10-Q 1 a2048997z10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-8045 ------------------------ GENRAD, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1360950 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 7 TECHNOLOGY PARK DRIVE 01886-0033 WESTFORD, MASSACHUSETTS (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 589-7000 ------------------------ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 28,544,401 shares of the Common Stock of GenRad, Inc., $1.00 par value, were outstanding on May 9, 2001. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- GENRAD INC. QUARTERLY REPORT ON FORM 10-Q THREE MONTHS ENDED MARCH 31, 2001 TABLE OF CONTENTS
PAGE -------- PART I. FINANCIAL INFORMATION Item Consolidated Financial Statements 1: Consolidated Statements of Operations for the three months ended March 31, 2001 and April 1, 2000.................. 1 Consolidated Balance Sheets as of March 31, 2001 and April 1, 2000........................................... 2 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and April 1, 2000.................. 3 Notes to Consolidated Financial Statements................ 4 Item Management's Discussion and Analysis of Financial Condition 2: and Results of Operations................................. 9 PART II. OTHER INFORMATION Item Exhibits.................................................... 18 6: Signatures.................................................. 19
PART I ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS GENRAD, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2001 2000 --------- -------- REVENUE: Products.................................................. $ 46,231 $49,570 Services.................................................. 16,201 16,803 -------- ------- Total revenue......................................... 62,432 66,373 COST OF REVENUE: Products.................................................. 32,611 27,256 Services.................................................. 11,728 10,946 -------- ------- Total cost of revenue................................. 44,339 38,202 -------- ------- Gross margin................................................ 18,093 28,171 OPERATING EXPENSES: Selling, general and administrative....................... 21,858 17,774 Research and development.................................. 7,896 5,754 Amortization of acquisition-related intangible assets..... 2,248 791 Acquired in-process research and development.............. -- 500 Restructuring and other charges (benefits)................ 3,058 (2,479) -------- ------- Total operating expenses.............................. 35,060 22,340 -------- ------- Operating income (loss)..................................... (16,967) 5,831 OTHER INCOME (EXPENSE): Interest income........................................... 46 65 Interest expense.......................................... (2,609) (409) Other..................................................... 206 42 -------- ------- Total other expense................................... (2,357) (302) -------- ------- Income (loss) before income taxes........................... (19,324) 5,529 Income tax benefit.......................................... 7,373 12,549 -------- ------- Net income (loss)........................................... $(11,951) $18,078 ======== ======= NET INCOME (LOSS) PER SHARE: Basic..................................................... $ (0.42) $ 0.64 ======== ======= Diluted................................................... $ (0.42) $ 0.63 ======== ======= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic..................................................... 28,511 28,138 ======== ======= Diluted................................................... 28,511 28,704 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 1 GENRAD, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
MARCH 31, DECEMBER 30, 2001 2000 ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 14,260 $ 8,321 Accounts receivable, less allowance of $1,300 and $828...... 83,549 114,355 Inventories................................................. 73,946 65,551 Deferred tax assets......................................... 12,765 12,781 Other current assets........................................ 12,455 8,445 -------- -------- Total current assets.................................. 196,975 209,453 Property and equipment, net................................. 46,193 47,620 Deferred tax assets......................................... 25,855 18,410 Intangible assets, net...................................... 85,622 91,497 Other assets................................................ 2,434 2,625 -------- -------- Total assets................................................ $357,079 $369,605 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable...................................... $ 27,235 $ 21,427 Accrued liabilities......................................... 13,787 14,766 Deferred revenue............................................ 11,817 10,185 Accrued compensation and employee benefits.................. 6,765 10,645 Current portion of long-term debt........................... 94,135 48,590 -------- -------- Total current liabilities............................. 153,739 105,613 LONG-TERM LIABILITIES: Long-term debt.............................................. 47 45,050 Deferred revenue............................................ 1,042 1,232 Deferred tax liabilities.................................... 3,167 3,412 Other long-term liabilities................................. 13,342 13,541 -------- -------- Total long-term liabilities........................... 17,598 63,235 -------- -------- Total liabilities........................................... $171,337 $168,848 -------- -------- STOCKHOLDERS' EQUITY: Common stock, $1.00 par value, 60,000 shares authorized; 30,429 and 28,545 issued and outstanding, respectively at March 31, 2001 and 30,394 and 28,510 issued and outstanding, respectively at December 30, 2000............ 30,429 30,394 Additional paid-in capital.................................. 226,086 225,738 Treasury stock, 1,884 shares at March 31, 2001 and December 30, 2000.................................................. (31,292) (31,292) Accumulated deficit......................................... (34,370) (22,419) Accumulated other comprehensive loss........................ (5,111) (1,664) -------- -------- Total stockholders' equity............................ 185,742 200,757 -------- -------- Total liabilities and stockholders' equity.................. $357,079 $369,605 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 2 GENRAD, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
