10-Q 1 a2056783z10-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 JUNE 30, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 1-8045 ------------------------ GENRAD, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1360950 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 7 TECHNOLOGY PARK DRIVE WESTFORD, MASSACHUSETTS 01886-0033 (Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 589-7000 ------------------------ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 28,551,636 shares of the Common Stock of GenRad, Inc., $1.00 par value, were outstanding on August 9, 2001. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- GENRAD, INC. QUARTERLY REPORT ON FORM 10-Q THREE MONTHS ENDED JUNE 30, 2001 TABLE OF CONTENTS
PAGE -------- PART I. FINANCIAL INFORMATION Item 1: Consolidated Financial Statements Consolidated Statements of Operations for the Three and Six months ended June 30, 2001 and July 1, 2000......... 1 Consolidated Balance Sheets as of June 30, 2001 and December 30, 2000....................................... 2 Consolidated Statements of Cash Flows for the Six months ended June 30, 2001 and July 1, 2000.................... 3 Notes to Consolidated Financial Statements................ 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 12 PART II. OTHER INFORMATION Item 4: Submission of Matters to a Vote of Security Holders......... 23 Item 6: Exhibits and Reports on Form 8-K............................ 23 Signatures.................................................. 24
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS GENRAD, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- JUNE 30, JULY 1, JUNE 30, JULY 1, 2001 2000 2001 2000 -------- -------- -------- -------- REVENUE: Products.............................................. $ 39,852 $70,303 $ 86,083 $119,873 Services.............................................. 14,646 17,021 30,847 33,824 -------- ------- -------- -------- Total revenue..................................... 54,498 87,324 116,930 153,697 COST OF REVENUE: Products.............................................. 51,669 40,740 84,280 67,996 Services.............................................. 10,640 12,245 22,368 23,191 -------- ------- -------- -------- Total cost of revenue............................. 62,309 52,985 106,648 91,187 -------- ------- -------- -------- Gross margin.......................................... (7,811) 34,339 10,282 62,510 OPERATING EXPENSES: Selling, general and administrative................... 18,309 20,329 40,167 38,103 Research and development.............................. 8,249 7,237 16,145 12,991 Amortization of acquisition-related intangible assets.............................................. 2,070 2,004 4,318 2,795 Restructuring and other charges....................... -- 4,124 3,058 1,645 Impairment of long-lived assets....................... 21,816 -- 21,816 -- Acquired in-process research and development.......... -- -- -- 500 -------- ------- -------- -------- Total operating expenses.......................... 50,444 33,694 85,504 56,034 -------- ------- -------- -------- Operating income (loss)............................... (58,255) 645 (75,222) 6,476 OTHER INCOME (EXPENSE): Interest income....................................... 42 59 88 124 Interest expense...................................... (3,181) (2,326) (5,790) (2,735) Other................................................. (812) 10 (606) 52 -------- ------- -------- -------- Total other expense............................... (3,951) (2,257) (6,308) (2,559) -------- ------- -------- -------- Income (loss) before income taxes..................... (62,206) (1,612) (81,530) 3,917 Income tax benefit.................................... 23,608 581 30,981 13,130 -------- ------- -------- -------- Net income (loss)..................................... $(38,598) $(1,031) $(50,549) $ 17,047 ======== ======= ======== ======== NET INCOME (LOSS) PER SHARE: Basic............................................... $ (1.35) $ (0.04) $ (1.77) $ 0.61 ======== ======= ======== ======== Diluted............................................. $ (1.35) $ (0.04) $ (1.77) $ 0.60 ======== ======= ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic............................................... 28,549 28,073 28,530 28,105 ======== ======= ======== ======== Diluted............................................. 28,549 28,073 28,530 28,551 ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 1 GENRAD, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
JUNE 30, DECEMBER 30, 2001 2000 ----------- ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 5,935 $ 8,321 Accounts receivable, less allowance of $1,403 and $828...... 66,522 114,355 Inventories................................................. 58,570 65,551 Deferred tax assets......................................... 10,649 12,781 Other current assets........................................ 14,467 8,445 -------- -------- Total current assets.................................... 156,143 209,453 Property and equipment, net................................. 44,133 47,620 Deferred tax assets......................................... 48,891 18,410 Intangible assets, net...................................... 53,104 91,497 Other assets................................................ 2,200 2,625 -------- -------- Total assets................................................ $304,471 $369,605 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt........................... $ 85,519 $ 48,590 Trade accounts payable...................................... 28,168 21,427 Accrued liabilities......................................... 9,804 14,766 Accrued compensation and employee benefits.................. 8,001 10,645 Deferred revenue............................................ 11,834 10,185 -------- -------- Total current liabilities............................... 143,326 105,613 LONG-TERM LIABILITIES: Long-term debt.............................................. 45 45,050 Deferred revenue............................................ 951 1,232 Deferred tax liabilities.................................... -- 3,412 Other long-term liabilities................................. 13,273 13,541 -------- -------- Total long-term liabilities............................. 14,269 63,235 -------- -------- Total liabilities........................................... $157,595 $168,848 -------- -------- STOCKHOLDERS' EQUITY: Common stock, $1.00 par value, 60,000 shares authorized; 30,437 and 28,553 issued and outstanding, respectively at June 30, 2001 and 30,394 and 28,510 issued and outstanding, respectively at December 30, 2000............ 30,437 30,394 Additional paid-in capital.................................. 226,186 225,738 Treasury stock, 1,884 shares at June 30, 2001 and December 30, 2000.................................................. (31,292) (31,292) Accumulated deficit......................................... (72,968) (22,419) Accumulated other comprehensive loss........................ (5,487) (1,664) -------- -------- Total stockholders' equity.............................. 146,876 200,757 -------- -------- Total liabilities and stockholders' equity.................. $304,471 $369,605 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 2 GENRAD, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED ------------------- JUNE 30, JULY 1, 2001 2000 -------- -------- OPERATING ACTIVITIES: Net income (loss)........................................... $(50,549) $17,047 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................... 14,290 10,614 Deferred income tax benefit................................. (31,436) -- Impairment of long-lived assets............................. 28,190 -- All other non-cash adjustments.............................. 17,840 (15,586) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable......................................... 45,041 (6,581) Inventories................................................. (7,483) (16,876) All other operating assets and liabilities changes.......... (6,943) (1,122) -------- ------- Net cash provided by (used in) operating activities......... 8,950 (12,504) INVESTING ACTIVITIES: Purchases of property and equipment......................... (4,523) (12,782) Proceeds from sale of property and equipment................ 921 -- Purchase of subsidiaries, net of cash acquired.............. -- (69,185) Development of intangible assets............................ (1,083) (1,619) -------- ------- Net cash used in investing activities....................... (4,685) (83,586) FINANCING ACTIVITIES: Proceeds from (repayments of) credit facility, net.......... (9,404) 99,224 Proceeds from employee stock plans.......................... 268 818 Purchase of treasury stock.................................. -- (2,275) -------- ------- Net cash (used in) provided by financing activities......... (9,136) 97,767 Effect of exchange rates on cash and cash equivalents....... 2,485 3,011 -------- ------- (Decrease) increase in cash and cash equivalents............ (2,386) 4,688 Cash and cash equivalents at beginning of period............ 8,321 6,951 -------- ------- Cash and cash equivalents at end of period.................. $ 5,935 $11,639 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 3 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of GenRad, Inc. ("GenRad" or "the Company") should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 30, 2000. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly the consolidated financial position at June 30, 2001 and December 30, 2000, the results of operations for the three and six months ended June 30, 2001 and July 1, 2000, and cash flows for the six months ended June 30, 2001 and July 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 earnings per share ("EPS") is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options using the "treasury stock" method. The following table presents the calculation for both basic and diluted EPS for the three and six months ended June 30, 2001 and July 1, 2000 (in thousands, except per share amounts):
