<PAGE>
- --------------------------------------------------------------------------------
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 APRIL 1, 2000
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)
---------
<TABLE>
<CAPTION>
<S> <C>
MASSACHUSETTS 04-1360950
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
7 TECHNOLOGY PARK DRIVE 01886-0033
WESTFORD, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
</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.
29,931,554 shares of the Common Stock, $1 par value, were outstanding on
May 11, 2000.
- --------------------------------------------------------------------------------
<PAGE>
GENRAD INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
THREE MONTHS ENDED APRIL 1, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <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............................10
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.........................................21
Signatures...............................................................23
</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
------------------
APRIL 1, April 3,
2000 1999
---- ----
<S> <C> <C>
REVENUE:
Products....................................................................... $49,570 $36,683
Services....................................................................... 16,803 16,427
------ ------
Total revenue.................................................................. 66,373 53,110
COST OF REVENUE:
Products....................................................................... 27,256 14,382
Services....................................................................... 10,946 10,176
------ ------
Total cost of revenue........................................................ 38,202 24,558
------ ------
Gross margin..................................................................... 28,171 28,552
OPERATING EXPENSES:
Selling, general and administrative............................................ 17,774 16,301
Research and development....................................................... 5,754 4,684
Amortization of acquisition-related intangible assets.......................... 791 830
Acquired in-process research and development................................... 500 ---
Restructuring benefit, net..................................................... (2,479) ---
------ ------
Total operating expenses..................................................... 22,340 21,815
------ ------
Operating income................................................................. 5,831 6,737
OTHER INCOME (EXPENSE):
Interest income................................................................ 65 127
Interest expense............................................................... (409) (224)
Other, net..................................................................... 42 (206)
------ ------
Total other income (expense)................................................. (302) (303)
------ ------
Net income before income taxes................................................... 5,529 6,434
Income tax benefit............................................................... 12,549 3,888
------ -----
Net income....................................................................... $18,078 $10,322
======= =======
NET INCOME PER SHARE:
Basic.......................................................................... $0.64 $0.37
======= =======
Diluted........................................................................ $0.63 $0.35
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.......................................................................... 28,138 28,107
======= =======
Diluted........................................................................ 28,704 29,340
======= =======
</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>
APRIL 1, JANUARY 1,
2000 2000
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 9,725 $ 6,951
Accounts receivable, less allowance of $1,868 and $1,487........................ 81,453 81,276
Inventory....................................................................... 70,615 49,068
Deferred tax asset.............................................................. 15,173 --
Other current assets............................................................ 8,293 8,228
------- --------
Total current assets................................................ 185,259 145,523
Property and equipment, net of accumulated depreciation of
$43,042 and $41,751.......................................................... 50,050 43,194
Deferred tax asset.............................................................. 18,863 19,868
Intangible assets, net of accumulated amortization of $12,764 and $10,866....... 67,110 38,686
Other assets.................................................................... 3,300 1,368
------- --------
$324,582 $248,639
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.......................................................... 26,351 21,841
Accrued liabilities............................................................. 10,131 9,681
Deferred revenue................................................................ 10,060 9,388
Accrued compensation and employee benefits...................................... 5,359 6,750
Current portion of bank debt.................................................... 27,701 2,353
------- --------
Total current liabilities..................................................... 79,602 50,013
Long-term portion of bank debt.................................................. 36,033 3,653
Accrued pension benefits........................................................ 9,097 9,175
Lease costs of excess facilities................................................ 50 3,922
Deferred revenue................................................................ 994 1,005
Other long-term liabilities..................................................... 4,323 4,036
------- --------
Total long-term liabilities.................................................. 50,497 21,791
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 60,000 shares authorized;
29,935 and 29,877 issued and outstanding at April 1, 2000
and January 1, 2000, respectively............................................. 29,935 29,877
Additional paid-in capital...................................................... 223,446 221,854
Treasury stock, net............................................................. (31,292) (29,017)
Accumulated deficit............................................................. (25,988) (44,066)
Accumulated other comprehensive loss............................................ (1,618) (1,813)
------- --------
Total stockholders' equity.................................................... 194,483 176,835
------- --------
.............................................................................. $324,582 $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>
THREE MONTHS ENDED
APRIL 1, April 3,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................................................................... $18,078 $10,322
