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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 24, 2002
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from ________ to ________
Commission file number 1-11344
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INTERMAGNETICS GENERAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1537454
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 Old Niskayuna Road, PO Box 461, Latham, NY 12110-0461
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(518) 782-1122
----------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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.
Common Stock, $.10 par value - 16,490,700 as of December 29, 2002.
INTERMAGNETICS GENERAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets - November 24, 2002 and May 26, 2002............................... 3
Consolidated Income Statements - Three Months and Six Months Ended
November 24, 2002 and November 25, 2001...................................................... 5
Consolidated Statements of Cash Flows - Six Months Ended
November 24, 2002 and November 25, 2001...................................................... 6
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income -
Six Months Ended November 24, 2002 ........................................................... 7
Notes to Consolidated Financial Statements..................................................... 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 15
Item 3: Quantitative and Qualitative Disclosures About Market Risk..................................... 21
Item 4: Controls and Procedures........................................................................ 22
PART II - OTHER INFORMATION............................................................................. 23
SIGNATURES.............................................................................................. 24
CERTIFICATIONS.......................................................................................... 24
2
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
November 24, May 26,
2002 2002
------------ --------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 74,639 $ 73,517
Trade accounts receivable, less allowance
(November 24, 2002 - $182; May 26, 2002 - $293) 20,812 20,612
Costs and estimated earnings in excess of
billings on uncompleted contracts 380 428
Inventories:
Consigned products 301 2,799
Finished products 906 659
Work in process 9,116 7,405
Materials and supplies 8,160 9,054
-------- --------
18,483 19,917
Deferred income taxes 1,497 1,497
Prepaid expenses and other 2,913 2,037
-------- --------
TOTAL CURRENT ASSETS 118,724 118,008
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,128 1,128
Buildings and improvements 12,172 12,172
Machinery and equipment 36,083 34,642
Leasehold improvements 3,705 3,705
-------- --------
53,088 51,647
Less accumulated depreciation and amortization 25,278 23,310
-------- --------
27,810 28,337
INTANGIBLE AND OTHER ASSETS
Available-for-sale securities 2,833
Goodwill 13,750 13,750
Other intangibles, less accumulated amortization
(November 24, 2002- $6,666; May 26, 2002 - $5,746) 7,839 8,759
Note receivable 3,910 3,861
Other assets 1,818 1,677
-------- --------
TOTAL ASSETS $173,851 $177,225
======== ========
3
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
November 24, May 26,
2002 2002
------------ ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES
Current portion of long-term debt $ 277 $ 267
Accounts payable 11,171 10,757
Salaries, wages and related items 6,191 7,221
Customer advances and deposits 451 1,007
Product warranty reserve 1,163 1,326
Accrued income taxes 2,332
Other liabilities and accrued expenses 2,215 1,985
-------- --------
TOTAL CURRENT LIABILITIES 21,468 24,895
LONG-TERM DEBT, less current portion 4,529 4,668
DERIVATIVE LIABILITY 407 268
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.10 per share:
Authorized - 2,000,000 shares
Issued and outstanding - None
Common Stock, par value $.10 per share:
Authorized - 40,000,000 shares
Issued and outstanding (including shares in treasury):
November 24, 2002 - 17,471,493 shares;
May 26, 2002 - 17,333,459 shares; 1,747 1,733
Additional paid-in capital 138,151 137,419
Notes receivable from employees (3,725) (799)
Retained earnings 22,322 15,999
Accumulated other comprehensive loss (266) (906)
-------- --------
158,229 153,446
Less cost of Common Stock in treasury
November 24, 2002 - 982,576 shares
May 26, 2002 - 671,316 shares (10,782) (6,052)
-------- --------
147,447 147,394
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $173,851 $177,225
======== ========
See notes to consolidated financial statements.
