in revenue, with the largest
impact being on U.S. in-circuit test revenue. Revenues from international
markets are subject to the risk of currency fluctuations.
GROSS MARGINS
Gross margin was $10.3 million, or 8.8%, for 2001 compared to
$62.5 million, or 40.7%, for 2000. Product margin decreased $50.1 million and
service margin decreased $2.1 million. The decrease in product margin was mainly
attributable to a $35.1 million decrease related to the PS line of business,
partially offset by an in increase of $1.2 million in product
margin related to the FS line of business and an increase of $1.3 million in
product margin related to the DS line of business. Specifically, the decrease in
gross margin dollarswhich reflects weakened in-circuit test products margin of $7.0$26.7 million due to
an unfavorable mix of product sales and under-absorption of manufacturing
facility costs. Another factor in the lower gross margins was the recording of
an additional excess and obsolete inventory provision of $11.9 million in 2001
which reduced the product margins of PS by $5.1 million, FS by $1.6 million and
DS $5.2 million. The service margin decrease is attributedadditional provision was a result of two main factors,
being the Company's decision to strong lower-margin ICS revenues offset by reduced higher-margin application
revenues.discontinue its GTE3200 automotive aftermarket
product within the DS line of business and the current and projected softness in
the electronics manufacturing market sector impacting all lines of business. The
Company also recorded a $6.4 million charge in 2001, impacting cost of revenue
for the write down of certain capitalized software in the DS segment and
hardware and software technology purchased as part of the Autodiagnos
acquisition.
16
Inventory turnover on an annualized basis for 2001 increased to 1.9was 2.6 times, (annualized)2.1 times
excluding the additional excess and obsolete inventory provision, as compared to
1.82.1 times (annualized) for 2000. The Company's consolidated inventory balance
increased by $8.4 million, to $73.9 million during 2001 compared to a year ago.
The growth is attributed to the combination of the weak global product demand
and the establishment of a buffer stock of printed circuit boards due to the
production outsourcing plan. Inventory investment is slowing and the balances
are expected to decline over the remainder of the year.
OPERATING EXPENSES
Selling, general and administrative expenses increased to $21.9$40.2 million, or
35.0%34.4% of total revenue for 2001 from $17.8$38.1 million, or 26.8%24.8% of total revenue
for 2000. Excluding expenses of NIS and Autodiagnos, selling, general and
administrative expenses totaled $19.0 million during 2001 and $17.4 million
during 2000. The increase in selling, general and administrative expenses in
dollars iswas primarily attributable to $2.7 million related to the incremental
expenses of the Nicolet Imaging Systems and Sierra Research Technology
(collectively "NIS") and Autodiagnos acquisitions, selling and corporate
marketing expenses, and increased amortization expenses associated with the
Company's enterprise resource planning system SAP R/3-TM- ("SAP"), for which the second
phase of which was placed in service in the third quarter of 2000. These
increases were partially offset by a cost savings resulting from the
restructuring program implemented in the first quarter of 2001.
Research and development expenses increased to $7.9$16.1 million, or 12.6%13.8% of
total revenue for 2001 from $5.8$13.0 million, or 8.7%8.5% of total revenue for 2000.
Excluding expenses of NIS and Autodiagnos, research and development expenses
totaled $6.6 million for 2001 and $5.6 million for 2000.
The increase in research and development expenses primarily reflects the
Company's efforts to
enter the automotive aftermarket in DS and on-going new product development efforts in the imaging and software
product line of PS.lines. The Company expects to continue to invest in new product
development and enhancements to its existing products.
Amortization of acquisition-related intangible assets totaled $2.2$4.3 million,
or 3.6%3.7% of total revenue, for 2001, compared to $0.8$2.8 million, or 1.2%1.8% of total
revenue, for 2000. The increase in dollars, and as a percentage of revenue, is
attributable to the acquisitions of NIS and Autodiagnos in 2000. 12
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSFor the
remainder of 2001, the amount of acquisition-related intangible assets to be
amortized will decrease from the amortization in the first six months of the
year due to the impairment of intangible assets in the second quarter of 2001
related to the acquisitions of Autodiagnos and Mastertech. For further
discussion refer to "Impairment of Long-Lived Assets".