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization...................................................................... 4,338 2,888
Loss on disposal of property and equipment......................................................... 243 585
Deferred tax asset................................................................................. (13,102) (4,500)
Lease costs of excess facilities, net.............................................................. (3,872) --
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, net........................................................................... 5,713 710
Inventory.......................................................................................... (14,543) (6,615)
Other current assets............................................................................... 728 (2,340)
Accounts payable................................................................................... 2,724 1,933
Deferred revenue................................................................................... 647 3,121
Accrued liabilities................................................................................ (766) 868
Accrued compensation and employee benefits......................................................... (2,030) (1,960)
Other, net......................................................................................... (1,879) (1,211)
------- -------
Net cash (used in) provided by operating activities................................................ (2,235) 3,801
INVESTING ACTIVITIES:
Purchases of property and equipment................................................................ (8,799) (5,148)
Acquisitions, net of cash acquired................................................................. (42,021) --
Development of intangible assets................................................................... (887) (1,380)
------- -------
Net cash used in investing activities.............................................................. (51,707) (6,528)
FINANCING ACTIVITIES:
Proceeds from credit facility, net................................................................. 57,770 (588)
Proceeds from employee stock plans................................................................. 584 4,181
Purchase of treasury stock......................................................................... (2,275) (3,696)
------- -------
Net cash provided by (used in) financing activities................................................ 56,079 (103)
Effect of exchange rates on cash and cash equivalents.............................................. 637 1,705
------- -------
Increase (Decrease) in cash and cash equivalents................................................... 2,774 (1,125)
Cash and cash equivalents at beginning of period................................................... 6,951 12,998
------- -------
Cash and cash equivalents at end of period......................................................... $9,725 $11,873
====== =======
</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
(In thousands)
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF FINANCING AND INVESTING ACTIVITIES:
Cash outlay associated with the Company's acquisitions in 2000 totaled
approximately $42.0 million.
Fair value of assets acquired and liabilities assumed upon acquisition:
Accounts receivable, net $6,445
Inventory, net 7,184
Other current assets 822
Property and equipment, net 842
Trade accounts payable 1,834
Accrued liabilities 332
Deferred revenue 55
Accrued compensation and employee
benefits 753
Other long-term liabilities 233
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 April 1, 2000
and January 1, 2000, and the results of operations and cash flows for the three
months ended April 1, 2000 and April 3, 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 months ended April 1, 2000 and April
3, 1999, respectively (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
APRIL 1, 2000 APRIL 3, 1999
------------- ---------------
<S> <C> <C>
Net income...................................................... $18,078 $10,322
Basic: weighted average shares outstanding..................... 28,138 28,107
Weighted average share equivalents........................ 566 1,233
--------- --------
Diluted: weighted average shares outstanding................... 28,704 29,340
====== ======
Basic net income per share.................................... $0.64 $0.37
====== ======
Diluted net income per share................................. $0.63 $0.35
====== ======
</TABLE>
COMPREHENSIVE INCOME (LOSS)
For the three months ended April 1, 2000 and April 3, 1999,
comprehensive income included changes in cumulative foreign currency translation
adjustments of $0.2 million and $0.7 million, respectively. Total comprehensive
income for the quarters ended April 1, 2000 and April 3, 1999 totaled $18.3
million and $11.0 million, respectively. At April 1, 2000, accumulated other
comprehensive loss totaled $1.6 million.
5
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 2: ACQUISITIONS
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 results of operations were not material to the
Company's consolidated results of operations for the three months ended April
1, 2000. The results of NIS are included in the condensed consolidated
financial statements beginning from the date of purchase. 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 purchase price was allocated to the tangible and intangible assets
of NIS as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Goodwill............................................................... $ 8,642
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.................... 15,205
Liabilities assumed.................................................... (3,207)
--------
$40,490
========
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of GenRad and NIS as if the acquisition had
occurred at the beginning of 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) for the three months ended April 1, 2000 and twelve months
ended January 1, 2000. 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 and NIS been a combined company during the specified periods.
Additionally, they are not indicative of the results of future combined
operations.
<TABLE>
<CAPTION>
Three months ended Twelve months ended
April 1, 2000 January 1, 2000
------------------ --------------------
<S> <C> <C>
Revenue.................................. $73,119 $330,261
Net income............................... $17,857 $ 45,205
Net income per share:
Basic................................ $ 0.63 $ 1.58
Diluted.............................. $ 0.62 $ 1.52
</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 GRS segment operations in its current Atlanta, Georgia facility,
and a management restructuring of the ADS 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 the facility closure with a lease term into
fiscal 2005. For the three months ended April 1, 2000, there were no charges
against the restructuring 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.
