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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 February 22, 2004
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
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)
- --------------------------------------------------------------------------------
(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 - 16,827,588 as of March 28, 2004
INTERMAGNETICS GENERAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets - February 22, 2004 and May 25, 2003................................3
Consolidated Income Statements - Three and Nine Months Ended
February 22, 2004 and February 23, 2003.......................................................5
Consolidated Statements of Cash Flows - Nine Months Ended
February 22, 2004 and February 23, 2003........ .............................................6
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income -
Nine Months Ended February 22, 2004 ..........................................................7
Notes to Consolidated Financial Statements......................................................8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................20
Item 3: Quantitative and Qualitative Disclosures About Market Risk.....................................29
Item 4: Controls and Procedures........................................................................29
PART II - OTHER INFORMATION.............................................................................30
SIGNATURES..............................................................................................31
CERTIFICATIONS..........................................................................................32
2
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
February 22, May 25,
2004 2003
------------ ------------
(Undaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,470 $ 88,514
Trade accounts receivable, less allowance
(February 22, 2004 - $942; May 25, 2003 - $223) 38,547 23,864
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,224 188
Inventories:
Consigned products 1,610 339
Finished products 3,525 589
Work in process 8,862 6,002
Materials and supplies 13,584 7,280
-------- --------
27,581 14,210
Deferred income taxes 2,672 619
Note receivable 64 3,959
Prepaid expenses and other 4,082 2,756
-------- --------
TOTAL CURRENT ASSETS 83,640 134,110
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,628 1,128
Buildings and improvements 14,972 12,172
Machinery and equipment 46,405 38,461
Leasehold improvements 4,359 3,785
-------- --------
67,364 55,546
Less accumulated depreciation and amortization 31,971 27,160
-------- --------
35,393 28,386
INTANGIBLE AND OTHER ASSETS
Goodwill 116,487 13,750
Other intangibles, less accumulated amortization
(February 22, 2004 - $9,167; May 25, 2003 - $7,460) 33,900 6,928
Other assets 3,442 1,881
-------- --------
TOTAL ASSETS $272,862 $185,055
======== ========
3
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
February 22, May 25,
2004 2003
------------ ------------
(Undaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 4,165 $ 284
Accounts payable 8,880 9,276
Salaries, wages and related items 11,632 7,698
Customer advances and deposits 785 544
Product warranty reserve 2,936 1,466
Accrued income taxes 2,206 821
Other liabilities and accrued expenses 15,444 4,156
--------- ---------
TOTAL CURRENT LIABILITIES 46,048 24,245
LONG-TERM DEBT, less current portion 58,682 4,384
DEFERRED INCOME TAXES 2,167 1,453
DERIVATIVE LIABILITY 491 469
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):
February 22, 2004 - 18,016,490 shares;
May 25, 2003 - 17,538,762 shares; 1,802 1,754
Additional paid-in capital 142,416 138,974
Notes receivable from employees (3,421) (3,725)
Retained earnings 39,869 30,916
Accumulated other comprehensive loss (512) (514)
--------- ---------
180,154 167,405
Less cost of Common Stock in treasury
February 22, 2004 - 1,192,878 shares
May 25, 2003 - 1,112,597 shares (14,680) (12,901)
--------- ---------
165,474 154,504
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 272,862 $ 185,055
========= =========
See notes to consolidated financial statements.
4
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
February 22, February 23, February 22, February 23,
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 43,133 $ 37,837 $ 105,296 $ 109,681
Cost of products sold 24,691 23,206 62,791 67,307
--------- --------- --------- ---------
Gross margin 18,442 14,631 42,505 42,374
Product research and development 3,148 2,860 8,815 9,558
Selling, general and administrative 7,633 4,837 18,002 13,840
Stock based compensation 201 168 442 470
Amortization of intangible assets 786 460 1,707 1,380
--------- --------- --------- ---------
11,768 8,325 28,966 25,248
--------- --------- --------- ---------
Operating income 6,674 6,306 13,539 17,126
Interest and other income 176 299 695 974
Interest and other expense (295) (144) (524) (385)
Loss on available-for-sale securities (2,108)
Gain on litigation settlement 537
--------- --------- --------- ---------
Income before income taxes 6,555 6,461 13,710 16,144
Provision for income taxes 2,274 2,242 4,757 5,602
--------- --------- --------- ---------
NET INCOME $ 4,281 $ 4,219 $ 8,953 $ 10,542
========= ========= ========= =========
Net Income per Common Share:
Basic $ 0.26 $ 0.26 $ 0.54 $ 0.64
========= ========= ========= =========
Diluted $ 0.25 $ 0.25 $ 0.53 $ 0.62
========= ========= ========= =========
See notes to consolidated financial statements.
5
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
---------------------------------
February 22, February 23,
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net income $ 8,953 $ 10,542
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,212 4,460
Stock based compensation 442 470
Loss on sale and disposal of assets 16 57
Realized loss on available-for-sale securities 2,108
Fair value adjustment to inventory 116
Change in discount on note receivable (41) (74)
Change in operating assets and liabilities:
Increase in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts (1,951) (3,873)
(Increase) decrease in inventories and prepaid expenses and other assets (3,132) 2,698
Increase (decrease) in accounts payable and accrued expenses 1,469 (2,395)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,084 13,993
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,320) (2,879)
Collection of note receivable 4,000
Purchase of Invivo, net of cash acquired (149,280)
Proceeds from sale of available-for-sale securities 1,363
Proceeds from sale of property, plant and equipment 29 17
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (148,571) (1,499)
FINANCING ACTIVITIES
Proceeds from sale of Common Stock, including exercise of stock options 3,006 500
Proceeds from (advances to) employees - Executive Stock Purchase Plan 304 (2,926)
Purchase of Treasury Stock (1,779) (5,470)
Proceeds from long term borrowings 67,000
Principal payments on note payable and long-term debt (10,106) (195)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 58,425 (8,091)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 18
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (79,044) 4,403
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 88,514 73,517
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,470 $ 77,920
========= =========
See notes to consolidated financial statements.
