-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LYIh7LHNClI8HHRQqcR61Z6hWgCakMWG5WHTMcWRtT6uTTVCh1GE2/fdKvFs77xe ojXuDadin7A8IdTaJ4soVw== 0000912057-99-006443.txt : 19991117 0000912057-99-006443.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006443 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENRAD INC CENTRAL INDEX KEY: 0000040972 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 041360950 STATE OF INCORPORATION: MA FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08045 FILM NUMBER: 99758764 BUSINESS ADDRESS: STREET 1: 7 TECHNOLOGY PARK DR CITY: WESTFORD STATE: MA ZIP: 01886-0033 BUSINESS PHONE: 9785897000 MAIL ADDRESS: STREET 1: 7 TECHNOLOGY PARK DRIVE CITY: WESTFORD STATE: MA ZIP: 01886-0033 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL RADIO CO DATE OF NAME CHANGE: 19760210 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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 OCTOBER 2, 1999 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 INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 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. 29,746,314 shares of the Common Stock, $1 par value, were outstanding on November 12, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GENRAD, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q THREE MONTHS ENDED OCTOBER 2, 1999 TABLE OF CONTENTS
PAGE -------- PART I. FINANCIAL INFORMATION: Item 1: Condensed Consolidated Financial Statements Condensed Consolidated Statements of Operations........... 1 Condensed Consolidated Balance Sheets..................... 2 Condensed Consolidated Statements of Cash Flows........... 3 Notes to Condensed Consolidated Financial Statements...... 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations........... 12 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K............................ 31 Signatures.................................................. 33
PART I ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS GENRAD, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ----------------------- OCTOBER 2, October 3, OCTOBER 2, October 3, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenue: Product........................................... $ 91,482 $ 43,039 $174,234 $119,791 Service........................................... 17,764 17,511 51,740 48,771 -------- -------- -------- -------- Total revenue................................... 109,246 60,550 225,974 168,562 Cost of revenue: Product........................................... 55,799 26,562 92,987 62,018 Service........................................... 10,946 9,521 31,170 28,288 -------- -------- -------- -------- Total cost of revenue........................... 66,745 36,083 124,157 90,306 -------- -------- -------- -------- Gross margin........................................ 42,501 24,467 101,817 78,256 Operating expenses: Selling, general and administrative............... 16,925 17,294 51,219 53,183 Research and development.......................... 5,421 4,265 14,720 14,628 Acquired in-process research and development...... -- -- -- 10,097 Restructuring charges............................. -- 5,490 -- 8,753 Loss from impairment of intangible assets......... -- -- -- 4,906 -------- -------- -------- -------- Total operating expenses........................ 22,346 27,049 65,939 91,567 ======== ======== ======== ======== Operating income (loss)............................. 20,155 (2,582) 35,878 (13,311) Other income (expense): Interest income................................... 20 26 177 340 Interest expense.................................. (435) (311) (921) (907) Other, net........................................ 28 (302) (78) (402) -------- -------- -------- -------- Total other income (expense).................... (387) (587) (822) (969) -------- -------- -------- -------- Net income (loss) before income taxes............... 19,768 (3,169) 35,056 (14,280) Income tax benefit (expense)........................ (2,000) (750) 994 7,332 -------- -------- -------- -------- Net income (loss)................................... $ 17,768 $ (3,919) $ 36,050 $ (6,948) ======== ======== ======== ======== Net income (loss) per share: Basic............................................. $ 0.62 $ (0.14) $ 1.26 $ (0.25) ======== ======== ======== ======== Diluted........................................... $ 0.60 $ (0.14) $ 1.22 $ (0.25) ======== ======== ======== ======== Weighted average shares outstanding: Basic............................................. 28,748 28,289 28,511 28,028 ======== ======== ======== ======== Diluted........................................... 29,773 28,289 29,537 28,028 ======== ======== ======== ========
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 1 GENRAD, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
OCTOBER 2, January 2, 1999 1999 ----------- ---------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................................... $ 7,004 $ 12,998 Accounts receivable, less allowance for doubtful accounts of $1,575 and $1,538...................................................... 116,711 65,490 Inventory................................................................... 44,513 32,989 Other current assets........................................................ 7,837 7,119 -------- -------- Total current assets.................................................... 176,065 118,596 Property and equipment, net of accumulated depreciation of $40,492 and $37,769......................................................... 42,822 37,269 Intangible assets, net of accumulated amortization of $9,229 and $5,636....... 36,269 35,744 Deferred tax assets........................................................... 19,922 15,368 Other assets.................................................................. 1,273 1,248 -------- -------- $276,351 $208,225 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit.............................................................. $ 20,290 $ -- Accounts payable............................................................ 24,769 10,299 Accrued liabilities......................................................... 7,350 19,786 Deferred revenue............................................................ 9,991 6,789 Accrued compensation and employee benefits.................................. 6,184 6,844 Accrued income taxes........................................................ 4,374 620 Current portion of long-term debt........................................... 2,382 2,425 -------- -------- Total current liabilities............................................... 75,340 46,763 Long-term debt................................................................ 4,167 6,062 Accrued pension benefits...................................................... 10,935 11,488 Lease costs of excess facilities.............................................. 3,922 3,854 Deferred revenue.............................................................. 863 962 Other long-term liabilities................................................... 3,937 5,065 Commitments and contingencies STOCKHOLDERS' EQUITY: Common stock, $1.00 par value, 60,000 shares authorized; 29,744 and 29,176 issued and outstanding at October 2, 1999 and January 2, 1999, respectively.............................................................. 29,744 29,176 Additional paid-in capital, common stock.................................... 219,465 214,227 Treasury stock, net......................................................... (14,374) (14,958) Accumulated deficit......................................................... (55,509) (91,560) Accumulated other comprehensive loss........................................ (2,139) (2,854) -------- -------- Total stockholders' equity.............................................. 177,187 134,031 -------- -------- $276,351 $208,225 ======== ========
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2 GENRAD, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
NINE MONTHS ENDED ----------------------- OCTOBER 2, October 3, 1999 1998 ---------- ---------- OPERATING ACTIVITIES: Net income (loss)......................................... $ 36,050 $ (6,948) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................... 11,092 9,461 Loss on disposal of property and equipment.............. 429 1,256 Deferred income tax benefit............................. (4,500) (7,500) Lease costs of excess facilities, net................... (35) (1,024) Acquired in-process research and development............ -- 8,420 Loss from impairment of intangible assets............... -- 4,906 Restructuring and non-recurring charges................. -- 6,385 Increase (decrease) resulting from changes in operating assets and liabilities: Accounts receivable, net................................ (52,313) 6,627 Inventory............................................... (12,160) (6,786) Other current assets.................................... (761) 164 Accounts payable........................................ 14,646 (4,177) Accrued liabilities..................................... (12,108) 5,768 Deferred revenue........................................ 3,119 1,466 Accrued compensation and employee benefits.............. (579) (1,428) Accrued income taxes.................................... 3,720 (692) Other, net.............................................. (1,158) (927) -------- -------- Net cash (used in) provided by operating activities..... (14,558) 14,971 INVESTING ACTIVITIES: Purchases of property and equipment....................... (13,807) (12,330) Purchase of subsidiary.................................... -- (3,093) Purchase of intangible assets............................. (4,118) (3,378) -------- -------- Net cash (used in) investing activities................... (17,925) (18,801) FINANCING ACTIVITIES: Principal payments on long-term debt...................... (1,759) (1,827) Borrowings on credit facility............................. 55,065 -- Principal payments on credit facility..................... (34,775) -- Proceeds from employee stock plans........................ 10,086 4,235 Purchase of treasury stock................................ (3,696) (10,856) -------- -------- Net cash provided by (used in) financing activities....... 24,921 (8,448) Effect of exchange rates on cash and cash equivalents....... 1,568 (1,620) Decrease in cash and cash equivalents....................... (5,994) (13,898) Cash and cash equivalents at beginning of period............ 12,998 21,883 -------- -------- Cash and cash equivalents at end of period.................. $ 7,004 $ 7,985 ======== ========
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 3 GENRAD, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 2, 1999, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly the consolidated financial position at October 2, 1999 and January 2, 1999, and the results of operations and cash flows for the three and nine months ended October 2, 1999 and October 3, 1998, respectively. Interim results are not necessarily indicative of the results for the full fiscal year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period balances have been reclassified to conform to the current presentation. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share" for the three and nine months ended October 2, 1999 and October 3, 1998, respectively (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ----------------------- OCTOBER 2, October 3, OCTOBER 2, October 3, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net income (loss)................................ $17,768 $(3,919) $36,050 $(6,948) Basic weighted average shares outstanding........ 28,748 28,289 28,511 28,028 Weighted average share equivalents............... 1,025 -- 1,026 -- ------- ------- ------- ------- Diluted weighted average shares outstanding...... 29,773 28,289 29,537 28,028 ======= ======= ======= ======= Basic net income (loss) per share................ $ 0.62 $ (0.14) $ 1.26 $ (0.25) ======= ======= ======= ======= Diluted net income (loss) per share.............. $ 0.60 $ (0.14) $ 1.22 $ (0.25) ======= ======= ======= =======
COMPREHENSIVE INCOME (LOSS) For the three and nine months ended October 2, 1999, comprehensive income (loss) included changes in cumulative foreign currency translation adjustments of $(0.1) and $0.7 million, compared to $(0.2) and $(0.8) million for the three and nine months ended October 3, 1998. Total comprehensive income (loss) for the three and nine months ended October 2, 1999 totaled $17.7 and $36.8 million, compared to $(4.1) and $(7.7) million for the three and nine months ended October 3, 1998. At October 2, 1999, accumulated other comprehensive loss totaled $2.1 million. 4 GENRAD, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 2: ACQUISITIONS INDUSTRIAL COMPUTER CORPORATION On April 7, 1998, GenRad acquired all of the then outstanding common shares of Industrial Computer Corporation ("ICC"), a software company providing real-time manufacturing execution systems to electronics manufacturers. ICC was established in 1980 and is located in Atlanta, Georgia. The transaction was accounted for as a purchase, and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. In connection with the acquisition of ICC, 1,237,917 shares of GenRad's common stock were issued for all of the then outstanding shares of ICC in a tax-free reorganization. The total consideration for the acquisition of ICC was approximately $36.6 million. Direct costs of the acquisition totaled approximately $1.6 million and consisted primarily of legal fees, accounting fees and broker fees. The results of ICC are included in the 1998 financial statements beginning from the date of purchase. The purchase price was allocated to the tangible and intangible assets of ICC as follows: Acquired in-process research and development............ $ 8,420 Goodwill................................................ 16,982 Developed technology.................................... 11,370 Assembled workforce..................................... 1,280 Tradename............................................... 408 Assets, primarily accounts receivable and property and equipment............................................... 3,954 Liabilities assumed..................................... (4,215) ------- $38,199 =======