6
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 4: INVENTORY
Inventory consists of the following at April 1, 2000 and January 1
2000, respectively (in thousands):
<TABLE>
<CAPTION>
APRIL 1, January 1,
2000 2000
---- ----
<S> <C> <C>
Raw materials................................................................ $20,278 $13,247
Work in process.............................................................. 21,229 17,891
Finished goods............................................................... 29,108 17,930
------- -------
$70,615 $49,068
======= ========
</TABLE>
NOTE 5: 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 6: OPERATING SEGMENTS
The following table illustrates, (in thousands), each of the Company's
operating segments' operating income (loss) for the three months ended April 1,
2000 and April 3, 1999. The amounts provided herein are those utilized by the
respective segments' President, in conjunction with the Company's President and
Chief Executive Officer, 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>
EMS ADS GRS TOTAL
--- --- --- -----
<S> <C> <C> <C> <C>
Three months ended April 1, 2000:
Revenue:
Products..................................................................... $35,028 $12,735 $1,807 $49,570
Services..................................................................... 7,774 6,739 2,290 16,803
------- ------- ------- -------
Total revenue.............................................................. $42,802 $19,474 $4,097 $66,373
======= ======= ======= =======
Operating income (loss)...................................................... $12,569 $60 $(1,711) $10,918
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
EMS ADS GRS TOTAL
--- --- --- -----
<S> <C> <C> <C> <C>
Three months ended April 3, 1999:
Revenue:
Products..................................................................... $29,698 $2,044 $4,941 $36,683
Services..................................................................... 7,409 6,450 2,568 16,427
------- ------ ------ -------
Total revenue............................................................ $37,107 $8,494 $7,509 $53,110
======= ====== ====== =======
Operating income........................................................... $9,346 $1,220 $1,257 $11,823
====== ====== ====== =======
</TABLE>
7
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
A reconciliation of the totals reported for the operating segments to
net income before income taxes in the condensed consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
APRIL 1, 2000 APRIL 3, 1999
------------- -------------
<S> <C> <C>
Operating income:
Total for reportable segments................... $10,918 $11,823
Corporate expenses (a).......................... (5,087) (5,086)
------- -------
Operating income per consolidated financial
statements...................................... 5,831 6,737
Other expenses, net............................. (302) (303)
------- -------
Net income before income taxes.................... $5,529 $6,434
======== ========
</TABLE>
- -----------
(a) Includes amortization of capitalized software, corporate research and
development and other charges.
NOTE 7: 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 April 1, 2000 and April
3, 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 8: 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 April 1,
2000 ranged from 8.06% to 9.75%. 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 April 1, 2000, borrowings outstanding
under the line totaled $63.7 million, of which $45.0 million was related to
acquisitions and $18.7 million related to general working capital.
8
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 9: 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 10: 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" ("SAB 101"). SAB 101 provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
as well as examples of how the staff applies revenue recognition guidance to
specific circumstances. Registrants may adopt a change in accounting principle
no later than the first quarter of the fiscal year beginning after December 15,
1999 (January 2, 2000 for the Company). In March 2000, SAB 101A was issued by
the SEC delaying the implementation date of SAB 101 for registrants until no
later than the second quarter of the fiscal year beginning after December 15,
1999 (April 2, 2000 for the Company). The Company has determined that SAB 101
will not have a material impact on the Company's financial position and results
of operations.
STOCK COMPENSATION
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of previously fixed stock options or awards, and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company is still assessing the impact of FIN 44 on the
Company's financial position or results of operations.
NOTE 11: SUBSEQUENT EVENTS
In April 2000, the Company acquired substantially all of the
outstanding capital stock of Autodiagnos AB ("Autodiagnos") for approximately
$26.7 million in cash. Autodiagnos is an automotive aftermarket diagnostics
software and equipment vendor based in Stockholm, Sweden, who maintains sales
offices in England, the Netherlands, Germany and the United States. The
transaction will be accounted for as a purchase.
In April 2000, Robert M. Dutkowsky was elected Chairman, President
and Chief Executive Officer of the Company. As a result, the employment
agreement of James F. Lyons was terminated. Pursuant to the provisions of the
employment agreement, Mr. Lyons received cash of approximately $3.0 million
and benefit continuation for three years. A charge will be incurred during
the three months ended July 1, 2000 to account for this transaction.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION 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"), which commenced operations in
1915, is a leading global manufacturing solutions company. GenRad designs,
manufactures and markets integrated hardware and software solutions that enable
the successful manufacture, test and service for microprocessors and other
electronic devices and components. The Company operates primarily in the United
States, Western Europe and Southeast Asia through its three business segments,
Electronic Manufacturing Solutions ("EMS"), Advanced Diagnostic Solutions
("ADS") and GR Software ("GRS").
EMS focuses on the integration of hardware and software for process
control in the manufacture of printed circuit boards, emphasizing inspection
technologies. EMS provides its customers with leading-edge, cost effective
solutions used to collect data about its manufacturing process and provide
reliable, timely and useful information which can be used to optimize
manufacturing processes.