THREE MONTHS ENDED -------------------- MARCH 31, APRIL 1, 2001 2000 --------- -------- OPERATING ACTIVITIES: Net income (loss)........................................... $(11,951) $ 18,078 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................... 7,424 4,338 Deferred income tax benefit................................. (7,445) (13,102) All other non-cash adjustments.............................. 5,354 (1,550) Increase (decrease) in operating assets and liabilities, net of effects of acquisitions: Accounts receivable......................................... 28,978 5,332 Inventories................................................. (10,050) (14,597) All other operating assets and liabilities changes.......... (3,758) (734) -------- -------- Net cash provided by (used in) operating activities......... 8,552 (2,235) INVESTING ACTIVITIES: Purchases of property and equipment......................... (2,715) (8,799) Purchase of subsidiaries, net of cash acquired.............. -- (42,021) Development of intangible assets............................ (595) (887) -------- -------- Net cash used in investing activities....................... (3,310) (51,707) FINANCING ACTIVITIES: Proceeds from credit facility, net.......................... (957) 57,770 Proceeds from employee stock plans.......................... 237 584 Purchase of treasury stock.................................. -- (2,275) -------- -------- Net cash (used in) provided by financing activities......... (720) 56,079 Effect of exchange rates on cash and cash equivalents....... 1,417 637 -------- -------- Increase in cash and cash equivalents....................... 5,939 2,774 Cash and cash equivalents at beginning of period............ 8,321 6,951 -------- -------- Cash and cash equivalents at end of period.................. $ 14,260 $ 9,725 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of GenRad, Inc. ("GenRad" or "the Company") should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 30, 2000. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly the consolidated financial position at March 31, 2001 and December 30, 2000, and the results of operations and cash flows for the three months ended March 31, 2001 and April 1, 2000. Interim results are not necessarily indicative of the results for the full fiscal year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period balances have been reclassified to conform to the current presentation. EARNINGS PER SHARE Basic EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options using the "treasury stock" method. The following table presents the calculation for both basic and diluted EPS for the three months ended March 31, 2001 and April 1, 2000 (in thousands, except per share amounts):
THREE MONTHS ENDED --------------------------------------------------------------- MARCH 31, 2001 APRIL 1, 2000 ------------------------------ ------------------------------ PER PER SHARE SHARE LOSS SHARES AMOUNT INCOME SHARES AMOUNT -------- -------- -------- -------- -------- -------- BASIC: Income (loss) available to common stockholders... $(11,951) 28,511 $(0.42) $18,078 28,138 $0.64 Dilutive effect of stock options................. -- -- -- -- 566 (0.01) -------- ------ ------ ------- ------ ----- DILUTED: Income (loss) available to common stockholders... $(11,951) 28,511 $(0.42) $18,078 28,704 $0.63 ======== ====== ====== ======= ====== =====
Options to purchase 4.1 million shares for the three months ended April 1, 2000 were outstanding but were not included in the computations of diluted EPS because the price of the options was greater than the average market price of the common stock for the period reported. There is no difference between basic and diluted earnings per share in 2001 since potential common shares from the exercise of stock options are anti-dilutive. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The Company's other comprehensive income (loss) is comprised of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional 4 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) currency and changes in the fair value of financial instruments designated as cash flow hedges. Comprehensive income (loss) for the three months ended March 31, 2001 and April 1, 2000 are as follows (in thousands):
THREE MONTHS ENDED ------------------------------ MARCH 31, 2001 APRIL 1, 2000 -------------- ------------- Net income (loss)........................................... $(11,951) $18,078 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax of $667 and $(70).......................................... (1,089) 125 Unrealized losses on derivatives, net of tax of $642...... (1,048) -- -------- ------- Total other comprehensive income (loss)..................... (2,137) 125 -------- ------- Comprehensive income (loss)................................. $(14,088) $18,203 ======== =======
NOTE 2: RESTRUCTURING AND OTHER CHARGES (BENEFITS) 2001 CHARGES In February 2001, the Company implemented a restructuring plan in an effort to improve operating efficiencies. The plan involves outsourcing all printed circuit board manufacturing, exiting certain unprofitable product lines and consolidating certain manufacturing and administrative operations. The plan included a workforce reduction of approximately 140 employees primarily in the areas of manufacturing, engineering, service and administration. Total anticipated annual savings from the plan will be approximately $10 million. In accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" the Company recorded a restructuring charge during the first quarter of 2001 of $3.1 million. A summary of these charges and the activity through March 31, 2001 is as follows (in thousands):
RESERVE AS ORIGINAL 2001 OF MARCH 31, RESERVE ACTIVITY 2001 -------- -------- ------------ Severance................................................... $2,579 ($488) $2,091 Facilities.................................................. 80 -- 80 Other....................................................... 399 (399) -- ------ ----- ------ Totals...................................................... $3,058 $(887) $2,171 ====== ===== ======