The Securities and Exchange Commission ("SEC"), in September 1998, issued guidance related to the valuation of acquired in-process research and development as set forth in its letter dated September 9, 1998 from the Chief Accountant of the SEC to the American Institute of Certified Public Accountants. In April 1999, the Company corresponded with the staff of the SEC ("the Staff") concerning the application of the methodology to the valuation of the incomplete technology and other intangible assets and implemented the methodology. As a result of the application of the valuation methodology the purchase price was allocated to acquired in-process research and development, developed technology, assembled workforce and tradename. In April 1999 the Company restated its originally filed Form 10-Q filings for its second and third quarters of fiscal 1998 using this methodology. The valuation of acquired in-process research and development was based on management's projections of the after tax net cash flows attributable to the acquired in-process research and development. Specifically, the valuation considers the following: (i) a fair market value premise; (ii) comprehensive due diligence concerning all potential intangible assets including trademarks and tradenames, patents, copyrights, non-compete agreements, assembled workforce and customer relationships and sales channel relationships; (iii) the value contribution of core technology to the acquired in-process technology, with a view toward ensuring the relative allocations to core technology and acquired in-process research and development were consistent with the relative contributions of each to the final product; and (iv) the calculation used to determine the value allocated to acquired in-process research and development considered only the efforts completed as of the transaction date and only the cash flow associated with said completed efforts for one generation of the product development efforts in-process at the acquisition date. 5 GENRAD, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 2: ACQUISITIONS (CONTINUED) The charge for acquired in-process research and development relates to one development project in process at the date of the acquisition that had not reached technological feasibility, had no alternative future use, and for which ultimate successful development was uncertain. The conclusion that the development efforts in-process, or any material subcomponent, had no alternative future use was reached in consultation with engineering personnel from ICC as well as the Company's valuation advisors. The in-process project consists of the development of ICC's existing UNIX based product using an object oriented design and standard programming language which will provide users of the product the ability to use ICC's Shop Floor Data Manager-TM- ("SFDM") product on varied operating platforms. The primary project tasks open at the time of acquisition included completion of the design of certain modules, or objects, which will house the program code, completion of program code written in the new language and preliminary quality assurance and testing of the product. At the time of acquisition, additional development remained on all tasks (management estimated that the project was approximately 69% complete) and costs to complete were estimated to total approximately $928,000. At the time of the acquisition, management believed that the product being developed would become available for sale late in fiscal 1999. GenRad will begin to benefit from the acquired in-process research and development once completed product is sold. Failure to reach successful completion of this project may result in impairment of the associated capitalized intangible assets, i.e. goodwill and developed technology, and/or may require the Company to accelerate the time period over which the intangibles are being amortized, which may have a material adverse effect on the Company's results of operations and financial condition. Significant assumptions used to determine the value of the acquired in-process research and development included several factors. The first was a forecast of net cash flows that were expected to result from the in-process development effort using projections prepared by ICC management, portions of which (1998 and 1999) were provided to GenRad's Board of Directors. Net cash flow projections included projected revenue growth and trends in profit margins and selling, general and administrative expenses that were consistent with recent historical trends prior to the acquisition. Second, a percentage complete of 69% for the project estimated by considering the costs invested to date relative to the expected total cost of the development effort, supported by the amount of technological progress completed as of the transaction date relative to the overall technological achievements required to achieve the intended functionality of the eventual product. The technological issues were addressed primarily by engineering representatives from ICC along with the Company's independent valuation advisors. Third, a 24% discount rate, which represents a rate equivalent to that which would be employed in a fair value analysis, i.e., one that considers all cash flows associated with the product. Lastly, a core technology charge reflected as one-third of after tax net income related to the in-process project was utilized. This rate represents an amount that the Company would be required to pay in royalties assuming it had licensed the products expected to be derived from the acquired in-process development efforts. As of October 2, 1999, the technological feasibility of the project has been reached and no significant departures from the assumptions included in the valuation analysis have occurred. MANUFACTURING EXECUTION SYSTEMS BUSINESS On April 9, 1998, GenRad acquired certain assets of the Manufacturing Execution Systems ("MES") business of Valstar Systems Limited ("Valstar") located in Aberdeen, Scotland. Valstar's MES component provides integration services and support and distribution in Europe for ICC's Software. 6 GENRAD, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 2: ACQUISITIONS (CONTINUED) Total consideration paid for Valstar's MES business was $3.2 million in cash, including acquisition costs, funded through internally generated funds. As part of the acquisition, the Company entered into a two-year consulting and services agreement with Valstar that includes securing certain Valstar personnel and other resources to transition the business to GenRad. Of the $3.0 million purchase price, $2.0 million was paid on April 9, 1998 and $1.0 million was released from escrow on October 7, 1998 as certain contingencies were achieved. Direct costs of the acquisition totaled approximately $0.2 million and consisted primarily of legal and accounting fees. The transaction was accounted for as a purchase, and accordingly, the purchase price was allocated to the intangible assets acquired based on their respective fair values. The purchase price was allocated to the intangible assets of Valstar's MES business as follows (in thousands): Goodwill.................................... $2,100 Customer lists.............................. 900 Employment contracts........................ 200 ------ $3,200 ======
NOTE 3: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES During the three months ended July 4, 1998 ("second quarter") and October 3, 1998 ("third quarter"), respectively, the Company recorded certain restructuring and other charges totaling approximately $9.8 million and $10.4 million, respectively. Total charges are summarized as follows (in thousands)
THREE MONTHS ENDED -------------------------------- JULY 4, OCTOBER 3, 1998 1998 TOTAL -------- ---------- -------- Impairment loss.................................. $4,900 -- $ 4,900 Acquired in-process diagnostic software.......... 1,700 -- 1,700 Restructuring and other charges.................. 3,200 10,400 13,600 ------ ------- ------- $9,800 $10,400 $20,200 ====== ======= =======
IMPAIRMENT LOSS In fiscal 1996, the Company purchased Test Technology Associates, Inc. ("TTA") and Testware, Inc. ("Testware"). These companies provide custom test programming, test fixture integration and other value-added services to manufacturers and users of electronic products. Additionally, GenRad acquired certain assets of Field Oriented Engineering, AG in fiscal 1996, consisting primarily of the software program known as TRACS-Registered Trademark- III, which is sold to electronic manufacturing systems customers. The excess purchase price over the net assets acquired for these acquisitions was recorded as long-term intangibles, primarily goodwill. Through July 4, 1998 the historical financial performance of these entities continued to be less than anticipated and the businesses had been negatively impacted by a decline in the in-circuit test market. Due to these factors as well as certain management changes during the three months ended July 4, 1998, the 7 GENRAD, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 3: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED) Company prepared revised projections of future operating cash flows relating to these businesses, which indicated that the businesses would not generate sufficient operating cash flows to realize the carrying value of the intangible assets. This analysis was performed in accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." As a result, a $4.9 million impairment loss, representing the net book value of goodwill, was recorded during the second quarter and is included in the accompanying condensed consolidated statements of operations for nine months ended October 3, 1998. ACQUIRED IN-PROCESS DIAGNOSTIC SOFTWARE On July 2, 1998, the Company acquired the rights to certain diagnostic software for which technological feasibility had not been established. The Company plans to use the acquired technology in the diagnosis of increasingly complex mechatronic systems, particularly in vehicle systems. At the time of acquisition, the acquired technology had not yet reached technological feasibility, had no alternative future uses and, accordingly, the entire purchase price was expensed. The total of $1.7 million is included in acquired in-process research and development in the accompanying condensed consolidated statements of operations for the nine months ended October 3, 1998. RESTRUCTURING AND OTHER CHARGES During the second and third quarters of 1998, the Company restructured its operations, which resulted in a workforce reduction of approximately 230 manufacturing and general and administrative employees or 15% of the Company's workforce. In accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits, and Other Costs to Exit an Activity," the Company recorded a charge for restructuring totaling approximately $6.8 million for severance costs and post-employment benefits ($5.2 million), write-offs of certain fixed assets which will no longer be utilized ($1.0 million) and for the termination fees of certain equipment and real estate leases ($0.6 million). During the third quarter of 1998, the Company ceased its manufacturing operations at its Manchester, UK facility. Inventory related to the manufacturer of certain ADS products and the cessation of ADS' contract manufacturing business totaling $3.5 million was charged to cost of products. In addition, restructuring charges totaling approximately $0.5 million were recorded related to a workforce reduction of approximately 20 people and certain fixed assets which will no longer be utilized and will be disposed of in 1999. During the third quarter, the Company completed an in depth analysis of the hardware portion of the Vision product line resulting in a decision to exit this business. This decision was based upon the following: (i) the market for Vision equipment in PCB manufacturing was not as large as had been previously estimated, and (ii) the continued research and development investment required for the existing Vision product was not warranted given the resizing of the Vision market. Exiting the Vision hardware product line resulted in charges totaling $2.8 million related to fixed assets which will no longer be utilized and were disposed of in 1998 and certain excess inventory, inventory purchase commitments and prepaid royalties. Of the total of $2.8 million, $1.4 million is recorded in costs of products and $1.4 million is recorded as restructuring charges in the accompanying consolidated financial statements. 8 GENRAD, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 4: INVENTORY Inventory consists of the following at October 2, 1999 and January 2, 1999, respectively (in thousands):
OCTOBER 2, January 2, 1999 1999 ---------- ---------- Raw materials........................................... $11,474 $ 8,992 Work in process......................................... 16,935 15,204 Finished goods.......................................... 16,104 8,793 ------- ------- $44,513 $32,989 ======= =======
NOTE 5: CONTINGENCIES The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to any such claims will not materially affect the results of operations or the financial position of the Company. 9 GENRAD, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 6: OPERATING SEGMENTS The following table illustrates, (in thousands), each of the Company's operating segments' revenues and operating income (loss) for the three and nine months ended October 2, 1999 and October 3, 1998, respectively. The amounts provided herein are those utilized by the respective segment's President, in conjunction with the Company's President and Chief Executive Officer, in allocating resources and evaluating performance.