4
CONSOLIDATED INCOME STATEMENTS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
--------------------------------- -----------------------------------
November 24, November 25, November 24, November 25,
2002 2001 2002 2001
------------- -------------- --------------- ---------------
Net sales $ 36,664 $ 38,971 $ 71,844 $ 79,060
Cost of products sold 22,521 22,937 44,101 45,787
---------- ----------- ----------- -----------
Gross margin 14,143 16,034 27,743 33,273
Product research and development 3,226 3,689 6,698 7,707
Marketing, general and administrative 4,952 6,579 9,305 13,655
Amortization of intangible assets 460 486 920 1,013
---------- ----------- ----------- -----------
8,638 10,754 16,923 22,375
---------- ----------- ----------- -----------
Operating income 5,505 5,280 10,820 10,898
Interest and other income 244 703 675 1,055
Interest and other expense (130) (180) (241) (307)
Loss on available-for-sale securities (2,090) (2,108)
Gain on litigation settlement 537 537
Gain on sale of division 15,376 15,376
Write down of investments (6,290) (6,290)
---------- ----------- ----------- -----------
Income before income taxes 4,066 14,889 9,683 20,732
Provision for income taxes 1,411 4,502 3,360 6,705
---------- ----------- ----------- -----------
NET INCOME $ 2,655 $ 10,387 $ 6,323 $ 14,027
========== =========== =========== ===========
Net Income per Common Share:
Basic $ 0.16 $ 0.64 $ 0.38 $ 0.87
========== =========== =========== ===========
Diluted $ 0.16 $ 0.60 $ 0.37 $ 0.81
========== =========== =========== ===========
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
(Unaudited)
Six Months Endedc
---------------------------------------
November 24, November 25,
2002 2001
------------------- -------------------
OPERATING ACTIVITIES
Net income $ 6,323 $ 14,027
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,954 2,935
Gain on sale of division (15,376)
Write down of investments 6,290
Stock based compensation 302 326
Loss on sale and disposal of assets 46 14
Realized loss on available-for-sale securities 2,108
Change in discount on note receivable (49)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts (152) 1,303
(Increase) decrease in inventories and prepaid expenses and other 362 (2,629)
Decrease in accounts payable and accrued expenses (3,484) (68)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,410 6,822
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,570) (5,385)
Proceeds from sale of available-for-sale securities 1,363
Proceeds from the sale of property, plant and equipment 17
Proceeds from sale of division 29,771
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (190) 24,386
FINANCING ACTIVITIES
Proceeds from sale of Common Stock and exercise of stock options 359 2,588
Proceeds from (advances for) Executive Stock Purchase Plan (2,926) 257
Purchase of Treasury Stock (4,402)
Principal payments on note payable and long-term debt (129) (2,217)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,098) 628
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (164)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,122 31,672
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 73,517 27,675
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 74,639 $ 59,347
=========== ===========
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
INTERMAGNETICS GENERAL CORPORATION
Six months ended November 24, 2002
(Dollars in Thousands)
(Unaudited)
Accumulated
Additional Other Notes
Common Paid-in Retained Comprehensive Treasury Receivable Comprehensive
Stock Capital Earnings Income (Loss) Stock from Employees Income
-------- ------------ ----------- ---------------- ---------- ---------------- ---------------
Balances at May 26, 2002 $ 1,733 $ 137,421 $ 15,999 $ (906) $ (6,052) $ (799)
Comprehensive income:
Net Income 6,323 $ 6,323
Unrealized loss on
available-for-sale
securities, net of tax
benefit of $157,000 9 9
Reclassification adjustment -
available-for-sale securities 628 628
Gain on derivative, net of tax
benefit of $141,000 3 3
-------
Total comprehensive income $ 6,963
=======
Loans to employees for purchase
of common stock (2,926)
Issuance of 138,034 shares of
Common Stock, including
exercise of stock options 14 402
Receipt of treasury stock, upon
exercise of stock options 328 (328)
Treasury stock purchase (4,402)
------- --------- -------- -------- --------- --------
Balances at November 24, 2002 $ 1,747 $ 138,151 $ 22,322 $ (266) $ (10,782) $ (3,725)
======= ========= ======== ======== ========= ========
7
INTERMAGNETICS GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - General
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary to present fairly the Company's financial position at November
24, 2002 and the results of its operations, cash flows and changes in
shareholders' equity for the periods presented. The results for the three and
six months ended November 24, 2002 are not necessarily indicative of the results
to be expected for the entire year. The Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's consolidated
financial statements for the year ended May 26, 2002, filed on Form 10-K on
August 23, 2002.
It is the Company's policy to reclassify prior year consolidated
financial statements to conform to current year presentation.
Note B - Earnings Per Common Share
A summary of the shares used in the calculation of net income per
Common Share is shown below:
Three Months Ended Six Months Ended
------------------------------- -------------------------------
Nov. 24, 2002 Nov. 25, 2001 Nov. 24, 2002 Nov. 25, 2001
--------------- --------------- --------------- ---------------
Income available to common stockholders $ 2,655 $ 10,387 $ 6,323 $ 14,027
Weighted average shares 16,466,089 16,229,361 16,567,001 16,166,681
Dilutive potential Common Shares:
Warrants 32,345 37,425
Stock Options 503,025 1,120,471 510,149 1,155,538
------------ ------------- ------------- -------------
Adjusted weighted average shares 16,969,114 17,382,177 17,077,150 17,359,644
============ ============= ============= =============
Net income per common share:
Basic $ 0.16 $ 0.64 $ 0.38 $ 0.87
============ ============= ============= =============
Diluted $ 0.16 $ 0.60 $ 0.37 $ 0.81
============ ============= ============= =============
8
Note C - New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", ("SFAS No. 144") which supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144
establishes a single accounting method for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired, and extends the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 also requires that an impairment loss be recognized for assets
held-for-use when the carrying amount of an asset (group) is not recoverable.