2000 CHARGES During the first quarter of 2000, the Company implemented a restructuring plan involving closure of the Company's Portland, Oregon office and a management restructuring of the Diagnostic Solutions segment in the Manchester, UK facility. The plan resulted in a workforce reduction of approximately 25 employees, mainly consisting of engineering, marketing and training functions and facility closure costs. For the three months ended April 1, 2000, the Company recorded a restructuring charge of $1.0 million which included severance costs of $0.7 million and facility closure costs of $0.3 million. As of March 31, 2001 the plan was substantially complete. Additionally during the first quarter of 2000, the Company completed the extension of a sublease entered into at a facility in Maidenhead, England to include the Company's remaining lease obligation through 2013. As a result of this extension, the Company reversed a charge recorded in a prior year for excess facility reserves. This restructuring charge included accruals 5 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) related to the lease costs of the facility. The sublet of the facility resulted in the reversal of approximately $3.5 million of the restructuring accrual. NOTE 3: INVENTORY Inventory consists of the following at March 31, 2001 and December 30, 2000, respectively (in thousands):
MARCH 31, DECEMBER 30, 2001 2000 --------- ------------ Raw materials......................................... $24,560 $22,704 Work in process....................................... 37,156 31,378 Finished goods........................................ 12,230 11,469 ------- ------- $73,946 $65,551 ======= =======
NOTE 4: OPERATING SEGMENTS The Company elected to change the reporting of its operating segments effective the third quarter of 2000. Prior period operating results have been restated to conform to current period presentation. The Company is comprised of the following four lines of business: - Process Solutions ("PS") focuses on in-circuit test, imaging and re-work solutions as well as plant and line management solutions for electronic product manufacturers. - Functional Solutions ("FS") focuses on functional test platforms for manufacturers of telecommunications, computer and automotive electronics. - Diagnostic Solutions ("DS") focuses on service bay and manufacturing solutions for transportation OEMs and independent service providers. - Support and Services ("SS") focuses on maintenance programs, on-site and remote support, programming services and training to help customers optimize their hardware and software solutions. The following table illustrates, (in thousands), each of the Company's operating segments' operating income (loss) for the three months ended March 31, 2001 and April 1, 2000. The amounts provided herein are those utilized by senior management, in allocating resources and evaluating performance. GenRad's 6 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) chief operating decision makers do not utilize, nor does GenRad maintain, asset information or capital expenditures by segment, accordingly, such information is not presented herein.
PS FS DS SS TOTAL -------- -------- -------- -------- -------- THREE MONTHS ENDED MARCH 31, 2001: Revenue: Products................................... $24,239 $ 6,001 $13,825 $ 2,166 $46,231 Services................................... -- -- -- 16,201 16,201 ------- ------- ------- ------- ------- Total revenue............................ $24,239 $ 6,001 $13,825 $18,367 $62,432 ======= ======= ======= ======= ======= Operating income (loss)...................... $(6,972) $ (640) $(2,227) $ 4,707 $(5,132) ======= ======= ======= ======= ======= THREE MONTHS ENDED APRIL 1, 2000: Revenue: Products................................... $31,930 $ 3,031 $12,735 $ 1,874 $49,570 Services................................... -- -- -- 16,803 16,803 ------- ------- ------- ------- ------- Total revenue............................ $31,930 $ 3,031 $12,735 $18,677 $66,373 ======= ======= ======= ======= ======= Operating income (loss)...................... $ 8,311 $(1,227) $(2,134) $ 5,969 $10,919 ======= ======= ======= ======= =======
A reconciliation of the totals reported for the operating segments to income (loss) before income taxes in the condensed consolidated statements of operations is as follows:
THREE MONTHS ENDED ------------------------------ MARCH 31, 2001 APRIL 1, 2000 -------------- ------------- Operating income (loss): Total for reportable segments............................. $ (5,132) $10,919 Corporate expenses (a).................................... (8,777) (7,067) Acquired in-process research and development.............. -- (500) Restructuring and other (charges) benefits................ (3,058) 2,479 -------- ------- Operating income (loss)................................... (16,967) 5,831 Other expense............................................. (2,357) (302) -------- ------- Income (loss) before income taxes........................... $(19,324) $ 5,529 ======== =======
------------------------ (a) Includes amortization of capitalized software, corporate research and development and other charges. NOTE 5: INDEBTEDNESS In March 2000, the Company re-negotiated its existing $50.0 million credit facility, increasing the total borrowings available to $125.0 million (the "new line"). The new line is supported by a syndicated group of banks and provides for a term loan of up to $75.0 million to be utilized for acquisitions and a revolving line of credit of $50.0 million to be used for general working capital purposes. The new line requires the Company to maintain certain leverage, operating cash flow and operating income covenants as well as non-financial operating covenants, as defined, and expires in March 2004. If the Company is not in compliance with its covenants and other obligations under the new line, the lenders may refuse to allow the Company to draw down funds under the revolving line of credit. The new line is collaterized by substantially all of the Company's assets. Certain borrowings on the line, primarily related to acquisitions, are payable quarterly 7 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) while the remaining borrowings are payable on demand. The new line bears interest at the lesser of the banks' prime rate plus 1.0% or LIBOR plus 2.0%, as determined from time to time by the banks. The interest rates on the new line at March 31, 2001 ranged from 8.44% to 9.50%. Under the terms of the new line, the Company is required to pay a commitment fee on the unused portion of the line of 0.75% of the total unused portion of the line dependent on the Company's operating performance. At March 31, 2001, borrowings outstanding under the line totaled $92.3 million, of which $60.0 million was related to acquisitions and $32.3 million related to general working capital. As of March 31, 