EMS ADS GRS TOTAL -------- -------- -------- -------- Three months ended October 2, 1999: Revenues: Product........................................... $ 38,794 $51,126 $ 1,562 $ 91,482 Service........................................... 8,169 6,431 3,164 17,764 -------- ------- ------- -------- Total revenues.................................. $ 46,963 $57,557 $ 4,726 $109,246 ======== ======= ======= ======== Operating income (loss)............................. $ 15,976 $11,104 $(1,457) $ 25,623 ======== ======= ======= ======== Three months ended October 3, 1998: Revenues: Product........................................... $ 37,375 $ 2,065 $ 3,599 $ 43,039 Service........................................... 8,673 5,875 2,963 17,511 -------- ------- ------- -------- Total revenues.................................. $ 46,048 $ 7,940 $ 6,562 $ 60,550 ======== ======= ======= ======== Operating income...................................... $ 10,924 $ 939 $ 1,019 $ 12,882 ======== ======= ======= ======== Nine months ended October 2, 1999: Revenues: Product........................................... $103,992 $62,225 $ 8,017 $174,234 Service........................................... 23,819 18,757 9,164 51,740 -------- ------- ------- -------- Total revenues.................................. $127,811 $80,982 $17,181 $225,974 ======== ======= ======= ======== Operating income (loss)............................... $ 38,492 $14,920 $(1,104) $ 52,308 ======== ======= ======= ======== Nine months ended October 3, 1998: Revenues: Product........................................... $106,166 $ 7,451 $ 6,174 $119,791 Service........................................... 25,761 16,813 $ 6,197 48,771 -------- ------- ------- -------- Total revenues.................................. $131,927 $24,264 $12,371 $168,562 ======== ======= ======= ======== Operating income (loss)............................... $ 27,414 $ 1,740 $(1,917) $ 27,237 ======== ======= ======= ========
10 GENRAD, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NOTE 6: OPERATING SEGMENTS (CONTINUED) A reconciliation of the totals reported for the operating segments to net income (loss) before income taxes in the condensed consolidated financial statements is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ----------------------- OCTOBER 2, October 3, OCTOBER 2, October 3, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Operating income (loss): Total for reportable segments..................... $25,623 $ 12,882 $ 52,308 $ 27,237 Corporate expenses (a)............................ (5,468) (15,464) (16,430) (40,548) ------- -------- -------- -------- Operating income (loss) per condensed consolidated financial statements............................ 20,155 (2,582) 35,878 (13,311) Other expenses, net............................... 387 587 822 969 ------- -------- -------- -------- Net income (loss) before income taxes............... $19,768 $ (3,169) $ 35,056 $(14,280) ======= ======== ======== ========
- ------------------------ (a) Includes capitalization and amortization of capitalized software, corporate research and development and other charges. NOTE 7: TREASURY STOCK On June 11, 1998, the Company's Board of Directors authorized the Company to repurchase up to 2,500,000 shares of its common stock, which represented approximately 8.0% of the then issued and outstanding shares of common stock. At October 2, 1999, the Company had repurchased 1,225,600 shares of common stock at a cost of approximately $18.7 million. The Company accounts for its treasury stock utilizing the cost method. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The matters discussed herein contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1 "Business" of the Company's Annual Report on Form 10-K for the year ended January 2, 1999 as well as those discussed in this section and elsewhere in this Quarterly Report on Form 10-Q. OVERVIEW GenRad, Inc. ("GenRad" or "the Company"), which commenced operations in 1915, is a leading global manufacturing solutions company. GenRad designs, manufactures and markets integrated hardware and software solutions that enable the successful manufacture, test and service of microprocessors and other electronic devices and components. The Company operates primarily in North America, Europe and Southeast Asia through its three business segments, Electronic Manufacturing Systems ("EMS"), Advanced Diagnostic Systems ("ADS") and GR Software ("GRS"). EMS focuses on the integration of hardware and software for process control in the manufacture of printed circuit boards, emphasizing inspection technologies. EMS provides its customers with leading-edge, cost effective solutions used to collect data about its manufacturing process and provide reliable, timely and useful information which can be used to optimize manufacturing processes. ADS is a global leader in developing and marketing diagnostic solutions comprised of hardware, software and services which optimize the manufacturing and service capabilities of leading transportation and equipment companies. ADS' solutions are used by its customers to maximize manufacturing efficiencies at time of product build as well as to maintain efficient and effective service operations throughout the product's life. GRS develops and markets product solutions and services to companies wishing to achieve and maintain control over and optimize its manufacturing processes. GRS' products manage a business's process information necessary to manufacture products according to plan. They also enable the shop floor to communicate with a company's ERP systems to have a real time direct impact on a business's manufacturing operations. 12 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items in the Company's Condensed Consolidated Statements of Operations.
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ----------------------- OCTOBER 2, October 3, OCTOBER 2, October 3, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Total revenue........................................ 100.0% 100.0% 100.0% 100.0% Cost of revenue...................................... 61.1% 59.6% 54.9% 53.6% ------ ------ ------ ------ Gross margin......................................... 38.9% 40.4% 45.1% 46.4% Selling, general and administrative.................. 15.5% 28.6% 22.7% 31.5% Research and development............................. 5.0% 7.0% 6.5% 8.7% Acquired in-process research and development......... -- -- -- 6.0% Restructuring charges................................ -- 9.1% -- 5.2% Loss from impairment of intangible assets............ -- -- -- 2.9% ------ ------ ------ ------ Total operating expenses....................... 20.5% 44.7% 29.2% 54.3% ------ ------ ------ ------ Operating income (loss).............................. 18.4% (4.3)% 15.9% (7.9)% Other income (expense)............................... (0.3)% (1.0)% (0.3)% (0.6)% Income tax benefit (expense)......................... (1.8)% (1.2)% 0.4% 4.4% ------ ------ ------ ------ Net income (loss).................................... 16.3% (6.5)% 16.0% (4.1)% ====== ====== ====== ======
THREE MONTHS ENDED OCTOBER 2, 1999 VS. THREE MONTHS ENDED OCTOBER 3, 1998 ORDERS AND BACKLOG Orders for the Company's products and services increased to $76.9 million for the three months ended October 2, 1999 from $59.9 million for the three months ended October 3, 1998. EMS orders totaled $45.6 million for the three months ended October 2, 1999 compared to $47.4 million for the three months ended October 3, 1998. ADS orders totaled $27.1 million for the three months ended October 2, 1999 compared to $6.6 million for the three months ended October 3, 1998. GRS orders totaled $4.2 million for the three months ended October 2, 1999 compared to $5.9 million for the three months ended October 3, 1998. The decrease in EMS orders of $1.8 million for the three months ended October 2, 1999 compared to the comparable period ended October 3, 1998 reflects consistent overall demand for the segment's in-circuit products during the quarter, offset by a significant decline in demand for the segment's high-end functional test products. Orders for these products decreased $1.6 million, or 36%, during the three months ended October 2, 1999 as compared to the comparable year ago period. The increase of $20.5 million in ADS orders for the three months ended October 2, 1999 compared to the comparable period ended October 3, 1998 is primarily attributable to both the European and North American launches of the Company's WDS product for The Ford Motor Company ("Ford"). During the three months ended October 2, 1999, the segment received orders totaling $19.0 million from Ford. The decrease of $1.7 million in GRS orders for the three months ended October 2, 1999 compared to the three months ended October 3, 1998 reflects the significant sales cycle for GRS's products and the timing of significant customer orders. 13 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ORDERS AND BACKLOG (CONTINUED) North American orders totaled $43.4 million during the three months ended October 2, 1999 compared to $38.4 million during the three months ended October 3, 1998. European orders totaled $29.0 million during the three months ended October 2, 1999 compared to $17.3 million during the three months ended October 3, 1998. Asian orders totaled $4.5 million during the three months ended October 2, 1999 compared to $4.2 million during the three months ended October 3, 1998. The increase in North American orders of $5.0 million is due to increased order activity related to the launch of the Company's WDS 3500 product for Ford which increased orders $7.8 million from the comparable year ago period. This increase was offset by a decline in North American orders of $2.8 million related to the Company's EMS segment, indicative of the emergence of Eastern Europe as an expansion area for certain of the Company's major contract manufacturing customers and the decline in orders for the Company's high-end functional test equipment products. The increase in European orders of $11.7 million reflects increases in EMS orders of $0.8 million reflecting the continued migration of certain of the Company's large contract manufacturing customers into Eastern Europe and the launch of the Company's WDS 3500 product for Ford which amounted to $9.9 million in orders during the three months ended October 2, 1999. Orders in Europe also reflected an increase of $1.0 million of orders related to GRS's activity with certain large telecommunications companies in Europe. Backlog totaled $28.0 million at October 2, 1999 compared to $60.3 and $21.6 million at July 3, 1999 and January 2, 1999. The Company believes that a substantial portion of backlog at October 2, 1999 will be shipped during the three months ended January 1, 2000. REVENUE Product revenue increased to $91.5 million for the three months ended October 2, 1999 from $43.0 million for the three months ended October 3, 1998. EMS product revenue totaled $38.8 million for the three months ended October 2, 1999 compared to $37.4 million for the three months ended October 3, 1998. ADS product revenue totaled $51.1 million for the three months ended October 2, 1999 compared to $2.0 million for the three months ended October 3, 1998. GRS product revenue totaled $1.6 million for the three months ended October 2, 1999 compared to $3.6 million for the three months ended October 3, 1998. EMS product revenue increased $1.4 million primarily due to a change in product mix for the three months ended October 2, 1999 compared to the three months ended October 3, 1998 which contributed $1.7 million in higher product revenue. This increase reflects EMS customers' desire to optimize their manufacturing processes by moving toward higher throughput EMS products which carry higher margins. Also contributing to the increase in EMS product revenues is an increase of $1.2 million in product revenue related to the Company's GR Pilot. Offsetting these favorable results was a decrease in product revenue of $1.5 million in all other EMS products including a decline of $0.9 related to the Company's high-end functional test products. The increase in ADS product revenue of $49.1 million is almost entirely attributable to an increase of $47.4 million related to the Company's WDS product for Ford. During the three months ended October 2, 1999 the Company shipped approximately 7,400 WDS 3500 units to Ford primarily in North America and Europe. Shipments by Ford to its North American dealers contributed $35.9 million in product revenue during the three months ended October 2, 1999. In addition, $11.5 million of product revenue for the three months ended October 2, 1999 related to the launch of the product by Ford to its European dealers. The Company expects to continue to derive significant revenues from Ford related to the WDS 3500 product 14 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVENUE (CONTINUED) during the remainder of 1999 and in 2000. However, the Company does not anticipate a unit count approaching the unit count in the three months ended October 2, 1999 in any one future three month period because of the nature of the product roll-out for Ford in which the Company and Ford worked together to time the major regional launches to European and North American dealers during June, July and September of 1999. Subsequent regional market launches, as well as launches for certain of Ford's subsidiaries and strategic partners, are planned beginning in January 2000. The decline of approximately $2.0 million in GRS product revenue reflects the timing of significant customer orders as well as the lengthy sales cycle involved in selling the segment's products. During the three months ended October 2, 1999, segment management has continued to focus on building the segment's sales pipeline and new product development. Should such efforts not yield favorable results during the three months ended January 1, 2000, the segment's revenue could be significantly impacted, affecting the Company's financial condition, results of operations or cash flow. Service revenue increased to $17.8 million for the three months ended October 2, 1999 from $17.5 million for the three months ended October 3, 1998. EMS service revenue totaled $8.2 million for the three months ended October 2, 1999 compared to $8.7 million for the three months ended October 3, 1998. ADS service revenue totaled $6.4 million for the three months ended October 2, 1999 compared to $5.9 million for the three months ended October 3, 1998. GRS service revenue totaled $3.2 million for the three months ended October 2, 1999 compared to $2.9 million for the three months ended October 3, 1998. The decline in EMS service revenue of $0.5 million is primarily attributable to a decline of $0.4 million in service revenue related to the segment's high-end functional test products that normally carry higher service revenues as a percentage than the segment's other products. The increase in ADS service revenues of $0.5 million reflects work on certain new customer orders received in 1999 while the increase in GRS service revenue of $0.3 million reflects installations at certain large contract manufacturing sites. Revenue from international markets increased to $51.0 million, or 46.7% of revenue, for the three months ended October 2, 1999 from $31.2 million, or 51.5% of revenue, for the three months ended October 3, 1998. The increase in international revenue in total reflects the Company's launch of the WDS 3500 product for Ford and the continued expansion of the Company's contract manufacturing customers into Eastern Europe and Mexico. The percentage decrease resulted from increased volume of business in North America attributable to the launch of the Company's WDS 3500 product for Ford during the three months ended October 2, 1999. Revenues from international markets are subject to the risks of currency fluctuations. GROSS MARGINS Product margins were $35.7 million, or 39.0%, for the three months ended October 2, 1999 compared to $16.5 million, or 38.3%, for the three months ended October 3, 1998. Excluding one-time charges of $4.9 million related to the cessation of manufacturing at the Company's Manchester, UK site and the discontinuation of the Company's Vision product line during the three months ended October 3, 1998, product margins for the three months ended October 3, 1998 were $21.4 million, or 49.8%. The increase in product margins of $14.3 million, excluding certain one-time charges during the comparable year ago period, consists of incremental margins of $10.4 million in the ADS segment and $5.7 million in incremental margins in the EMS segment. The increase in ADS margins was driven by the launch of the Company's WDS 3500 product for Ford while the increased margins in the EMS business are 15 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GROSS MARGINS (CONTINUED) attributable to improved manufacturing efficiencies and a more favorable product mix. These increases were offset by a decline in GRS margins of $2.1 million resulting from the decline in product revenue and decreased capitalized software amortization costs of $0.3 million during the three months ended October 2, 1999 as compared to the comparable year ago period. As a percentage of total revenues, product margins declined to 39.0% from 49.8% during the comparable year ago period. This decrease reflects the significantly lower margins realized on the WDS 3500 product compared to the Company's higher margin EMS products. Inventory turnover, excluding certain inventory related to the Company's contract with Ford, for the three months ended October 2, 1999, was 5.8. For the three months ended October 3, 1998 inventory turnover, excluding certain Ford inventory, was 3.5. The increase in inventory turnover for the three months ended October 2, 1999 compared to the year ago comparable period is attributable to increased operating efficiencies in manufacturing resulting from the Company's restructuring efforts in 1998, overall improved inventory management and significant turnover of the Company's WDS 3500 product. Service margins were $6.8 million, or 38.4%, for the three months ended October 2, 1999 compared to $8.0 million, or 45.6%, for the three months ended October 3, 1998. The decrease in service margins for the three months ended October 2, 1999 as compared to the three months ended October 3, 1998 is attributable to declining margins in the ADS segment which reflects the competitive market conditions in the markets that ADS competes. OPERATING EXPENSES Selling, general and administrative expenses decreased to $16.9 million, or 15.5% of total revenue, for the three months ended October 2, 1999 from $17.3 million, or 28.6% of total revenue, for the three months ended October 3, 1998. The decrease in selling, general and administrative expenses, in dollars, is attributable to the restructuring actions management implemented during the second and third quarters of 1998, accounting for approximately $1.7 million of reduced selling, general and administrative expenses for the three months ended October 2, 1999. The favorable impacts of the management actions in 1998 are offset during the three months ended October 2, 1999 by $0.4 million in increased marketing costs related to the Company's efforts in the low cost functional test market and $0.9 million in certain sales and management incentive programs. As a percentage of total revenue, the significant decrease reflects the launch of the WDS 3500 product as well as better organizational efficiencies. The Company expects to continue to focus on cost minimization efforts to lower selling, general and administrative expenses, particularly as a percentage of total revenue. However, there can be no assurances that such reductions can be achieved. Failure to achieve such reductions may impact the Company's financial position, results of operations or cash flow. Research and development expenses increased to $5.4 million, or 5.0% of total revenue, for the three months ended October 2, 1999 from $4.3 million, or 7.0% of total revenue, for the three months ended October 3, 1998. The increase in research and development costs primarily reflects the Company's efforts in entering the low cost functional test market adding $0.5 million of incremental costs, on-going new product development efforts in the GRS segment, totaling $0.8 million, which were not undertaken in 1998, and incremental research and development costs in the ADS segment of $0.5 million attributable to the Company's contract with Ford and the increasingly complex nature of vehicle electronic systems. The 16 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING EXPENSES (CONTINUED) increase in research and development expenses is offset somewhat by decreases in research and development efforts for certain EMS products totaling $0.5 million and an increase in capitalized software of $0.2 million for the three months ended October 2, 1999 compared to the comparable year ago period. During the three months ended October 2, 1999, on-going research and development projects continue to reflect the development of in-circuit test software, new product development efforts in low cost functional test equipment software, and significant new product development and system enhancements for the Company's GRS product suite as well as maintenance of existing products in the EMS segment. The Company expects to continue to invest in new product development and enhancements to its existing products. Interest expense was $0.4 million for the three months ended October 2, 1999 compared to $0.3 million for the three months ended October 3, 1998 reflecting increased borrowings. A net income tax expense of $2.0 million was recorded during the three months ended October 2, 1999 compared to a net income tax expense of $0.8 million during the three months ended October 3, 1998 reflecting higher pre-tax net income. NINE MONTHS ENDED OCTOBER 2, 1999 VS. NINE MONTHS ENDED OCTOBER 3, 1998 ORDERS Orders for the Company's products and services increased to $232.3 million for the nine months ended October 2, 1999 from $166.8 million for the nine months ended October 3, 1998. EMS orders totaled $133.9 million for the nine months ended October 2, 1999 compared to $132.1 million for the nine months ended October 3, 1998. ADS orders totaled $80.2 million for the nine months ended October 2, 1999 compared to $22.1 million for the nine months ended October 3, 1998. GRS orders totaled $18.2 million for the nine months ended October 2, 1999 compared to $12.6 million for the nine months ended October 3, 1998. EMS orders increased $1.8 million for the nine months ended October 2, 1999 compared to the comparable period ended October 3, 1998 due to the improvement in the economic conditions in which the Company's customers operate during the nine months ended October 2, 1999 offset by declining demand for the segment's high-end functional test products during the nine months ended October 2, 1999. The increase of $58.1 million in ADS orders for the nine months ended October 2, 1999 compared to the comparable period ended October 3, 1998 is attributable to both the European and North American launches of the Company's WDS 3500 product for Ford. The increase of $5.6 million in GRS orders for the nine months ended October 2, 1999 compared to the nine months ended October 3, 1998 is attributable to the acquisition of Industrial Computer Corporation ("ICC") in April 1998. North American orders totaled $134.1 million during the nine months ended October 2, 1999 compared to $97.2 million during the nine months ended October 3, 1998. European orders totaled $84.3 million during the nine months ended October 2, 1999 compared to $57.8 million during the nine months ended October 3, 1998. Asian orders totaled $13.9 million during the nine months ended October 2, 1999 compared to $11.8 million during the three months ended October 3, 1998. The increase in North American orders of $36.9 million consists of an increase in order activity related to the launch of the Company's WDS 3500 product for Ford, which contributed $37.0 million in incremental orders during the nine months ended October 2, 1999. North American orders were affected by a decline in EMS order activity of $5.9 million caused by the migration of certain of the Company's 17 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ORDERS (CONTINUED) large contract manufacturing customers to Eastern Europe. This