The carrying amount of an asset (group) is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset (group), excluding interest charges. Estimates of
future cash flows used to test the recoverability of a long-lived asset (group)
must incorporate the entity's own assumptions about its use of the asset (group)
and must factor in all available evidence. The Company adopted SFAS No. 144
effective May 27, 2002; this did not have a material impact on the financial
statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". This Standard
addresses a number of items related to leases and other matters. The Company
adopted this Standard effective May 27, 2002; this did not have a material
impact on the financial statements.
In June 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
Standard addresses the recognition, measurement and reporting costs that are
associated with exit or disposal activities. SFAS No.146 is effective for exit
or disposal activities that are initiated after December 31, 2002. The Company
does not expect the adoption of SFAS No. 146 to have a material effect on its
financial statements.
Note D - Segment and Related Information
The Company operates in three reportable segments: Magnetic Resonance
Imaging (MRI), Instrumentation, and Energy Technology. The MRI segment consists
primarily of the manufacture and sale of magnets (by the IGC-Magnet Business
Group) and radio frequency coils (by IGC-Medical Advances Inc.), which are used
9
principally in the medical diagnostic imaging market. Until October 25, 2001
this segment also included the manufacture and sale of low-temperature
superconducting wire (by IGC-Advanced Superconductors, also known as IGC-AS).
The Company sold substantially all of the assets of IGC-AS on October 25, 2001.
The Instrumentation segment consists of the manufacture and sale of
refrigeration equipment (by IGC-Polycold Systems Inc.), used primarily in
ultra-high vacuum applications, industrial coatings, analytical instrumentation,
medical diagnostics and semiconductor processing and testing. This segment also
included IGC-APD Cryogenics Inc., which manufactured and sold refrigeration
equipment. The Company transferred the mixed-gas portion of IGC-APD to
IGC-Polycold and sold the remaining IGC-APD business in a stock sale effective
February 5, 2002. The Energy Technology segment, operated through SuperPower
Inc., is developing second generation, high-temperature superconducting (HTS)
materials that we expect to use in devices designed to enhance capacity,
reliability and quality of transmission and distribution of electrical power.
Intersegment sales and transfers are accounted for as if the sales or
transfers were to third parties, that is, at current market prices. The Company
evaluates the performance of its reportable segments based on operating income
(loss).
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
Three Months Ended
-----------------------------------------------------------------------
November 24, 2002
-----------------------------------------------------------------------
(Dollars in Thousands) Magnetic Resonance Energy
Imaging Instrumentation Technology Total
-----------------------------------------------------------------------
Net sales to external customers:
Magnet systems & components $ 31,261 $ 31,261
Refrigeration equipment $ 4,999 4,999
Other $ 404 404
---------- ---------- --------- ----------
Total 31,261 4,999 404 36,664
Intersegment net sales
Segment operating income (loss) 7,059 12 (1,577) 5,494
Total assets $ 155,199 $ 10,682 $ 7,970 $ 173,851
10
(Dollars in Thousands) November 25, 2001
-------------------------------------------------------------------------
Magnetic Resonance Energy
Imaging Instrumentation Technology Total
-------------------------------------------------------------------------
Net sales to external customers:
Magnet systems & components $ 29,690 $ 29,690
Refrigeration equipment $ 7,568 7,568
Other 1,061 $ 652 1,713
----------- ----------- --------- ---------
Total 30,751 7,568 652 38,971
Intersegment net sales 1,236 1,236
Segment operating income (loss) 6,790 (426) (1,659) 4,705
Total assets $ 146,177 $ 16,048 $ 7,368 $ 169,593
(Dollars in Thousands) Six Months Ended
-------------------------------------------------------------------------
November 24, 2002
-------------------------------------------------------------------------
Magnetic Resonance Energy
Imaging Instrumentation Technology Total
-------------------------------------------------------------------------
Net sales to external customers:
Magnet systems & components $ 61,521 $ 61,521
Refrigeration equipment $ 9,556 9,556
Other $ 767 767
----------- ----------- --------- ---------
Total 61,521 9,556 767 71,844
Intersegment net sales -
Segment operating income (loss) 14,544 (102) (3,649) 10,793