ADS is a global leader in developing and marketing diagnostic solutions
comprised of hardware, software and services which optimize the manufacturing
and service capabilities of leading transportation and equipment companies. ADS
solutions are used by its customers to maximize manufacturing efficiencies at
time of product build as well as to maintain efficient and effective service
operations throughout the product's life.
GRS develops and markets product solutions and services to companies
wishing to achieve and maintain control over manufacturing processes. GRS'
flagship product, Shop Floor Data Manager -TM- ("SFDM"), manages a business's
process information necessary to manufacture products according to plan. SFDM
also enables the shop floor to communicate with a company's ERP systems to have
a real time direct impact on a business's manufacturing operations.
10
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GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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
APRIL 1, 2000 APRIL 3, 1999
------------- -------------
<S> <C> <C>
Total revenue..................................................... 100.0% 100.0%
Cost of revenue................................................... 57.6% 46.2%
----- -----
Gross margin...................................................... 42.4% 53.8%
Selling, general and administrative............................... 26.8% 30.7%
Research and development.......................................... 8.6% 8.8%
Amortization of acquisition-related intangible assets............. 1.2% 1.6%
Acquired in-process research and development...................... 0.7% --
Restructuring benefit, net........................................ (3.7%) --
----- -----
Total operating expenses........................................ 33.6% 41.1%
----- -----
Operating income.................................................. 8.8% 12.7%
Other income (expense)............................................ (0.5)% (0.6)%
Income tax benefit................................................ 18.9% 7.3%
----- -----
Net income........................................................ 27.2% 19.4%
===== =====
</TABLE>
THREE MONTHS ENDED APRIL 1, 2000 VS. THREE MONTHS ENDED APRIL 3, 1999
ORDERS AND BACKLOG
Orders for the Company's products and services increased to $80.1
million for the three months ended April 1, 2000 from $59.4 million for the
three months ended April 3, 1999. Excluding orders from the acquisition of
Nicolet Imaging Systems and Sierra Research Technology (collectively "NIS"),
completed on March 24, 2000, orders totaled $78.7 million for the three months
ended April 1, 2000. EMS orders totaled $42.9 million for the three months ended
April 1, 2000 compared to $44.5 million for the three months ended April 3,
1999. Excluding orders from the acquisition of NIS, EMS orders totaled $41.5
million for the three months ended April 1, 2000. ADS orders totaled $31.2
million for the three months ended April 1, 2000 compared to $7.5 million for
the three months ended April 3, 1999. GRS orders totaled $6.0 million for the
three months ended April 1, 2000 compared to $7.4 million for the three months
ended April 3, 1999.
EMS orders decreased $3.0 million for the three months ended April
1, 2000 compared to the comparable period ended April 3, 1999 when excluding
orders related to the acquisition of NIS. This decrease was primarily due to
declining demand in the segment's in-circuit products and fixture programming
business. Orders for these products decreased $1.9 million and $3.1 million,
respectively, during the three months ended April 1, 2000 as compared to the
comparable period ended April 3, 1999. There was also an incremental decrease
in orders for the Company's GR Pilot product. These decreases were partially
offset by a $2.5 million increase in orders of the Company's functional test
products. The increase in ADS orders of $23.7 million for the three months
ended April 1, 2000 compared to the period ended April 3, 1999 is partially
attributable to the launch of the Company's WDS 3500 product for The Ford
Motor Company ("Ford"). During the three months ended April 1, 2000, the
segment received orders totaling $11.3 million from Ford. ADS also
11
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GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
received orders of $7.2 million related to additional WDS business, for which
there were no orders in 1999, and an incremental increase of $5.2 million in the
remainder of the ADS business. The decrease of $1.4 million in GRS orders
reflects the significant sales cycle for GRS's products and the timing of
significant customer orders.
North American orders totaled $35.1 million for the three months ended
April 1, 2000 compared to $31.8 million for the three months ended April 3,
1999. European orders totaled $39.6 million for the three months ended April 1,
2000 compared to $23.7 million for the three months ended April 3, 1999. Asian
orders totaled $5.4 million for the three months ended April 1, 2000 compared to
$3.9 million for the three months ended April 3, 1999.
North American orders increased $3.3 million for the three months ended
April 1, 2000 compared to the comparable period ended April 3, 1999. Excluding
orders from the acquisition of NIS, North American orders increased $2.1
million. This increase was primarily due to the launch of the Company's WDS 3500
product for Ford, which totaled $4.0 million in North American orders during the
three months ended April 1, 2000, and additional non-Ford WDS orders of $1.6
million. In addition, there was an incremental increase in EMS North American
orders of $0.4 million due to strengthening demand in the fixture programming
business, offset by a migration of certain of the Company's large contract
manufacturing customers to Eastern Europe. These increases were offset by
declines in North American orders of other business in the Company's ADS segment
of $2.0 million and GRS of $1.9 million.