6
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Nine Months Ended February 22, 2004
(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 25, 2003 $ 1,754 $138,974 $30,916 $(514) $(12,901) $ (3,725)
Comprehensive income:
Net income 8,953 8,953
Loss on derivatives, net of tax benefit (16) (16)
Unrealized gain on foreign currency
translation 18 18
-------
Total comprehensive income $ 8,955
=======
Issuance of 477,728 shares of Common Stock,
related to exercises of stock options 48 3,442
Repayments of notes receivable 304
Treasury stock purchase (60)
Treasury stock, upon exercise of stock
options (1,719)
------- -------- ------- ----- -------- --------
Balances at February 22, 2004 $ 1,802 $142,416 $39,869 $(512) $(14,680) $ (3,421)
======= ======== ======= ===== ======== ========
See notes to consolidated financial statements.
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 February
22, 2004 and the results of its operations, cash flows and changes in
shareholders' equity for the periods presented. The results for the three and
nine months ended February 22, 2004 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 25, 2003, filed on Form
10-K on August 25, 2003.
It is the Company's policy to reclassify prior year consolidated
financial statements to conform to current year presentation.
Note B - Acquisition
On January 27, 2004, the Company completed its purchase of Invivo Corp.
("Invivo"), a publicly traded company that designs, manufactures and markets
patient monitoring systems that measure and display vital signs of patients in
medical settings, particularly during magnetic resonance imaging procedures. The
Company acquired 100% of the outstanding common stock of Invivo for a total
purchase price of $159.3 million which includes professional fees and other
acquisition costs. As a result of the acquisition, Invivo became a wholly-owned
subsidiary of the Company and accordingly, Invivo's results of operations have
been included in the Company's consolidated financial statements since the date
of acquisition. Management believes that the acquisition of Invivo provides the
Company with an enhanced platform for future growth, a substantially expanded
sales team and customer base. The source of funds for the acquisition was a
combination of the Company's available cash and borrowings totaling $67.0
million under its existing $100.0 million unsecured credit facility. The
following represents the initial allocation of the total purchase price to the
assets acquired and liabilities assumed:
8
(In thousands)
--------------
Consideration:
Cash paid:
Outstanding common shares of Invivo (5,948,323 at $22.00/share) $ 130,863
Outstanding options of Invivo ($22.00/share net of exercise price) 20,081
Transaction costs 4,574
Accruals:
Estimated remaining transaction costs 3,811
---------
Total purchase price $ 159,329
=========
Allocated to:
Working capital, less inventory $ 7,707
Inventory 12,624
Other non-current assets 282
Deferred tax asset, net 1,339
Property and equipment 7,244
Long-term debt (1,284)
Intangible assets:
Trade name/Trademarks 11,510
Product trade names/trademarks 1,350
Original equipment manufacturer customer (OEM) relationships 5,650
Know-how and core technology 6,660
Product technology and design 2,970
Order backlog 540
Goodwill 102,737
---------
Total $ 159,329
=========
The allocation of the purchase price is based on an initial estimate of
their fair values. The Company is in the process of obtaining an independent
valuation from a nationally recognized valuation firm to assist in the
allocation of the purchase price. The Company anticipates receiving the final
valuation report before May 30, 2004.
The following (unaudited) pro forma consolidated income statements
have been prepared in accordance with SFAS No. 141 "Business Combinations" as if
the acquisition of Invivo had occurred on May 27, 2002. The table below
includes certain costs that would not have been incurred by either Company had
the acquisition not occurred:
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
February 22, February 23, February 22, February 23,
2004 2003 2004 2003
---------- ---------- ----------- -----------
Net sales $ 54,292 $ 50,852 $ 150,367 $ 146,073
========== ========== =========== ===========
Net income $ 4,794 $ (2,606) $ 10,833 $ 4,039
========== ========== =========== ===========
Earnings per share:
Basic $ 0.29 $ (0.16) $ 0.65 $ 0.24
========== ========== =========== ===========
Diluted $ 0.28 $ (0.16) $ 0.64 $ 0.24
========== ========== =========== ===========
9
In the following (unaudited) pro forma consolidated income statements,
net income for the three and nine months ended February 23, 2003 have been
adjusted by $6.7 million, net of tax for investment banking, legal, other
professional fees as well as an inventory impairment charge and the true-up of
commissions payable by Invivo and other costs incurred by both companies that
would not have been incurred had the acquisition not occurred. The Company
believes this table provides helpful information for assessing the impact of the
acquisition.
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
February 22, February 23, February 22, February 23,
2004 2003 2004 2003
---------- ---------- ----------- -----------
Net sales $ 54,292 $ 50,852 $ 150,367 $ 146,073
========== ========== =========== ===========
Net income $ 4,794 $ 4,065 $ 10,833 $ 10,710
========== ========== =========== ===========
Earnings per share:
Basic $ 0.29 $ 0.25 $ 0.65 $ 0.65
========== ========== =========== ===========
Diluted $ 0.28 $ 0.24 $ 0.64 $ 0.63
========== ========== =========== ===========
The above pro forma results do not include any anticipated revenue synergies.