2001, the Company was not in compliance with the financial covenants of the new line, but subsequently obtained a waiver from the banks through June 15, 2001. The waiver includes a reduction in the maximum availability of the revolving line of credit to $38.0 million. The Company is currently in discussion with its bankers to renegotiate the terms of the new line. Additionally, the Company has begun to explore alternative financing sources, however the outcome of this course of action is uncertain. The Company has classified all amounts outstanding under the new line at March 31, 2001 as due within one year in the financial statements. NOTE 6: FINANCIAL INSTRUMENTS In 2000, the Company entered into three interest rate swaps to mitigate fluctuations in the variable interest rates related to the credit facility. The swaps were designated for the first $22.5 million, second $22.5 million and next $15.0 million of the outstanding principal of the credit facility with fixed interest rates of 6.99%, 7.0% and 6.93%, respectively. The maturity dates of the agreements match that of the underlying credit facility which is March 2004. In accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", which the Company implemented at the beginning of 2001, changes in the fair value of the derivative are to be carried in accumulated other comprehensive income (expense) over the life of the agreements. On maturity of the agreements, the appropriate gain or loss of the swaps is to be reclassified from accumulated other income (loss) to the income statement in other income (expense). As of March 31, 2001, the Company recorded $1.7 million to accumulated other comprehensive loss, which represents a cumulative-effect-type adjustment of $1.0 million, $0.6 million net of tax, related to the unrealized loss on the derivatives as of the beginning of the first quarter of 2001, and an adjustment of $0.7 million, $0.4 million net of tax, to recognize a reduction in the fair value of its swaps during the current quarter. The Company anticipates over the next twelve months that $0.6 million will be reclassed to other expense. NOTE 7: TREASURY STOCK The Company has a stock repurchase program whereby it will purchase in the open market shares of its stock. The Company intends to buy back its stock at times when the market price of the stock presents opportunities to do so, and depending on the Company's other cash requirements. The Company's stock repurchase plan is intended as a means to partially mitigate the dilutive impact of stock options. Through March 31, 2001 and April 1, 2000, the Company had utilized $36.0 million, cumulatively, to repurchase 2,195,600 shares of its common stock. Through March 31, 2001 and April 1, 2000 the Company had reissued 312,000 shares of treasury stock repurchased. 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to the historical information contained in this document, the discussion in this Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Report on Form 10-Q should be read as being applicable to all related forward-looking statements whenever they appear in this Report on Form 10-Q. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed in Item 1 "Business" of the Company's Annual Report on Form 10-K for the year ended December 30, 2000 as well as those discussed in this section and elsewhere in this Quarterly Report on Form 10-Q. OVERVIEW GenRad develops, manufactures and markets advanced performance-assurance technologies. GenRad's primary global markets for OEM and contract manufacturers include computers, advanced telecommunications for e-commerce and Internet services, and diagnostic systems for the transportation/ automotive industry. The Company operates primarily in the United States, Western Europe and Southeast Asia. GenRad operates as four lines of business bringing to market integrated hardware, software and service solutions that empower always-on services and un-interruptable business applications. The Company considers each line of business a reportable segment: - Process Solutions ("PS") focuses on in-circuit test, imaging and re-work solutions as well as plant and line management solutions for electronic product manufacturers. - Functional Solutions ("FS") focuses on functional test platforms for manufacturers of telecommunications, computers and automotive electronics. - Diagnostic Solutions ("DS") focuses on service bay and manufacturing solutions for transportation OEMs and independent service providers. - Support and Services ("SS") focuses on maintenance programs, on-site and remote support, and training to help customers optimize their hardware and software solutions. RESULTS OF OPERATIONS While first quarters are traditionally weak for the Company, this first quarter has been especially difficult and is a direct reflection of weak global demand and dramatic slowdown in our customers' businesses. Regardless of these challenges, we are working through this extraordinary downturn by investing in and enhancing our products and services solutions that help our customers gain productivity, competitiveness and profitability. The Company began experiencing the downturn late last year and implemented cost and expense reduction initiatives including work force downsizing, out-sourcing printed circuit board production and business consolidations to temper the impact of the broad economic slowdown. While we cannot minimize the impact of this slowdown, the Company is a global enterprise providing us with a degree of resiliency. The business is equally distributed between our North America and Europe-Asia operations; our customers are well balanced between original equipment and contract manufacturers; 9 GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and in 2001 no one customer is expected to account for more than eight percent of our business. This business diversity becomes an even greater strength in times of economic uncertainty. The Company now believes there is a cyclical downturn in the industry. There is uncertainty as to if and when the next cyclical growth phase will occur. Until such time as we return to a growth period, we expect a continued weakness in orders and therefore expect that the second quarter's revenue will not improve from the levels experienced by the Company during the first quarter of 2001. In light of that belief, the Company has expanded the cost reduction initiatives including the curtailment of all discretionary expenses. The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Company's consolidated statements of operations.