Total assets $ 155,199 $ 10,682 $ 7,970 $ 173,851
November 25, 2001
------------------------------------------------------------------------
Magnetic Resonance Energy
Imaging Instrumentation Technology Total
------------------------------------------------------------------------
Net sales to external customers:
Magnet systems & components $ 57,506 $ 57,506
Refrigeration equipment $ 17,911 17,911
Other 2,092 $ 1,551 3,643
----------- ----------- --------- ---------
Total 59,598 17,911 1,551 79,060
Intersegment net sales 2,931 2,931
Segment operating income (loss) 13,502 289 (3,126) 10,665
Total assets $ 146,177 $ 16,048 $ 7,368 $ 169,593
11
The following are reconciliations of the information used by the chief
operating decision maker to the Company's consolidated totals:
(Dollars in Thousands)
Three Months Ended
-----------------------------------------------
November 24, 2002 November 25, 2001
----------------------- -----------------------
Reconciliation of income before income taxes:
Total profit from reportable segments $ 5,494 $ 4,705
Intercompany profit in ending inventory 11 575
------------ -----------
Net operating income 5,505 5,280
Interest and other income 244 703
Interest and other expense (130) (180)
Loss on available-for-sale securities (2,090)
Gain on litigation settlement 537
Gain on sale of division 15,376
Write down of investments (6,290)
------------ -----------
Income before income taxes $ 4,066 $ 14,889
============ ===========
Six Months Ended
-----------------------------------------------
November 24, 2002 November 25, 2001
--------------------- ------------------------
Reconciliation of income before income taxes:
Total profit from reportable segments $ 10,793 $ 10,665
Intercompany profit in ending inventory 27 233
------------ -----------
Net operating income 10,820 10,898
Interest and other income 675 1,055
Interest and other expense (241) (307)
Loss on available-for-sale securities (2,108)
Gain on litigation settlement 537
Gain on sale of division 15,376
Write down of investments (6,290)
------------ -----------
Income before income taxes $ 9,683 $ 20,732
============ ===========
Note E - Business Combinations, Goodwill and Other Intangible Assets
The Company adopted Statements of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets" effective May 28, 2001. SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
identifiable intangible assets other than goodwill be amortized over their
useful lives. SFAS No. 141 is effective for all business combinations initiated
after June 30, 2001 and for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001.
12
The components of other intangibles are as follows:
(Dollars in Thousands)
As of November 24, 2002
----------------------------------------------------------
Gross Carrying Accumulated Weighted
Amount Amortization Average Life
----------------- ----------------- ----------------
Amortized Intangible Assets
Production Rights $ 8,750 $4,640 5.5
Patents 3,832 775 17.9
Trade Name 960 288 20.0
Unpatented Technology 930 930 5.0
Other 33 33 5.0
------- ------ ------
$14,505 $6,666 9.8
Aggregate amortization expense for the quarter and six months ended November 24,
2002 was $460,000 and $920,000 respectively.
Estimated Amortization Expense:
For the year ending May 2003 $1,841
For the year ending May 2004 $1,841
For the year ending May 2005 $1,841
For the year ending May 2006 $ 382
For the year ending May 2007 $ 250
All intangibles are amortized on a straight line basis.
There have been no changes in the carrying amount of goodwill for the quarter
ended November 24, 2002. Management has evaluated goodwill for impairment during
the quarter ending November 24, 2002 in accordance with SFAS No. 142 and has
determined no impairment exists.
Note F - Derivative Instruments and Hedging Activities
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
effective May 26, 2001. SFAS No. 133, as amended, 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. For the
quarter and six months ended November 24, 2002, the Company recorded other
comprehensive gain of $8,000 and $3,000 respectively net of tax.
13
The Company has entered into interest rate swap agreements to reduce
the effect of changes in interest rates on its floating rate long-term debt. At
November 24, 2002, the Company had outstanding interest rate swap agreements
with a commercial bank, having a total original notional principal amount of
approximately $5.735 million. Those agreements effectively change the Company's
interest rate exposure on its mortgages due 2004 to a fixed 6.88%. The interest
rate swap agreement matures at the time the related notes mature. The Company is
exposed to credit loss in the event of non-performance by the other parties to
the interest rate swap agreement. However, the Company does not anticipate
non-performance by the counterparties.
