<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NO. 1-8045
GENRAD, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C>
MASSACHUSETTS 04-1360950
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
7 TECHNOLOGY PARK DRIVE WESTFORD, MASSACHUSETTS 01886-0033
(Address of principal executive offices) (Zip Code)
</TABLE>
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.
30,307,389 shares of the Common Stock, $1 par value, were outstanding on
November 10, 2000.
--------------------------------------------------------------------------------
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<PAGE>
GENRAD INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
THREE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations............. 1
Condensed Consolidated Balance Sheets....................... 2
Condensed Consolidated Statements of Cash Flows............. 3
Notes to Condensed Consolidated Financial Statements........ 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K............................ 23
Signatures.................................................. 24
</TABLE>
<PAGE>
PART I
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENRAD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Products.......................................... $63,265 $91,482 $183,138 $174,234
Services.......................................... 15,316 17,764 49,140 51,740
------- ------- -------- --------
Total revenue..................................... 78,581 109,246 232,278 225,974
COST OF REVENUE:
Products.......................................... 34,497 55,799 102,493 92,987
Services.......................................... 11,117 10,946 34,308 31,170
------- ------- -------- --------
Total cost of revenue............................. 45,614 66,745 136,801 124,157
------- ------- -------- --------
Gross margin........................................ 32,967 42,501 95,477 101,817
OPERATING EXPENSES:
Selling, general and administrative............... 20,001 16,258 58,104 49,055
Research and development.......................... 7,799 5,421 20,790 14,720
Amortization of acquisition-related intangible
assets.......................................... 2,216 667 5,011 2,164
Acquired in-process research and development...... -- -- 500 --
Restructuring benefit, net........................ -- -- (2,479) --
Reorganization charges............................ -- -- 4,124 --
------- ------- -------- --------
Total operating expenses........................ 30,016 22,346 86,050 65,939
------- ------- -------- --------
Operating income.................................... 2,951 20,155 9,427 35,878
OTHER INCOME (EXPENSE):
Interest income................................... 47 20 171 177
Interest expense.................................. (2,923) (435) (5,659) (921)
Other, net........................................ 359 28 411 (78)
------- ------- -------- --------
Total other income (expense).................... (2,517) (387) (5,077) (822)
------- ------- -------- --------
Net income before income taxes...................... 434 19,768 4,350 35,056
Income tax benefit (expense)........................ (157) (2,000) 12,973 994
------- ------- -------- --------
Net income.......................................... $ 277 $17,768 $ 17,323 $ 36,050
======= ======= ======== ========
NET INCOME PER SHARE:
Basic............................................. $ 0.01 $ 0.62 $ 0.62 $ 1.26
======= ======= ======== ========
Diluted........................................... $ 0.01 $ 0.60 $ 0.61 $ 1.22
======= ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................. 28,144 28,748 28,118 28,511
======= ======= ======== ========
Diluted........................................... 28,471 29,773 28,585 29,537
======= ======= ======== ========
</TABLE>
The Accompanying Notes are an Integral Part of These Condensed Consolidated
Financial Statements.
1
<PAGE>
GENRAD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 9,559 $ 6,951
Accounts receivable, less allowance of $1,776 and $1,487.... 93,693 81,276
Inventory................................................... 80,188 49,068
Deferred tax assets......................................... 15,648 --
Other current assets........................................ 8,194 8,228
-------- --------
Total current assets...................................... 207,282 145,523
Property and equipment, net of accumulated depreciation of
$48,986 and $41,751....................................... 49,526 43,194
Deferred tax assets......................................... 17,805 19,868
Intangible assets, net of accumulated amortization of
$20,268 and $10,866....................................... 93,835 38,686
Other assets................................................ 3,000 1,368
-------- --------
$371,448 $248,639
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable...................................... 23,323 21,841
Accrued liabilities......................................... 14,488 9,681
Deferred revenue............................................ 10,371 9,388
Accrued compensation and employee benefits.................. 9,212 6,750
Current portion of bank debt................................ 49,717 2,353
-------- --------
Total current liabilities................................. 107,111 50,013
Long-term portion of bank debt.............................. 50,127 3,653
Accrued pension benefits.................................... 8,754 9,175
Lease costs of excess facilities............................ 50 3,922
Deferred revenue............................................ 1,026 1,005
Deferred tax liabilities.................................... 3,546 --
Other long-term liabilities................................. 4,412 4,036
-------- --------
Total long-term liabilities............................... 67,915 21,791
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 60,000 shares authorized;
30,318 and 29,877 issued and outstanding at September 30,
2000 and January 1, 2000, respectively.................... 30,318 29,877
Additional paid-in capital.................................. 225,042 221,854
Treasury stock, net......................................... (31,292) (29,017)
Accumulated deficit......................................... (26,743) (44,066)
Accumulated other comprehensive loss........................ (903) (1,813)
-------- --------
Total stockholders' equity................................ 196,422 176,835
-------- --------
$371,448 $248,639
======== ========
</TABLE>
The Accompanying Notes are an Integral Part of These Condensed Consolidated
Financial Statements.