European orders increased $15.9 million, primarily attributable to the
launch of the Company's WDS 3500 product for Ford, which contributed $6.7
million in European orders during the three months ended April 1, 2000 and
additional non-Ford WDS orders of $4.4 million. There were also incremental
increases in European orders of other business in the ADS segment of $7.2
million from increased demand for the segment's hardware products, and in the
GRS segment of $0.4 million. These increases were offset by a decrease in EMS
European orders of $2.8 million due to a decrease in orders in the fixture
programming business, partially offset by an increase in the segment's other
products from the migration of certain of the Company's large contract
manufacturing customers to Eastern Europe.
Backlog totaled $48.0 million at April 1, 2000 compared to $30.9
million at January 1, 2000. Excluding backlog from the acquisition of NIS,
ending backlog totaled $45.3 million at April 1, 2000. The Company believes that
a substantial portion of backlog at April 1, 2000 will be shipped during the
three months ended July 1, 2000.
REVENUE
Product revenue increased to $49.6 million for the three months ended
April 1, 2000 from $36.7 million for the three months ended April 3, 1999.
Excluding revenue from the acquisition of NIS, product revenue totaled $47.7
million for the three months ended April 1, 2000. EMS product revenue totaled
$35.0 million for the three months ended April 1, 2000 compared to $29.7 million
for the three months ended April 3, 1999. Excluding revenue from the acquisition
of NIS, EMS product revenue totaled $33.1 million for the three months ended
April 1, 2000. ADS product revenue totaled $12.8 million for the three months
ended April 1, 2000 compared to $2.0 million for the three months ended April 3,
1999. GRS product revenue totaled $1.8 million for the three months ended April
1, 2000 compared to $5.0 million for the three months ended April 3, 1999.
EMS product revenue increased $3.4 million for the three months ended
April 1, 2000 compared to the comparable period ended April 3, 1999 when
excluding product revenues related to the acquisition of NIS. The increase was
due to $3.7 million incremental product revenue related to the Company's
high-end in-circuit test products and $0.3 million in its fixture programming
business. These increases were offset by a decrease of $0.6 million related to
the Company's GR Pilot product.
12
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in ADS product revenue of $10.8 million is attributable to
the launch of the Company's WDS 3500 product with Ford, which contributed $9.0
million of product revenue during the three months ended April 1, 2000, other
WDS business of $0.4 million and incremental ADS revenues of $1.4 million. For
the three months ended April 1, 2000 the Company shipped approximately 1,350 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.
The decline of approximately $3.2 million in GRS product revenue
reflects the timing of significant customer orders as well as the lengthy sales
cycle involved in selling the segment's products.
Service revenue increased to $16.8 million for the three months ended
April 1, 2000 from $16.4 million for the three months ended April 3, 1999. EMS
service revenue totaled $7.8 million for the three months ended April 1, 2000
compared to $7.4 million for the three months ended April 3, 1999. ADS service
revenue totaled $6.7 million for the three months ended April 1, 2000 compared
to $6.4 million for the three months ended April 3, 1999. GRS service revenue
totaled $2.3 million for the three months ended April 1, 2000 compared to $2.6
million for the three months ended April 3, 1999.
The increase in EMS service revenue of $0.4 million was attributable to
increases of $0.3 million related to the Company's high-end in-circuit test
systems and $0.1 million from the acquisition of NIS. The increase in ADS
services revenue of $0.3 million was due to $2.3 million of incremental service
revenue related to the WDS 3500 product, offset by a decline in ADS service
revenue of $2.0 million due to the completion of a service contract for a
product that preceded the WDS 3500 product. The decline in GRS service revenue
of $0.3 million reflects the timing of significant customer orders.
Revenue from international markets increased to $39.3 million, or 59.2%
of revenue, for the three months ended April 1, 2000 from $25.4 million, or
47.8% of revenue, for the three months ended April 3, 1999. The increase in
international revenue in dollars, and as a percentage of total revenue, reflects
the Company's launch of the WDS 3500 product for Ford and the continued
expansion of the Company's contract manufacturing customers into Eastern Europe.
Revenues from international markets are subject to the risks of currency
fluctuations.
GROSS MARGINS
Product margins were $22.3 million, or 45.0%, for the three months
ended April 1, 2000 compared to $22.3 million, or 60.8%, for the three months
ended April 3, 1999. The stable product margins in dollars reflect the
acquisition of NIS, which contributed $0.5 million in product margins for the
three months ended April 1, 2000, and an increase in product margins of $3.8
million in the remaining EMS segment primarily from improving margins in the
Company's high-end in-circuit products. These increases were offset by declines
in GRS and ADS product margins of $3.0 million and $0.3 million, respectively,
and increased amortization costs of capitalized software of $1.0 million during
the three months ended April 1, 2000 compared to the three months ended April 3,
1999.