decline was offset by a similar increase in GRS North American orders of $5.8 million for the nine months ended October 2, 1999 attributable to the acquisition of ICC in April 1998. European orders increased $26.5 million attributable to increases in EMS orders of $5.7 million reflecting the continued migration of certain of the Company's large contract manufacturing customers into Eastern Europe and the launch of the Company's WDS 3500 product for Ford, which amounted to $17.3 million in orders during the nine months ended October 2, 1999. Orders in Europe also reflected an increase of $3.5 million of incremental business in the Company's ADS segment relating to certain contracts with European truck manufacturers. PRODUCT REVENUE Product revenue increased to $174.2 million for the nine months ended October 2, 1999 from $119.8 million for the nine months ended October 3, 1998. EMS product revenue totaled $104.0 million for the nine months ended October 2, 1999 compared to $106.2 million for the nine months ended October 3, 1998. ADS product revenue totaled $62.2 million for the nine months ended October 2, 1999 compared to $7.4 million for the nine months ended October 3, 1998. GRS product revenue totaled $8.0 million for the nine months ended October 2, 1999 compared to $6.2 million for the nine months ended October 3, 1998. The decrease in EMS product revenue of $2.2 million is primarily attributable to declines in product revenue of $5.5 million related to the Company's high-end functional test systems, reflecting significantly lessened demand for these products. Competition for these systems remains intense and is often evaluated against customers' own internally developed solutions. Other declines amounted to $0.8 million related to the segment's fixture programming operations and $1.2 million related to the Company's low cost in-circuit systems and its GR Vision product which was discontinued in 1998. These decreases are offset by increases of $2.7 million related to the segment's in-circuit systems. This increase reflects EMS customers' desire to optimize their manufacturing processes by moving toward higher throughput EMS products which carry higher average selling prices. Also offsetting the decline in EMS product revenues is an increase of $2.6 million in product revenue related to the Company's GR Pilot. The increase in ADS product revenue of $54.8 million is almost entirely attributable to an increase of $54.1 million related to the Company's WDS 3500 product for Ford. During the nine months ended October 2, 1999 the Company shipped approximately 8,400 WDS 3500 units to Ford dealers primarily in North America and Europe. The Company expects to continue to derive significant revenues from Ford related to its WDS 3500 product during the remainder of 1999 and in 2000. However, the Company does not anticipate a unit count approaching the unit count in the nine months ended October 2, 1999 in any one future comparable period because of the nature of the product roll-out for Ford in which the Company and Ford worked together to time the major regional launches to Ford dealers during June, July and September of 1999. Subsequent regional market launches, as well as launches for certain of Ford's subsidiaries and strategic partners, are planned beginning in January 2000. The increase of approximately $1.8 million in GRS product revenue reflects the acquisition of ICC in April of 1998. SERVICE REVENUE Service revenue increased to $51.7 million for the nine months ended October 2, 1999 from $48.8 million for the nine months ended October 3, 1998. EMS service revenue totaled $23.8 million for the nine months ended October 2, 1999 compared to $25.8 million for the nine months ended October 3, 18 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SERVICE REVENUE (CONTINUED) 1998. ADS service revenue totaled $18.7 million for the nine months ended October 2, 1999 compared to $16.8 million for the nine months ended October 3, 1998. GRS service revenue totaled $9.2 million for the nine months ended October 2, 1999 compared to $6.2 million for the nine months ended October 3, 1998. The decline in EMS service revenue of $2.0 million is primarily attributable to declines of $1.2 and $1.6 million in service revenue related to the segment's high-end functional test products and its fixture programming business, respectively. The decrease related to the segment's high-end functional test systems reflects the overall decrease in demand for these products. The decline in the Company's fixture programming business reflects the overall decreased demand for the segment's products driven by customer demands for higher throughput per manufacturing line and improved worldwide asset management. These decreases are offset by an increase of $0.8 million of service revenue related to the Company's in-circuit test products. The increase in ADS service revenues of $1.9 million reflects work on certain new customer orders received in 1999 while the increase in GRS service revenue of $3.0 million reflects the acquisition of ICC in April 1998. Revenue from international markets increased to $109.6 million, or 48.5% of revenue, for the nine months ended October 2, 1999 from $88.9 million, or 52.7% of revenue, for the nine months ended October 3, 1998. The increase in international revenue in total reflects the increased revenue in Europe associated with the Company's launch of the WDS 3500 product for Ford and the continued expansion of the Company's contract manufacturing customers into Eastern Europe and Mexico. The percentage decrease resulted from increased volume of business in North America attributable to the launch of the Company's WDS 3500 product for Ford during the nine months ended October 2, 1999. Revenues from international markets are subject to the risks of currency fluctuations. GROSS MARGINS Product margins were $81.2 million, or 46.6% for the nine months ended October 2, 1999 compared to $57.8 million, or 48.2%, for the nine months ended October 3, 1998. Excluding one-time charges of $4.9 million related to the cessation of manufacturing at the Company's Manchester, UK site and the discontinuation of the Company's Vision product line during the nine months ended October 3, 1998, product margins for the three months ended October 3, 1998 were $62.7 million, or 52.3%. The increase in product margins of $18.5 million, excluding certain one-time charges during the comparable year ago period, consists of incremental margins of $13.3 million in the ADS segment, $3.4 million in incremental margins in the EMS segment and $1.7 million in incremental margins in the GRS segment. The increase in ADS margins was driven by the launch of the Company's WDS 3500 product for Ford amounting to $11.4 million in incremental margins and improved manufacturing efficiencies totaling $1.9 million. The $3.4 million in incremental margins in the EMS business is attributable to improved manufacturing efficiencies affected by management's restructuring efforts in 1998 and a more favorable product mix. The increase of $1.7 million in GRS product margins primarily relates to increased product sales realized during the nine months ended October 2, 1999 compared to the comparable year ago period. These increases were accompanied by decreased capitalized software amortization costs of $0.1 million during the nine months ended October 2, 1999 as compared to the comparable year ago period. As a percentage of total revenues, product margins declined to 46.6% from 52.3% during the comparable year ago period. This decrease reflects the significantly lower margins realized on the WDS 3500 product compared to the Company's higher margin EMS and GRS products. 19 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GROSS MARGINS (CONTINUED) Inventory turnover, excluding certain inventory related to the Company's contract with Ford, for the nine months ended October 2, 1999, was 3.9. For the nine months ended October 3, 1998 inventory turnover, excluding certain Ford inventory, was 2.7. The increase in inventory turnover for the nine months ended October 2, 1999 compared to the year ago comparable period is attributable to increased operating efficiencies in manufacturing resulting from the Company's restructuring efforts in 1998, overall improved inventory management and significant turnover related to the Company's WDS 3500 product. Service margins were $20.6 million, or 39.8%, for the nine months ended October 2, 1999 compared to $20.5 million, or 42.0%, for the nine months ended October 3, 1998. The relatively stable service margins, for the nine months ended October 2, 1999 as compared to the nine months ended October 3, 1998, reflects increased margins in the GRS segment attributable to the acquisition of ICC in April 1998. This increase is offset by declining margins in the EMS and ADS segments indicative of the competitive market conditions in the end markets for EMS' and ADS' products. OPERATING EXPENSES Selling, general and administrative expenses decreased to $51.2 million, or 22.7% of total revenue, for the nine months ended October 2, 1999 from $53.2 million, or 31.5% of total revenue, for the nine months ended October 3, 1998. The decrease in selling, general and administrative expenses, both in dollars and as a percentage of total revenue, is attributable to the restructuring actions management implemented during the second and third quarters of 1998, accounting for approximately $4.7 million of reduced selling, general and administrative expenses for the nine months ended October 2, 1999. This decrease was offset by approximately $1.2 million in incremental selling, general and administrative expenses resulting from the acquisition of ICC in April 1998, $0.5 million in increased marketing costs related to the Company's efforts in the low cost functional test market and $1.2 million in certain sales and management incentive programs. The Company expects to continue to focus on cost minimization efforts to lower selling, general and administrative expenses, particularly as a percentage of total revenue. However, there can be no assurances that such reductions can be achieved. Failure to achieve such reductions may impact the Company's financial position, results of operations or cash flow. Research and development expenses increased to $14.7 million, or 6.5% of total revenue, for the nine months ended October 2, 1999 from $14.6 million, or 8.7% of total revenue, for the nine months ended October 3, 1998. The increase in research and development costs primarily reflects the Company's efforts in the low cost functional test market which made up $0.5 million of incremental costs, a new in-circuit test platform which carried incremental costs of $0.9 million, on-going new product development efforts in the GRS segment, totaling $2.9 million, which were not undertaken in 1998, and a decline in research and development costs in the ADS segment of $1.3 million primarily due to the decrease in maintenance efforts in the first half of 1999 related to certain existing products. In addition, the Company has moved into a sustaining mode related to its high end functional test products which decreased research and development $0.8 million during the nine months ended October 2, 1999. The increase in research and development expenses is offset somewhat by an increase in capitalized software of $1.6 million for the nine months ended October 2, 1999 compared to the comparable year ago period. 