2
<PAGE>
GENRAD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 17,323 $ 36,050
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................... 17,191 11,092
Stock-based compensation.................................... 448 456
Loss on disposal of property and equipment.................. 816 429
Deferred tax assets......................................... (14,057) (4,500)
Lease costs of excess facilities, net....................... (3,872) (35)
Acquired in-process research and development................ 500 --
Restructuring charges....................................... 986 --
Increase (Decrease) resulting from changes in operating
assets and liabilities, net of effects of acquisitions:
Accounts receivable......................................... (8,558) (52,313)
Inventory................................................... (23,348) (12,160)
Other current assets........................................ 814 (761)
Accounts payable............................................ (552) 14,646
Deferred revenue............................................ 1,307 3,119
Accrued liabilities......................................... 3,170 (8,388)
Accrued compensation and employee benefits.................. 1,881 (579)
Other, net.................................................. (1,430) (1,158)
-------- --------
Net cash used in operating activities....................... (7,381) (14,102)
INVESTING ACTIVITIES:
Purchases of property and equipment......................... (15,765) (13,807)
Acquisitions, net of cash acquired.......................... (69,185) --
Development of intangible assets............................ (3,213) (4,118)
-------- --------
Net cash used in investing activities....................... (88,163) (17,925)
FINANCING ACTIVITIES:
Proceeds from credit facility, net.......................... 93,683 18,531
Proceeds from employee stock plans.......................... 2,115 9,630
Purchase of treasury stock.................................. (2,275) (3,696)
-------- --------
Net cash provided by financing activities................... 93,523 24,465
Effect of exchange rates on cash and cash equivalents....... 4,629 1,568
Increase (Decrease) in cash and cash equivalents............ 2,608 (5,994)
Cash and cash equivalents at beginning of period............ 6,951 12,998
-------- --------
Cash and cash equivalents at end of period.................. $ 9,559 $ 7,004
======== ========
</TABLE>
The Accompanying Notes are an Integral Part of These Condensed Consolidated
Financial Statements.
3
<PAGE>
GENRAD INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF FINANCING AND INVESTING ACTIVITIES:
Cash outlay associated with the Company's acquisitions in 2000 totaled
approximately $69.2 million.
Fair value of assets acquired and liabilities assumed upon acquisition:
<TABLE>
<S> <C>
Accounts receivable, net.................................... $7,350
Inventory, net.............................................. 8,021
Other current assets........................................ 1,045
Property and equipment, net................................. 1,540
Other assets................................................ 323
Trade accounts payable...................................... 2,383
Accrued liabilities......................................... 1,132
Deferred revenue............................................ 55
Current portion of long-term debt........................... 619
Accrued pensions and benefits............................... 134
Accrued compensation and employee benefits.................. 977
Other long-term liabilities................................. 5,624
</TABLE>
The Accompanying Notes are an Integral Part of These Condensed Consolidated
Financial Statements.
4
<PAGE>
GENRAD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed 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 January 1, 2000, filed
with the Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, considered necessary to
present fairly the consolidated financial position at September 30, 2000 and
January 1, 2000, the results of operations for the three and nine months ended
September 30, 2000 and October 2, 1999, and cash flows for the nine months ended
September 30, 2000 and October 2, 1999. 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.
NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share in accordance with Statement of Financial Accounting Standards
No. 128 "Earnings per Share" for the three and nine months ended September 30,
2000 and October 2, 1999, respectively (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ ------------------------------------
SEPTEMBER 30, 2000 OCTOBER 2, 1999 SEPTEMBER 30, 2000 OCTOBER 2, 1999
------------------ --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Net income.............................. $ 277 $17,768 $17,323 $36,050
======= ======= ======= =======
Basic: weighted average shares
outstanding........................... 28,144 28,748 28,118 28,511
Weighted average share equivalents...... 327 1,025 467 1,026
------- ------- ------- -------
Diluted: weighted average shares
outstanding........................... 28,471 29,773 28,585 29,537
======= ======= ======= =======
Basic net income per share.............. $ 0.01 $ 0.62 $ 0.62 $ 1.26
======= ======= ======= =======
Diluted net income per share............ $ 0.01 $ 0.60 $ 0.61 $ 1.22
======= ======= ======= =======
</TABLE>
COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2000, comprehensive income
(loss) included changes in cumulative foreign currency translation adjustments
of $0.4 and $0.9 million compared to $(0.1) and $0.7 million for the three and
nine months ended October 2, 1999. Total comprehensive income for the three and
nine months ended September 30, 2000 totaled $0.7 and $18.2 million compared to
$17.7 and $36.8 million for the three and nine months ended October 2, 1999. At
September 30, 2000, accumulated other comprehensive loss totaled $0.9 million.
5
<PAGE>
GENRAD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2: ACQUISITIONS
NICOLET IMAGING SYSTEMS AND SIERRA RESEARCH TECHNOLOGY
On March 24, 2000, the Company acquired substantially all the assets of
Nicolet Imaging Systems and the outstanding capital stock of Sierra Research
Technology (collectively "NIS") located in San Diego, California and Westford,
Massachusetts, respectively. The NIS business consists of two additional product
suites for the Company, X-ray inspection technologies and repair/re-work
equipment.
Consideration paid for NIS totaled $40.0 million in cash. Direct costs
related to the acquisition totaled $0.5 million, primarily consisting of legal
and accounting fees. The consideration paid was funded through the Company's
credit facility. The transaction was accounted for as a purchase, and
accordingly, the purchase price was allocated to the assets and liabilities
assumed based on their respective fair values. Identified intangible assets are
being amortized on a straight-line basis over a period of 5 to 7 years. Goodwill
is being amortized on a straight-line basis over a period of 10 years. The
results of NIS are included in the condensed consolidated financial statements
beginning from the date of purchase.
The purchase price was allocated to the tangible and intangible assets of
NIS as follows (in thousands):
<TABLE>
<S> <C>
Goodwill.................................................... $10,202
Developed technology........................................ 4,500
Assembled workforce......................................... 2,550
Patents and trademarks...................................... 6,400
Customer list............................................... 5,900
Acquired in-process research and development................ 500
Assets, primarily accounts receivable and inventory......... 13,645
Liabilities assumed......................................... (3,207)
-------
$40,490
=======
</TABLE>
AUTODIAGNOS AB
On April 12, 2000, the Company acquired substantially all of the outstanding
capital stock of Autodiagnos AB ("Autodiagnos"). Autodiagnos is an automotive
aftermarket diagnostic software and equipment vendor based in Stockholm, Sweden.
It also maintains sales offices in England, the Netherlands, Germany and the
United States.
Consideration paid for Autodiagnos totaled $26.7 million in cash. Direct
costs related to the acquisition totaled $0.7 million, consisting primarily of
legal and accounting fees. The consideration paid was funded through the
Company's credit facility. The transaction was accounted for as a purchase, and
accordingly, the purchase price was allocated to the assets and liabilities
assumed based on their respective fair values. Identified intangible assets are
being amortized on a straight-line basis over a period of 4 to 10 years.