As a percentage of product revenue, product margins declined to 45.0%
for the three months ended April 1, 2000 from 60.8% for the three months ended
April 3, 1999. The decrease reflects the significantly lower margins realized on
the WDS 3500 product compared to the Company's higher margin EMS and GRS
products.
13
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Inventory turnover for the three months ended April 1, 2000
increased to 1.8 times (annualized) as compared to 1.6 times (annualized) for
the three months ended April 3, 1999. The increase is primarily related to
turnover related to the WDS 3500 product partially offset by inventory on
hand for new products as of April 1, 2000. Excluding inventory related to the
Company's contract with Ford, inventory turnover for the three months ended
April 1, 2000 decreased to 1.9 times (annualized) as compared to 2.4 times
(annualized) for the three months ended April 3, 1999.
Service margins were $5.9 million, or 34.9%, for the three months
ended April 1, 2000 compared to $6.3 million, or 38.1%, for the three months
ended April 3, 1999. The decrease in service margins, in dollars and as a
percentage of revenue, is primarily attributable to declining margins in the
ADS segment which reflects the competitive market conditions in the markets
that ADS competes.
OPERATING EXPENSES
Selling, general and administrative expenses increased to $17.8
million, or 26.8% of total revenue, for the three months ended April 1, 2000
from $16.3 million, or 30.7% of total revenue, for the three months ended April
3, 1999. Excluding expenses from the acquisition of NIS, selling, general and
administrative expenses totaled $18.1 million during the three months ended
April 1, 2000. The increase in selling, general and administrative expenses in
dollars is primarily attributable to additional expenses to support the
Company's new European offices and implementation of Phase II of SAP R/3 -TM-
("SAP"), and an increase in marketing expenses of $0.2 million.
Research and development expenses increased to $5.8 million, or 8.7% of
total revenue, for the three months ended April 1, 2000 from $4.7 million, or
8.8% of total revenue, for the three months ended April 3, 1999. The increase in
research and development expenses primarily reflects the Company's efforts in
entering the automotive aftermarket which were not undertaken during the three
months ended April 3, 1999 and on-going new product development efforts in the
EMS segment, particularly in the Company's low-end functional product, during
the three months ended April 1, 2000 compared to the comparable period ended
April 3, 1999. There was a decrease in capitalized software costs of $0.5
million for the three months ended April 1, 2000 compared to the three months
ended April 3,1999.
During the three months ended April 1, 2000, on-going research and
development projects continued for improvements in in-circuit and functional
test equipment software, and system enhancements to the Company's GRS 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 $0.8
million, or 1.2% of total revenue, for the three months ended April 1, 2000,
compared to $0.8 million, or 1.6% of total revenue, for the three months ended
April 3, 1999. The amortization of acquisition-related intangible assets is
primarily related to the purchase of Industrial Computer Corporation in 1998.
The Company anticipates that amortization of acquisition-related intangible
assets will increase on a quarterly basis in comparison to the three months
ended April 1, 2000 for each of the remaining quarters in fiscal 2000 and in
future fiscal years.
Interest expense was $0.4 million for the three months ended April 1,
2000 compared to $0.2 million for the three months ended April 3, 1999
reflecting increased borrowings on its credit facility.
The Company recorded a net tax benefit of $12.6 million for the three
months ended April 1, 2000 compared to a net income tax benefit of $3.9 million
for the three months ended April 3, 1999. The recorded income tax benefit of
$12.6 million results primarily from a reversal of a portion of the Company's
deferred tax asset valuation allowance totaling
14
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$14.5 million which was recorded 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 increased to
$1.9 million for the three months ended April 1, 2000 from $0.6 million for the
three months ended April 3, 1999. The increase in the income tax provision is
caused by an increase of the effective tax rate in fiscal 2000 as compared to
fiscal 1999, offset by lower net income before income taxes during the three
months ended April 1, 2000.
ACQUISITION OF 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 results of operations were not material to the
Company's consolidated results of operations for the three months ended April
1, 2000. The results of NIS are included in the condensed consolidated
financial statements beginning from the date of purchase. 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. Consideration was allocated to the tangible and intangible
assets of NIS as follows: goodwill ($8.6 million), developed technology ($4.5
million), assembled workforce ($2.6 million), patents and trademarks ($6.4
million), customer list ($5.9 million), acquired in-process research and
development ($0.5 million) and the net assets and liabilities assumed of NIS
($12.0 million).