THREE MONTHS ENDED --------------------------------------------------------------- JUNE 30, 2001 JULY 1, 2000 ------------------------------ ------------------------------ PER PER SHARE SHARE LOSS SHARES AMOUNT LOSS SHARES AMOUNT -------- -------- -------- -------- -------- -------- BASIC: Net loss......................................... $(38,598) 28,549 $(1.35) $(1,031) 28,073 $(0.04) Dilutive effect of stock options................. -- -- -- -- -- -- -------- ------ ------ ------- ------ ------ DILUTED: Net loss......................................... $(38,598) 28,549 $(1.35) $(1,031) 28,073 $(0.04) ======== ====== ====== ======= ====== ======
SIX MONTHS ENDED --------------------------------------------------------------- JUNE 30, 2001 JULY 1, 2000 ------------------------------ ------------------------------ PER PER SHARE SHARE LOSS SHARES AMOUNT INCOME SHARES AMOUNT -------- -------- -------- -------- -------- -------- BASIC: Net income (loss)................................ $(50,549) 28,530 $(1.77) $17,047 28,105 $ 0.61 Dilutive effect of stock options................. -- -- -- -- 446 $(0.01) -------- ------ ------ ------- ------ ------ DILUTED: Net income (loss)................................ $(50,549) 28,530 $(1.77) $17,047 28,551 $ 0.60 ======== ====== ====== ======= ====== ======
4 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) Options to purchase 4.6 million shares for the six months ended July 1, 2000 were outstanding but were not included in the computation 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 or the three months ended July 1, 2000 as the Company is in a loss position and therefore potential common shares from the exercise of stock options are anti-dilutive. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The Company's other comprehensive income (loss) is comprised of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency and changes in the fair value of financial instruments designated as cash flow hedges. Comprehensive income (loss) for the three and six months ended June 30, 2001 and July 1, 2000 are as follows (in thousands):
THREE MONTHS ENDED ---------------------------- JUNE 30, 2001 JULY 1, 2000 ------------- ------------ Net loss.................................................... $(38,598) $(1,031) Other comprehensive income (loss): Foreign currency translation adjustments, net of tax of $213 and $(108)......................................... (347) 192 Unrealized gain on derivatives, net of tax of $70......... 114 -- -------- ------- Total other comprehensive income (loss)..................... (233) 192 -------- ------- Comprehensive loss.......................................... $(38,831) $ (839) ======== =======
SIX MONTHS ENDED ---------------------------- JUNE 30, 2001 JULY 1, 2000 ------------- ------------ Net income (loss)........................................... $(50,549) $17,047 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax of $880 and $(178)......................................... (1,436) 316 Unrealized loss on derivatives, net of tax of $572........ (934) -- -------- ------- Total other comprehensive income (loss)..................... (2,370) 316 -------- ------- Comprehensive income (loss)................................. $(52,919) $17,363 ======== =======
NOTE 2: RESTRUCTURING AND OTHER CHARGES 2001 CHARGES In February 2001, the Company implemented a restructuring plan in an effort to improve operating efficiencies. The plan involves outsourcing all printed circuit board manufacturing, exiting certain unprofitable product lines and consolidating certain manufacturing and administrative operations. The plan included a workforce reduction of approximately 140 employees primarily in the areas of manufacturing, engineering, service and administration. Total anticipated annual savings from the plan will be approximately $10 million. In accordance with EITF 94-3, "Liability Recognition for 5 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) Certain Employee Termination Benefits and Other Costs to Exit an Activity" the Company recorded a restructuring charge during the first quarter of 2001 of $3.1 million. The Company estimates that payments related to the restructuring will be completed by the second quarter of 2002. A summary of these charges and the activity through June 30, 2001 is as follows (in thousands):
SEVERANCE FACILITIES OTHER TOTAL --------- ---------- -------- -------- Original reserve........................................... $2,579 $80 $399 $3,058 Payments in the three months ended March 31, 2001.......... (488) -- (399) (887) ------ --- ---- ------ Remaining reserve as of March 31, 2001..................... 2,091 80 -- 2,171 Payments in the three months ended June 30, 2001........... (943) (29) -- (972) ------ --- ---- ------ Remaining reserve as of June 30, 2001...................... $1,148 $51 -- $1,199 ====== === ==== ======
2000 CHARGES During the second quarter of 2000, the Company implemented a reorganization plan in connection with the election of Robert M. Dutkowsky as Chairman, President and Chief Executive Officer (collectively "CEO"). As a result, the employment of certain members of management, including the then current CEO, was terminated. A charge of $4.1 million for severance costs to be completed during fiscal 2001 was recorded during the three months ended July 1, 2000. As of July 1, 2000, payments of $3.1 million were made against the reserve. As of June 30, 2001 the remaining balance was $0.1 million. NOTE 3: IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company records impairment losses on long-lived assets to be held and used or to be disposed of when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. In accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company records impairment losses on capitalized computer software costs when indicators of impairment are present and the estimated value of the assets is less than the assets' carrying amount. During the second quarter of 2001, the Company performed a review of the carrying value of goodwill and other long lived assets pertaining to the Diagnostic Solutions ("DS") operating segment in accordance with SFAS No. 121 and SFAS No. 86. The goodwill and other long-lived assets involved in the review related principally to the acquisitions of Autodiagnos in April 2000 and Mastertech in December 1999. This review was performed as a result of several indicators specific to the second quarter of 2001 that an impairment of such assets had occurred. Such indicators included a continued deterioration of market conditions, together with management's approval and subsequent execution of a plan to discontinue the development of the GTE3200 automotive diagnostics aftermarket product. Following this review management concluded that a significant impairment of the goodwill and other long lived assets had occurred because the estimated fair value (determined on a discounted cash flow basis using management's most recent projections) was less than the carrying value of these assets. This difference between the fair value and the carrying value of the assets resulted in a $28.2 million 6 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) impairment charge, of which $16.1 million relates to acquired goodwill and $12.1 million relates to other identifiable intangible assets. In the Company's consolidated statements of operations, $21.8 million of the impairment charge relating to the write down of the carrying value of goodwill and certain other intangibles has been recorded as a separate line item within operating expenses; $6.4 million is included in cost of revenue as it relates to the write down of $1.8 million of software costs previously capitalized under SFAS 86; and $4.6 million of hardware and software technology purchased as part of the Autodiagnos acquisition. NOTE 4: INVENTORY Inventory consists of the following at June 30, 2001 and December 30, 2000, respectively (in thousands):
JUNE 30, DECEMBER 30, 2001 2000 -------- ------------ Raw materials.......................................... $14,653 $22,704 Work in process........................................ 28,435 31,378 Finished goods......................................... 15,482 11,469 ------- ------- $58,570 $65,551 ======= =======
Part of the decrease in the inventory balance is a result of recording an additional excess and obsolete inventory provision of $11.9 million in 2001. The additional provision was a result of two main factors, being the Company's decision to discontinue its GTE3200 automotive aftermarket product within the DS line of business and the current and projected softness in the electronics manufacturing market sector impacting all lines of business. NOTE 5: OPERATING SEGMENTS The Company elected to change the reporting of its operating segments effective the third quarter of 2000. Prior period operating results have been restated to conform to current period presentation. The Company is comprised of the following four lines of business: - Process Solutions ("PS") focuses on in-circuit test, imaging and re-work solutions as well as plant and line management solutions for electronic product manufacturers. - Functional Solutions ("FS") focuses on functional test platforms for manufacturers of telecommunications, computer and automotive electronics. - Diagnostic Solutions ("DS") focuses on service bay and manufacturing solutions for transportation OEMs and independent service providers. - Support and Services ("SS") focuses on maintenance programs, on-site and remote support, programming services and training to help customers optimize their hardware and software solutions. The following table illustrates, (in thousands), each of the Company's operating segments' operating income (loss) for the three and six months ended June 30, 2001 and July 1, 2000. The amounts provided herein are those utilized by senior management, in allocating resources and evaluating performance. GenRad's chief operating decision makers do not utilize, nor does GenRad 7 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) maintain, asset information or capital expenditures by segment, accordingly, such information is not presented herein.