Goodwill is being amortized on a straight-line basis over a period of 10 years.
The results of Autodiagnos are included in the condensed consolidated financial
statements beginning from the date of purchase.
6
<PAGE>
GENRAD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2: ACQUISITIONS (CONTINUED)
The purchase price was allocated to the tangible and intangible assets of
Autodiagnos as follows (in thousands):
<TABLE>
<S> <C>
Goodwill.................................................... $16,652
Developed technology........................................ 6,570
Assembled workforce......................................... 594
Patents and trademarks...................................... 1,686
Customer list............................................... 4,833
Assets, primarily accounts receivable, inventory and
property and equipment.................................... 3,239
Liabilities assumed......................................... (6,157)
-------
$27,417
=======
</TABLE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information presents the
combined results of operations of GenRad, NIS and Autodiagnos as if the
acquisitions had occurred at the beginning of fiscal 2000 and 1999,
respectively, after giving effect to the amortization of goodwill and other
intangible assets but excluding the effects of the charge for acquired
in-process research and development. The per share impact of the acquired
in-process research and development charge totals $(0.01) and $(0.02) for the
nine months ended September 30, 2000 and October 2, 1999, respectively. This
unaudited pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the results of operations that
actually would have been realized had the Company, NIS and Autodiagnos been a
combined company during the specified periods. Additionally, they are not
necessarily indicative of the results of future combined operations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 OCTOBER 2, 1999
------------------ -----------------
<S> <C> <C>
Revenue............................................ $237,967 $252,084
Net income......................................... $ 15,437 $ 31,929
Net income per share:
Basic............................................ $ 0.55 $ 1.12
Diluted.......................................... $ 0.54 $ 1.09
</TABLE>
NOTE 3: RESTRUCTURING CHARGES (BENEFIT)
During the three months ended April 1, 2000, the Company implemented a
restructuring plan in an effort to improve operating efficiencies. The plan
involves closure of the Company's Portland, Oregon office and relocation of
employees from the United States and Switzerland for the purpose of centralizing
certain Process Solutions segment operations in its current Atlanta, Georgia
facility, and a management restructuring of the Diagnostic Solutions segment in
the Manchester, UK facility. This will result in a workforce reduction of
approximately 25 employees, mainly consisting of engineering, marketing and
training functions. 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 three months ended April 1,
2000. The charge totaled approximately $1.0 million, and includes severance
costs of $0.7 million to be completed during fiscal 2001 and exit costs of
$0.3 million related to
7
<PAGE>
GENRAD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3: RESTRUCTURING CHARGES (BENEFIT) (CONTINUED)
the facility closure with a lease term into fiscal 2005. As of September 30,
2000, there were $0.3 million of severance and $0.2 million of facility exit
payments made against the reserve.
During the three months ended April 1, 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 fiscal 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 fiscal 1993 restructuring
accrual.
NOTE 4: REORGANIZATION CHARGES
During the three months ended July 1, 2000, the Company implemented a
reorganization plan in connection with the election of Robert M. Dutkowsky as
Chairman, President and Chief Executive Officer (collectively "CEO"). As a
result, the employment of certain members of management, including the then
current CEO, was terminated. A charge of $4.1 million for severance costs to be
completed during fiscal 2001 was recorded during the three months ended July 1,
2000. As of September 30, 2000, payments of $3.7 million were made against the
reserve.
NOTE 5: INVENTORY
Inventory consists of the following at September 30, 2000 and January 1,
2000, respectively (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
<S> <C> <C>
Raw materials............................................... $26,767 $13,247
Work in process............................................. 35,256 17,891
Finished goods.............................................. 18,165 17,930
------- -------
$80,188 $49,068
======= =======
</TABLE>
NOTE 6: CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to any such claims will not materially affect
the results of operations or the financial position of the Company.
NOTE 7: OPERATING SEGMENTS
The Company elected to change the reporting of its operating segments
effective July 2, 2000 as part of the reorganization plan implemented by the
CEO. Prior period operating results have been restated to conform to current
period presentation.
The Company is comprised of the following four business units:
- Process Solutions ("PS") focuses on in-circuit test, x-ray test, 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.
8
<PAGE>
GENRAD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7: OPERATING SEGMENTS (CONTINUED)
- 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 nine months ended
September 30, 2000 and October 2, 1999. The amounts provided herein are those
utilized by senior management, in allocating resources and evaluating
performance. GenRad's 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.