OTHER EXPENSE
Other expense was $2.4$6.3 million for 2001 compared to $0.3$2.6 million for 2000,2000.
This increase reflects two quarters of interest expense on the Company's credit
facility related to net interest charges, reflecting increased borrowings onacquisitions in 2001 as compared to one quarter in 2000 as
well as fees incurred as part of amending its credit facility primarily due to acquisitions.agreement in 2001.
INCOME TAX BENEFIT
The Company recorded a net income tax benefit of $7.4$31.0 million for 2001
compared to a net income tax benefit of $12.5$13.1 million for 2000. The recorded net
income tax benefit in 2001 is the result of the pre-tax net loss of
$19.3$81.5 million. The recorded net income tax benefit in 2000 results primarily
from a reversal of a portion of the deferred tax asset valuation allowance
totaling $14.5 million, which was recorded during the three months ended
April 1, 2000 due to management's expectations of future income and expected
utilization of domestic and foreign net operating loss carryforwards. Excluding
the reversal of a portion of the deferred tax asset valuation allowance, the
income tax provision totaled $1.9$1.4 million for 2000.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENTIMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of", the Company records
impairment losses on long-lived assets to be held and used or to be disposed of
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the asset's carrying
amount.
17
In accordance with SFAS No. 86, "Accounting for Costs of Computer Software
to be Sold, Leased or Otherwise Marketed" the Company records impairment losses
on capitalized computer software costs when indicators of impairment are present
and the estimated value of the assets is less than the assets' carrying amount.
During the firstsecond quarter of 2000,2001, the Company performed a review of the
carrying value of goodwill and other long lived assets pertaining to the
Diagnostic Solutions ("DS") operating segment in accordance with SFAS No. 121
and SFAS No. 86. The goodwill and other long-lived assets involved in the review
related principally to the acquisitions of AutoDiagnos in April 2000 and
Mastertech in December 1999. This review was performed as a result of several
indicators specific to the second quarter of 2001 that an impairment of such
assets had occurred. Such indicators included a continued deterioration of
market conditions, together with management's approval and subsequent execution
of a plan to discontinue the development of the GTE3200 automotive diagnostics
aftermarket product.
Following this review management concluded that a significant impairment of
the goodwill and other long lived assets had occurred because the estimated fair
value (determined on a discounted cash flow basis using management's most recent
projections) was less than the carrying value of these assets. This difference
between the fair value and the carrying value of the assets resulted in a
$28.2 million impairment charge, of which $16.1 million relates to acquired
goodwill and $12.1 million relates to other identifiable intangible assets.
In the rightsCompany's consolidated statements of operations, $21.8 million of the
impairment charge relating to certain
imaging technologiesthe write down of the carrying value of goodwill
and other intangibles has been recorded as a separate line item within operating
expenses; $6.4 million is included in cost of revenue as it relates to the write
down of $1.8 million of software costs previously capitalized under SFAS 86 and
$4.6 million of hardware and software technology purchased as part of its purchase of NIS for which technological
feasibility had not been established and no alternative future uses were
identified. Consequently, a portion of the
purchase price relating to acquired
in-process research and development was expensed at the time of theAutodiagnos acquisition.
The total of $0.5 million is included as acquired in-process research and
development in the accompanying consolidated statement of operations.
RESTRUCTURING AND OTHER CHARGES (BENEFITS)
2001 CHARGES
In February 2001, the Company implemented a strategic restructuring plan in
an effort to improve operating efficiencies. The plan involves outsourcing all
printed circuit board manufacturing, exiting certain unprofitable product lines
and consolidating manufacturing and administrative operations. The plan included
a workforce reduction of approximately 140 employees primarily in the areas of
manufacturing, engineering, service and administration. Total anticipated annual
savings from the plan will be approximately $10 million. In accordance with EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity" the Company recorded a restructuring charge during
the first quarter of 2001 of $3.1 million. A summary of these charges and the
activity used through March 31, 2001 is as follows (in thousands):
RESERVE AS
ORIGINAL 2001 OF MARCH 31,
RESERVE ACTIVITY 2001
-------- -------- ------------
Severance................................................... $2,579 ($488) $2,091
Facilities.................................................. 80 -- 80
Other....................................................... 399 (399) --
------ ----- ------
Totals...................................................... $3,058 ($887) $2,171
====== ===== ======
2000 CHARGES
During the first quarter of 2000, the Company implemented a restructuring
plan involving closure of the Company's Portland, Oregon office and a management
restructuring of the Diagnostic Solutions
13
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
segment in the Manchester, UK facility. The plan resulted in a workforce
reduction of approximately 25 employees, mainly consisting of engineering,
marketing and training functions and facility closure costs. For the three
months ended April 1, 2000, the Company recorded a restructuring charge of $1.0
million which included severance costs of $0.7 million and facility closure
costs of $0.3 million. As of March 31, 2001 the plan was substantially complete.