Note C - Earnings Per Common Share
A summary of the shares used in the calculation of net income per Common Share
is shown below:
(Dollars in Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
Feb. 22, 2004 Feb. 23, 2003 Feb. 22, 2004 Feb. 23, 2003
-------------- ------------- ------------- -------------
Income available to
Common shareholders $ 4,281 $ 4,219 $ 8,953 $ 10,542
=========== =========== =========== ===========
Weighted average shares 16,746,949 16,480,959 16,647,798 16,538,320
Dilutive potential Common
Shares:
Warrants 22,102 16,463
Restricted stock 1,802 1,231
Stock options 313,793 533,024 286,339 509,270
----------- ----------- ----------- -----------
Adjusted weighted average
shares 17,084,646 17,013,983 16,951,831 17,047,590
Net income per Common Share:
Basic $ 0.26 $ 0.26 $ 0.54 $ 0.64
=========== =========== =========== ===========
Diluted $ 0.25 $ 0.25 $ 0.53 $ 0.62
=========== =========== =========== ===========
10
As of February 22, 2004 the Company had 820,000 shares of restricted
stock, net of forfeitures, outstanding to key employees. These shares are
restricted units, which will convert into common stock only upon the achievement
of compounded growth in the Company's pre-tax diluted earnings per share grater
than eight percent over the next five fiscal years. The vesting schedule in
fiscal years 2003 through 2007 is 0%, 0%, 15%, 20% and 65%, respectively. For
the nine months ended, the stock is not considered dilutive, as the performance
criteria have not been met. The Company will record expense for the restricted
stock when management determines it will be probable that the performance
targets will be met. At that time the expense will be recorded and treated as
variable through the date that the restriction lapses. Additional shares of
restricted stock may be granted to newly hired key employees.
As of February 22, 2004 the Company had granted 13,866 shares of
restricted stock to the Board of Directors. These shares are vesting over a 5
year time frame at 10%, 10%, 10%, 10%, and 60% respectively. For nine months
ended February 22, 2004 and February 23, 2003, the Company had recorded expense
of $15,000 and $0, respectively.
During the three and nine month period ending February 23, 2003, shares
issuable upon conversion of stock warrants were considered in calculating
"diluted" earnings per share, but have been excluded, as the effect would be
anti-dilutive. Additionally, all stock options in which the market value is
lower than the exercise price have also been excluded, as the effect would be
anti-dilutive. Anti-dilutive shares for the three and nine months ended February
22, 2004 were 286,429 and 504,575 respectively.
Note D - Long-term Debt
On December 17, 2003, the Company entered into a Credit Facility with a
group of commercial lenders under which the Company may borrow up to $100
million in the aggregate consisting of (i) up to $75 million in a five-year
revolving credit facility and (ii) a $25 million five-year term loan facility.
Both facilities have maturity dates five years from the effective date of these
loans. Proceeds of this facility were used for the acquisition of Invivo
Corporation including direct costs associated with the acquisition and this
credit facility and to provide working capital for general corporate
requirements of the Company. This facility replaced the Company's existing
unsecured $50.0 million line of credit.
The term loan will be payable quarterly in scheduled amounts; 15% in
years one and two, 20% in year three, and 25% in years four and five.
The Credit Facility contains a prepayment provision whereby certain
amounts borrowed must be repaid upon the occurrence of certain specified events
and conditions, including issuance of any equity, proceeds from the issuance of
any additional debt, certain asset sales, insurance proceeds and excess cash
flows, subject to debt leverage ratios, as defined in the Credit Facility.
Borrowings under the facilities will bear interest, at the Company's
option, at: (x) the higher of Wachovia's prime commercial lending rate or the
federal funds rate plus 0.50% per annum, plus the applicable margin rate based
on the Company's leverage ratio (the ratio of total funded debt to earnings
before interest, taxes, depreciation and amortization, "EBITDA") (the "Leverage
Ratio") which for the first two full fiscal quarters following the closing of
the Credit Agreement, will be 0.50% per annum; or (y) the applicable London
Interbank Offered Rate ("LIBOR") plus the applicable LIBOR margin rate based on
the Company's Leverage Ratio, which, for the first two full fiscal quarters
following the closing of the Credit Agreement, will be 1.50% per annum.
11
In addition, the Company is obligated to pay a commitment fee on the
unutilized portion of the Revolving Loan of 0.30% per annum. The Company was
also required to pay underwriting and administrative fees and reimburse certain
expenses. These costs were recorded as deferred financing costs and are being
amortized over the life of the debt.
The agreement is unsecured and unconditionally guaranteed by each
existing and subsequently acquired or organized domestic subsidiary of the
Company. The Company must also comply with certain financial and operational
covenants. The most restrictive financial covenants include various debt to
EBITDA, tangible net worth and fixed charge coverage ratios as defined in the
Credit Facility.
Effective with the acquisition of Invivo on January 27, 2004, the
Company assumed a term loan mortgage due in 2016. The term loan bears interest
at LIBOR plus 2% and is secured by land and building located in Orlando, FL. As
of February 22, 2004, $1.4 million was included in long-term debt of which
$113,000 was payable within one year.
The Company incurred costs directly associated with obtaining this
unsecured credit facility amounting to $1.3 million. These costs were deferred
and are being amortized using the straight-line method over the life of the
debt. As of February 22, 2004, the Company had the following long-term debt
outstanding:
As of
---------------------------
(In thousands) February 22, May 25,
2004 2003
------- -------
Long-Term Debt:
Mortgages payable $ 5,847 $ 4,668
Term loan ($25 million) 25,000 -
Revolving line of credit ($75 milllion) 32,000 -
------- -------
Total long-term debt 62,847 4,668
Less current maturities 4,165 284
------- -------
Long-term debt excluding current maturities $58,682 $ 4,384
======= =======
As of February 22, 2004, the Company had $43 million available under
its unsecured credit facility.
Note E - New Accounting Pronouncements
In April 2003, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 149 is generally
effective for derivative instruments, including derivative instruments embedded
in certain contracts, entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of SFAS No.
149 did not have a material impact on the Company's financial statements.
12
In May 2003, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material impact on the Company's consolidated financial statements.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition", which supercedes
SAB 101, "Revenue Recognition in Financial Statements". SAB 104's primary
purpose is to rescind accounting guidance contained in SAB 101 related to
multiple element arrangements, superceded as a result of the issuance of EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables". The
Company's adoption of SAB 104 did not have a material effect on its financial
statements.