THREE MONTHS ENDED ---------------------- MARCH 31, APRIL 1, 2001 2000 ---------- --------- Total revenue............................................... 100.0% 100.0% Cost of revenue............................................. 71.0% 57.5% ------- ------- Gross margin................................................ 29.0% 42.5% Selling, general and administrative......................... 35.0% 26.8% Research and development.................................... 12.6% 8.7% Amortization of acquisition-related intangible assets....... 3.6% 1.2% Acquired in-process research and development................ --% 0.7% Restructuring and other charges (benefits).................. 4.9% (3.7)% ------- ------- Total operating expenses.................................... 56.2% 33.7% ------- ------- Operating income (loss)..................................... (27.2)% 8.8% Other expense............................................... (3.8)% (0.5)% Income tax benefit.......................................... 11.8% 18.9% ------- ------- Net income (loss)........................................... (19.1)% 27.2% ======= =======
ORDERS AND BACKLOG Orders for the Company's products and services decreased to $64.1 million for the three months ended March 31, 2001 ("2001") from $80.1 million for the three months ended April 1, 2000 ("2000"). Excluding orders from the acquisitions of Nicolet Imaging Systems and Sierra Research Technology (collectively "NIS") and Autodiagnos AB ("Autodiagnos"), which were completed on March 24, 2000 and April 12, 2000, respectively, orders totaled $59.0 million for 2001 compared to $78.8 million for 2000. PS orders totaled $20.1 million for 2001 compared to $31.8 million for 2000. Excluding NIS, PS orders totaled $16.0 for 2001 compared to $30.5 million for 2000. FS orders totaled $3.0 million for 2001 compared to $4.1 million for 2000. DS orders totaled $20.0 million for 2001 compared to $25.0 million for 2000. Excluding orders from the acquisition of Autodiagnos, DS orders totaled $19.0 million for 2001. SS orders totaled $21.0 million for 2001 compared to $19.2 million for 2000. PS orders decreased $14.5 million for 2001 compared to 2000 when excluding orders of NIS, driven by weakening contract manufacturing demand for the segment's in-circuit test products where orders decreased $12.4 million. FS orders decreased $1.1 million for 2001 compared to 2000 driven by decreased demand for Geneva products. DS orders decreased $5.0 million for 2001 compared to 2000. The decrease 10 GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS is attributable to the decrease in orders of the Ford WDS 3500 product. In 2001, $10.0 million of such orders were received compared to $16.3 million in 2000. This was partially offset by an increase in orders of $1.9 million in the Advanced Manufacturing Systems ("AMS") product line. North American orders totaled $26.8 million for 2001 compared to $35.0 million for 2000, a decrease of $8.2 million. Excluding orders of NIS, orders decreased $10.4 million. PS orders totaled $10.3 million for 2001 compared to $18.4 million for 2000 which is mainly attributable to a $8.3 million decrease in the demand for the segment's in-circuit test products. DS orders decreased to $1.2 million in 2001 compared to $3.4 million in 2000 principally due to the reduction in WDS orders. European orders totaled $29.1 million for 2001 compared to $39.8 million for 2000, a decrease of $10.7 million. Excluding orders of NIS and Autodiagnos, orders decreased $11.9 million. This decrease is primarily attributable to reduced demand for in-circuit test products of $4.4 million in PS and a decrease of $1.0 million in FS product orders. In addition, DS product orders included a $5.4 million decrease in orders of the Ford WDS 3500 product, which was partially offset by an increase in orders of $2.3 million of AMS products. Asian orders totaled $8.2 million for 2001 compared to $5.3 million for 2000, an increase of $2.9 million. Excluding orders of NIS, orders increased $2.5 million. This increase is attributable to improved demand in all lines of business in this region. Specifically, orders for products in PS increased $0.6 million, orders for products in FS increased $0.5 million and orders of the Ford WDS 3500 product in DS increased $1.5 million. Backlog, represented by those orders received, which are backed by a purchase order, at March 31, 2001 was $44.0 million compared to $42.3 million at December 30, 2000. Most orders have been historically fulfilled within three months of receipt. Although orders are subject to cancellation, GenRad's experience has been that losses resulting from cancellations are not material, however, refer to "Factors That May Affect Future Results". REVENUE Total revenue decreased to $62.4 million for 2001 from $66.4 million for 2000. Excluding revenue of NIS and Autodiagnos, revenue totaled $57.4 million for 2001 compared to $64.5 for 2000. PS revenue totaled $24.2 million for 2001 compared to $31.9 million for 2000. Excluding revenue of NIS, PS revenue totaled $20.2 million in 2001 compared to $30.1 million for 2000. FS revenue totaled $6.0 million for 2001 compared to $3.0 million for 2000. DS revenue totaled $13.8 million for 2001 compared to $12.8 million for 2000. Excluding revenue of Autodiagnos, DS revenue totaled $12.8 million for 2001. SS revenue totaled $18.4 million for 2001 compared to $18.7 million for 2000. PS revenue decreased $9.9 million for 2001 compared to 2000 when excluding revenue of NIS. The decrease was due to $9.1 million in lower revenues related to in-circuit test products, principally related to the global economic slowdown and a weakening contract manufacturing demand. FS revenue increased $3.0 million in 2001 compared to 2000 as a result of higher Geneva product shipments of $3.0 million. DS revenue remained stable when excluding revenue of Autodiagnos. This is attributable to a $1.7 million increase in ADS revenue and $1.1 million in AMS, offset by a decrease in revenue related to the WDS 3500 product, which was $2.7 million lower during 2001. In 2001, the Company shipped 1,053 WDS units compared with 1,396 units in 2000. 