20 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING EXPENSES (CONTINUED) During the nine months ended October 2, 1999, on-going research and development projects continued to be for in-circuit test software, a next generation in-circuit hardware platform, a low cost functional test system and new product development and system enhancements for the Company's GRS product suite. The Company expects to continue to invest in new product development and enhancements to its existing products. Interest expense was $0.9 million for the nine months ended October 2, 1999 and $0.9 million for the nine months ended October 3, 1998. Interest expense has remained consistent for the nine months ended October 2, 1999, considering increased borrowings on its credit facility, offset by lower average interest rates on the Company's five year term loan. A net income tax benefit of $1.0 million was recorded during the nine months ended October 2, 1999 compared to a net income tax benefit of $7.3 million during the nine months ended October 3, 1998. The recorded income tax benefit of $1.0 million for the nine months ended October 2, 1999 results primarily from a reversal of a portion of the Company's deferred tax asset valuation allowance totaling $4.5 million which was recorded due to management's expectations of future income and expected utilization of the Company's domestic and foreign net operating loss carryforwards. Excluding the reversal of a portion of the deferred tax asset valuation allowance income tax expense was $3.5 million for the nine months ended October 2, 1999 compared to an income tax expense of $0.2 million for the nine months ended October 3, 1998. IMPAIRMENT LOSS In fiscal 1996, the Company purchased Test Technology Associates, Inc. and Testware, Inc. These components provide custom test programming, text fixture integration and other value-added services to manufacturers and users of electronic products. Additionally, GenRad acquired certain assets of Field Oriented Engineering, AG in fiscal 1996, consisting primarily of the software program known as TRACS-Registered Trademark- III, which is sold to electronic manufacturing systems customers. The excess purchase price over the net assets acquired for these acquisitions was recorded as long-term intangibles, primarily goodwill. Through July 4, 1998 the historical financial performance of these entities continued to be less than anticipated and the businesses had been negatively impacted by the recent decline in the in-circuit test market. Due to these factors as well as certain management changes during the second quarter of 1998, the Company prepared revised projections of future net cash flows relating to these businesses, which indicated that the businesses would not generate sufficient net cash flows to realize the carrying value of the intangible assets. This analysis was performed in accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of." As a result, a $4.9 million impairment loss, representing the net book value of goodwill, was recorded during the second quarter of 1998 and is included in the accompanying condensed consolidated statements of operations for the nine months ended October 3, 1998. ACQUIRED IN-PROCESS DIAGNOSTIC SOFTWARE On July 2, 1998, the Company acquired the rights to certain diagnostic software for which technological feasibility had not been established. The Company plans to use the acquired technology in the development and diagnosis of increasingly complex mechatronic systems, particularly in vehicle systems. At the time of the acquisition, the acquired technology had not yet reached technological feasibility and had 21 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACQUIRED IN-PROCESS DIAGNOSTIC SOFTWARE (CONTINUED) no alternative future uses and, accordingly, the entire purchase price was expensed. The total of $1.7 million is included in acquired in-process research and development in the accompanying condensed consolidated statements of operations for the nine months ended October 3, 1998. RESTRUCTURING AND OTHER CHARGES During the second and third quarters of 1998, the Company restructured its operations, which resulted in a workforce reduction of approximately 230 manufacturing and general and administrative employees or 15% of the Company's workforce. In accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits, and Other Costs to Exit an Activity," the Company recorded a charge for restructuring totaling approximately $6.8 million for severance costs and post-employment benefits ($5.2 million), write-offs of certain fixed assets which will no longer be utilized ($1.0 million) and for the termination fees of certain equipment and real estate leases ($0.6 million). During the third quarter of 1998, the Company ceased its manufacturing operations at its Manchester, UK facility. Inventory related to the manufacture of certain ADS products and the cessation of ADS' contract manufacturing business totaling $3.5 million was charged to cost of products. In addition, restructuring charges totaling approximately $0.5 million were recorded related to a workforce reduction of approximately 20 people and certain fixed assets which will no longer be utilized and will be disposed of in 1999. During the third quarter of 1998, the Company completed an in depth analysis of the hardware portion of the Vision product line resulting in a decision to exit this business. This decision was based upon the following: (i) the market for Vision equipment in PCB manufacturing was not as large as had been previously estimated and (ii) the continued research and development investment required for the existing Vision product was not warranted given the resizing of the Vision market. Exiting the Vision hardware product line resulted in charges totaling $2.8 million related to fixed assets which will no longer be utilized and were disposed of in 1998 and certain excess inventory, inventory purchase commitments and prepaid royalties. Of the total of $2.8 million, $1.4 million is recorded in costs of products and $1.4 million is recorded as restructuring charges in the accompanying consolidated financial statements. ACQUISITION OF INDUSTRIAL COMPUTER CORPORATION On April 7, 1998, GenRad acquired all of the then outstanding common shares of Industrial Computer Corporation ("ICC"), a software company providing real-time manufacturing execution systems to electronics manufacturers. ICC was established in 1980 and is located in Atlanta, Georgia. The transaction was accounted for as a purchase, and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. In connection with the acquisition of ICC, 1,237,917 shares of GenRad's common stock were issued for all of the then outstanding shares of ICC in a tax-free reorganization. Consideration for the acquisition of ICC totaled approximately $36.6 million. Direct costs of the acquisition totaled approximately $1.6 million and consisted primarily of legal fees, accounting fees and broker fees. Consideration was allocated to the tangible and intangible assets of ICC as follows: acquired in-process research and development ($8.4 million), developed technology ($11.4 million), goodwill ($17.0 million), other intangible assets ($1.7 million) and the net assets and liabilities of ICC (net liability of $0.3 million). The results of ICC are included in the 1998 financial statements beginning from the date of purchase. 22 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACQUISITION OF INDUSTRIAL COMPUTER CORPORATION (CONTINUED) The Securities and Exchange Commission ("SEC"), in September 1998, issued guidance related to the valuation of acquired in-process research and development as set forth in its letter dated September 9, 1998 from the Chief Accountant of the SEC to the American Institute of Certified Public Accountants. In April 1999 the Company corresponded with the staff of the SEC ("the Staff") concerning the application of the methodology to the valuation of the incomplete technology and other intangible assets and implemented the methodology. As a result of the application of the valuation methodology, the purchase price was allocated to acquired in-process research and development, developed technology, assembled workforce and tradename. In April 1999, the Company restated its originally filed Forms 10-Q filings for its second and third quarters of fiscal 1998 to reflect this methodology. The valuation of acquired in-process research and development was based on management's projections of the after tax net cash flows attributable to the acquired in-process research and development. Specifically, the valuation considers the following: (i) a fair market value premise; (ii) comprehensive due diligence concerning all potential intangible assets including trademarks and tradenames, patents, copyrights, non-compete agreements, assembled workforce and customer relationships and sales channel relationships; (iii) the value contribution of core technology to the acquired in-process technology, with a view toward ensuring the relative allocations to core technology and acquired in-process research and development were consistent with the relative contributions of each to the final product; and (iv) the calculation used to determine the value allocated to acquired in-process research and development considered only the efforts completed as of the transaction date and only the cash flow associated with the product development efforts in-process at the acquisition date. The charge for acquired in-process research and development relates to one development project in process at the date of the acquisition that had not reached technological feasibility, had no alternative future use, and for which ultimate successful component, had no alternative future use was reached in consultation with engineering personnel from ICC as well as the Company's valuation advisors. The in-process project consists of the development of ICC's existing UNIX based product using an object oriented design and standard programming language which will provide users of the product the ability to use ICC's Shop Floor Data Manager-TM- ("SFDM") product on varied operating platforms. The primary project tasks open at the time of acquisition included completion of the design of certain modules, or objects, which will house the program code, completion of program code written in the new language and preliminary quality assurance and testing of the product. At the time of acquisition, additional development remained on all tasks (management estimated that the project was approximately 69% complete) and costs to complete were estimated to total approximately $928,000. At the time of the acquisition, management believed that the product being developed would become available for sale late in fiscal 1999. GenRad will begin to benefit from the acquired in-process research and development once completed product is sold. Failure to reach successful completion of this project may result in impairment of the associated capitalized intangible assets, i.e. goodwill and developed technology, and/or may require the Company to accelerate the time period over which the intangibles are being amortized, which may have a material adverse effect on the Company's results of operations and financial condition. Significant assumptions used to determine the value of the acquired in-process research and development included several factors. The first was a forecast of net cash flows that were expected to result from the in-process development effort using projections prepared by ICC management, portions of which (1998 and 1999) were provided to GenRad's Board of Directors. Net cash flow projections included projected revenue growth and trends in profit margins and selling, general and administrative expense that 23 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACQUISITION OF INDUSTRIAL COMPUTER CORPORATION (CONTINUED) were consistent with recent historical trends prior to the acquisition. Second, a percentage complete of 69% for the project estimated by considering the costs invested to date relative to the expected total cost of the development effort, supported by the amount of technological progress completed as of the transaction date relative to the overall technological achievements required to achieve the intended functionality of the eventual product. The technological issues were addressed primarily by engineering representatives from ICC along with the Company's independent valuation advisors. Third, a 24% discount rate, which represents a rate equivalent to that which would be employed in a fair value analysis, i.e., one that considers all cash flows associated with the project and resulting product, and therefore represents a blended rate of all the risks associated with the product. Lastly, a core technology charge reflected as one third of after tax net income related to the in-process project was utilized. This rate represents an amount that the Company would be required to pay in royalties assuming it had licensed