Note G - Available-for-Sale Securities
During October 2002 the Company sold its remaining 827,153 shares of Ultralife
Batteries, Inc. for total proceeds of $1,283,230 with a gross realized loss of
$2,090,000. In connection with the sale, net unrealized holding loss of $628,000
has been reclassified from accumulated other comprehensive income.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
Intermagnetics General Corporation ("Intermagnetics", "Company", "we"
or "us") makes forward-looking statements in this document. Typically, we
identify forward-looking statements with words like "believe," "anticipate,"
"perceive," "expect," "estimate" and similar expressions. Unless a passage
describes a historical event, it should be considered a forward-looking
statement. These forward-looking statements are not guarantees of future
performance and involve important assumptions, risks, uncertainties and other
factors that could cause the Company's actual results for fiscal year 2003 and
beyond to differ materially from those expressed in the forward-looking
statements. These important factors include, without limitation, the
assumptions, risks, and uncertainties set forth in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, as well as other
assumptions, risks, uncertainties and factors disclosed throughout this report.
Except for our continuing obligations to disclose material information
under federal securities laws, we are not obligated to update these
forward-looking statements, even though situations may change in the future. We
qualify all of our forward-looking statements by these cautionary statements.
Company Overview
The Company operates in three reportable operating segments: Magnetic
Resonance Imaging (MRI), Instrumentation, and Energy Technology. The MRI segment
consists primarily of the manufacture and sale of magnet systems (by the
IGC-Magnet Business Group) and radio frequency coils (by IGC-Medical Advances
Inc.). These products are used principally in the medical diagnostic imaging
market. Until October 24, 2001 this segment also included the manufacture and
sale of low-temperature superconducting wire by our IGC-Advanced Superconductor
division ("IGC-AS"). The Instrumentation segment consists of refrigeration
equipment produced by IGC-Polycold Systems Inc. ("IGC-Polycold"). These systems
are used primarily in ultra-high vacuum applications, industrial coatings,
analytical instrumentation, medical diagnostics and semiconductor processing and
testing. For the first three quarters of fiscal year 2002, this segment also
included IGC-APD Cryogenics Inc ("IGC-APD"). The Energy Technology segment,
operated through SuperPower, Inc. is developing second generation,
high-temperature superconducting materials that we expect to use in devices
designed to enhance capacity, reliability and quality of transmission and
distribution of electrical power.
Intersegment sales and transfers are accounted for as if the sales or
transfers were to third parties, that is, at current market prices. The Company
evaluates the performance of its reportable segments based on operating income
(loss). The Company operates on a 52/53-week fiscal year ending the last Sunday
during the month of May.
15
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon; in part, the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect assets, liabilities, revenues, expenses and related
disclosure of contingent liabilities.
The Company recognizes revenue and profit on long-term development
contracts based upon the lesser of, milestones achieved or costs incurred plus
earned profit. Some of these contracts require the Company to contribute to the
development effort. Should the actual costs exceed the estimates for these
development efforts and the Company was not successful in securing additional
funding, it would be necessary to record additional expense.
The Company maintains a reserve for inventory that may become damaged in
the manufacturing process or technologically obsolete. If technology advances
more rapidly than expected, manufacturing processes improve substantially or the
market for our products declines substantially, adjustments to reserves may be
required.
The provision for warranty for potential defects with our manufactured
products is based on historical experience for the period the product was under
warranty during the fiscal year. The Company believes this reserve is adequate
based on the evaluation criteria, procedures in place to control the
manufacturing process and pre-testing of newly developed products to ensure
their manufacturability prior to commercial introduction. If product quality
declines the Company may require additional provisions.
The Company maintains a provision for potential environmental remediation
for businesses disposed of during fiscal 2002. These provisions are based upon
estimates from environmental engineers that have visited the sites and
understand the scope of the project, should a cleanup be required. The Company
believes these provisions are adequate based on estimates from environmental
engineers.
The Company records an investment impairment charge on available-for-sale
securities when it believes an investment has experienced a decline in value
that is other than temporary. Future adverse changes in market conditions or
poor operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investment. Should this occur the
Company would be required to record an impairment charge in the future.
16
Results Of Operations
Throughout this commentary reference is made to "as reported" and
"on-going" results. "As reported" results refers to prior year results which
include our current business plus the effect of contributions and costs of the
divested superconducting wire and helium businesses. "As reported" also includes
the contributions and costs related to our mixed gas business. "On-going"
results refers to our current business with the past contributions and costs of
the divested businesses removed from prior year results. Additionally,
"on-going" results include the contribution and cost of mixed gas business
transferred to our California facility.