11 GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SS revenue decreased $0.3 million for 2001 compared to 2000. Service revenue for PS totaled $7.6 million for 2001 compared to $7.9 million for 2000. Service revenue for FS products totaled $0.8 million for 2001 compared to $0.7 million for 2000. Service revenue for DS products totaled $5.5 million for 2001 compared to $6.7 million for 2000, a $1.2 million decrease principally driven by reduced demand for services related to ADS. Revenue from international markets was $37.7 million, or 60.5% of revenue for 2001 compared to $39.3 million, or 59.2% of revenue for 2000. The international mix of the Company's revenues remained consistent from year to year with reduced international revenues following the worldwide revenue decline. Revenues from international markets are subject to the risk of currency fluctuations. GROSS MARGINS Gross margin was $18.1 million, or 29.0%, for 2001 compared to $28.2 million, or 42.4%, for 2000. Product margin decreased $8.7 million and service margin decreased $1.4 million. The decrease in product margin is mainly attributable to a $10.2 million decrease in product margin related to the PS line of business partially offset by an in increase of $1.2 million in product margin related to the FS line of business and an increase of $1.3 million in product margin related to the DS line of business. Specifically, the decrease in gross margin dollars reflects weakened in-circuit test products margin of $7.0 million due to an unfavorable mix of product sales and under-absorption of manufacturing facility costs. The service margin decrease is attributed to strong lower-margin ICS revenues offset by reduced higher-margin application revenues. Inventory turnover for 2001 increased to 1.9 times (annualized) as compared to 1.8 times (annualized) for 2000. The Company's consolidated inventory balance increased by $8.4 million, to $73.9 million during 2001 compared to a year ago. The growth is attributed to the combination of the weak global product demand and the establishment of a buffer stock of printed circuit boards due to the production outsourcing plan. Inventory investment is slowing and the balances are expected to decline over the remainder of the year. OPERATING EXPENSES Selling, general and administrative expenses increased to $21.9 million, or 35.0% of total revenue for 2001 from $17.8 million, or 26.8% of total revenue for 2000. Excluding expenses of NIS and Autodiagnos, selling, general and administrative expenses totaled $19.0 million during 2001 and $17.4 million during 2000. The increase in selling, general and administrative expenses in dollars is primarily attributable to selling and corporate marketing expenses and increased amortization expenses associated with the Company's enterprise resource planning system SAP R/3-TM- ("SAP"), for which the second phase was placed in service in the third quarter of 2000. Research and development expenses increased to $7.9 million, or 12.6% of total revenue for 2001 from $5.8 million, or 8.7% of total revenue for 2000. Excluding expenses of NIS and Autodiagnos, research and development expenses totaled $6.6 million for 2001 and $5.6 million for 2000. The increase in research and development expenses primarily reflects the Company's efforts to enter the automotive aftermarket in DS and on-going new product development efforts in the imaging product line of PS. 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 3.6% of total revenue, for 2001, compared to $0.8 million, or 1.2% of total revenue, for 2000. The increase in dollars, and as a percentage of revenue, is attributable to the acquisitions of NIS and Autodiagnos in 2000. 12 GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER EXPENSE Other expense was $2.4 million for 2001 compared to $0.3 million for 2000, related to net interest charges, reflecting increased borrowings on its credit facility, primarily due to acquisitions. INCOME TAX BENEFIT The Company recorded a net tax benefit of $7.4 million for 2001 compared to a net income tax benefit of $12.5 million for 2000. The recorded net tax benefit in 2001 is the result of the pre-tax net loss of $19.3 million. The recorded net tax benefit in 2000 results primarily from a reversal of a portion of the deferred tax asset valuation allowance totaling $14.5 million, which was recorded during the three months ended April 1, 2000 due to management's expectations of future income and expected utilization of domestic and foreign net operating loss carryforwards. Excluding the reversal of a portion of the deferred tax asset valuation allowance, the income tax provision totaled $1.9 million for 2000. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT During the first quarter of 2000, the Company acquired the rights to certain imaging technologies as part of its purchase of NIS for which technological feasibility had not been established and no alternative future uses were identified. Consequently, a portion of the purchase price relating to acquired in-process research and development was expensed at the time of the acquisition. The total of $0.5 million is included as acquired in-process research and development in the accompanying consolidated statement of operations. RESTRUCTURING AND OTHER CHARGES (BENEFITS) 2001 CHARGES In February 2001, the Company implemented a strategic restructuring plan in an effort to improve operating efficiencies. The plan involves outsourcing all printed circuit board manufacturing, exiting certain unprofitable product lines and consolidating manufacturing and administrative operations. The plan included a workforce reduction of approximately 140 employees primarily in the areas of manufacturing, engineering, service and administration. Total anticipated annual savings from the plan will be approximately $10 million. In accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" the Company recorded a restructuring charge during the first quarter of 2001 of $3.1 million. A summary of these charges and the activity used through March 31, 2001 is as follows (in thousands):
RESERVE AS ORIGINAL 2001 OF MARCH 31, RESERVE ACTIVITY 2001 -------- -------- ------------ Severance................................................... $2,579 ($488) $2,091 Facilities.................................................. 80 -- 80 Other....................................................... 399 (399) -- ------ ----- ------ Totals...................................................... $3,058 ($887) $2,171 ====== ===== ======