Additionally during the first quarter of 2000, the Company completed the
extension of a sublease entered into at a facility in Maidenhead, England to
include the Company's remaining lease obligation through 2013. As a result of
this extension, the Company reversed a charge recorded in a prior year for
excess facility reserves. This restructuring charge included accruals related to
the lease costs of the facility. The sublet of the facility resulted in the
reversal of approximately $3.5 million of the restructuring accrual.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's primary source of liquidity is internally generated funds and
utilization of its available credit facility.
Cash at March 31,June 30, 2001 totaled $14.3$5.9 million compared to $8.3 million at
December 30, 2000. The Company's current ratio at March 31,June 30, 2001 decreased to 1.31.1
from 2.0 at December 30, 2000. NetFor the six months ended, net cash provided by
operating activities was $8.6$9.0 million in 2001 compared to net cash used in
operating activities, net of effects of acquisitions, of $2.2$12.5 million in 2000.
Net cash provided by operating activities during 2001 was primarily driven
by a decrease in accounts receivable of $29.0$45.0 million, the result of aggressive
collection efforts combined with the quarter's depressed sales volume, and an increase in
trade accounts payable of $6.9 million. Significant non-cash items affecting net
loss were a $28.2 million charge for the impairment of goodwill and other
long-lived assets, depreciation and amortization of $7.4$14.3 million and restructuring chargesincreased
excess and obsolete inventory provisions of $3.1$13.3 million. These inflows were
primarily utilized to fund the $12.0$50.6 million net loss, inventory investments of
$10.1 million, and$7.5 million.
Accounts receivable turnover on an increaseannualized basis in deferred tax
assets2001 was 2.7 compared
to 3.6 in 2000. The deterioration is reflective of $7.4 million, mainly from the tax benefit generated by the net loss.current year's depressed
sales volumes.
During 2001, net cash used in investing activities was $3.3$4.7 million,
compared to $51.7$83.6 million for 2000, mainly due to the acquisitionacquisitions of NIS.NIS and
Autodiagnos in 2000. Capital expenditures totaled $2.7$4.5 million for 2001 and
$8.8$12.8 million for 2000. The significant decrease in capital expendituresexpenditure for 2001
compared to 2000 iswas mainly attributable to two significant items in 2000:items: the investment of
$2.3 million in 2000 required in bringing production of the Ford WDS 3500
product in-house and an incrementala decrease in 2001 of $1.3$3.3 million related to implementing the second phase
of
SAP.
Net cash used in financing activities was $0.7$9.1 million for 2001 compared to
net cash provided by financing activities of $56.1$97.8 million for 2000. This is
primarily attributable to the Company's net payment of debt during 2001 compared
with the significant additional borrowings during 2000 for the purpose of
18
funding acquisitions. Net borrowings in 2000 totaled $63.7$99.2 million of which
$45.0$71.3 million werewas related to acquisitions and $18.7$27.9 million was related to
general working capital requirements, primarily inventory investment.
TREASURY STOCK
The Company has a stock repurchase program whereby it will purchase in the
open market shares of its stock. The Company intends to buy back its stock at
times when the market price of the stock presents opportunities to do so, and
depending on the Company's other cash requirements. The Company's stock
repurchase plan is intended as a means to partially mitigate the dilutive impact
of stock options. During the first quarter of 2000, the Company utilized $2.3
million to repurchase 151,000 shares of its common stock.