PS FS DS SS TOTAL -------- -------- -------- -------- -------- THREE MONTHS ENDED JUNE 30, 2001: Revenue: Products................................. $ 20,857 $ 2,996 $ 14,915 $ 1,084 $ 39,852 Services................................. -- -- -- 14,646 14,646 -------- ------- -------- ------- -------- Total revenue.......................... $ 20,857 $ 2,996 $ 14,915 $15,730 $ 54,498 ======== ======= ======== ======= ======== Operating income (loss)...................... $(12,754) $(4,474) $(37,404) $ 4,017 $(50,615) ======== ======= ======== ======= ======== THREE MONTHS ENDED JULY 1, 2000: Revenue: Products................................. $ 46,953 $ 3,350 $ 17,771 $ 2,229 $ 70,303 Services................................. -- -- -- $17,021 $ 17,021 -------- ------- -------- ------- -------- Total revenue.......................... $ 46,953 $ 3,350 $ 17,771 $19,250 $ 87,324 ======== ======= ======== ======= ======== Operating income (loss)...................... $ 10,366 $ (799) $ (2,018) $ 4,851 $ 12,400
PS FS DS SS TOTAL -------- -------- -------- -------- -------- SIX MONTHS ENDED JUNE 30, 2001: Revenue: Products................................. $ 45,096 $ 8,997 $ 28,740 $ 3,250 $ 86,083 Services................................. -- -- -- 30,847 30,847 -------- ------- -------- ------- -------- Total revenue.......................... $ 45,096 $ 8,997 $ 28,740 $34,097 $116,930 ======== ======= ======== ======= ======== Operating income (loss)...................... $(19,726) $(5,113) $(39,631) $ 8,723 $(55,747) ======== ======= ======== ======= ======== SIX MONTHS ENDED JULY 1, 2000: Revenue: Products................................. $ 78,883 $ 6,381 $ 30,506 $ 4,103 $119,873 Services................................. -- -- -- 33,824 33,824 -------- ------- -------- ------- -------- Total revenue.......................... $ 78,883 $ 6,381 $ 30,506 $37,927 $153,697 ======== ======= ======== ======= ======== Operating income (loss)...................... $ 16,163 $(1,565) $ (4,877) $10,815 $ 20,536 ======== ======= ======== ======= ========
8 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) A reconciliation of the totals reported for the operating segments to income (loss) before income taxes in the condensed consolidated statements of operations is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- ---------------------------- JUNE 30, 2001 JULY 1, 2000 JUNE 30, 2001 JULY 1, 2000 ------------- ------------ ------------- ------------ Operating income (loss): Total for reportable segments............. $(50,615) $12,400 $(55,747) $ 20,536 Corporate expenses (a).................... (7,640) (7,631) (16,417) (11,915) Acquired in-process research and development............................. -- -- -- (500) Restructuring and other charges........... -- (4,124) (3,058) (1,645) -------- ------- -------- -------- Operating income (loss)................... (58,255) 645 (75,222) 6,476 Other expense............................. (3,951) (2,257) (6,308) (2,559) -------- ------- -------- -------- Income (loss) before income taxes........... $(62,206) $(1,612) $(81,530) $ 3,917 ======== ======= ======== ========
------------------------ (a) Includes amortization of capitalized software, corporate research and development and other charges. NOTE 6: INDEBTEDNESS In March 2000, the Company re-negotiated its existing $50.0 million credit facility, increasing the total borrowings available to $125.0 million (the "new line"). The new line is supported by a syndicated group of banks and in March 2000 provided for a term loan of up to $75.0 million to be utilized for acquisitions and a revolving line of credit of $50.0 million to be used for general working capital purposes. The new line requires the Company to maintain certain leverage, operating cash flow and operating income covenants as well as non-financial operating covenants, as defined, and expires in March 2004. 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 2.75% or LIBOR plus 3.75%, as determined from time to time by the banks. The interest rates on the new line at June 30, 2001 ranged from 8.44% to 9.50%. Under the terms of the new line, the Company is required to pay a commitment fee on the unused portion of the line of 0.75% of the total unused portion of the line dependent on the Company's operating performance. At June 30, 2001, borrowings outstanding under the line totaled $83.9 million, of which $53.7 million was related to acquisitions and $30.2 million related to general working capital. As of March 31, 2001, the Company was not in compliance with certain financial covenants under the new line, but subsequently obtained a waiver from the banks through June 15, 2001. With effect from June 15, 2001, the Company obtained an additional waiver from the banks. The additional waiver extends through September 28, 2001 and carries certain conditions which the Company must satisfy. These conditions included the achievement of certain revenue levels for the second quarter, which the Company has satisfied at June 30, 2001. The waiver also included a reduction in the maximum availability of the revolving line of credit to $38.0 million through July 12, 2001, to $40.0 million from July 13, 2001 through August 5, 2001 and to $43.0 million after August 5, 2001, provided that the Company had achieved certain benchmarks. With the execution of the definitive merger agreement signed on August 1, 2001, as described in Note 9, the Company has achieved those benchmarks. 9 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) In connection with the waiver, the Company paid the banks fees of $483,000 in the second quarter and agreed to pay the banks an additional fee of $483,000 on September 20, 2001, plus an additional fee of $50,000 when the Company's borrowings under the revolving line of credit exceed $38 million. Fees paid to date have been included within interest expense in the profit and loss account. As of June 30, 2001, the interest rates applicable to the new line increased two percentage points. The Company likely will not be in compliance with financial covenants of the new line when the existing waiver expires on September 28, 2001 and will need to seek a further waiver at that date. In the past, the Company has obtained waivers from its banks for similar covenant defaults, however, there can be no assurance that the banks will grant any additional waivers in the future. If the Company is in default with the financial covenants on September 28, 2001 and the banks do not waive the default, the banks may demand immediate payment of the full outstanding balance under the new line and prohibit new borrowings under the