<TABLE>
<CAPTION>
PS FS DS SS TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Three months ended September 30, 2000:
Revenue:
Products................................. $ 46,445 $ 2,687 $11,944 $ 2,189 $ 63,265
Services................................. -- -- -- 15,316 15,316
-------- ------- ------- ------- --------
Total revenue.......................... $ 46,445 $ 2,687 $11,944 $17,505 $ 78,581
======== ======= ======= ======= ========
Operating income (loss)...................... $ 10,164 $(1,138) $(1,810) $ 4,646 $ 11,862
======== ======= ======= ======= ========
Three months ended October 2, 1999:
Revenue:
Products................................. $ 35,392 $ 3,261 $51,126 $ 1,703 $ 91,482
Services................................. -- -- -- 17,764 17,764
-------- ------- ------- ------- --------
Total revenue.......................... $ 35,392 $ 3,261 $51,126 $19,467 $109,246
======== ======= ======= ======= ========
Operating income (loss)...................... $ 11,352 $(1,312) $ 8,574 $ 7,009 $ 25,623
======== ======= ======= ======= ========
Nine months ended September 30, 2000:
Revenue:
Products................................. $125,326 $ 9,068 $42,451 $ 6,293 $183,138
Services................................. -- -- -- 49,140 49,140
-------- ------- ------- ------- --------
Total revenue.......................... $125,326 $ 9,068 $42,451 $55,433 $232,278
======== ======= ======= ======= ========
Operating income (loss)...................... $ 30,379 $(3,735) $(5,838) $15,572 $ 36,378
======== ======= ======= ======= ========
Nine months ended October 2, 1999:
Revenue:
Products................................. $ 96,941 $10,606 $62,225 $ 4,462 $174,234
Services................................. -- -- -- 51,740 51,740
-------- ------- ------- ------- --------
Total revenue.......................... $ 96,941 $10,606 $62,225 $56,202 $225,974
======== ======= ======= ======= ========
Operating income (loss)...................... $ 27,069 $(3,477) $ 8,061 $20,655 $ 52,308
======== ======= ======= ======= ========
</TABLE>
9
<PAGE>
GENRAD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7: OPERATING SEGMENTS (CONTINUED)
A reconciliation of the totals reported for the operating segments to net
income (loss) before income taxes in the condensed consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Operating income:
Total for reportable segments................. $11,862 $25,623 $36,378 $ 52,308
Corporate expenses(a)......................... (8,911) (5,468) (26,951) (16,430)
------- ------- ------- --------
Operating income per condensed consolidated
financial statements........................ 2,951 20,155 9,427 35,878
Other income (expense), net................... (2,517) (387) (5,077) (822)
------- ------- ------- --------
Net income before income taxes.................. $ 434 $19,768 $ 4,350 $ 35,056
======= ======= ======= ========
</TABLE>
------------------------
(a) Includes amortization of capitalized software, corporate research and
development and other corporate charges.
NOTE 8: TREASURY STOCK
During the second quarter of 1998, the Company commenced a stock repurchase
program whereby the Company will purchase, in the open market, shares of its
stock. On January 28, 2000, an additional 2,500,000 shares were authorized to be
repurchased, increasing the total shares authorized to 5,000,000. 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. The Plan has been
funded entirely through operating cash flow, however, the Company may if it
considers it prudent, utilize its available credit facilities in connection with
its stock repurchase program. Through September 30, 2000 and October 2, 1999,
the Company had utilized approximately $36.0 and $18.7 million, respectively, to
repurchase 2,195,600 and 1,225,600 shares of its common stock.
NOTE 9: CREDIT FACILITY
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 provides
for up to $75.0 million to be utilized for acquisitions and $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 March 2004.
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 line bears
interest at the lesser of the banks' prime rate plus 0.75% or LIBOR plus 1.75%,
as determined from time to time by the banks. The interest rates on the credit
facility at September 30, 2000 ranged from 8.625% to 10.5%. Under the terms of
the new line, the Company is required to pay a commitment fee on the unused
portion of the line ranging from 0.375% to 0.5% of the total unused portion of
the line dependent on the Company's operating performance. At September 30,
2000, borrowings outstanding under the line totaled $98.9 million, of which
$67.5 million was related to acquisitions and $31.4 million related to general
working capital.
10
<PAGE>
GENRAD INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10: INCOME TAXES
During the three months ended April 1, 2000 and April 3, 1999, the Company
reversed a portion of its deferred tax asset valuation allowance resulting in a
tax benefit of $14.5 million and $4.5 million, respectively. These were recorded
due to management's expectations of future income and expected utilization of
the Company's domestic and foreign net operating loss carryforwards.
NOTE 11: IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FINANCIAL INSTRUMENTS
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This Statement is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000 (December 31, 2000 for the
Company) and requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company is currently determining the impact
of the adoption of SFAS 133 to its operating results or financial position.
REVENUE RECOGNITION
In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company has
adopted SAB 101 as of the beginning of the fourth quarter of fiscal 2000.
11
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
The matters discussed herein contain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Item 1
"Business" of the Company's Annual Report on Form 10-K for the year ended
January 1, 2000 as well as those discussed in this section and elsewhere in this
Quarterly Report on Form 10-Q.
OVERVIEW
GenRad, Inc. ("GenRad" or "the Company") 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 is comprised of four business units bringing to market integrated
hardware, software and service solutions that empower always-on services and
un-interruptable business applications:
- Process Solutions ("PS") focuses on in-circuit test, x-ray test, 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, programming services, and training to help customers
optimize their hardware and software solutions.
12
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenue represented by certain items in the Company's Condensed
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
-------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Total revenue................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenue............................. 58.0% 61.1% 58.9% 54.9%
----- ----- ----- -----
Gross margin................................ 42.0% 38.9% 41.1% 45.1%
Selling, general and administrative......... 25.5% 14.9% 25.0% 21.7%
Research and development.................... 9.9% 5.0% 9.0% 6.5%
Amortization of acquisition-related
intangible assets......................... 2.8% 0.6% 2.2% 1.0%
Acquired in-process research and
development............................... -- -- 0.1% --
Restructuring benefit, net.................. -- -- (1.1)% --
Reorganization charges...................... -- -- 1.8% --
----- ----- ----- -----
Total operating expenses.................. 38.2% 20.5% 37.0% 29.2%
----- ----- ----- -----
Operating income.............................. 3.8% 18.4% 4.1% 15.9%
Other income (expense)........................ (3.2)% (0.3)% (2.2)% (0.3)%
Income tax benefit (expense).................. (0.2)% (1.8)% 5.6% 0.4%
----- ----- ----- -----
Net income.................................... 0.4% 16.3% 7.5% 16.0%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED OCTOBER 2, 1999
ORDERS AND BACKLOG
Orders for the Company's products and services increased 15.9% to
$89.1 million for 2000 from $76.9 million for 1999. 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, orders totaled $78.2 million for
2000.
PS orders totaled $58.7 million in 2000 compared to $35.9 million in 1999.
Excluding orders of NIS, PS orders totaled $50.4 million in 2000. PS orders
increased $22.8 million in 2000 compared to 1999. In addition to NIS orders of
$8.3 million, the improvement was principally due to strengthening demand for
the segment's in-circuit test products ($18.5 million). FS orders totaled
$3.8 million in 2000 compared to $2.3 million in 1999. FS orders increased
$1.5 million in 2000 compared to 1999 due to improved Geneva and Versa orders.