For the three months ended November 24, 2002, as reported sales
decreased approximately 6%, to $36.7 million, from $39.0 million for the same
period last year.
Sales from on-going operations increased 5% to $36.7 million from
$35.0 million for the same period last year.
As reported sales for the six month period ended November 24, 2002
decreased about 9% to $71.8 million from $79.1 million due primarily to the
divesture of IGC-AS and IGC-APD and reduced customer demand in the
Instrumentation segment partially offset by increased sales related to the MRI
segment. Sales from on-going operations increased about $200,000 to $71.8
million from $71.6 million in the previous year. This increase is primarily
related to improved product mix in the MRI segment.
MRI segment sales, as reported increased 2% or $500,000 to $31.3
million for the quarter. Magnet system and component sales increased more than
5% or, $1.6 million from last year's second quarter due largely to an improved
product mix. Partially offsetting this increase was a decline in sales of
superconducting wire of approximately $1.1 million for the quarter due to the
divestiture of IGC-AS. Sales from on-going operations increased 5% or $1.6
million for the period due primarily to improved product mix.
On an as reported basis, sales of the MRI segment, for the six months
ended increased 3.2% or nearly $2.0 million to $61.5 million. Magnet system and
components increased $4.0 million to $61.5 million or 7%. This increase was
primarily a result of improved product mix as well as increased customer demand.
Partially offsetting this increase was a decline in superconducting wire sales
of about $2.1 million due to the divestiture of IGC-AS.
Sales from on-going operations increased 7% to $61.5 million from $57.5
million in the previous year due to improved product mix as well as increased
customer demand.
Instrumentation segment sales, as reported decreased $2.6 million or
34% to $5.0 million for the quarter over the same period last year due primarily
to the divesture of IGC-APD ($3.8 million) partially offset by an increase of
$1.2 million from IGC-Polycold related to increased demand as well as the
transfer of IGC-APD's mixed gas product line.
17
On-going Instrumentation segment sales increased $300,000 to nearly
$5.0 million or 7% for the quarter due to increased customer demand.
Instrumentation segment sales, as reported declined $8.4 million or 47%
to $9.6 million for the six months ended November 24, 2002. About $6.9 million
of this decline was related to the divesture of IGC-APD and $1.5 million due to
reduced customer demand during the first quarter of fiscal 2003. On-going sales
declined about $3.0 million for the six months ended. Prior year results
included a period of significant demand which was related to increased capacity
requirements from the telecommunications, fiber optics and other industries
requiring our technology. During the past year this demand has diminished and is
not expected to reach similar levels in the near future.
Sales of the Energy Technology segment decreased $250,000 or 38% to
about $400,000 for the quarter due to increased efforts being applied to
unfunded programs. The prior period contained sales from various funded programs
now completed. In the current period the effort dedicated to those programs has
been applied to programs for which funding is not available at this time
relating primarily to superconducting devices.
Energy Technology segment sales for the six months ended November 24,
2002 declined nearly $800,000 or 51% to about $770,000 related to reduced
customer funding and additional effort applied to unfunded programs for similar
reasons stated above.
Overall, as reported gross margins decreased $1.9 million to $14.1
million or 39% of sales for the quarter, from $16.0 million, or 41% of sales for
the same period last year. Of this decline $2.3 million is related to disposed
businesses partially offset by a $400,000 increase related to increased sales,
primarily in the MRI segment.
Gross margins for the three months ended related to on-going operations
increased $300,000 from $13.9 million, or 40% of sales to $14.1 million, or 39%
of sales. This increase is a result of increased sales in all segments except
Energy Technology.
Gross margin for the six months ended, on an as reported basis,
declined $5.5 million or 17% to $27.7 million or 39% of sales, from $33.3
million or 42% of sales. The Company realized about a $4.5 million decline in
margin relating to the sale of divested businesses. The remainder of this
decline is related to reduced margins primarily in the Instrumentation segment
as a result of the decline in markets served, partially offset by increased
margins in the MRI segment related to increased sales.
18
Gross margin for the six months related to on-going operations declined
about $1.3 million from $29.0 million or 41% of sales to $27.7 million or 39% of
sales. This decline is also a result of reduced customer demand in the
Instrumentation segment partially offset by improved customer demand in the MRI
segment.
Internal research and development declined about $500,000 to $3.2
million from $3.7 million for the three months ended November 24, 2002, on an as
reported basis. Primarily this decline was related to businesses no longer being
consolidated partially offset by increased spending in the MRI segment.