revolving line of credit. If this were to occur, the Company would have no ability to satisfy the demand for payment or fund continuing operations without access to the revolving line of credit. The Company currently has no plans to obtain additional financing. The Company has classified all amounts outstanding under the new line at June 30, 2001 as due within one year in these financial statements. On August 1, 2001, the Company entered into a merger agreement with Teradyne, Inc. pursuant to which Teradyne will acquire the Company in a merger (see Note 9). Following the completion of the merger, Teradyne has agreed to repay the outstanding balance under the new line. The accompanying financial statements have been prepared on a going concern basis which assumes that the Company will continue as a going concern and, accordingly, the statements do not reflect any adjustments that would be necessary should the Company not be able to continue as a going concern. The Company's ability to continue as a going concern is uncertain. NOTE 7: FINANCIAL INSTRUMENTS In 2000, the Company entered into three interest rate swaps to mitigate fluctuations in the variable interest rates related to the credit facility. The swaps were designated for the first $22.5 million, second $22.5 million and next $15.0 million of the outstanding principal of the credit facility with fixed interest rates of 6.99%, 7.0% and 6.93%, respectively. The maturity dates of the agreements match that of the underlying credit facility which is March 2004. In accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", which the Company implemented at the beginning of 2001, changes in the fair value of the derivative are to be carried in accumulated other comprehensive income (loss) over the life of the agreements. On maturity of the agreements, the appropriate gain or loss of the swaps is to be reclassified from accumulated other comprehensive income (loss) to the income statement in other income (expense). As of June 30, 2001, the Company has recorded $1.5 million to accumulated other comprehensive loss, which represents a cumulative-effect-type adjustment of $1.0 million, $0.6 million net of tax, related to the unrealized loss on the derivatives as of the beginning of the first quarter of 2001, and an adjustment of $0.5 million, $0.3 million net of tax, to recognize a reduction in the fair value of its swaps during the current year. The Company anticipates over the next twelve months that $0.6 million will be reclassified to other expense. 10 GENRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 8: IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS GOODWILL AND OTHER INTANGIBLE ASSETS In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, in fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's reported financial results of operations and balance sheet has not yet been determined. NOTE 9: SUBSEQUENT EVENTS On August 1, 2001, the Company announced the signing of a definitive merger agreement to be acquired by Teradyne, Inc. ("Teradyne"). Under the terms of the proposed acquisition, each outstanding share of the Company's common stock would be converted into 0.1733 shares of Teradyne common stock. The acquisition is subject to approval by the Company's shareholders, expiration of the Hart-Scott-Rodino waiting period and other closing conditions. Additionally, on August 1, 2001, the Company announced it had received an offer to purchase its Diagnostic Solutions business unit, headquartered in Manchester, UK. The Company has received an offer from a British investment consortium. The offer is under consideration by management and Board of Directors. The potential sale transaction would be subject to the customary process of due diligence and the negotiation of a definitive agreement. Completion of the sale of the Diagnostics Solutions business unit is not a condition to the Company's acquisition by Teradyne. 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS GENRAD, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to the historical information contained in this document, the discussion in this Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Report on Form 10-Q should be read as being applicable to all related forward-looking statements whenever they appear in this Report on Form 10-Q. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed in Item 1 "Business" of the Company's Annual Report on Form 10-K for the year ended December 30, 2000 as well as those discussed in this section and elsewhere in this Quarterly Report on Form 10-Q. OVERVIEW GenRad develops, manufactures and markets advanced performance-assurance technologies. GenRad's primary global markets for OEM and contract manufacturers include computers, advanced telecommunications for e-commerce and Internet services, and diagnostic systems for the transportation/automotive industry. The Company operates primarily in the United States, Western Europe and Southeast Asia. GenRad operates as four lines of business bringing to market integrated hardware, software and service solutions that empower always-on services and un-interruptable business applications. The Company considers each line of business a reportable segment: - Process Solutions ("PS") focuses on in-circuit test, imaging and re-work solutions as well as plant and line management solutions for electronic product manufacturers. - Functional Solutions ("FS") focuses on functional test platforms for manufacturers of telecommunications, computers and automotive electronics. - Diagnostic Solutions ("DS") focuses on service bay and manufacturing solutions for transportation OEMs and independent service providers. - Support and Services ("SS") focuses on maintenance programs, on-site and remote support, and training to help customers optimize their hardware and software solutions. RESULTS OF OPERATIONS The second quarter and year to date results are a direct reflection of weak global demand and the dramatic slowdown in our customers' businesses. The current cyclical downturn as first seen in the first quarter of this year continues. There is uncertainty as to when the next cyclical growth phase will occur. Until such time as the general economy returns to a period of growth, we expect a continued weakness in orders and therefore expect that the third quarter's revenue will not improve from the levels experienced by the Company during the second quarter of 2001. In light of that belief, the Company continues to expand the cost reduction strategies previously initiated. 12 The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Company's consolidated statements of operations.