DS orders totaled $13.8 million in 2000 compared to $20.8 million in 1999.
Excluding orders of Autodiagnos, DS orders totaled $12.1 million in 2000. DS
orders decreased $7.0 million in 2000 compared to 1999. This decrease is mainly
attributable to orders received during 1999 related to the launch of the
Company's WDS 3500 product for The Ford Motor Company ("Ford") offset by an
increase in orders related to additional WDS business, for which there were no
orders in 1999. SS orders totaled $12.8 million in 2000 compared to
$17.9 million in 1999.
North American orders totaled $42.8 million for 2000 compared to
$43.4 million for 1999. North American orders decreased $0.6 million for 2000
compared to 1999. Excluding orders of NIS, North American orders decreased
$6.2 million. This decrease was primarily due to the launch of the Company's
13
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WDS 3500 product for Ford during 1999 in the DS segment. For 2000, there was an
incremental decrease in WDS North American orders of $8.4 million from 1999.
There was also a $1.7 million incremental decrease of orders in the SS segment.
These decreases were offset by NIS orders of $5.7 million, increased orders of
$2.0 million in the remainder of the PS segment primarily due to strengthening
demand for in-circuit test products and an increase in FS orders of
$1.2 million.
European orders totaled $32.6 million for 2000 compared to $29.0 million for
1999. European orders increased $3.6 million for 2000 compared to 1999.
Excluding orders of NIS and Autodiagnos, European orders increased
$0.5 million. This increase was primarily due to improved demand for in-circuit
test products of $5.7 million partially offset by decreased SS orders of
$3.6 million.
Asian orders totaled $13.7 million for 2000 compared to $4.5 million for
1999, an increase of $9.2 million. Excluding orders of NIS, Asian orders
increased $7.9 million. This increase was primarily due to improved demand for
in-circuit test products of $7.3 million.
Backlog totaled $49.9 million at September 30, 2000 compared to
$30.9 million at January 1, 2000. Excluding backlog of NIS and Autodiagnos,
ending backlog totaled $47.6 million. The increased level of backlog is due
primarily to the continued strong demand for in-circuit test products, coupled
with manufacturing delays associated with the implementation of an Enterprise
Resource Planning (ERP) system. The Company believes that a substantial portion
of this backlog will be shipped during the three months ended December 30, 2000.
REVENUE
Total revenue decreased to $78.6 million for 2000 from $109.2 million for
1999. Excluding revenue of NIS and Autodiagnos, revenue totaled $69.0 million
for 2000. PS revenue totaled $46.4 million for 2000 compared to $35.4 million
for 1999. Excluding revenue of NIS, PS revenue totaled $38.3 million for 2000.
FS revenue totaled $2.7 million for 2000 compared to $3.3 million for 1999. DS
revenue totaled $11.9 million for 2000 compared to $51.1 million for 1999.
Excluding revenue of Autodiagnos, DS revenue totaled $10.5 million for 2000. SS
revenue totaled $17.5 million for 2000 compared to $19.5 million for 1999.
PS revenue increased $11.0 million for 2000 compared to 1999. When excluding
revenue of NIS, PS revenue increased $2.9 million. The increase was due to
$2.5 million in incremental revenue related to in-circuit test products and
$0.7 million in Viper products primarily due to strengthening demand in those
areas. These increases were partially offset by a decrease of $0.2 million
related to Process Software products.
FS revenue decreased $0.6 million for 2000 compared to 1999. The unfavorable
change was due to lower Geneva product shipments in the quarter.
DS revenue decreased $39.2 million for 2000 compared to 1999. When excluding
revenue of Autodiagnos, the segment's revenues decreased $40.6 million. The
decrease is attributable to the substantial reduction in WDS revenue of
$43.0 million offset by an incremental increase in other DS revenues of
$2.3 million. For the third quarter of 2000, the Company shipped 821 WDS units,
compared to 7,389 units during the third quarter of 1999. The Company expects to
derive significant revenues from Ford related to its WDS 3500 product for the
remainder of 2000 and beyond. However, the Company does not anticipate a unit
count approaching the unit count during the twelve months ended January 1, 2000
in any future twelve month period, or compared to the Company's original
estimate for the year 2000 due to changing purchasing patterns of Ford.
14
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SS revenue decreased $2.0 million for 2000 compared to 1999. Service revenue
for PS products totaled $9.0 million for 2000 compared to $10.6 million for
1999. Service revenue for FS products totaled $0.7 million for 2000 compared to
$0.8 million for 1999. Service revenue for DS products totaled $5.7 million for
2000 compared to $6.4 million for 1999.
Revenue from international markets decreased to $39.7 million, or 50.6% of
revenue, for 2000 from $51.0 million, or 46.7% of revenue, for 1999. The
decrease in international revenue in dollars, coupled with the increase as a
percentage of total revenue, reflects the shift of revenues from the WDS 3500
product and the expansion of other products and services in Europe. Revenues
from international markets are subject to the risks of currency fluctuations.
GROSS MARGIN
Gross margin was $33.0 million, or 42.0%, for 2000 compared to
$42.5 million, or 38.9%, for 1999. The decreased margin in dollars, and the
increase in percentage, is due to the WDS 3500 unit reduction and its
substantially lower margins than other products, partially offset by the
acquisitions of NIS and Autodiagnos, which contributed $4.3 million in margin
for 2000. Additional downward pressure on gross margin is related to increased
amortization costs of capitalized software and product related intangible assets
of $1.0 million during 2000 compared to 1999. As a percentage of product
revenue, product margins increased to 45.5% for 2000 from 39.0% for 1999. The
increase reflects the significantly decreased unit shipments of lower margin WDS
3500 product compared to higher margin PS and FS products.
Inventory turnover for 2000 decreased to 1.8 times (annualized) as compared
to 4.7 times (annualized) for 1999. The decrease is primarily related to
turnover of the WDS 3500 product. Excluding inventory related to the WDS 3500
contract with Ford, inventory turnover was 2.5 times (annualized) for 2000 and
1999.