Internal research and development related to on-going operations was
essentially the same as last year. MRI sector internal research and development
increased about 18% or $300,000 resulting from additional effort applied to new
magnet development. This increase was partially offset by a slight decline in
spending at other segments.
Internal Research and Development on an as reported basis, for the six
months ended, declined approximately $1.0 million to $6.7 million. This decline
is primarily related to the sale of IGC-AS and IGC-APD.
Internal research and development related to on-going operations for
the six months ended increased about $300,000 resulting from additional focus on
new magnet systems and second generation high temperature superconductors and
first generation devices.
Marketing, general and administrative expenses, on an as reported basis
decreased by $1.6 million to $5.0 million for the quarter. About $900,000 of
this decline was due to the sale of IGC-AS and IGC-APD, with the remainder
resulting from reduced spending relating to salaries, consulting, recruiting and
a reduction of accruals for incentive compensation.
On an on-going basis, marketing, general and administrative expenses
for the quarter decreased by $700,000 due to the spending reductions mentioned
above.
Marketing, general and administrative expenses for the six months ended
declined $4.4 million on an as reported basis. Approximately $2.0 million of
this decline is related to the disposed businesses. The remainder of this
spending decrease is a result of decreases in all segments most notably the MRI
segment due to the reductions stated above.
Amortization of intangibles decreased by $26,000 in the three month
period due to the sale of IGC-APD during fiscal 2002.
Operating income as reported for the quarter increased by approximately
$225,000 over the same period last year. Operating income from on-going
operations increased about $945,000 compared to the same period last year. As
reported, operating income for the six months ended is essentially the same as
last year despite the disposition of IGC-AS and IGC-APD. Operating income from
on-going operations increased about $985,000.
19
Interest and other income decreased about $450,000 for the three month
period and $400,000 for the six month period. This decrease is primarily related
to the prior year containing income of about $540,000 from the sale of a product
line. Additionally, the Company's cash balances have increased considerably in
the current year however, interest rates have declined therefore resulting in
lower interest income earned. Interest and other expense have declined about
$50,000 in the three month period and $66,000 in the six month period due to the
disposition of IGC-APD.
During the three months ended the Company sold its remaining shares of
Ultralife Batteries Inc. and realized a pre-tax loss of $2.1 million (see Note
G).
Looking forward, we expect to continue to maintain our investment in
Energy Technology in order to be ready when the market for these products begins
to develop, which we believe will be about the middle of the decade. Despite
this investment, and a decrease in sales, resulting from the sale of IGC-AS and
IGC-APD, we expect net income to increase in the current fiscal year by about
10% to 15% (from on-going operations) as a result of our streamlined business
focus, cost containment and manufacturing efficiencies. A portion of this growth
is expected to come from increased sales of high field (3.0T) as well as
recently developed and new products being developed at IGC-Medical Advances and
IGC-Polycold. These products were being developed at the end of the prior fiscal
year and continue to be developed now. Our customers are intimately involved in
the definition and development of these products. Additionally, the Company has
an active cost cutting program in each of its divisions to increase earnings.
These expectations are based on the following assumptions, among others:
o The market for MRI systems continues to grow and our largest
customer retains its share of that market;
o Customer acceptance of the new products recently developed and
products under development throughout the Company;
o New products and recently developed products achieve the level of
growth and market acceptance expected;
o Uncertainty in economic conditions does not impede further
improvement in Instrumentation orders; and,
o We are able to maintain gross margins through continued production
cost reductions and manufacturing efficiencies.
20
Liquidity and Capital Commitments
For the first six months of the current fiscal year, we generated
approximately $8.4 million of cash from operating activities, $1.4 million from
the sale of available-for-sale securities and about $359,000 from the exercise
of stock options. We used approximately $1.6 million of cash for capital
expenditures, $2.9 million under our Executive Stock Purchase Plan, net of
repayments and $4.7 million for the purchase of treasury stock. See the
consolidated statement of cash flows, located elsewhere in this report, for
further details on the sources and uses of cash.
Our capital and resource commitments as of November 24, 2002 consisted
of capital equipment commitments of approximately $1,956,000.
At November 24, 2002, we had a $50 million unsecured line of credit
with three banks. Borrowings under the line bear interest at the London
Interbank Offered Rate (LIBOR) plus an applicable margin or prime plus an
applicable margin, at our option. The line was not in use during the quarter or
year. It expires in October 2004.