14
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDEBTEDNESS
In March 2000, the Company re-negotiated its existing $50.0 million credit
facility, increasing the total borrowings available to $125.0 million (the "new
line"). The new line is supported by a syndicated group of banks and providesin
March 2000 provide for a term loan of up to $75.0 million to be utilized for
acquisitions and a revolving line of credit of $50.0 million to be used for
general working capital purposes. The new line requires the Company to maintain
certain leverage, operating cash flow and operating income covenants as well as
non-financial operating covenants, as defined, and expires in March 2004. If the Company is
not in compliance with its covenants and other obligations under the new line,
the lenders may refuse to allow the Company to draw down funds under the
revolving line of credit. The
new line is collaterized by substantially all of the Company's assets. Certain
borrowings on the line, primarily related to acquisitions, are payable quarterly
while the remaining borrowings are payable on demand. The new line bears
interest at the lesser of the banks' prime rate plus 1.0%2.75% or LIBOR plus 2.0%3.75%,
as determined from time to time by the banks. The interest rates on the new line
at March 31,June 30, 2001 ranged from 8.44% to 9.50%. Under the terms of the new line,
the Company is required to pay a commitment fee on the unused portion of the
line of 0.75% of the total unused portion of the line dependent on the Company's
operating performance. At March 31,June 30, 2001, borrowings outstanding under the line
totaled $92.3$83.9 million, of which $60.0$53.7 million was related to acquisitions and
$32.3$30.2 million related to general working capital.
As of March 31, 2001, the Company was not in compliance with thecertain
financial covenants ofunder the new line, but subsequently obtained a waiver from
the banks through June 15, 2001. With effect from June 15, 2001, the Company
obtained an additional waiver from the banks. The additional waiver extends
through September 28, 2001 and carries certain conditions which the Company must
satisfy. These conditions included the achievement of certain revenue levels for
the second quarter, which the Company has satisfied at June 30, 2001. The waiver
includesalso included a reduction in the maximum availability of the revolving line of
credit to $38.0 million through July 12, 2001, to $40.0 million from July 13,
2001 through August 5, 2001 and to $43.0 million after August 5, 2001, provided
that the Company had achieved certain benchmarks. With the execution of the
definitive merger agreement announced on August 1, 2001, and as described in
Note 9, the Company has achieved those benchmarks.
In connection with the waiver, the Company paid the banks fees of $483,000
in the second quarter and agreed to pay the banks an additional fee of $483,000
on September 20, 2001, plus an additional fee of $50,000 when the Company's
borrowings under the revolving line of credit exceed $38 million. Fees paid to
date have been included within interest expense in the profit and loss account.
As of June 30, 2001, the interest rates applicable to the new line increased two
percentage points.
The Company is
currentlylikely will not be in discussioncompliance with its bankers to renegotiate the termsfinancial covenants of the
new line. Theline when the existing waiver expires on September 28, 2001 and will need to
seek a further waiver at that date. In the past, the Company has timely made all paymentsobtained
waivers from its banks for similar covenant defaults, however, there can be no
assurance that the banks will grant any additional waivers in the future. If the
Company is in default with the financial covenants on September 28, 2001 and the
banks do not waive the default, the banks may demand immediate payment of principal and interest duethe
full outstanding balance under the new line and anticipates that it will continue to be able to make
payments of principal and interestprohibit new borrowings under
the newrevolving line as they become due in the
ordinary course. Additionally,of credit. If this were to occur, the Company would have no
ability to satisfy the demand for payment or fund continuing operations without
access to the revolving line of credit. The Company currently has begunno plans to
explore alternative
financing sources, however the outcome of this course of action is uncertain.obtain additional financing. The Company has classified all amounts outstanding
under the new line at March 31,June 30, 2001 as due within one year in thethese financial
statements.
19
On August 1, 2001, the Company entered into a merger agreement with
Teradyne, Inc. pursuant to which Teradyne will acquire the Company in a merger
(See Note 9). Following the completion of the merger, Teradyne has agreed to
repay the outstanding balance under the new line.
The accompanying financial statements have been prepared on a going concern
basis which assures that the Company will continue as a going concern and,
accordingly, the statements do not reflect any adjustments that would be
necessary should the Company not be able to continue as a going concern. The
Company's ability to continue as a going concern is uncertain.