Service margins were $4.2 million, or 27.4%, for 2000 compared to
$6.8 million, or 38.4%, for 1999. The decrease in service margin, in dollars and
as a percentage of revenue, is primarily attributable to declining margin in the
DS segment that reflects the competitive market conditions in the markets that
DS competes.
OPERATING EXPENSES
Selling, general and administrative expenses increased to $20.0 million, or
25.5% of total revenue, for 2000 from $16.3 million, or 14.9% of total revenue,
for 1999. Excluding expenses of NIS and Autodiagnos, selling, general and
administrative expenses totaled $18.5 million during 2000. The increase in
selling, general and administrative expenses in dollars is primarily
attributable to additional expenses to support the increase of non-WDS related
revenues during 2000 as compared to 1999, new European offices, and increased
amortization expenses associated with the next phase of the Company's ERP System
going live as of the beginning of the third quarter of 2000.
Research and development expenses increased to $7.8 million, or 9.9% of
total revenue, for 2000 from $5.4 million, or 5.0% of total revenue, for 1999.
Excluding expenses of NIS and Autodiagnos, research and development expenses
totaled $6.9 million for 2000. The increase in research and development expenses
primarily reflects the Company's efforts to enter the automotive aftermarket and
on-going new product development efforts in the PS segment. There was a increase
in capitalized software costs of $0.1 million for 2000 compared to 1999. During
2000, on-going research and development projects and improvements continued for
in-circuit and functional test equipment software, and system enhancements to
the software
15
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
suite of products. 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 million,
or 2.8% of total revenue, for 2000, compared to $0.7 million, or 0.6% of total
revenue, for 1999. The increase in dollars, and as a percentage of revenue, is
attributable to the acquisitions of NIS and Autodiagnos in fiscal 2000.
Interest expense was $2.9 million for 2000 compared to $0.4 million for 1999
reflecting increased borrowings on its credit facility.
The Company recorded a net income tax expense of $0.2 million for 2000
compared to a net income tax expense of $2.0 million for 1999. The decrease in
the income tax provision is caused by the substantially reduced net income
before income taxes during 2000 compared to 1999 partially offset by an increase
of the effective tax rate in fiscal 2000 as compared to fiscal 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED OCTOBER 2, 1999
ORDERS AND BACKLOG
Orders for the Company's products and services increased to $248.1 million
for 2000 from $232.3 million for 1999. Excluding NIS and Autodiagnos, orders
totaled $228.4 million for 2000. PS orders totaled $135.9 million for 2000
compared to $99.2 million for 1999. Excluding orders of NIS, PS orders totaled
$119.3 million for 2000. FS orders totaled $13.2 million for 2000 compared to
$9.8 million for 1999. DS orders totaled $47.4 million for 2000 compared to
$60.7 million for 1999. Excluding orders of Autodiagnos, DS orders totaled
$44.3 million for 2000. SS orders totaled $51.6 million for 2000 compared to
$62.6 million for 1999.
PS orders increased $20.1 million for 2000 compared to 1999 when excluding
orders of NIS, driven by strengthening demand for the segment's in-circuit test
products. Orders for these products increased $23.0 million during 2000 as
compared to 1999. These increases were partially offset by a $2.4 million
decrease in orders for process software solutions. FS orders increased
$3.4 million for 2000 compared to 1999 driven by increased demand for Geneva
products. DS orders decreased $16.4 million for 2000 compared to 1999 when
excluding orders of Autodiagnos. The decrease is attributable to orders received
during 1999 relating to the launch of the WDS 3500 product for Ford. In 2000,
$26.8 million of orders were received compared to $56.1 million in 1999. This
was offset by increases in orders of the remainder of the DS segment, namely,
$8.5 million of Advanced Manufacturing Systems (AMS) and $4.1 million of
Advanced Diagnostic Systems (ADS).
North American orders totaled $122.4 million for 2000 compared to
$134.0 million for 1999. North American orders decreased $11.6 million for 2000
compared to 1999. Excluding orders of NIS, orders decreased $23.6 million. This
decrease was primarily due to orders of the WDS 3500 product for Ford, which
resulted in an incremental decrease of $32.2 million during 2000. In addition,
there was an incremental decrease in SS orders of $2.3 million. These decreases
were offset by increases of $1.8 million in the FS segment and PS orders of
$7.4 million due to strengthening demand in several product lines and a
geographic shift of orders from the Company's large contract manufacturers.
European orders totaled $97.1 million for 2000 compared to $84.3 million for
1999. European orders increased $12.8 million for 2000 compared to 1999.
Excluding orders of NIS and Autodiagnos, orders increased $8.1 million. This
increase is primarily attributable to improved demand for in-circuit test
products of the PS segment of $8.2 million and incremental increases in orders
of AMS and ADS products in the DS segment of $11.0 million. These increases were
offset by a decrease in SS orders of $9.1 million.
16
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asian orders totaled $28.6 million for 2000 compared to $14.0 million for
1999. Asian orders increased $14.6 million for 2000 compared to 1999. This
increase is primarily attributable to improved demand for in-circuit test
products of the PS segment of $6.1 million and WDS products of the DS segment of
$3.9 million.
REVENUE
Total revenue increased to $232.3 million for 2000 from $226.0 million for
1999. Excluding revenue of NIS and Autodiagnos, revenue totaled $211.8 million
for 2000. PS revenue totaled $125.3 million for 2000 compared to $96.9 million
for 1999. Excluding revenue of NIS, PS revenue totaled $107.6 million for 2000.
FS revenue totaled $9.0 million for 2000 compared to $10.6 million for 1999. DS
revenue totaled $42.4 million for 2000 compared to $62.2 million for 1999.
Excluding revenue of Autodiagnos, DS revenue totaled $39.6 million for 2000. SS
revenue totaled $55.4 million for 2000 compared to $56.2 million for 1999.