We believe we have adequate resources to meet our needs for the
short-term from our existing cash balances, our expected cash generation in the
current fiscal year, and our line of credit. Longer-term, with substantial
increases in sales volume and/or large research and development or capital
expenditure requirements to pursue new opportunities in the Energy Technology
segment, we may need to raise additional funds. We would expect to be able to do
so through additional lines of credit, public offerings or private placements.
However, in the event funds were not available from these sources, or on
acceptable terms, we would expect to manage our growth within the financing
available.
Inflation has not had a material impact on our financial statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in short-term
marketable securities and long-term debt, is not material. The financial
instruments of the Company that are interest rate dependent are unsecured line
of credit and a mortgage payable. The Company manages interest rates through
various methods within contracts. On its mortgage payable, the Company
negotiated an "interest rate swap" agreement that, in effect, fixes the rate at
6.88%. With respect to its unsecured line of credit, the Company may elect to
apply interest rates to borrowings under the line which relate to either LIBOR
plus an applicable margin, or prime plus an applicable margin, whichever is most
favorable. The Company's objective in managing its exposure to changes in
interest rates is to limit the impact of changing rates on earnings and cash
flow and to lower its borrowing costs.
21
The Company does not believe that its exposure to commodity and foreign
exchange risk is material.
ITEM 4: CONTROLS AND PROCEDURES
The Company, with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, has carried out an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as
of a date within 90 days prior to the filing date of this quarterly report.
Based upon, and as of the date of, that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the disclosure controls and
procedures of the Company were effective in ensuring that information required
to be disclosed in the periodic reports that it files or submits under the
Exchange Act is accumulated and communicated to the management of the Company,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
There have been no significant changes in the Company's internal controls, or in
other factors that could significantly affect these controls, subsequent to the
date of the evaluation referred to above. There were no significant deficiencies
or material weaknesses identified in the evaluation and, therefore, no
corrective actions have been taken since the date of the evaluation.
22
PART II: OTHER INFORMATION
ITEM 4:. Submission of Matters to a Vote of Security Holders
(a) The November 2002 Annual Meeting of Shareholders of the Company was held on
November 12, 2002.
(c)(i) At the Annual Meeting, the Shareholders of the Company approved an
increase to the number of shares available for issuance under the 2000 Stock
Option and Award Plan by 820,000 shares. The vote was 11,728,195 FOR; 3,365,336
AGAINST; 77,245 ABSTAIN.
(c)(ii) At the Annual Meeting, the Shareholders of the Company approved an
increase to the maximum number of shares for which any individual may receive
grants under the 2000 Stock Option and Award Plan to 500,000 per calendar year.
The vote was 11,400,564 FOR; 3,691,773 AGAINST; 78,439 ABSTAIN..
(c)(iii) At the Annual Meeting, the Shareholders of the Company elected to
the Board of Directors all four nominees for director with the following vote:
- ---------------------------------------------------------------------------------------------------------------
BROKER
DIRECTOR FOR WITHHELD ABSTAIN NON-VOTES
- ---------------------------------------------------------------------------------------------------------------
John M. Albertine 14,331,122 859,654 -- --
- ---------------------------------------------------------------------------------------------------------------
Glenn H. Epstein 14,341,980 828,796 -- --
- ---------------------------------------------------------------------------------------------------------------
James S. Hyde 14,339,492 831,284 -- --
- ---------------------------------------------------------------------------------------------------------------
Larry G. Garberding 14,384,397 786,379 -- --
- ---------------------------------------------------------------------------------------------------------------
ITEM 6:. Exhibits and Reports on Form 8K.
(a) Exhibits
Certifications of Chief Executive Officer and Chief Financial Officer
* 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of
2002.
* 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8K
On October 23, 2002 the Company filed an 8-K with respect to the sale
of all remaining shares of Ultralife Batteries, Inc.
23
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.
INTERMAGNETICS GENERAL CORPORATION
Dated: January 8, 2003 By: /s/Glenn H. Epstein
----------------------------------
Glenn H. Epstein
President and Chief Executive Officer
Dated: January 8, 2003 By: /s/Michael K. Burke
-------------------------------------
Michael K. Burke
Executive Vice President and
Chief Financial Officer
24
CERTIFICATIONS
- --------------
I, Glenn H. Epstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Intermagnetics
General Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based upon my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
The registrant's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: January 8, 2003
/s/Glenn H. Epstein
----------------------------------
Glenn H. Epstein
President and Chief Executive Officer
25
CERTIFICATIONS
- --------------
I, Michael K. Burke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Intermagnetics
General Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based upon my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
The registrant's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: January 8, 2003
/s/Michael K. Burke
---------------------------------------
Michael K. Burke
Executive Vice President and
Chief Financial Officer