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 GRS segment operations in its current Atlanta, Georgia facility,
and a management restructuring of the ADS 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 the facility closure with a lease term into
fiscal 2005. For the three months ended April 1, 2000, there were no charges
against the restructuring 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 restructuring accrual requiring the reversal of
approximately $3.5 million of the fiscal 1993 accrual.
15
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND SOURCES OF CAPITAL
SOURCES AND USES OF CASH
Cash and cash equivalents at April 1, 2000 totaled approximately $9.7
million, compared to approximately $7.0 million at January 1, 2000. The
Company's current ratio at April 1, 2000 decreased to 2.3 from 2.9 at January 1,
2000. Net cash used in operating activities, net of effects of acquisitions, was
$2.2 million for the three months ended April 1, 2000, compared to net cash
provided by operating activities of $3.8 million for the three months ended
April 3, 1999.
The change in cash (used in) provided by operating activities during
the three months ended April 1, 2000 as compared to the three ended April 3,
1999 is primarily driven by significant inventory investments, which used
incremental cash of $7.9 million, related to the Company's contract with Ford,
an incremental change in deferred tax assets of $8.6 million, mainly from a
reversal of a portion of the Company's deferred tax asset valuation allowance,
and a one-time restructuring benefit, net of charges, of $2.4 million. This was
offset by increased net income and better cash management related to receipt of
customer payments and timing of vendor payments.
During the three months ended April 1, 2000, the Company's accounts
receivable turnover was approximately 4.0 (annualized) compared to approximately
3.6 (annualized) for the three months ended April 3, 1999. The slight
improvement reflects management's continued focus on cash collections, offset by
continued customer demands for more favorable payment terms during the three
months ended April 1, 2000. Excluding the impact from acquisitions, the
Company's accounts receivable turnover was approximately 3.9 (annualized) for
the three months ended April 1, 2000.
During the three months ended April 1, 2000, net cash used in
investing activities was $51.7 million, compared to $6.5 million for the
three months ended April 3, 1999. Capital expenditures totaled $8.8 million
for the three months ended April 1, 2000 compared to $5.1 million for the
three months ended April 3, 1999. Cash used in acquisitions, net of cash
acquired, totaled $42.0 million for the three months ended April 1, 2000.
Cash used in the development of certain intangible assets totaled $0.9
million for the three months ended April 1, 2000 compared to $1.4 million for
the three months ended April 3, 1999.
The increase in capital expenditures for the three months ended April
1, 2000 compared to the three months ended April 3, 1999 is primarily
attributable to purchases in bringing production of the Company's WDS 3500
product for Ford in-house during the three months ended April 1, 2000. Through
January 1, 2000, the Company was outsourcing production of the WDS 3500 unit.
Total capital expenditures for the three months ended April 1, 2000 related to
bringing the production in-house were approximately $2.3 million.
Beginning in 1998, the Company began efforts to implement SAP R/3 -TM-
("SAP"), an enterprise resource planning system. During the three months ended
April 1, 2000, total capital expenditures related to the Company's SAP
implementation totaled approximately $1.8 million. At the end of 1998, the
Company had completed Phase I of this project with the successful implementation
of certain modules of the SAP ERP system. During the three months ended April 3,
1999, the Company began Phase II of this project, which involves the
implementation of certain other modules of SAP, including sales, manufacturing
and distribution related modules. Expenditures remaining through the targeted
go-live date of July 3, 2000 are expected to approximate $1.5 million to $2.0
million. After go-live, the Company expects to continue to incur certain 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.
Cash used in the development of certain intangible assets was $0.9
million for the three months ended April 1, 2000. This represents the costs of
software capitalized as well as the direct purchase of certain intangible assets
from third parties.
16
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash provided by financing activities was $56.1 million for the
three months ended April 1, 2000 compared to net cash used in financing
activities of $0.1 million for the three months ended April 3, 1999. The change
in cash provided by (used in) financing activities during the three months ended
April 1, 2000 as compared to the three months ended April 3, 1999 is primarily
attributable to the Company's borrowings during the three months ended April 1,
2000. Net borrowings totaled $63.7 million during the three months ended April
1, 2000, of which $45.0 million were related to acquisitions and $18.7 million
related to general working capital. There was a decreased cash outlay of $1.4
million related to the Company's stock repurchase program for the three months
ended April 1, 2000. Offsetting these increases was an incremental decrease in
cash of $3.6 million related to proceeds from employee stock plans and
additional payments on long-term debt of $5.3 million for the three months ended
April 1, 2000.
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 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 April 1, 2000 and April 3, 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 April 1,
2000 ranged from 8.06% to 9.75%. 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 April 1, 2000, borrowings outstanding
under the line totaled $63.7 million, of which $45.0 million was related to
acquisitions and $18.7 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.