PS revenue increased $10.6 million for 2000 compared to 1999 when excluding
revenue of NIS. The increase was due to $11.4 million in incremental revenue
related to the high-end in-circuit test products and $1.3 million in Viper
products. These increases were offset by decreases of the segment's process
software products of $1.5 million.
FS revenue decreased $1.6 million in 2000 compared to 1999 as a result of
lower Geneva product shipments of $1.9 million partially offset by increased
Versa product shipments of $0.4 million.
DS revenue decreased $22.6 million for 2000 compared to 1999 when excluding
revenue of Autodiagnos. The decrease in DS revenue is attributable to the WDS
3500 product, which was $29.4 million lower during 2000. For the year-to-date
2000, the Company shipped 2,837 WDS units. The Company expects to derive
significant revenues from Ford related to its WDS 3500 product for the remainder
of 2000 and beyond. However, the Company does not anticipate a unit count
approaching the unit count during the twelve months ended January 1, 2000 in any
future twelve month period, or compared to the Company's original estimate for
the year 2000 due to changing purchasing patterns of Ford.
SS revenue decreased $0.8 million for 2000 compared to 1999. Service revenue
for PS products totaled $28.4 million for 2000 compared to $30.6 million for
1999. Service revenue for FS products totaled $2.1 million for 2000 compared to
$2.4 million for 1999. Service revenue for DS products totaled $18.6 million for
2000 compared to $18.8 million for 1999.
Revenue from international markets increased to $125.3 million, or 53.9% of
revenue, for 2000 from $109.6 million, or 48.5% of revenue, for 1999. The
increase in international revenue in dollars, and as a percentage of total
revenue, reflects the Company's revenues related to the WDS 3500 product and the
expansion of the Company's products and services in Europe. Revenues from
international markets are subject to the risks of currency fluctuations.
GROSS MARGIN
Gross margin was $95.5 million, or 41.1%, for 2000 compared to
$101.8 million, or 45.1%, for 1999. The decrease in gross margin in dollars
reflects a $0.6 million reduction in product gross margin related to the
significant decrease in WDS 3500 product unit sales. This resulted in an
incremental decrease of $10.9 million in product margins in 2000 compared to
1999. This decrease was offset by increases in the remainder of the DS segment,
in-circuit test products and the acquisitions of NIS and Autodiagnos.
Additionally, gross margin was impacted by a $5.7 million reduction in service
gross margin for 2000 and
17
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increased amortization costs of capitalized software and product related
intangible assets of $2.8 million during 2000 compared to 1999. As a percentage
of revenue, gross margin declined 4.0% from 1999. The decrease reflects the
significantly lower margin realized in the SS segment for 2000 (29.7%) compared
to 1999 (38.2%).
Inventory turnover for 2000 decreased to 2.0 times (annualized) as compared
to 3.0 times (annualized) for 1999. The decrease is primarily related to
turnover of the WDS 3500 product. Excluding inventory related to the WDS 3500
contract with Ford, inventory turnover was 2.6 times (annualized) for 2000
compared to 2.5 times (annualized) for 1999.
OPERATING EXPENSES
Selling, general and administrative expenses increased to $58.1 million, or
25.0% of total revenue, for 2000 from $49.1 million, or 21.7% of total revenue,
for 1999. Excluding expenses of NIS and Autodiagnos, selling, general and
administrative expenses totaled $53.1 million during 2000. The increase in
selling, general and administrative expenses in dollars is primarily
attributable to additional expenses to support increased revenues during 2000,
new European offices, and increased amortization expenses associated with the
next phase of the Company's ERP System going live as of the beginning of the
third quarter of 2000.
Research and development expenses increased to $20.8 million, or 9.0% of
total revenue, for 2000 from $14.7 million, or 6.5% of total revenue, for 1999.
Excluding expenses of NIS and Autodiagnos, research and development expenses
totaled $18.5 million for 2000. The increase in research and development
expenses primarily reflects the Company's efforts to enter the automotive
aftermarket in the DS segment and on-going new product development efforts in
the PS segment. There was a decrease in capitalized software costs of
$1.3 million for 2000 compared to 1999. During 2000, on-going research and
development projects and improvements continued for in-circuit and functional
test equipment software, and system enhancements to the software suite of
products. The Company expects to continue to invest in new product development
and enhancements to its existing products.
Amortization of acquisition-related intangible assets totaled $5.0 million,
or 2.2% of total revenue, for 2000, compared to $2.2 million, or 1.0% of total
revenue, for 1999. The increase in dollars, and as a percentage of revenue, is
attributable to the acquisitions of NIS and Autodiagnos in fiscal 2000.
Interest expense was $5.7 million for 2000 compared to $0.9 million for 1999
reflecting increased borrowings on its credit facility.
The Company recorded a net tax benefit of $13.0 million for 2000 compared to
a net income tax benefit of $1.0 million for 1999. The recorded income tax
benefit 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 the Company's domestic and foreign net operating loss
carryforwards. Excluding the reversal of a portion of the deferred tax asset
valuation allowance, the income tax provision decreased to $1.5 million for 2000
from $3.5 million for 1999. The decrease in the income tax provision is caused
by lower net income before income taxes during 2000, offset by an increase of
the effective tax rate in fiscal 2000 as compared to fiscal 1999.
18
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND SOURCES OF CAPITAL
SOURCES AND USES OF CASH
Cash and cash equivalents at September 30, 2000 totaled approximately
$9.6 million, compared to approximately $7.0 million at January 1, 2000. The
current ratio at September 30, 2000 decreased to 1.9 from 2.9 at January 1,
2000. Net cash used in operating activities, net of effects of acquisitions, was
$7.4 million for the nine months ended September 30, 2000, compared to net cash
used in operating activities of $14.1 million for the nine months ended
October 2, 1999.
Net cash used in operating activities during the nine months ended
September 30, 2000 is primarily driven by a significant incremental inventory
investment of $23.3 million, including incremental inventory of $12.6 million
related to the Ford WDS 3500 contract. In addition, the usage is impacted by an
incremental change in deferred tax assets of $14.1 million, mainly from a
reversal of a portion of the deferred tax asset valuation allowance, and an
increase in accounts receivable of $8.6 million due to the increase in sales
volume. These investments were partially funded by net income of $17.3 million
and depreciation and amortization of $17.2 million.