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------- ------------------------------- JUNE 30, 2001 JULY 1, 2000 JUNE 30, 2001 JULY 1, 2000 ------------- ------------ ------------- ------------ Total revenue............................. 100.0% 100.0% 100.0% 100.00% Cost of revenue........................... 114.3% 60.7% 91.2% 59.3% --------- -------- --------- --------- Gross margin.............................. (14.3)% 39.3% 8.8% 40.7% Selling, general and administrative....... 33.6% 23.3% 34.3% 24.8% Research and development.................. 15.1% 8.3% 13.8% 8.5% Amortization of acquisition-related intangible assets....................... 3.8% 2.3% 3.7% 1.8% Restructuring and other charges........... -- 4.7% 2.6% 1.1% Impairment of long-lived assets........... 40.0% -- 18.7% -- Acquired in-process research and development............................. -- -- -- 0.3% --------- -------- --------- --------- Total operating expenses.................. 92.5% 38.6% 73.1% 36.5% --------- -------- --------- --------- Operating income (loss)................... (106.8)% 0.7% (64.3)% 4.2% Other expense............................. (7.3)% (2.6)% (5.4)% (1.6)% --------- -------- --------- --------- Income tax benefit........................ 43.3% 0.7% 26.5% 8.5% --------- -------- --------- --------- Net income (loss)......................... (70.8)% (1.2)% (43.2)% 11.1% ========= ======== ========= =========
THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JULY 1, 2000 ORDERS AND BACKLOG Orders for the Company's products and services decreased to $48.5 million for the three months ended June 30, 2001 ("2001") from $78.8 million for the three months ended July 1, 2000 ("2000"). PS orders totaled $21.3 million for 2001 compared to $45.3 million for 2000. FS orders totaled $1.8 million for 2001 compared to $5.3 million for 2000. DS orders totaled $10.7 million for 2001 compared to $8.6 million for 2000. SS orders totaled $14.7 million for 2001 compared to $19.6 million for 2000. The decrease in PS orders as compared to 2000 was driven by weakening contract manufacturing demand for the segment's in-circuit test products where orders decreased $20.9 million. FS orders decreased $3.5 million for 2001 compared to 2000 driven by decreased demand for Geneva products. DS orders increased $2.1 million for 2001 compared to 2000. This was attributable to an increase in orders of $3.9 million in the Advanced Diagnostic Systems ("ADS") product line, partially offset by a decrease of $1.2 million in orders of the Ford WDS 3500 product. SS orders decreased $4.9 million largely due to a reduction in product orders. North American orders totaled $21.5 million for 2001 compared to $44.4 million for 2000, a decrease of $22.9 million. PS orders totaled $10.4 million for 2001 compared to $26.8 million for 2000, the decrease is mainly attributable to a $14.6 million decrease in the demand for the segment's in-circuit test products. FS orders decreased $2.6 million to $1.6 million in 2001 from $4.2 million in 2000 largely due to a decrease in demand for Geneva products. DS orders decreased to $0.7 million in 2001 compared to $2.2 million in 2000 from a weakening demand in all product areas. European orders totaled $18.1 million for 2001 compared to $24.8 million for 2000, a decrease of $6.7 million. This decrease was primarily attributable to reduced demand for in-circuit test products of $6.3 million in PS. In addition, DS included a $3.3 million increase in orders of the ADS product line, which was offset by a corresponding decrease in service orders. 13 Asian orders totaled $8.9 million for 2001 compared to $9.6 million for 2000, a decrease of $0.7 million. This decrease was attributable to reduced demand for the Ford WDS 3500 and Geneva products, partially offset by an increase in orders for services and the ADS product line. Backlog, represented by those orders received which are backed by a purchase order, at June 30, 2001 was $38.0 million compared to $44.0 million and $42.3 million at March 31, 2001 and December 30, 2000, respectively. Historically, most orders have been fulfilled within three months of receipt. Although orders are subject to cancellation or deferral, GenRad's experience demonstrates that losses resulting from cancellations are not material, however, refer to "Factors That May Affect Future Results". REVENUE Total revenue decreased to $54.5 million for 2001 from $87.3 million for 2000. PS revenue totaled $20.9 million for 2001 compared to $47.0 million for 2000. FS revenue totaled $3.0 million for 2001 compared to $3.3 million for 2000. DS revenue totaled $14.9 million for 2001 compared to $17.8 million for 2000. SS revenue totaled $15.7 million for 2001 compared to $19.2 million for 2000. PS revenue decreased $26.1 million for 2001 compared to 2000. The decrease was primarily due to $20.4 million in lower revenues related to in-circuit test products, principally related to the global economic slowdown and a weakening contract manufacturing demand. FS revenue decreased $0.3 million in 2001 compared to 2000 due to a reduction in demand for Geneva products. DS revenue decreased $2.9 million for 2001 compared to 2000. This was primarily attributable to a $3.3 million decrease in revenue related to the WDS 3500 product, as the Company shipped 1,190 WDS units in 2001 compared with 1,471 units in 2000. This decrease was partially offset by an increase in Advanced Manufacturing Systems ("AMS") revenue. SS revenue decreased $3.5 million for 2001 compared to 2000. There was a $1.2 million decrease in service revenue for DS products principally driven by reduced demand for services related to ADS. Revenue from international markets was $36.9 million, or 68% of revenue for 2001 compared to $46.2 million, or 53% of revenue for 2000. The decrease in international revenue in dollars and the increase as a percentage of total revenue reflects the overall worldwide decline in revenue, with the largest impact being on U.S. in-circuit test revenue. Revenues from international markets are subject to the risk of currency fluctuations. GROSS MARGINS Gross margin was $(7.8) million, or (14.3)%, for 2001 compared to $34.3 million, or 39.3%, for 2000. Product margin decreased $41.4 million and service margin decreased $0.7 million. The decrease in product margin was mainly attributable to a $24.9 million decrease in the PS line of business which reflects weakened in-circuit test products margin of $19.5 million due to a combination of adverse sales volume, mix and pricing factors. Another factor in the lower gross margins was the recording of an additional excess and obsolete inventory provision of $11.9 million in 2001 which reduced the product margins of PS by $5.1 million, FS by $1.6 million and DS $5.2 million. The additional provision was a result of two main factors, being the Company's decision to discontinue its GTE3200 automotive aftermarket product within the DS line of business and the current and projected softness in the electronics manufacturing market sector impacting all lines of business. The Company also recorded a $6.4 million charge in 2001, impacting cost of revenue for the write down of certain capitalized software in the DS segment and hardware and software technology purchased as part of the Autodiagnos acquisition. Inventory turnover on an annualized basis for 2001 was 3.1 times, 2.2 times excluding the additional excess and obsolete inventory provision, as compared to 2.3 times for 2000. 14 OPERATING EXPENSES Selling, general and administrative expenses decreased to $18.3 million, or 33.6% of total revenue for 2001 from $20.3 million, or 23.3% of total revenue for 2000. The decrease in selling, general and administrative expenses in dollars was primarily attributable to the cost savings resulting from the restructuring program implemented in the first quarter of 2001. Research and development expenses increased to $8.2 million, or 15.1% of total revenue for 2001 from $7.2 million, or 8.3% of total revenue for 2000. The increase in research and development expenses primarily reflects the on-going new product development efforts in the imaging and software product lines. Amortization of acquisition-related intangible assets totaled $2.1 million, or 3.8% of total revenue, for 2001, compared to $2.0 million, or 2.3% of total revenue, for 2000. For the remainder of 2001, the amount of acquisition-related intangible assets to be amortized will decrease from the amortization amount in the second quarter due to the impairment of goodwill and other long lived assets in the second quarter of 2001 related to the acquisitions of Autodiagnos and Mastertech. For further discussion refer to "Impairment of Long-Lived Assets." OTHER EXPENSE Other expense was $4.0 million for 2001 compared to $2.3 million for 2000, with the increase primarily related to fees incurred as part of the Company amending its credit facility agreement. INCOME TAX BENEFIT The Company recorded a net income tax benefit of $23.6 million for 2001 compared to a net income tax benefit of $0.6 million for 2000. The recorded net income tax benefit in 