17
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GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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
18
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GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
THE YEAR 2000 ISSUE
Many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year. Consequently, they may be
unable to process certain dates before, during and after the Year 2000. As a
result, entities are at risk for possible miscalculations or system failures
causing disruptions in their operations. GenRad has evaluated its operations to
assess modifications needed for this issue. In October 1999, GenRad completed a
comprehensive worldwide program that identified and corrected potential material
problems related to the Year 2000 in its products, information systems,
infrastructure and manufacturing facilities. As of April 1, 2000, the Company
had not been adversely effected from the Year 2000 issue.
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,
19
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GENRAD, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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" ("SAB 101"). SAB 101 provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
as well as examples of how the staff applies revenue recognition guidance to
specific circumstances. Registrants may adopt a change in accounting principle
no later than the first quarter of the fiscal year beginning after December 15,
1999 (January 2, 2000 for the Company). In March 2000, SAB 101A was issued by
the SEC delaying the implementation date of SAB 101 for registrants until no
later than the second quarter of the fiscal year beginning after December 15,
1999 (April 2, 2000 for the Company). The Company has determined that SAB 101
will not have a material impact on the Company's financial position and results
of operations.
STOCK COMPENSATION
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of previously fixed stock options or awards, and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company is still assessing the impact of FIN 44 on the
Company's financial position or results of operations.
20
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this report:
10. Lease agreement dated July 26, 1996 between GenRad, Inc. and
Michelson Farm-Westford Technology Park Trust, incorporated by
reference to Exhibit 10 to the Company's report on Form 10-Q for the
quarter ended June 29, 1996.
10.1 Facility agreement dated June 26, 1997 between GenRad Limited and
BankBoston, N.A. London Branch, incorporated by reference to Exhibit
10.1 to the Company's report on Form 10- Q for the quarter ended June
28, 1997.
10.2 Amended and restated revolving credit agreement dated May 6, 1997
between GenRad, Inc. and BankBoston, N.A., incorporated by reference
to Exhibit 10.2 to the Company's report on Form 10-Q for the quarter
ended June 28, 1997.
10.3 Severance Agreement between GenRad, Inc. and Kevin R. Cloutier
effective as of May 9, 1997, incorporated by reference to Exhibit
10.3 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.
10.4 Severance Agreement between GenRad, Inc. and Paul Geere effective as
of May 9, 1997, incorporated by reference to Exhibit 10.4 to the
Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.5 Severance Agreement between GenRad, Inc. and Lori B. Hannay effective
as of May 9, 1997, incorporated by reference to Exhibit 10.5 to the
Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.6 Severance Agreement between GenRad, Inc. and Sarah H. Lucas effective
as of May 9, 1997, incorporated by reference to Exhibit 10.6 to the
Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.7 Severance Agreement between GenRad, Inc. and James F. Lyons effective
as of May 8, 1997, incorporated by reference to Exhibit 10.7 to the
Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.8 Severance Agreement between GenRad, Inc. and Paul Pronsky, Jr.
effective as of May 9, 1997, incorporated by reference to Exhibit
10.8 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.
10.9 Severance Agreement between GenRad, Inc. and Michael W. Schraeder
effective as of May 9, 1997, incorporated by reference to Exhibit
10.9 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.
10.10 Severance Agreement between GenRad, Inc. and Walter A. Shephard
effective as of October 24, 1997, incorporated by reference to
Exhibit 10.10 of the Company's report on Form 10-K for the year ended
January 3, 1998.
10.11 Severance Agreement between GenRad, Inc. and Gary H. Mueller
effective as of October 24, 1997, incorporated by reference to
Exhibit 10.11 of the Company's report on Form 10-K for the year ended
January 3, 1998.
21
<PAGE>
10.12 Agreement dated February 12, 1997 between GenRad Limited and Ford
Motor Company, incorporated by reference to Exhibit 10.12 Of the
Company's report on Form 10-K for the year ended January 2, 1999.
10.13 Settlement agreement and Mutual General Release dated April 7, 1999
between William E. Gaines, William E. Massaker, Frank B. Wingate and
Heritage Investment Limited Partnership and GenRad, Inc., James F.
Lyons and Paul Pronsky Jr., incorporated by reference to Exhibit
10.13 of the Company's report on Form 10-K for the year ended January
2, 1999.
27. Financial Data Schedule.
(b) There were no reports on Form 8-K filed during the three months ended April
1, 2000.
22
<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.
GenRad, Inc.
By: /s/ WALTER A. SHEPHARD
______________________________________
Walter A. Shephard
Vice President and
Chief Financial Officer and Clerk
Date: May 16, 2000
23
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 1, 2000 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 1, 2000
FOR GENRAD, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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