Note F - Stock Compensation
The Company accounts for its stock compensation arrangements using the
intrinsic value method under the provisions of APB No. 25, accounting for stock
issued to employees. The following pro forma net income and earnings per share
information has been determined as if the Company had accounted for stock-based
compensation awarded under its stock option plans using the fair value-based
method. The pro forma effect on net income for the three and nine months ended
February 22, 2004 and February 23, 2003 is not representative of the pro forma
effect on net income in future years because, as required by SFAS No. 123,
"Accounting for Stock Based Compensation," no consideration has been given to
awards granted prior to fiscal 1996.
(Dollars in Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
February 22, February 23, February 22, February 23,
2004 2003 2004 2003
------- ------- ------- -------
Net income (as reported) $ 4,281 $ 4,219 $ 8,953 $ 10,542
Add recorded non-cash stock compensation, net of tax 131 110 288 307
Less non-cash stock compensation under
SFAS No. 123, net of tax (769) (601) (1,779) (1,741)
------- ------- ------- -------
Pro forma Net Income $ 3,643 $ 3,728 $ 7,462 $ 9,108
Earnings per Common Share (as reported):
Basic $ 0.26 $ 0.26 $ 0.54 $ 0.64
======= ======= ======= =======
Diluted $ 0.25 $ 0.25 $ 0.53 $ 0.62
======= ======= ======= =======
Earnings per Common Share (pro forma):
Basic $ 0.22 $ 0.23 $ 0.45 $ 0.55
======= ======= ======= =======
Diluted $ 0.21 $ 0.22 $ 0.44 $ 0.53
======= ======= ======= =======
13
Note G - Segment and Related Information
The Company operates in three reportable segments: Medical Technology
(formerly referred to as Magnetic Resonance Imaging, MRI), Instrumentation, and
Energy Technology. The Medical Technology segment consists primarily of the
manufacture and sale of magnets (by the IGC-Magnet Business Group), radio
frequency coils (by IGC-Medical Advances Inc.), and now, also includes the
design, manufacture and sale of patient monitoring systems (by recently acquired
Invivo Corp.). These products are used principally in the medical diagnostic
imaging market. 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. 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. The Company evaluates the
performance of its reportable segments based on operating income (loss).
14
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
SEGMENT DATA
(Dollars in Thousands)
Three Months Ended
February 22, 2004
--------------------------------------------------------------------------------
Medical Energy
Technology Instrumentation Technology Total
---------- --------------- ---------- --------
Net sales to external customers:
Magnet systems & components $ 31,326 $ 31,326
Medical devices 4,715 4,715
Refrigeration equipment $ 5,573 5,573
Other $ 1,519 1,519
-------- -------- -------- --------
Total 36,041 5,573 1,519 43,133
Segment operating profit (loss) 7,618 760 (1,704) 6,674
Total assets $253,963 $ 9,575 $ 9,324 $272,862
Three Months Ended
February 23, 2003
--------------------------------------------------------------------------------
Medical Energy
Technology Instrumentation Technology Total
---------- --------------- ---------- --------
Net sales to external customers:
Magnet systems & components $ 32,113 $ 32,113
Medical devices -
Refrigeration equipment $ 5,213 5,213
Other $ 511 511
-------- -------- -------- --------
Total 32,113 5,213 511 37,837
Segment operating profit (loss) 7,715 113 (1,522) 6,306
Total assets $159,866 $ 10,281 $ 8,058 $178,205
15
Nine Months Ended
February 22, 2004
--------------------------------------------------------------------------------
Medical Energy
Technology Instrumentation Technology Total
---------- --------------- ---------- --------
Net sales to external customers:
Magnet systems & components $ 78,088 $ 78,088
Medical devices 4,715 4,715
Refrigeration equipment $ 17,965 17,965
Other $ 4,528 4,528
-------- -------- -------- --------
Total 82,803 17,965 4,528 105,296
Segment operating profit (loss) 15,342 2,316 (4,141) 13,517
Total assets $253,963 $ 9,575 $ 9,324 $272,862
Nine Months Ended
February 23, 2003
--------------------------------------------------------------------------------
Medical Energy
Technology Instrumentation Technology Total
---------- --------------- ---------- --------
Net sales to external customers:
Magnet systems & components $ 93,634 $ 93,634
Refrigeration equipment $ 14,769 14,769
Other $ 1,278 1,278
-------- -------- -------- --------
Total 93,634 14,769 1,278 109,681
Segment operating profit (loss) 22,259 11 (5,171) 17,099
Total assets $159,866 $ 10,281 $ 8,058 $178,205
16
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
-----------------------------------------
February 22, 2004 February 23, 2003
----------------- -----------------
Reconciliation of income before income taxes:
Total operating profit from reportable segments $ 6,674 $ 6,306
-------- --------
Intercompany profit in ending inventory
Net operating profit 6,674 6,306
Interest and other income 176 299
Interest and other expense (295) (144)
-------- --------
Income before income taxes $ 6,555 $ 6,461
======== ========
Nine Months Ended
-----------------------------------------
February 22, 2004 February 23, 2003
----------------- -----------------
Reconciliation of income before income taxes:
Total operating profit from reportable segments $ 13,517 $ 17,099
Intercompany profit in ending inventory 22 27
-------- --------
Net operating profit 13,539 17,126
Interest and other income 695 974
Interest and other expense (524) (385)
Loss on available for sale securities (2,108)
Gain on litigation settlement 537
-------- --------
Income before income taxes $ 13,710 $ 16,144
======== ========
Note H - 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.