2001 is the result of the pre-tax net loss of $62.2 million. The recorded net income tax benefit in 2000 is the result of the pre-tax net loss of $1.6 million. SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JULY 1, 2000 ORDERS Orders for the Company's products and services decreased to $112.6 million for the six months ended June 30, 2001 ("2001") from $158.9 million for the six months ended July 1, 2000 ("2000"). PS orders totaled $41.4 million for 2001 compared to $77.2 million for 2000. FS orders totaled $4.8 million for 2001 compared to $9.4 million for 2000. DS orders totaled $30.7 million for 2001 compared to $33.5 million for 2000. SS orders totaled $35.7 million for 2001 compared to $38.8 million for 2000. PS orders decreased $35.8 million for 2001 compared to 2000 driven by weakening contract manufacturing demand for the segment's in-circuit test products where orders decreased $33.3 million. FS orders decreased $4.6 million for 2001 compared to 2000 driven by decreased demand for Geneva products. DS orders decreased $2.8 million for 2001 compared to 2000. This was attributable to a decrease in the orders of the Ford WDS 3500 product, partially offset by an increase in orders in the other product lines in the DS segment. In 2001, $14.7 million of Ford WDS 3500 product orders were received compared to $22.1 million in 2000. SS orders decreased $3.1 million largely due to a reduction in product orders. North American orders totaled $48.2 million for 2001 compared to $79.4 million for 2000, a decrease of $31.3 million. PS orders totaled $20.7 million for 2001 compared to $45.2 million for 2000, which is mainly attributable to a $22.8 million decrease in the demand for the segment's in-circuit test products. FS orders decreased $3.3 million to $3.6 million in 2001 from $6.9 million in 2000, largely 15 due to a decrease in demand for Geneva products. DS orders decreased to $1.9 million in 2001 compared to $5.6 million in 2000 principally due to the reduction in WDS orders. European orders totaled $47.2 million for 2001 compared to $64.6 million for 2000, a decrease of $17.4 million. This decrease was primarily attributable to reduced demand for in-circuit test products of $10.7 million in PS, a $5.3 million decrease in orders of the Ford WDS 3500 product and decrease in service orders of $4.6 million primarily in PS and DS. These decreases were partially offset by increases in orders related to the other product lines in the DS segment other than WDS. Asian orders totaled $17.2 million for 2001 compared to $14.9 million for 2000, an increase of $2.3 million. This was attributable to an increase in DS orders of $1.7 million and SS orders of $1.0 million, partially offset by reduced demand for Geneva products. REVENUE Total revenue decreased to $116.9 million for 2001 from $153.7 million for 2000. PS revenue totaled $45.1 million for 2001 compared to $78.9 million for 2000. FS revenue totaled $9.0 million for 2001 compared to $6.4 million for 2000. DS revenue totaled $28.7 million for 2001 compared to $30.5 million for 2000. SS revenue totaled $34.1 million for 2001 compared to $37.9 million for 2000. PS revenue decreased $33.8 million for 2001 compared to 2000, primarily due to $29.5 million in lower revenues related to in-circuit test products, principally from the global economic slowdown and a weakening contract manufacturing demand. FS revenue increased $2.6 million in 2001 compared to 2000 due to strong Geneva sales during the first quarter of 2001. Revenues for Geneva were relatively flat in the second quarter of 2001 as compared to 2000, reflecting the decrease in demand. DS revenue decreased $1.8 million for 2001 compared to 2000. This was primarily attributable to a $6.0 million decrease in revenue related to the WDS 3500 product. In 2001, the Company shipped 2,243 WDS units compared with 2,867 units in 2000. The decrease in WDS revenue was partially offset by an increase in revenues for the other product lines in the DS segment. SS revenue decreased $3.8 million for 2001 compared to 2000. This was primarily attributable to a $2.4 million decrease in service revenue related to DS products principally driven by reduced demand for services related to ADS. Revenue from international markets was $74.2 million, or 63% of revenue for 2001 compared to $85.6 million, or 56% of revenue for 2000. The decrease in international revenue in dollars and the increase as a percentage of total revenue, reflects the overall worldwide decline in revenue, with the largest impact being on U.S. in-circuit test revenue. Revenues from international markets are subject to the risk of currency fluctuations. GROSS MARGINS Gross margin was $10.3 million, or 8.8%, for 2001 compared to $62.5 million, or 40.7%, for 2000. Product margin decreased $50.1 million and service margin decreased $2.1 million. The decrease in product margin was mainly attributable to a $35.1 million decrease related to the PS line of business, which reflects weakened in-circuit test products margin of $26.7 million due to an unfavorable mix of product sales and under-absorption of manufacturing facility costs. Another factor in the lower gross margins was the recording of an additional excess and obsolete inventory provision of $11.9 million in 2001 which reduced the product margins of PS by $5.1 million, FS by $1.6 million and DS $5.2 million. The additional provision was a result of two main factors, being the Company's decision to discontinue its GTE3200 automotive aftermarket product within the DS line of business and the current and projected softness in the electronics manufacturing market sector impacting all lines of business. The Company also recorded a $6.4 million charge in 2001, impacting cost of revenue for the write down of certain capitalized software in the DS segment and hardware and software technology purchased as part of the Autodiagnos acquisition. 16 Inventory turnover on an annualized basis for 2001 was 2.6 times, 2.1 times excluding the additional excess and obsolete inventory provision, as compared to 2.1 times for 2000. OPERATING EXPENSES Selling, general and administrative expenses increased to $40.2 million, or 34.4% of total revenue for 2001 from $38.1 million, or 24.8% of total revenue for 2000. The increase in selling, general and administrative expenses in dollars was primarily attributable to $2.7 million related to the incremental expenses of the Nicolet Imaging Systems and Sierra Research Technology (collectively "NIS") and Autodiagnos acquisitions, selling and corporate marketing expenses, and increased amortization expenses associated with the Company's enterprise resource planning system SAP R/3-TM- ("SAP"), the second phase of which was placed in service in the third quarter of 2000. These increases were partially offset by a cost savings resulting from the restructuring program implemented in the first quarter of 2001. Research and development expenses increased to $16.1 million, or 13.8% of total revenue for 2001 from $13.0 million, or 8.5% of total revenue for 2000. The increase in research and development expenses primarily reflects the Company's on-going new product development efforts in the imaging and software product lines. The Company expects to continue to invest in new product development and enhancements to its existing products. Amortization of acquisition-related intangible assets totaled $4.3 million, or 3.7% of total revenue, for 2001, compared to $2.8 million, or 1.8% of total revenue, for 2000. The increase in dollars, and as a percentage of revenue, is attributable to the acquisitions of NIS and Autodiagnos in 2000. For the remainder of 2001, the amount of acquisition-related intangible assets to be amortized will decrease from the amortization in the first six months of the year due to the impairment of intangible assets in the second quarter of 2001 related to the acquisitions of Autodiagnos and Mastertech. For further discussion refer to "Impairment of Long-Lived Assets". OTHER EXPENSE Other expense was $6.3 million for 2001 compared to $2.6 million for 2000. This increase reflects two quarters of interest expense on the Company's credit facility related to acquisitions in 2001 as compared to one quarter in 2000 as well as fees incurred as part of amending its credit facility agreement in 2001. INCOME TAX BENEFIT The Company recorded a net income tax benefit of $31.0 million for 2001 compared to a net income tax benefit of $13.1 million for 2000. The recorded net income tax benefit in 2001 is the result of the pre-tax net loss of $81.5 million. The recorded net income tax benefit in 2000 results primarily from a reversal of a portion of the deferred tax asset valuation allowance totaling $14.5 million, which was recorded during the three months ended April 1, 2000 due to management's expectations of future income and expected utilization of domestic and foreign net operating loss carryforwards. Excluding the reversal of a portion of the deferred tax asset valuation allowance, the income tax provision totaled $1.4 million for 2000. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", the Company records impairment losses on long-lived assets to be held and used or to be disposed of when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. 17 In accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed" the Company records impairment losses on capitalized computer software costs when indicators of impairment are present and the estimated value of the assets is less than the assets' carrying amount. During the second quarter of 2001, the Company performed a review of the carrying value of goodwill and other long lived assets pertaining to the Diagnostic Solutions ("DS") operating segment in accordance with SFAS No. 121 and SFAS No. 86. The goodwill and other long-lived assets involved in the review related principally to the acquisitions of AutoDiagnos in April 2000 and Mastertech in December 1999. This review was performed as a result of several indicators specific to the second quarter of 2001 that an impairment of such assets had occurred. Such indicators included a continued deterioration of market conditions, together with management's approval and subsequent execution of a plan to discontinue the development of the GTE3200 automotive diagnostics aftermarket product. Following this review management concluded that a significant impairment of the goodwill and other long lived assets had occurred because the estimated fair value (determined on a discounted cash flow basis using management's most recent projections) was less than the carrying value of these assets. This difference between the fair value and the carrying value of the assets resulted in a $28.2 million impairment charge, of which $16.1 million relates to acquired goodwill and $12.1 million relates to other identifiable intangible assets. In the Company's consolidated statements of operations, $21.8 million of the impairment charge relating to the write down of the carrying value of goodwill and other intangibles has been recorded as a separate line item within operating expenses; $6.4 million is included in cost of revenue as it relates to the write down of $1.8 million of software costs previously capitalized under SFAS 86 and $4.6 million of hardware and software technology purchased as part of the Autodiagnos acquisition. LIQUIDITY AND SOURCES OF CAPITAL Cash at June 30, 2001 totaled $5.9 million compared to $8.3 million at December 30, 2000. The Company's current ratio at June 30, 2001 decreased to 1.1 from 2.0 at December 30, 2000. For the six months ended, net cash provided by operating activities was $9.0 million in 2001 compared to net cash used in operating activities, net of effects of acquisitions, of $12.5 million in 2000. Net cash provided by operating activities during 2001 was primarily driven by a decrease in accounts receivable of $45.0 million, the result of aggressive collection efforts combined with depressed sales volume, and an increase in trade accounts payable of $6.9 million. Significant non-cash items affecting net loss were a $28.2 million charge for the impairment of goodwill and other long-lived assets, depreciation and amortization of $14.3 million and increased excess and obsolete inventory provisions of $13.3 million. These inflows were primarily utilized to fund the $50.6 million net loss, inventory investments of $7.5 million. Accounts receivable turnover on an annualized basis in 2001 was 2.7 compared to 3.6 in 2000. The deterioration is reflective of the current year's depressed sales volumes. During 2001, net cash used in investing activities was $4.7 million, compared to $83.6 million for 2000, mainly due to the acquisitions of NIS and Autodiagnos in 2000. Capital expenditures totaled $4.5 million for 2001 and $12.8 million for 2000. The significant decrease in capital expenditure for 2001 compared to 2000 was mainly attributable to two items: the investment of $2.3 million in 2000 required in bringing production of the Ford WDS 3500 product in-house and a decrease in 2001 of $3.3 million related to implementing SAP. Net cash used in financing activities was $9.1 million for 2001 compared to net cash provided by financing activities of $97.8 million for 2000. This is primarily attributable to the Company's net payment of debt during 2001 compared with the significant borrowings during 2000 for the purpose of 18 funding acquisitions. Net borrowings in 2000 totaled $99.2 million of which $71.3 million was related to acquisitions and $27.9 million was related to general working capital requirements, primarily inventory investment. 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 in March 2000 provide for a term loan of up to $75.0 million to be utilized for acquisitions and a revolving line of credit of $50.0 million to be used for general working capital purposes. The new line requires the Company to maintain certain leverage, operating cash flow and operating income covenants as well as non-financial operating covenants, as defined, and expires in March 2004. 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 2.75% or LIBOR plus 3.75%, as determined from time to time by the banks. The interest rates on the new line at June 30, 2001 ranged from 8.44% to 9.50%. Under the terms of the new line, the Company is required to pay a commitment fee on the unused portion of the line of 0.75% of the total unused portion of the line dependent on the Company's operating performance. At June 30, 2001, borrowings outstanding under the line totaled $83.9 million, of which $53.7 million was related to acquisitions and $30.2 million related to general working capital. As of March 31, 2001, the Company was not in compliance with certain financial covenants under the new line, but subsequently obtained a waiver from the banks through June 15, 2001. With effect from June 15, 2001, the Company obtained an additional waiver from the banks. The additional waiver extends through September 28, 2001 and carries certain conditions which the Company must satisfy. These conditions included the achievement of certain revenue levels for the second quarter, which the Company has satisfied at June 30, 2001. The waiver also included a reduction in the maximum availability of the revolving line of credit to $38.0 million through July 12, 2001, to $40.0 million from July 13, 2001 through August 5, 2001 and to $43.0 million after August 5, 2001, provided that the Company had achieved certain benchmarks. With the execution of the definitive merger agreement announced on August 1, 2001, and as described in Note 9, the Company has achieved those benchmarks. In connection with the waiver, the Company paid the banks fees of $483,000 in the second quarter and agreed to pay the banks an additional fee of $483,000 on September 20, 2001, plus an additional fee of $50,000 when the Company's borrowings under the revolving line of credit exceed $38 million. Fees paid to date have been included within interest expense in the profit and loss account. As of June 30, 2001, the interest rates applicable to the new line increased two percentage points. The Company likely will not be in compliance with financial covenants of the new line when the existing waiver expires on September 28, 2001 and will need to seek a further waiver at that date. In the past, the Company has obtained waivers from its banks for similar covenant defaults, however, there can be no assurance that the banks will grant any additional waivers in the future. If the Company is in default with the financial covenants on September 28, 2001 and the banks do not waive the default, the banks may demand immediate payment of the full outstanding balance under the new line and prohibit new borrowings under the revolving line of credit. If this were to occur, the Company would have no ability to satisfy the demand for payment or fund continuing operations without access to the revolving line of credit. The Company currently has no plans to obtain additional financing. The Company has classified all amounts outstanding under the new line at June 30, 2001 as due within one year in these financial statements. 19 On August 1, 2001, the Company entered into a merger agreement with Teradyne, Inc. pursuant to which Teradyne will acquire the Company in a merger (See Note 9). Following the completion of the merger, Teradyne has agreed to repay the outstanding balance under the new line. The accompanying financial statements have been prepared on a going concern basis which assures that the Company will continue as a going concern and, accordingly, the statements do not reflect any adjustments that would be necessary should the Company not be able to continue as a going concern. The Company's ability to continue as a going concern is uncertain. EFFECTS OF INFLATION Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on its revenues or its results of operations. The Company attempts to mitigate inflationary cost increases by continuously improving manufacturing methods and technologies. Management does not expect inflation to have a significant impact on operations in the foreseeable future. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company maintains development, sales and support facilities in several locations worldwide, including, the United Kingdom, France, Germany, Switzerland, Sweden, Singapore and Mexico among others. A significant amount of the Company's business is conducted with companies located in these and other countries and certain transactions may be denominated in currencies other than the US dollar. As a result, the Company may experience transaction gains and losses as a result of currency fluctuations. In order to minimize its exposure to loss from changes in foreign currency exchange rates, the Company mitigates its risk using foreign currency forward exchange contracts. The Company's currency risk mitigation strategies are designed to reduce the Company's vulnerability to certain foreign currency exchange exposures. In executing its strategies, the Company actively monitors foreign currency exchange rates and executes foreign currency forward exchange contracts, primarily with financial institutions. These contracts serve to offset the impact of actual foreign currency changes, e.g., if currency rates changed with respect to a certain transaction resulting in a loss to the Company, the forward contract would be structured to result in a gain, thereby minimizing the actual loss incurred, if any. The Company may be subject to losses resulting from unanticipated changes in foreign currency exchange rates. The market factors that expose the Company in this regard include economic conditions in which the Company conducts business as well as the Company's ability to effectively and efficiently engage in foreign currency forward exchange contracts at competitive rates with financial institutions or others. The Company expects to continue these or similar practices in the future to the extent appropriate. Historically, actual results of the Company's foreign currency risk management procedures have been in line with management's expectations and have not resulted in significant gains or losses, however, there can be no assurance that these results will continue in the future. FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results of operations and future financial conditions may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be beyond the Company's control. Factors that might cause such differences include, but are not limited to, those discussed below. The Company is severely capital constrained. Unless it can obtain additional financing, the Company's ability to operate and its viability as a business enterprise are in jeopardy. The Company will likely not be in compliance with financial covenants of the new line when the existing waiver 20 expires on September 28, 2001 and will need to seek a further waiver at that date. In the past, the Company has obtained waivers from its banks for similar covenant defaults, however, there can be no assurance that the banks will grant any additional waivers in the future. If the Company is in default with the financial covenants on September 28, 2001 and the banks do not waive the default, the banks may demand immediate payment of the full outstanding balance under the new line and prohibit new borrowings under the revolving line of credit. If this were to occur, the Company currently would have no ability to satisfy the demand for payment or fund continuing operations without access to the revolving line of credit. The Company currently has no plans to obtain additional financing. On August 1, 2001, the Company entered into a merger agreement with Teradyne pursuant to which Teradyne will acquire the Company in a merger. Upon completion of the merger, each outstanding share of the Company's common stock will be converted into 0.1733 share of common stock of Teradyne. Completion of the merger is subject to numerous but customary conditions, including approval of the transaction by the Company's stockholders and expiration of the Hart-Scott- Rodino waiting period. There is no guarantee that the conditions to the merger will be satisfied or that the merger will be completed. The recent economic downturn has had an impact on consumer and capital spending in many of the markets that the Company serves worldwide. It also has created an imbalance of supply and demand in both the OEM and contract manufacturing industries. These forces are currently adversely impacting the Company's order and revenue performance. Management is uncertain as to how long and how deep the current downturn may be in these markets. The Company has experienced and expects to continue to experience fluctuations in its results of operations, particularly on a quarterly basis. The Company's expense levels are based, in part, on expectations of future revenues. If revenue levels in a particular period do not meet expectations, due to the timing of the receipt of orders from customers, customer cancellations or delays of shipments, then operating results could be adversely impacted. The Company's principal markets are affected by the cyclical economic patterns of OEM and contract manufacturers' capital investment requirements. The market for the Company's products is characterized by rapid technological change, an increased demand for specific feature requests by customers, evolving industry standards, and frequent new product introductions. The introduction of products embodying new technology or the emergence of new industry standards or practices could render the Company's existing products obsolete or otherwise unmarketable. Future operating results are dependent upon the Company's ability to develop, design, manufacture and market technologically innovative products that meet customer needs. Competition in the markets where the Company operates is intense. The Company continues to invest in manufacturing productivity to try to minimize the impact of competitive pricing pressures, fluctuations within the Company's product mix, potential inventory obsolescence exposure and start-up manufacturing costs for new product introductions. The Company is dependent upon a number of suppliers for several key components of its products. The loss of certain of the Company's suppliers, supply shortages or increases in the costs of key raw materials could have a material adverse effect on the Company. OTHER FACTORS Other factors which could impact future results are past and future acquisitions, strategic alliances, patent or product liability claims in excess of available insurance coverage, changes in the Company's effective tax rates, new regulatory requirements, political and economic changes, tariffs, trade restrictions, transportation delays, foreign currency fluctuations and inflation. 21 The Company disclaims any intent or obligation to update any forward-looking statements that may be included in this report. Additionally, there can be no assurance that other factors, not included above, could impact future results. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS GOODWILL AND OTHER INTANGIBLE ASSETS In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, in fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's reported financial results of operations and balance sheet has not yet been determined. 22 PART II. OTHER INFORMATION ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders of GenRad, Inc. was held on May 9, 2001 (the "Annual Meeting"). (b) Not required pursuant to instructions No. 3. (c) Votes were cast or withheld in connection with the election of directors at the Annual Meeting as follows:
NAME OF DIRECTOR FOR WITHHELD ---------------- ---------- --------- William S. Antle III........................................ 23,378,205 1,253,755 Ed Zschau................................................... 23,379,592 1,252,368
Votes were cast or withheld in connection with the following proposals, more fully described in the Company's Proxy Statement dated May 9, 2001 at the Annual Meeting.
AFFIRMATIVE VOTES NEGATIVE VOTES ABSTAINED ----------------- -------------- --------- 1) To adopt the Company's 2001 Equity Incentive Plan.... 9,110,830 10,184,059 964,188 2) To adopt the Company's 2001 Director Stock Option Plan.................................................... 10,658,845 8,639,949 960,285
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report: 10.23 Amendment to revolving credit and term loan agreement between the Company and Fleet National Bank and the other banks party thereto effective as of May 15, 2001, filed herewith. 10.24 Amendment to revolving credit and term loan agreement between the Company and Fleet National Bank and the other banks party thereto effective as of June 15, 2001, filed herewith. 10.25 Agreement and Plan of Merger dated August 1, 2001 among the Company, Teradyne, Inc. and Radio Acquisition Corp., incorporated by reference from the Company's Current Report on Form 8-K filed August 2, 2001. (b) The following Current Report on Form 8-K was filed during the quarter ended June 30, 2001: 1. The Company filed a Current Report on Form 8-K dated June 19, 2001 reporting certain information under Item 9 with respect to its credit facility.
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