EFFECTS OF INFLATION
Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a material
effect on its revenues or its results of operations. The Company attempts to
mitigate inflationary cost increases by continuously improving manufacturing
methods and technologies. Management does not expect inflation to have a
significant impact on operations in the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains development, sales and support facilities in several
locations worldwide, including, the United Kingdom, France, Germany,
Switzerland, Sweden, Singapore and Mexico among others. A significant amount of
the Company's business is conducted with companies located in these and other
countries and certain transactions may be denominated in currencies other than
the US dollar. As a result, the Company may experience transaction gains and
losses as a result of currency fluctuations. In order to minimize its exposure
to loss from changes in foreign currency exchange rates, the Company mitigates
its risk using foreign currency forward exchange contracts. The Company's
currency risk mitigation strategies are designed to reduce the Company's
vulnerability to certain foreign currency exchange exposures. In executing its
strategies, the Company actively monitors foreign currency exchange rates and
executes foreign currency forward exchange contracts, primarily with financial
institutions. These
15
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS contracts serve to offset the impact of actual foreign
currency changes, e.g., if currency rates changed with respect to a certain
transaction resulting in a loss to the Company, the forward contract would be
structured to result in a gain, thereby minimizing the actual loss incurred, if
any.
The Company may be subject to losses resulting from unanticipated changes in
foreign currency exchange rates. The market factors that expose the Company in
this regard include economic conditions in which the Company conducts business
as well as the Company's ability to effectively and efficiently engage in
foreign currency forward exchange contracts at competitive rates with financial
institutions or others. The Company expects to continue these or similar
practices in the future to the extent appropriate. Historically, actual results
of the Company's foreign currency risk management procedures have been in line
with management's expectations and have not resulted in significant gains or
losses, however, there can be no assurance that these results will continue in
the future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results of operations and
future financial conditions may differ materially from those expressed in any
such forward-looking statements as a result of many factors that may be beyond
the Company's control. Factors that might cause such differences include, but
are not limited to, those discussed below.
The Company is severely capital constrained. Unless it can obtain additional
financing, the Company's ability to operate and its viability as a business
enterprise are in jeopardy. The Company will likely not be in compliance with
financial covenants of the new line when the existing waiver
20
expires on September 28, 2001 and will need to seek a further waiver at that
date. In the past, the Company has obtained waivers from its banks for similar
covenant defaults, however, there can be no assurance that the banks will grant
any additional waivers in the future. If the Company is in default with the
financial covenants on September 28, 2001 and the banks do not waive the
default, the banks may demand immediate payment of the full outstanding balance
under the new line and prohibit new borrowings under the revolving line of
credit. If this were to occur, the Company currently would have no ability to
satisfy the demand for payment or fund continuing operations without access to
the revolving line of credit. The Company currently has no plans to obtain
additional financing.
On August 1, 2001, the Company entered into a merger agreement with Teradyne
pursuant to which Teradyne will acquire the Company in a merger. Upon completion
of the merger, each outstanding share of the Company's common stock will be
converted into 0.1733 share of common stock of Teradyne. Completion of the
merger is subject to numerous but customary conditions, including approval of
the transaction by the Company's stockholders and expiration of the Hart-Scott-
Rodino waiting period. There is no guarantee that the conditions to the merger
will be satisfied or that the merger will be completed.
The recent economic downturn has had an impact on consumer and capital
spending in many of the markets that we servethe Company serves worldwide. It also has
created an imbalance of supply and demand in both the OEM and contract
manufacturing industries. These forces are currently adversely impacting the
Company's order and revenue performance. Management is uncertain as to how long
and how deep the current downturn may be in these markets.
The Company has experienced and expects to continue to experience
fluctuations in its results of operations, particularly on a quarterly basis.
The Company's expense levels are based, in part, on expectations of future
revenues. If revenue levels in a particular period do not meet expectations, due
to the timing of the receipt of orders from customers, customer cancellations or
delays of shipments, then operating results could be adversely impacted. The
Company's principal markets are affected by the cyclical economic patterns of
OEM and contract manufacturers' capital investment requirements.
The market for the Company's products is characterized by rapid
technological change, an increased demand for specific feature requests by
customers, evolving industry standards, and frequent new product introductions.