the products expected to be derived from the acquired in-process development efforts. As of October 2, 1999, the technological feasibility of the project has been reached and no significant departures from the assumptions included in the valuation analysis have occurred. ACQUISITION OF MANUFACTURING EXECUTION SYSTEMS BUSINESS On April 9, 1998, GenRad acquired certain assets of the Manufacturing Execution Systems ("MES") business of Valstar Systems Limited ("Valstar") located in Aberdeen, Scotland. Valstar's MES component provides integration services and support and distribution in Europe for ICC's Shop Floor Data Manager Software. Consideration paid for Valstar's MES business totaled $3.2 million in cash, including acquisition costs, funded through internally generated funds. As part of the acquisition, the Company entered into a two-year consulting and services agreement with Valstar that includes securing certain Valstar personnel and other resources to transition the business to GenRad. Of the $3.0 million purchase price, $2.0 million was paid on April 9, 1998 and $1.0 million was released from escrow on October 7, 1998 as certain contingencies were achieved. Direct costs of the acquisition totaled approximately $0.2 million and consisted primarily of legal and accounting fees. LIQUIDITY AND SOURCES OF CAPITAL SOURCES AND USES OF CASH Cash and cash equivalents at October 2, 1999 totaled approximately $7.0 million, compared to approximately $13.0 million at January 2, 1999. The Company's current ratio at October 2, 1999 and January 2, 1999 was 2.3 and 2.5. Net cash used in operating activities was $14.6 million for the nine months ended October 2, 1999, compared to net cash provided by operating activities of $15.0 million for the nine months ended October 3, 1998. The change in cash (used in) provided by operating activities during the nine months ended October 2, 1999 as compared to the nine months ended October 3, 1998 is primarily driven by significant inventory investments, which used incremental cash of $5.4 million, related to the Company's contract with Ford and payment of $7.0 million, net of insurance proceeds, related to the settlement of arbitration recorded in 1998 offset by increased net income, improved inventory management, improved payment timing on long-term contracts, and better cash management related to timing of vendor payments. 24 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SOURCES AND USES OF CASH (CONTINUED) During the three months ended October 2, 1999, the Company's accounts receivable turnover was approximately 6.6 (annualized) compared to approximately 4.0 (annualized) for the three months ended October 3, 1998. The improvement reflects management's continued focus on cash collections, offset by continued customer demands for more favorable payment terms during the three months ended October 2, 1999. During the nine months ended October 2, 1999, net cash used in investing activities was $17.9 million, compared to $18.8 million for the nine months ended October 3, 1998. Capital expenditures totaled $13.8 million for the nine months ended October 2, 1999 compared to $12.3 million for the nine months ended October 3, 1998. Cash used in the acquisition of certain intangible assets totaled $4.1 million for the nine months ended October 2, 1999 compared to $3.4 million for the nine months ended October 3, 1998. The purchase of Industrial Computer Corportion ("ICC") and Valstar Systems Limited during the nine months ended October 3, 1998 used cash of $3.1 million. The increase in capital expenditures during the nine months ended October 2, 1999 compared to the nine months ended October 3, 1998 is attributable to the Company's new business system implementation. Beginning in 1998, the Company began efforts to implement SAP R/3-TM- ("SAP"), an enterprise resource planning system. During the nine months ended October 2, 1999, total capital expenditures related to the Company's SAP implementation totaled approximately $5.6 million. At the end of 1998, the Company had completed Phase I of this project with the successful implementation of certain modules of the SAP ERP system. During the quarter ended April 3, 1999, the Company began Phase II of this project, which involves the implementation of certain other modules of SAP, including sales, manufacturing and distribution related modules. Total capital expenditures related to SAP in 1999 are expected to approximate $7.0 million to $8.0 million. Expenditures in 2000 through the targeted go-live date are expected to approximate $4.0 million to $5.0 million. After go-live, the Company expects to continue to incur certain capital expenditures and on-going expenses related to the implementation of SAP, however such expenditures are expected to be significantly less than those made in 1998 and expected to be made in 1999 and 2000 through the go-live date. Cash used in the acquisition of certain intangible assets of $4.1 million represents the costs of software capitalized in accordance with Statement of Financial Accounting Standards No. 86 as well as the direct purchase of certain intangible assets from third parties. Net cash provided by financing activities was $24.9 million for the nine months ended October 2, 1999 compared to net cash used in financing activities of $8.4 million for the nine months ended October 3, 1998. The increase in cash provided by (used in) financing activities during the nine months ended October 2, 1999 as compared to the nine months ended October 3, 1998 is primarily attributable to the Company's borrowings on its line of credit facility during the nine months ended October 2, 1999. Net borrowings totaled $20.3 million during the nine months ended October 2, 1999 and were made principally for inventory investments related to the Company's contract with Ford and on-going software development efforts in the Company's GRS segment. Proceeds from employee stock plans provided incremental cash from investing activities of $5.9 million as compared to the nine months ended October 3, 1998. Offsetting these increases was a lessened cash outlay of $7.2 million related to the Company's stock repurchase program for the nine months ended October 2, 1999. 25 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STOCK REPURCHASE PROGRAM During the second quarter of 1998, the Company commenced a stock repurchase program whereby the Company will purchase, in the open market, shares of its stock. The Company intends to buy back its stock at times when the market price of the stock presents opportunities to do so. The Company's stock repurchase plan is intended as a means to partially mitigate the dilutive impact of stock options and to provide an alternative investment for the Company's excess cash. The program has been funded entirely through operating cash flow, however, the Company may if it considers it prudent, utilize its available credit facilities in connection with its stock repurchase program. Through October 2, 1999, the Company had utilized approximately $18.7 million to repurchase 1,225,600 shares of its common stock. CREDIT FACILITY The Company has a $50.0 million credit facility, which requires the Company to maintain certain financial and operating covenants and expires in July 2001. Borrowings on the line are payable on demand and bear interest, which is payable quarterly in arrears, at the lesser of the bank's prime rate (for borrowings designated as "prime rate" borrowings) or LIBOR plus a range from 0.75% to 1.50% (for borrowings designated as "LIBOR" borrowings), as determined from time to time by the bank. Under the terms of the credit facility, the Company is required to pay a commitment fee on the unused portion of the line ranging from 0.25% to 0.50% of the total unused portion of the line dependent on the Company's operating performance. At October 2, 1999, borrowings outstanding under the line totaled $20.3 million, of which $10.0 million was designated as a LIBOR borrowing and $10.3 million as a prime rate borrowing. SUMMARY The Company's primary source of liquidity is internally generated funds. For the remainder of 1999, the Company anticipates it will fund its working capital and capital expenditure requirements, make principal and interest payments on its borrowings and meet its cash obligations from internally generated funds and from its available credit facility. EFFECTS OF INFLATION AND FOREIGN EXCHANGE Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on its revenues or its results of operations. The Company attempts to mitigate inflationary cost increases by continuously improving manufacturing methods and technologies. Management does not expect inflation to have a significant impact on operations in the foreseeable future. The Company maintains development, sales and support facilities in several locations worldwide, including, England, France, Germany, Switzerland, Singapore, and Mexico, 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 26 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EFFECTS OF INFLATION AND FOREIGN EXCHANGE (CONTINUED) offset the impact of actual foreign currency changes, e.g. if currency rates changed with respect to a certain transaction resulting in a loss to the Company, the forward contract would be structured to result in a gain, thereby minimizing the actual loss incurred, if any. The Company may be subject to losses resulting from unanticipated changes in foreign currency exchange rates. The market factors that expose the Company in this regard include economic conditions in which the Company conducts business as well as the Company's ability to effectively and efficiently engage in foreign currency forward exchange contracts at competitive rates with financial institutions or others. The Company expects to continue these or similar practices in the future to the extent appropriate. Historically, actual results of the Company's foreign currency risk management procedures have been in line with management's expectations and have not resulted in significant gains or losses, however, there can be no assurance that these results will continue in the future. THE INTRODUCTION OF THE EURO The Company is aware of and has developed systems designed to handle the introduction of the Euro as an effective currency in Europe. Although the Company believes the systems that have been implemented are sufficient for the Company to be able to process Euro denominated transactions, there can be no assurances that such systems will continue to function as designed. If they do not so function, GenRad's financial results could be adversely affected. To date, the Company has not encountered any significant processing issues related to the introduction of the Euro. The introduction of the Euro has not materially affected the manner in which the Company conducts its operations, nor has it required the Company to alter any significant contracts with suppliers and/or financial institutions. FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results of operations and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be beyond the Company's control. Factors that might cause such differences include, but are not limited to, those discussed below. The Company has experienced and expects to continue to experience fluctuations in its results of operations, particularly on a quarterly basis. The Company's expense levels are based, in part, on expectations of future revenues. If revenue levels in a particular period do not meet expectations, due to the timing of the receipt of orders from customers, customer cancellations or delays of shipments, then operating results could be adversely impacted. 