17
The components of other intangibles are as follows:
(Dollars in Thousands)
As of February 22, 2004
-------------------------------------------------------
Weighted
Gross Carrying Accumulated Average Life
Amount Amortization in Years
-------------- ------------ ------------
Amortized intangible assets
Production rights $ 8,750 $ 6,629 5.5
Patents 3,747 935 17.9
Unpatented technology 930 930 5.0
Trade names/trademarks 12,470 386 24.6
Product name/trademark 1,350 8 14.0
Know-how and core technology 6,660 70 8.0
Product technology and design 2,970 35 7.0
OEM customer relationships 5,650 39 12.0
Order backlog 540 135 0.3
------- ------- ----
$43,067 $ 9,167 13.6
======= =======
Aggregate amortization expense for the three and nine months ended
February 22, 2004 and February 23, 2003 was $786,000 and $460,000 and $1,707,000
and $1,380,000, respectively.
Estimated Amortization Expense:
For the year ending May 2004 $3,144
For the year ending May 2005 $4,127
For the year ending May 2006 $2,669
For the year ending May 2007 $2,536
For the year ending May 2008 $2,525
All intangibles are amortized on a straight line basis.
The changes in the carrying amount of goodwill between May 25, 2003 and February
22, 2004 are as follows:
(In thousands) Medical Technology
Segment
---------
Goodwill as of May 25, 2003 $ 13,750
Goodwill acquired on January 27, 2004 with the acquisition of Invivo
Corp. (preliminary purchase price allocation) 102,737
---------
Goodwill as of February 22, 2004 $ 116,487
=========
Management has evaluated goodwill excluding the goodwill generated from
the acquisition of Invivo for impairment during the quarter ended November 23,
2003 in accordance with SFAS No. 142 and determined no impairment exists.
Management will perform the next annual goodwill impairment test during the
quarter ended November 28, 2004 unless an event occurs or circumstances change
that would more likely than not reduce the fair value of the reporting unit
below its carrying amount.
18
Note I - 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.
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. On
February 22, 2004, the Company had outstanding interest rate swap agreements
with a commercial bank, having a notional principal amount of approximately $4.5
million. Those agreements effectively change the Company's interest rate
exposure on its mortgages due in 2005 to a fixed 6.88%. The interest rate swap
agreement matures at the time the related notes mature.
On February 5, 2004, the Company entered into an interest rate swap
agreement with a commercial bank, having a current notional principle amount of
$25 million. This agreement effectively hedges the Company's interest rate
exposure on its $25 million term loan due on December 31, 2008 to a fixed rate
of 2.95%. The interest rate swap agreement corresponds with the repayment terms
of the term loan and matures on December 31, 2008.
The Company is exposed to credit loss in the event of non-performance
by the other parties to the interest rate swap agreements. However, the Company
does not anticipate non-performance by the counterparties.
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 three and nine months ended February 22, 2004, the
Company recorded a net other comprehensive loss of $102,000 and $16,000,
respectively net of tax for the two interest rate swap agreements.
19
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 2004 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
- ----------------
On January 27, 2004, the Company completed its purchase of Invivo Corp.
("Invivo"), a publicly traded company that designs, manufactures and markets
patient monitoring systems. These monitoring systems measure and display vital
signs of patients in medical settings, particularly during magnetic resonance
imaging procedures. As a result of the acquisition, Invivo became a wholly-owned
subsidiary of the Company which management believes provides Intermagnetics with
an enhanced platform for future growth, a substantially expanded sales team and
customer base. Invivo's results of operations have been included in the
Company's consolidated financial statements since the date of acquisition
effective January 27, 2004 and are included in our discussion on Results of
Operations below. The source of funds for the acquisition was a combination of
the Company's available cash and borrowings totaling $67 million under its
existing $100 million unsecured credit facility.
The Company operates in three reportable segments: Medical Technology
(formerly referred to as Magnetic Resonance Imaging, MRI), Instrumentation, and
Energy Technology. The Medical Technology segment consists primarily of the
manufacture and sale of magnets (by the IGC-Magnet Business Group), radio
frequency coils (by IGC-Medical Advances Inc.), and now, also includes the
design, manufacture and sale of patient monitoring systems (by recently acquired
Invivo Corp.). These products are used principally in the medical diagnostic
imaging market. 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.
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.
20
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.
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 actual costs incurred plus earned profit when these costs
are less than the milestone value and the milestone has been achieved or
milestone value when the actual costs exceed the milestone value. These
contracts typically provide engineering services to achieve a specific
scientific result relating to superconductivity. Some of these contracts require
the Company to contribute to the development effort. The customers for these
contracts are both commercial customers and various state and federal government
agencies. When government agencies are providing funding we do not expect the
government to be a significant end user of the resulting products. Therefore,
the Company does not reduce Internal Research and Development by the funding
received. When it appears probable that estimated costs will exceed available
funding, and the Company is not successful in securing additional funding, the
Company records the estimated additional expense before it is incurred.
In certain instances, the Company recognizes revenue in accordance
with Staff Accounting Bulletin No. 101 as amended by Staff Accounting Bulletin
No. 104, on product that is complete and ready to ship for which our customer
has requested a delay in delivery. In these cases, all the criteria for revenue
recognition have been met including, but not limited to: the customer has a
substantial business purpose, there is a fixed delivery date, title and risk of
loss has transferred to our customer, the product is complete and ready for
shipment, and the product has been segregated and is not available to be used to
fill other orders. Upon notification from our customer, the product is shipped
to the stated destination. As of February 22, 2004 and February 23, 2003, these
systems comprised approximately 0.0% and 10.0%, respectively of consolidated
revenue for the three month periods then ended.
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.
21
The warranty provision 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 recorded a provision amounting to about $2.0 million for
potential environmental remediation for businesses disposed of during fiscal
2002. As of February 22, 2004, $1.9 million remained in other liabilities and
accrued expenses. These provisions are based upon in part, on the advice from
environmental engineers that have visited the sites and understand the scope of
the project, should a cleanup be required. These engineers are experienced in
such matters and with the appropriate government rulings in similar
circumstances. We have made our provision based on the estimate provided which
did not include any range of loss. Therefore, we are unable to identify or
estimate any additional loss that is reasonably possible. The Company believes
these provisions are adequate based on estimates from environmental engineers.