During the nine months ended September 30, 2000, net cash used in investing
activities was $88.2 million, compared to $17.9 million for the nine months
ended October 2, 1999. Capital expenditures totaled $15.8 million for the nine
months ended September 30, 2000 compared to $13.8 million for the nine months
ended October 2, 1999. Cash used in acquisitions, net of cash acquired, totaled
$69.2 million for the nine months ended September 30, 2000. Cash used in the
development of certain intangible assets, including software, totaled
$3.2 million for the nine months ended September 30, 2000 compared to
$4.1 million for the nine months ended October 2, 1999.
The increase in capital expenditures for the nine months ended
September 30, 2000 compared to the nine months ended October 2, 1999 is
primarily attributable to investments in bringing production of the Ford WDS
3500 product in-house during the nine months ended September 30, 2000. Through
January 1, 2000, the Company was outsourcing production of the WDS 3500 unit to
a contract manufacturer. Total capital expenditures for the nine months ended
September 30, 2000 related to bringing the production in-house were
approximately $2.7 million.
Beginning in 1998, the Company began implementation of SAP R/3-TM- ("SAP"),
an enterprise resource planning system. During the nine months ended
September 30, 2000, total capital expenditures related to the SAP implementation
totaled $6.0 million. At the end of 1998, the Company had completed Phase I of
this project with the successful implementation of selected accounting and
finance modules. During the three months ended April 3, 1999, the Company began
Phase II of this project, which involved the implementation of certain other
modules, including human resources, sales, manufacturing and distribution
related modules. While the Phase II go-live date of July 5, 2000 was achieved,
the Company expects to continue to incur capital expenditures and on-going
expenses related to the implementation of SAP, however, such expenditures are
expected to be significantly less than those made in 1999 and in 2000 through
the go-live date.
Net cash provided by financing activities was $93.5 million for the nine
months ended September 30, 2000 compared to net cash provided by financing
activities of $24.5 million for the nine months ended October 2, 1999. The
change in cash provided by financing activities compared to the prior year
nine-month period is attributable to the Company's significant additional
borrowings for the purpose of funding strategic acquisitions. Nine-month net
borrowings totaled $93.7 million of which $67.5 million
19
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
were related to acquisitions and $26.2 million related to general working
capital requirements, principally inventory demands.
STOCK REPURCHASE PROGRAM
During the second quarter of 1998, the Company commenced a stock repurchase
program whereby the Company will purchase, in the open market, shares of its
stock. On January 28, 2000, an additional 2,500,000 shares were authorized to be
repurchased, increasing the total shares authorized to 5,000,000. 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. The Plan has been
funded entirely through operating cash flow, however, the Company may if it
considers it prudent, utilize its available credit facilities in connection with
its stock repurchase program. Through September 30, 2000 and October 2, 1999,
the Company had utilized approximately $36.0 and $18.7 million, respectively, to
repurchase 2,195,600 and 1,225,600 shares of its common stock.
CREDIT FACILITY
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 provides
for up to $75.0 million to be utilized for acquisitions and $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 March 2004.
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 line bears
interest at the lesser of the banks' prime rate plus 0.75% or LIBOR plus 1.75%,
as determined from time to time by the banks. The interest rates on the credit
facility at September 30, 2000 ranged from 8.625% to 10.5%. Under the terms of
the new line, the Company is required to pay a commitment fee on the unused
portion of the line ranging from 0.375% to 0.5% of the total unused portion of
the line dependent on the Company's operating performance. At September 30,
2000, borrowings outstanding under the line totaled $98.9 million, of which
$67.5 million was related to acquisitions and $31.4 million related to general
working capital.
SUMMARY
The Company's primary source of liquidity is internally generated funds and
available credit facility. For the remainder of 2000, the Company anticipates it
will fund its working capital and capital expenditure requirements, make
principal and interest payments on its borrowings and meet its cash obligations
from internally generated funds and from its available credit facility. As the
Company continues to invest in new product developments and enhancements to
existing products, it expects research and development expenditures to continue
at approximately the same percentage of sales as prior fiscal years.
EFFECTS OF INFLATION AND FOREIGN EXCHANGE
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.
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<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company maintains development, sales and support facilities in several
locations worldwide, including England, France, Germany, Switzerland, Singapore,
and Mexico. 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 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.
THE INTRODUCTION OF THE EURO
The Company is aware of and has developed systems designed to handle the
introduction of the Euro as an effective currency in Europe. Although the
Company believes the systems that have been implemented are sufficient for the
Company to be able to process Euro denominated transactions, there can be no
assurances that such systems will continue to function as designed. If they do
not so function, GenRad's financial results could be adversely affected. To
date, the Company has not encountered any significant processing issues related
to the introduction of the Euro. The introduction of the Euro has not materially
affected the manner in which the Company conducts its operations, nor has it
required the Company to alter any significant contracts with suppliers and/or
financial institutions.
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 condition 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 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.
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<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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.
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FINANCIAL INSTRUMENTS
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This Statement is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000 (December 31, 2000 for the
Company) and requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company is currently determining the impact
of the adoption of SFAS 133 to its operating results or financial position.
REVENUE RECOGNITION
In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company has
adopted SAB 101 as of the beginning of the fourth quarter of fiscal 2000.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this report:
<TABLE>
<S> <C>
3.4 Articles of Amendment to the By-Laws of GenRad, Inc. as of
October 20, 2000, filed herewith.
27. Financial Data Schedule.
</TABLE>
(b) There were no reports on Form 8-K filed during the three months ended
September 30, 2000:
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
GENRAD, INC.
By: /s/ WALTER A. SHEPHARD
-----------------------------------------
Walter A. Shephard
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER AND CLERK
</TABLE>
Date: November 14, 2000
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