2000 CHARGES During the first quarter of 2000, the Company implemented a restructuring plan involving closure of the Company's Portland, Oregon office and a management restructuring of the Diagnostic Solutions 13 GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS segment in the Manchester, UK facility. The plan resulted in a workforce reduction of approximately 25 employees, mainly consisting of engineering, marketing and training functions and facility closure costs. For the three months ended April 1, 2000, the Company recorded a restructuring charge of $1.0 million which included severance costs of $0.7 million and facility closure costs of $0.3 million. As of March 31, 2001 the plan was substantially complete. Additionally during the first quarter of 2000, the Company completed the extension of a sublease entered into at a facility in Maidenhead, England to include the Company's remaining lease obligation through 2013. As a result of this extension, the Company reversed a charge recorded in a prior year for excess facility reserves. This restructuring charge included accruals related to the lease costs of the facility. The sublet of the facility resulted in the reversal of approximately $3.5 million of the restructuring accrual. LIQUIDITY AND SOURCES OF CAPITAL The Company's primary source of liquidity is internally generated funds and utilization of its available credit facility. Cash at March 31, 2001 totaled $14.3 million compared to $8.3 million at December 30, 2000. The Company's current ratio at March 31, 2001 decreased to 1.3 from 2.0 at December 30, 2000. Net cash provided by operating activities was $8.6 million in 2001 compared to net cash used in operating activities, net of effects of acquisitions, of $2.2 million in 2000. Net cash provided by operating activities during 2001 was primarily driven by a decrease in accounts receivable of $29.0 million, the result of aggressive collection efforts combined with the quarter's depressed sales volume, depreciation and amortization of $7.4 million, and restructuring charges of $3.1 million. These inflows were primarily utilized to fund the $12.0 million net loss, inventory investments of $10.1 million, and an increase in deferred tax assets of $7.4 million, mainly from the tax benefit generated by the net loss. During 2001, net cash used in investing activities was $3.3 million, compared to $51.7 million for 2000, mainly due to the acquisition of NIS. Capital expenditures totaled $2.7 million for 2001 and $8.8 million for 2000. The significant decrease in capital expenditures for 2001 compared to 2000 is attributable to two significant items in 2000: the investment of $2.3 million in 2000 required in bringing production of the Ford WDS 3500 product in-house, and an incremental decrease of $1.3 million related to implementing the second phase of SAP. Net cash used in financing activities was $0.7 million for 2001 compared to net cash provided by financing activities of $56.1 million for 2000. This is primarily attributable to the Company's significant additional borrowings during 2000 for the purpose of funding acquisitions. Net borrowings in 2000 totaled $63.7 million of which $45.0 million were related to acquisitions and $18.7 million was related to general working capital requirements, primarily inventory investment. TREASURY STOCK The Company has a stock repurchase program whereby it will purchase in the open market shares of its stock. The Company intends to buy back its stock at times when the market price of the stock presents opportunities to do so, and depending on the Company's other cash requirements. The Company's stock repurchase plan is intended as a means to partially mitigate the dilutive impact of stock options. During the first quarter of 2000, the Company utilized $2.3 million to repurchase 151,000 shares of its common stock. 14 GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDEBTEDNESS In March 2000, the Company re-negotiated its existing $50.0 million credit facility, increasing the total borrowings available to $125.0 million (the "new line"). The new line is supported by a syndicated group of banks and provides for a term loan of up to $75.0 million to be utilized for acquisitions and a revolving line of credit of $50.0 million to be used for general working capital purposes. The new line requires the Company to maintain certain leverage, operating cash flow and operating income covenants as well as non-financial operating covenants, as defined, and expires in March 2004. If the Company is not in compliance with its covenants and other obligations under the new line, the lenders may refuse to allow the Company to draw down funds under the revolving line of credit. The new line is collaterized by substantially all of the Company's assets. Certain borrowings on the line, primarily related to acquisitions, are payable quarterly while the remaining borrowings are payable on demand. The new line bears interest at the lesser of the banks' prime rate plus 1.0% or LIBOR plus 2.0%, as determined from time to time by the banks. The interest rates on the new line at March 31, 2001 ranged from 8.44% to 9.50%. Under the terms of the new line, the Company is required to pay a commitment fee on the unused portion of the line of 0.75% of the total unused portion of the line dependent on the Company's operating performance. At March 31, 2001, borrowings outstanding under the line totaled $92.3 million, of which $60.0 million was related to acquisitions and $32.3 million related to general working capital. As of March 31, 2001, the Company was not in compliance with the financial covenants of the new line, but subsequently obtained a waiver from the banks through June 15, 2001. The waiver includes a reduction in the maximum availability of the revolving line of credit to $38.0 million. The Company is currently in discussion with its bankers to renegotiate the terms of the new line. The Company has timely made all payments of principal and interest due under the new line and anticipates that it will continue to be able to make payments of principal and interest under the new line as they become due in the ordinary course. Additionally, the Company has begun to explore alternative financing sources, however the outcome of this course of action is uncertain. The Company has classified all amounts outstanding under the new line at March 31, 2001 as due within one year in the financial statements. EFFECTS OF INFLATION Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on its revenues or its results of operations. The Company attempts to mitigate inflationary cost increases by continuously improving manufacturing methods and technologies. Management does not expect inflation to have a significant impact on operations in the foreseeable future. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company maintains development, sales and support facilities in several locations worldwide, including, the United Kingdom, France, Germany, Switzerland, Sweden, Singapore and Mexico among others. A significant amount of the Company's business is conducted with companies located in these and other countries and certain transactions may be denominated in currencies other than the US dollar. As a result, the Company may experience transaction gains and losses as a result of currency fluctuations. In order to minimize its exposure to loss from changes in foreign currency exchange rates, the Company mitigates its risk using foreign currency forward exchange contracts. The Company's currency risk mitigation strategies are designed to reduce the Company's vulnerability to certain foreign currency exchange exposures. In executing its strategies, the Company actively monitors foreign currency exchange rates and executes foreign currency forward exchange contracts, primarily with financial institutions. These 15 GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contracts serve to offset the impact of actual foreign currency changes, e.g., if currency rates changed with respect to a certain transaction resulting in a loss to the Company, the forward contract would be structured to result in a gain, thereby minimizing the actual loss incurred, if any. The Company may be subject to losses resulting from unanticipated changes in foreign currency exchange rates. The market factors that expose the Company in this regard include economic conditions in which the Company conducts business as well as the Company's ability to effectively and efficiently engage in foreign currency forward exchange contracts at competitive rates with financial institutions or others. The Company expects to continue these or similar practices in the future to the extent appropriate. Historically, actual results of the Company's foreign currency risk management procedures have been in line with management's expectations and have not resulted in significant gains or losses, however, there can be no assurance that these results will continue in the future. FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results of operations and future financial conditions may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be beyond the Company's control. Factors that might cause such differences include, but are not limited to, those discussed below. The recent economic downturn has had an impact on consumer and capital spending in many of the markets that we serve worldwide. It also has created an imbalance of supply and demand in both the OEM and contract manufacturing industries. These forces are currently adversely impacting the Company's order and revenue performance. Management is uncertain as to how long and how deep the current downturn may be in these markets. The Company has experienced and expects to continue to experience fluctuations in its results of operations, particularly on a quarterly basis. The Company's expense levels are based, in part, on expectations of future revenues. If revenue levels in a particular period do not meet expectations, due to the timing of the receipt of orders from customers, customer cancellations or delays of shipments, then operating results could be adversely impacted. The Company's principal markets are affected by the cyclical economic patterns of OEM and contract manufacturers' capital investment requirements. The market for the Company's products is characterized by rapid technological change, an increased demand for specific feature requests by customers, evolving industry standards, and frequent new product introductions. The introduction of products embodying new technology or the emergence of new industry standards or practices could render the Company's existing products obsolete or otherwise unmarketable. Future operating results are dependent upon the Company's ability to develop, design, manufacture and market technologically innovative products that meet customer needs. Competition in the markets where the Company operates is intense. The Company continues to invest in manufacturing productivity to try to minimize the impact of competitive pricing pressures, fluctuations within the Company's product mix, potential inventory obsolescence exposure and start-up manufacturing costs for new product introductions. The Company is dependent upon a number of suppliers for several key components of its products. The loss of certain of the Company's suppliers, supply shortages or increases in the costs of key raw materials could have a material adverse effect on the Company. 16 GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER FACTORS Other factors which could impact future results are past and future acquisitions, strategic alliances, patent or product liability claims in excess of available insurance coverage, changes in the Company's effective tax rates, new regulatory requirements, political and economic changes, tariffs, trade restrictions, transportation delays, foreign currency fluctuations and inflation. 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. 17 PART II. OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report:
10.17 Revolving credit and term loan agreement between GenRad, Inc., GenRad Holdings Limited, GenRad Europe Limited and GenRad Limited ("GenRad") and Fleet National Bank effective as of March 24, 2000, filed herewith. 10.18 Amended revolving credit and term loan agreement between GenRad and Fleet National Bank effective as of June 29, 2000, filed herewith. 10.19 Amended revolving credit and term loan agreement between GenRad and Fleet National Bank effective as of September 30, 2000, filed herewith. 10.20 Amended revolving credit and term loan agreement between GenRad and Fleet National Bank effective as of December 30, 2000, filed herewith. 10.21 Amended revolving credit and term loan agreement between GenRad and Fleet National Bank effective as of April 18, 2001, filed herewith. 10.22 Severance agreement between GenRad, Inc. and Peter Miles effective as of September 1, 2000, filed herewith.
(b) There were no reports on Form 8-K filed during the three months ended March 31, 2001. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf the undersigned thereunto duly authorized. GENRAD, INC. By: /s/ WALTER A. SHEPHARD ----------------------------------------- Walter A. Shephard CHIEF FINANCIAL OFFICER, VICE PRESIDENT, GLOBAL BUSINESS OPERATIONS, TREASURER, AND CLERK
Date: May 17, 2001 19