If unexpected costs related to the environmental issues are incurred additional
provisions will be needed.
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. The
Company owns approximately 11% of the common stock of KryoTech a privately held
corporation. During fiscal year 2002, the Company wrote this investment down to
zero due to a decline in fair value, which in the opinion of management was
other than temporary.
Results Of Operations
- ---------------------
For purposes of the discussion below regarding our Results of
Operations, the Magnetic Resonance Imaging Segment (MRI) has been renamed the
Medical Technology segment and now includes the contributions of our recent
acquisition of Invivo Corp (Invivo).
Sales increased about $5.3 million or 14%, to $43.1 million, for the
three months ended February 22, 2004, from $37.8 million for the same period
last year. This increase was achieved through contributions from each segment;
driven by the inclusion of four weeks of sales from Invivo, increased product
demand as well as additional sales booked from government contracts within our
Energy Technology segment.
For the nine months ended February 22, 2004, sales decreased $4.4
million or 4% to $105.3 million from $109.7 million for the same period last
year. This decrease is related to the Medical Technology segment's agreement to
reduce shipments to our largest customer in an effort to manage their inventory
in exchange for a lengthening of our exclusive evergreen supply agreement. Over
the past six months, we have narrowed this difference primarily through the
contribution of Invivo sales, increased sales from our Instrumentation segment
and additional sales within our Energy Technology segment.
22
Medical Technology Segment Sales
--------------------------------
Sales during the third fiscal quarter for the Medical Technology
segment increased $3.9 million or 12.2% to $36.0 million compared to the same
quarter last year. This increase is largely due to the sales contribution of
$4.7 million from our acquisition of Invivo effective January 27, 2004 combined
with improved RF-Coil sales. Although the total number of magnet unit shipments
increased over the third fiscal quarter of last year, an unfavorable magnet mix
combined with lower contractual selling prices partially offset the revenue
increases noted above.
For the nine months ended February 22, 2004, Medical Technology segment
sales decreased $10.8 million or 11.6% to $82.8 million from the same nine month
period last year. This decrease is primarily the result of the previously
disclosed planned decline in magnet shipments during the first fiscal quarter.
This amounted to a reduction of about $16.5 million related to the transition of
managing supply chain logistics for Philips Medical Systems in return for an
enhanced and extended exclusive supply contract. In addition, an unfavorable
magnet mix combined with lower contractual selling prices more than offset an
increase in magnet unit volumes during our second and third fiscal quarters.
These decreases were partially offset by the inclusion of Invivo sales of $4.7
million and strong increases in RF-Coil sales.
Instrumentation Segment Sales
-----------------------------
Instrumentation segment sales for the current quarter ended February
22, 2004, increased $360,000, or 6.9% to $5.6 million over the same quarter last
year. This increase is primarily due to sales and service growth in our domestic
vacuum markets.
For the nine months ended, sales increased $3.2 million or 21.6% to
$18.0 million over the same nine month period last year. This increase was
primarily driven by continued sales and service growth in our vacuum market in
both Asia and the United States as well as increasing demand in the
semiconductor market.
Energy Technology Segment Sales
-------------------------------
Sales of the Energy Technology segment increased $1.0 million and $3.2
million for the three and nine months ended February 22, 2004, respectively over
their corresponding periods last year as result of revenue earned on existing
government and third party programs primarily involving HTS devices.
Gross Margin
------------
Consolidated gross margin increased $3.8 million to about $18.4 million
or 42.8% of sales for the three months ended February 22, 2004 from $14.6
million or 39% of sales for the same period last year. The increase in both
absolute dollars and as a percent of sales is driven by the inclusion of
Invivo's margin and the increase in RF-Coil sales as well as the continued
benefits of this segments cost savings efforts all combined to contribute about
$3.1million. The Instrumentation segment and the Energy Technology Segment also
contributed about $700,000 to the increase through an improved revenue
performance.
During the nine months ended February 22, 2004, gross margin of $42.5
million or 40.4% of sales was relatively unchanged from prior year in absolute
dollars but, increased 1.8% as a percent of sales for the same nine month period
last year. In the Medical Technology segment, reduced magnet shipments during
the first fiscal quarter, relating to the transition of managing supply chain
logistics for Philips Medical Systems, combined with an unfavorable magnet mix
and lower contractual selling prices more than offset an increase in magnet unit
volumes during our second and third fiscal quarters. These decreases were
23
essentially offset by the inclusion of Invivo's margin and an increase in
RF-Coil sales all combined to reduce gross margin by about $3.5 million. The
Instrumentation segment's contribution increased primarily through improved
sales in the domestic vacuum market combined with price increases. Finally, the
Energy Technology segment increased gross profit by about $3.7 million relating
to funding received for costs that were expensed in prior periods as well as
increased revenue on our existing HTS programs.
Product Research and Development
--------------------------------
Product research and development increased $288,000 or 10.1% to $3.1
million from $2.9 million for the three months ended February 22, 2004. This
increase primarily resulted from increased spending on various HTS projects in
our Energy Technology segment partially offset by a decline in spending in our
Instrumentation segment as resources were reallocated to existing product
enhancements. In the Medical Technology segment, increased third party funding
for continued development on magnet systems were nearly offset by new product
development costs in Invivo.
For the nine months ended, product research and development of $8.8
million decreased about $743,000 or 7.8% from $9.6 million for the same period
last year. This decrease primarily resulted from increased third party funding
for continued development on magnet systems, partially offset by new product
development at Invivo and increased spending on various HTS projects in our
Energy Technology segment. Although absolute levels of internal spending
declined actual technology development efforts increased as a result of
additional third party funding.