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 27 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FACTORS THAT MAY AFFECT FUTURE RESULTS (CONTINUED) within the Company's product mix, potential inventory obsolescence exposure and start-up manufacturing costs for new product introductions. The Company is dependent upon a number of suppliers for several key components of its products. The loss of certain of the Company's suppliers, supply shortages or increases in the costs of key raw materials could have a material adverse effect on the Company. THE YEAR 2000 ISSUE Many computer systems and other equipment with embedded chips or processors use only two digits to represent the year. Consequently, they may be unable to process certain dates before, during and after the Year 2000. As a result, entities are at risk for possible miscalculations or system failures causing disruptions in their operations. GenRad has evaluated its operations to assess modifications needed for this issue. A full time project manager position was established in 1998 to address the Year 2000 issue. In October 1999, GenRad completed a comprehensive worldwide program that was intended to identify and correct potential material problems related to the Year 2000 in its products, information systems, infrastructure and manufacturing facilities. The work plan established involved the following phases: - Inventory GenRad products, assets, facilities and manufacturing and business processes; - Assess the risk associated with that inventory; - Correct business systems impacted by Year 2000 issues; - Identify and communicate to customers those products that will be Year 2000 compliant, that have a remediation path to make those products Year 2000 compliant and that have no remediation path and will not be Year 2000 compliant; and - Test and document all of the above that must be or are represented to be compliant. All inventory reviews have been completed and they will continue to be updated in the future through the advent of the Year 2000. Software and hardware, as well as tools to test, age and evaluate data, were acquired, installed and utilized in completing the Year 2000 compliance work plan. Test plans for items identified as critical were developed and deployed. Prior to addressing the Year 2000 issue, GenRad had decided to replace all of its business system software. GenRad is replacing its worldwide business systems with systems that use programs primarily from SAP America, Inc. ("SAP"). SAP has advised GenRad that its programs are Year 2000 compliant. The financial system replacement was completed in the first quarter of 1999, while the manufacturing, materials, order entry and service portions are scheduled for completion in the Year 2000. The existing business systems have been corrected, tested and believed to be Year 2000 compliant. Although the results have been tested, there can be no assurances that such systems will function as tested, if necessary, in the Year 2000. With respect to GenRad products, the Company has designed and executed scripted tests that determined the impact of the Year 2000 on each currently manufactured GenRad product. GenRad treated all Year 2000 issues discovered during this process as important product maintenance issues and made reasonable efforts to provide available fixes to all worldwide GenRad customers. The on-going status 28 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE YEAR 2000 ISSUE (CONTINUED) of GenRad's Year 2000 compliance for each product it manufactures is posted on the Company's home page at the following web address: http://www.genrad.com. GenRad has initiated formal communications with all significant external interfaces, including customers, banks and municipal agencies, and suppliers, to determine the extent to which GenRad is vulnerable to failures by third parties to correct their own potential Year 2000 problems. The Company's banking service providers provide necessary service to the Company in the area of cash management. Certain municipal agencies in the municipalities in which GenRad operates provide necessary water and sewerage services to the Company. GenRad's formal communications with suppliers and other significant external interfaces have resulted in 65% of those contacted responding. As of the date of this report, the Company has not identified any suppliers or external interfaces which it believes critical to have a definitive Year 2000 compliance problem. GenRad's formal communications with its customers have resulted in a 13% response rate of those contacted responding. A failure of any of these interfaces to adequately address their Year 2000 issues could adversely affect the Company. The results to date have been evaluated in the context of GenRad's contingency plans. To date, GenRad has not identified any specific external interfaces which it considers to place the Company at significant risk. However, a portion of the Company's direct or indirect external interfaces are solely based in, or have headquarters in, Southeast Asia. Many publicly available surveys suggest that, of all major global economic regions, Southeast Asia is the least ready for the Year 2000, driven by the lack of solid information from the region concerning the region's Year 2000 readiness. Costs incurred to date for the Year 2000 issue, primarily related to software corrections, are approximately $1.3 million with estimated future costs of approximately $0.4 million, which the Company expects it will incur, if necessary, over the remainder of 1999 and 2000. The costs were and will continue to be funded through internally generated resources, without cannibalizing the Company's information technology budget or resources, and expensed as incurred in accordance with EITF 96-14, "Accounting For the Costs Associated with Modifying Computer Software for the Year 2000." Management believes that its internal Year 2000 issues have been addressed in a manner that will prevent such issues from having a material adverse effect on GenRad results of operations, financial position or cash flows. However, there can be no assurances that management will be successful in addressing all its internal Year 2000 issues or that all of the Company's external interfaces will be successful in addressing their Year 2000 issues. If management or any significant external interfaces is not, the Company's operating results and financial position could be materially and adversely impacted. In the worst case, although not anticipated or considered likely by GenRad management, the Company may not be able to operate manufacturing facilities or other support functions which would have a material adverse effect on the Company's financial position and results of operations for periods subsequent to 1999. Management believes that its contingency plans, which include the use of alternative manufacturing facilities currently available to the Company, and business systems, which the Company currently utilizes, are adequate to mitigate the risk associated with the Company's worst case scenario. 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 29 GENRAD, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER FACTORS (CONTINUED) effective tax rates, new regulatory requirements, political and economic changes, tariffs, trade restrictions, transportation delays, foreign currency fluctuations and inflation. The Company disclaims any intent or obligation to update any forward-looking statements that may be included in this report. Additionally, there can be no assurance that other factors, not included above, could impact future results. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS FINANCIAL INSTRUMENTS On June 15, 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (which the Company will adopt in fiscal year 2001, starting on December 31, 2000) and requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company is currently determining the impact of the adoption of SFAS 133 to its operating results or financial position. 30 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following Exhibits are filed as part of this report: 3.1 Articles of Organization of GenRad, Inc. as amended to May 21, 1980, incorporated by reference to Exhibit 3.1 to the Company's report on Form 10-K for the year ended January 3, 1981. 3.2 Articles of Amendment to the Articles of Organization of GenRad, Inc., incorporated by reference to Exhibit 3.1 to the Company's report on Form 10-K for the year ended December 31, 1983. 3.3 Articles of Amendment to the Articles of Organization of GenRad, Inc., incorporated by reference to Exhibit 3.1 to the Company's report on Form 10-K for the year ended January 2, 1988. 3.4 By-laws of GenRad, Inc. (as amended) incorporated by reference to Exhibit 3.2 of the Company's report on Form 10-K for the year ended December 29, 1990. 10. Lease agreement dated July 26, 1996 between GenRad, Inc. and Michelson Farm-Westford Technology Park Trust, incorporated by reference to Exhibit 10 to the Company's report on Form 10-Q for the three months ended June 29, 1996. 10.1 Facility agreement dated June 26, 1997 between GenRad Limited and BankBoston, N.A. London Branch, incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Q for the three months ended June 28, 1997. 10.2 Amended and restated revolving credit agreement dated May 6, 1997 between GenRad, Inc. and BankBoston, N.A. incorporated by reference to Exhibit 10.2 to the Company's report on Form 10-Q for the three months ended June 28, 1997. 10.3 Severance Agreement between GenRad, Inc. and Kevin R. Cloutier effective as of May 9, 1997, incorporated by reference to Exhibit 10.3 to the Company's report on Form 10-Q for the three months ended September 27, 1997. 10.4 Severance Agreement between GenRad, Inc. and Paul Geere effective as of May 9, 1997, incorporated by reference to Exhibit 10.4 to the Company's report on Form 10-Q for the three months ended September 27, 1997. 10.5 Severance Agreement between GenRad, Inc. and Lori B. Hannay effective as of May 9, 1997, incorporated by reference to Exhibit 10.5 to the Company's report on Form 10-Q for the three months ended September 27, 1997. 10.6 Severance Agreement between GenRad, Inc. and Sarah H. Lucas effective as of May 9, 1997, incorporated by reference to Exhibit 10.6 to the Company's report on Form 10-Q for the three months ended September 27, 1997. 10.7 Severance Agreement between GenRad, Inc. and James F. Lyons effective as of May 8, 1997, incorporated by reference to Exhibit 10.7 to the Company's report on Form 10-Q for the three months ended September 27, 1997. 10.8 Severance Agreement between GenRad, Inc. and Paul Pronsky, Jr. effective as of May 9, 1997, incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-Q for the three months ended September 27, 1997.
31 10.9 Severance Agreement between GenRad, Inc. and Michael W. Schraeder effective as of May 9, 1997, incorporated by reference to Exhibit 10.9 to the Company's report on Form 10-Q for the three months ended September 27, 1997. 10.10 Severance Agreement between GenRad, Inc. and Walter A. Shephard effective as of October 24, 1997, incorporated by reference to Exhibit 10.10 to the Company's report on Form 10-K for the year ended January 3, 1998. 10.11 Severance Agreement between GenRad, Inc. and Gary H. Mueller effective as of October 24, 1997, incorporated by reference to Exhibit 10.10 to the Company's report on Form 10-K for the year ended January 3, 1998. 10.12 Agreement dated February 12, 1997 between GenRad Limited and Ford Motor Company, incorporated by reference to Exhibit 10.12 of the Company's report on Form 10-K for the year ended January 2, 1999. 10.13 Settlement agreement and Mutual General Release dated April 7, 1999 between William E. Gaines, William E. Massaker, Frank B. Wingate and Heritage Investment Limited Partnership and GenRad, Inc., James F. Lyons and Paul Pronsky Jr., incorporated by reference to Exhibit 10.13 of the Company's report on Form 10-K for the year ended January 2, 1999. 27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the three months ended October 2, 1999. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENRAD, INC. By: /s/ WALTER A. SHEPHARD ----------------------------------------- Walter A. Shephard Vice President and Chief Financial Officer and Clerk
Date: November 16, 1999 33 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF OCTOBER 2, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 2, 1999 FOR GENRAD, INC. AND SUBSIDIARIES AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. U.S. DOLLARS 3-MOS JAN-01-2000 OCT-02-1999 1 7,004 0 118,286 1,575 44,513 176,065 83,314 40,492 276,351 75,340 0 0 0 29,744 147,443 276,351 91,482 109,246 55,799 66,745 22,346 0 435 19,768 (2,000) 17,768 0 0 0 17,768 0.62 0.60
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