The introduction of products embodying new technology or the emergence of new
industry standards or practices could render the Company's existing products
obsolete or otherwise unmarketable. Future operating results are dependent upon
the Company's ability to develop, design, manufacture and market technologically
innovative products that meet customer needs.
Competition in the markets where the Company operates is intense. The
Company continues to invest in manufacturing productivity to try to minimize the
impact of competitive pricing pressures, fluctuations within the Company's
product mix, potential inventory obsolescence exposure and start-up
manufacturing costs for new product introductions.
The Company is dependent upon a number of suppliers for several key
components of its products. The loss of certain of the Company's suppliers,
supply shortages or increases in the costs of key raw materials could have a
material adverse effect on the Company.
16
GENRAD, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER FACTORS
Other factors which could impact future results are past and future
acquisitions, strategic alliances, patent or product liability claims in excess
of available insurance coverage, changes in the Company's effective tax rates,
new regulatory requirements, political and economic changes, tariffs, trade
restrictions, transportation delays, foreign currency fluctuations and
inflation.
21
The Company disclaims any intent or obligation to update any forward-looking
statements that may be included in this report. Additionally, there can be no
assurance that other factors, not included above, could impact future results.
17IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
will be effective for fiscal years beginning after December 15, 2001, and will
thus be adopted by the Company, as required, in fiscal year 2002. The impact of
SFAS No. 141 and SFAS No. 142 on the Company's reported financial results of
operations and balance sheet has not yet been determined.
22
PART II. OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of GenRad, Inc. was held on May 9,
2001 (the "Annual Meeting").
(b) Not required pursuant to instructions No. 3.
(c) Votes were cast or withheld in connection with the election of directors
at the Annual Meeting as follows:
NAME OF DIRECTOR FOR WITHHELD
- ---------------- ---------- ---------
William S. Antle III........................................ 23,378,205 1,253,755
Ed Zschau................................................... 23,379,592 1,252,368
Votes were cast or withheld in connection with the following proposals, more
fully described in the Company's Proxy Statement dated May 9, 2001 at the Annual
Meeting.
AFFIRMATIVE VOTES NEGATIVE VOTES ABSTAINED
----------------- -------------- ---------
1) To adopt the Company's 2001 Equity Incentive Plan.... 9,110,830 10,184,059 964,188
2) To adopt the Company's 2001 Director Stock Option
Plan.................................................... 10,658,845 8,639,949 960,285
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
10.17 Revolving credit and term loan agreement between GenRad,
Inc., GenRad Holdings Limited, GenRad Europe Limited and
GenRad Limited ("GenRad") and Fleet National Bank effective
as of March 24, 2000, filed herewith.
10.18 Amended10.23 Amendment to revolving credit and term loan agreement
between GenRadthe Company and Fleet National Bank and the other
banks party thereto effective as of June 29,
2000,May 15, 2001, filed
herewith.
10.19 Amended10.24 Amendment to revolving credit and term loan agreement
between GenRadthe Company and Fleet National Bank and the other
banks party thereto effective as of September 30, 2000, filed herewith.
10.20 Amended revolving credit and term loan agreement between
GenRad and Fleet National Bank effective as of December 30,
2000, filed herewith.
10.21 Amended revolving credit and term loan agreement between
GenRad and Fleet National Bank effective as of April 18,June 15, 2001, filed
herewith.
10.22 Severance agreement between GenRad,10.25 Agreement and Plan of Merger dated August 1, 2001 among the
Company, Teradyne, Inc. and Peter Miles
effective as of September 1, 2000,Radio Acquisition Corp.,
incorporated by reference from the Company's Current Report
on Form 8-K filed herewith.August 2, 2001.
(b) The following Current Report on Form 8-K was filed during
the quarter ended June 30, 2001:
1. The Company filed a Current Report on Form 8-K dated June
19, 2001 reporting certain information under Item 9 with
respect to its credit facility.
(b) There were no reports on Form 8-K filed during the three months ended
March 31, 2001.
18
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 the
undersigned thereunto duly authorized.
GENRAD, INC.
By: /s/ WALTER A. SHEPHARD
-----------------------------------------
Walter A. Shephard
CHIEF FINANCIAL OFFICER, VICE PRESIDENT,
GLOBAL BUSINESS OPERATIONS, TREASURER, AND
CLERK
Date: May 17, 2001
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