Selling, General and Administrative
-----------------------------------
For the three months ended February 22, 2004, selling, general and
administrative expenses, increased $2.8 million from prior year or nearly 57.8%
to $7.6 million. This increase is primarily due to $1.2 million of internal
acquisition and integration costs related to our acquisition of Invivo combined
with the inclusion of Invivo's selling, general and administrative costs of
about $1.5 million. The remaining increases resulted from staffing and
relocation costs in filling open positions in our Medical Technology segment.
Selling, general and administrative expenses increased about $4.2
million or 30% to $18 million for the nine months ended February 22, 2004 from
$13.8 million for the same period last year. This increase is primarily due to
$1.2 million of internal acquisition and integration costs related to our
acquisition of Invivo combined with the inclusion of Invivo's selling, general
and administrative costs of about $1.5 million. In addition, increases in
incentive compensation, director fees, staffing and relocation costs in filling
various open positions, primarily in our Medical Technology segment,
representing another $1.8 million. The above increases combined with marginal
decreases in our Instrumentation and Energy Technology segments made up the
total increase.
Amortization of Intangible Assets
---------------------------------
Amortization expense of $786,000 and $1.7 million for the three and
nine month periods ended February 22, 2004, respectively, increased about
$326,000 from their corresponding periods last year. The increase is due to the
addition of the amortizable intangible assets resulting from our acquisition of
Invivo on January 27, 2004.
24
Operating Income
----------------
For the three months ended February 22, 2004, operating income
increased $368,000 or 5.8% over the same period last year. This increase is
primarily due to improved sales and margins partially offset by significant
internal acquisition and integration costs, including amortization. Excluding
the internal acquisition and integration charges, operating income for the
current period would have been $7.9 million which represents an increase of $1.6
million or 25.6% over the same period last year. See the reconciliation below.
During the nine months ended February 22, 2004, operating income of
$13.5 million decreased nearly $3.6 million from $17.1 million. This decrease
was primarily the result of the reduced magnet sales in our Medical Technology
segment during the first quarter. Additionally, we incurred about $1.2 million
of internal acquisition and integration related costs associated with the
acquisition of Invivo. Partially offsetting the Medical Technology segment
decline was a decrease in our net investment in the Energy Technology segment
combined with continued sales growth and related gross margin in our
Instrumentation segment. Excluding the internal acquisition and integration
charges, operating income for the nine months ended February 22, 2004 would have
been $14.8 million which represents a decrease of $2.3 million or 13.7% over the
same nine month period last year. See the reconciliation below.
Reconciliation of financial statements to GAAP equivalent
Three Months Ended
---------------------------------------
February 22, 2004 February 23, 2003
----------------- -----------------
As reported operating income $ 6,674 $ 6,306
Internal acquisition and integration charges
(included in selling, general and administrative
expenses) 1,247 -
------- -------
Operating income, excluding internal acquisition
and integration charges $ 7,921 $ 6,306
======= =======
Nine Months Ended
---------------------------------------
February 22, 2004 February 23, 2003
----------------- -----------------
As reported operating income $13,539 $17,126
Internal acquisition and integration charges
(included in selling, general and administrative
expenses) 1,247 -
------- -------
Operating income, excluding internal acquisition
and integration charges $14,786 $17,126
======= =======
Interest and Other
------------------
Interest and other income of $176,000 and $695,000 for the current
quarter and nine month period, decreased $123,000 and $279,000, respectively
from the corresponding periods last year. This decrease is primarily driven by
the continued decline in the interest rate environment as well as our lower cash
balances resulting from funding our acquisition of Invivo Corp on January 27,
2004.
25
Interest and other expense of $295,000 and $524,000 for the three and
nine month periods ended February 22, 2004, increased $151,000 and $139,000,
respectively from the corresponding periods last year. This increase is
primarily driven by the interest expense from the $67 million of proceeds
borrowed under our $100 million unsecured credit facility used to partially
finance our acquisition of Invivo Corp. effective January 27, 2004. As of
February 22, 2004, $57 million was outstanding under this credit facility.
During the nine months ended February 23, 2003, The Company sold its
remaining shares of Ultralife Batteries Inc. and realized a pre-tax loss of $2.1
million. During the same period, the Company realized a $537,000 gain resulting
from a favorable settlement of trade litigation.
Our effective tax rate of 34.7% for the nine months ended February 22,
2004 was unchanged from the previous year. We are in the process of analyzing
the affect the recent acquisition will have on our future effective tax rate. We
continue to review effective tax strategies to minimize our effective tax rate.
Liquidity and Capital Commitments
- ---------------------------------
For the nine months ended February 22, 2004, we generated $11.1 million
in cash from operating activities compared to $14.0 million of cash generated in
the same period last year. The decrease in cash generated was primarily driven
by the decrease in earnings resulting from costs incurred related to the
acquisition of Invivo.
For the nine months ended February 22, 2004, cash used by investing
activities of $148.6 million, increased $147.1 million from $1.5 million during
the same period last year. This significant use of cash primarily resulted from
our acquisition of Invivo effective January 27, 2004 which included the
following payments:
Cash paid:
Outstanding common shares of Invivo (5,948,323 at $22.00/share) $ 130,863
Outstanding options of Invivo ($22.00/share net of exercise price) 20,081
Transaction costs 4,574
Less cash acquired from Invivo (6,238)
---------
$ 149,280
=========
Additional investing activities during the current period included the
collection of the $4.0 million note receivable which was the final payment from
the sale of IGC-Advanced Superconductors to Outokumpu Advanced Superconductors,
Inc. in fiscal year 2002, partially offset by plant, property and equipment
purchases of $3.3 million. During the same nine month period last year,
investing activities consisted of about $2.9 million of plant, property and
equipment purchases partially offset by proceeds from the sale of
available-for-sale securities of $1.4 million.
26
Financing activities for the nine months ended February 22, 2004,
generated $58.4 million which primarily comprised $67 million of proceeds
received from long-term borrowings used to partially finance the acquisition of
Invivo, net of $10.1 million of principal payments. In addition, proceeds
received from exercised options of $3 million were partially offset by $1.8
million of treasury stock. This is compared to the $8.1 million of cash used in
the same period last year which mainly consisted of $5.5 million of treasury
stock purchases and $2.9 million of advances to employees under the shareholder
approved executive stock purchase plans.
See the consolidated statement of cash flows, located elsewhere in this
report for further details on sources and uses of cash.
Our capital and resource commitments as of February 22, 2004 consisted
of capital equipment commitments of approximately $937,000. These commitments
consisted of machinery, equipment and tooling used to improve the production
process and in research and development. Additionally, some of the capital
commitment is for computers and computer equipment to improve engineering
efficiency and to update other supporting functions. Individually, none of these
commitments are considered significant.
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 available unsecured 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.
On December 17, 2003, we entered into a Credit Facility with a group of
commercial lenders under which we may borrow up to $100 million in the aggregate
consisting of (i) up to $75 million in a five-year revolving credit facility and
(ii) a $25 million five-year term loan facility. Both facilities have maturity
dates five years from the effective date of these loans. Proceeds of this
facility were used for the acquisition of Invivo Corporation including direct
costs associated with the acquisition and this credit facility and to provide
working capital for general corporate requirements of the Company. We incurred
costs directly associated with obtaining this credit facility of $1.3 million
which have been recorded as deferred financing costs and are being amortized
straight-line over the life of the debt. This facility replaced our previous
unsecured $50.0 million line of credit. As of February 22, 2004, $57 million was
outstanding under this credit facility. See also Note D in the Company's notes
to consolidated financial statements.
27
Risk Factors
- ------------
In addition to the risk factors set forth in the Company's annual report on Form
10-K for the year ended May 25, 2003 and elsewhere in this report:
The Company May be Subject to Risk Associated with Acquisitions
---------------------------------------------------------------
The Company acquired Invivo Corp. (Invivo) effective January 27, 2004
and may make additional acquisitions in the future. Acquisitions involve
numerous risks, including difficulties in the integration of the operations,
services, technologies, products and personnel of the acquired companies,
diversion of management's attention from other business concerns, overvaluation
of the acquired companies, potential loss of key employees and customers of the
acquired companies and lack of acceptance by the marketplace of the acquired
companies' products or services. Future acquisitions may also result in dilution
to existing stockholders, the use of a substantial portion of the Company's
cash, the incurrence of debt, large one-time write-offs and the creation of
goodwill or other intangible assets that could result in significant impairment
charges or amortization expense. Moreover, the Company may face exposure to
litigation and other unanticipated contingent liabilities of the acquired
companies. Any of these problems or factors with respect to the acquisition of
Invivo or any other acquisition completed by the Company could result in a
material adverse effect to the Company's business, financial condition and
results of operations.
The Company May on Occasion be Subject to Significant Litigation
----------------------------------------------------------------
With the acquisition of Invivo, the Company now does business in the
critical healthcare setting, and may from time to time be subject to significant
litigation arising from actual or alleged injuries to patients. Litigation is by
its nature costly and may divert management's attention, either of which could
adversely affect the Company's operating results. In addition, if any current or
future litigation is determined adversely, the Company's operating results and
financial condition could be adversely affected.
The Company is Subject to Risk of New Laws Related to Health Care
-----------------------------------------------------------------
The Company's customer base includes original equipment manufacturers
of medical diagnostic equipment, imaging centers, small rural hospitals and
other healthcare providers. Changes in the law or new interpretations of
existing laws may have a significant effect on the Company's costs of doing
business and the amount of reimbursement the Company receives from both
government and third-party payors. In addition, economic forces, regulatory
influences and political initiatives are subjecting the health care industry to
fundamental changes. Federal, state and local government representatives are
likely to continue to review and assess alternative health care delivery systems
and payment methods. The Company expects ongoing public debate on these issues.
Any of these efforts or reforms could have a material adverse affect on the
Company's business and results of operations.
28
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk through foreign currency
exchange, derivative financial instruments and other financial instruments, such
as investments in short-term cash equivalents and long-term debt, is not
material. The Company has minimal exposure to foreign currency exchange risk
with respect to sales as the Company's sales are primarily denominated in U.S.
Dollars. The Company does not currently hedge against foreign currency rate
fluctuations and an immediate 10% change in exchange rates would not have a
material impact on the Company's future operating results or cash flows.
The financial instruments of the Company that are interest rate
dependent are mortgages payable and an unsecured $100 million credit facility
consisting of a $75 million revolving line of credit and a $25 million term
loan. 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 credit facility the Company may elect to apply interest rates to
borrowings under (x) the higher of Wachovia's prime commercial lending rate or
the federal funds rate plus applicable margins or (y) the applicable London
Interbank Offered Rate ("LIBOR") plus applicable margins, whichever is more
favorable. In addition, the Company entered into an "interest rate swap"
agreement that in effect, fixes the rate on its $25 million term loan at 2.95%.
See also Note I to the Company's consolidated financial statements.
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. With regards to invested cash the Company invests
only in high quality, low risk securities backed by the full faith of the United
States Government. The duration of these securities are an average weighted
duration of 90 days.
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 has been taken since the date of the
evaluation.
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PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8K.
(a) Exhibits
Certifications of Chief Executive Officer and Chief Financial Officer
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
32.1 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.
32.2 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 filed on Form 8K
On February 10, 2004, we filed a Current Report on Form 8-K reporting an
"Acquisition or Disposition of Assets" pursuant to which we disclosed that we
completed our cash tender offer for Invivo Corporation which became effective
January 27, 2004.
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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: April 2, 2004 By: /s/ Glenn H. Epstein
-----------------------------------------------
Glenn H. Epstein
Chairman and Chief Executive Officer
Dated: April 2, 2004 By: /s/ Michael K. Burke
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Michael K. Burke
Executive Vice President and Chief Financial Officer
31