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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 28, 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)
Delaware 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 by check mark whether the registrant is an accelerated filer (as
defined as Rule 12b-2 of the Exchange Act).
Yes __x__ No ____.
As of December 20, 2004, the registrant had 28,007,472 shares of $.10 par value
Common Stock outstanding.
1
INTERMAGNETICS GENERAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets - November 28, 2004 and May 30, 2004................................3
Consolidated Income Statements - Three and Six Months Ended
November 28, 2004 and November 23, 2003.......................................................5
Consolidated Statements of Cash Flows - Six Months Ended
November 28, 2004 and November 23, 2003.....................................................6
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income -
Six Months Ended November 28, 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.....................................30
Item 4: Controls and Procedures........................................................................30
PART II - OTHER INFORMATION.............................................................................31
SIGNATURES..............................................................................................33
CERTIFICATIONS..........................................................................................34
2
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
November 28, May 30,
2004 2004
------------ --------
ASSETS
Cash and cash equivalents $ 2,756 $ 11,868
Trade accounts receivable, less allowance
(November 28, 2004 - $1,198; May 30, 2004 - $849) 66,055 41,218
Costs and estimated earnings in excess of
billings on uncompleted contracts 124 127
Inventories:
Consigned products 1,766 1,822
Finished products 4,959 2,969
Work in process 9,470 8,291
Materials and supplies 19,823 13,955
-------- --------
36,018 27,037
Deferred income taxes 4,333 4,333
Prepaid expenses and other 5,877 4,608
Income tax receivable 3,414 4,285
-------- --------
TOTAL CURRENT ASSETS 118,577 93,476
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 2,128 1,628
Buildings and improvements 19,248 14,972
Machinery and equipment 53,906 48,692
Leasehold improvements 4,476 4,425
-------- --------
79,758 69,717
Less accumulated depreciation and amortization 35,319 32,981
-------- --------
44,439 36,736
INTANGIBLE AND OTHER ASSETS
Goodwill 176,590 118,816
Other intangibles, less accumulated amortization
(November 28, 2004 - $13,629; May 30, 2004 - $10,605) 55,832 32,491
Derivative asset 238 253
Other assets 3,079 3,163
-------- --------
TOTAL ASSETS $398,755 $284,935
======== ========
3
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
November 28, May 30,
2004 2004
------------ --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 8,244 $ 4,171
Accounts payable 17,057 10,242
Salaries, wages and related items 13,112 10,799
Customer advances and deposits 1,861 1,302
Product warranty reserve 3,179 3,189
Other liabilities and accrued expenses 9,978 11,753
-------- --------
TOTAL CURRENT LIABILITIES 53,431 41,456
LONG-TERM DEBT, less current portion 80,205 57,635
DEFERRED INCOME TAXES 20,605 10,050
NOTE PAYABLE 5,000
DERIVATIVE LIABILITY 129 225
COMMITMENTS AND CONTINGENCIES
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 - 80,000,000 shares
Issued (including shares in treasury):
November 28, 2004 - 29,868,980 shares;
May 30, 2004 - 27,076,418 shares 2,987 2,707
Additional paid-in capital 201,212 146,153
Notes receivable from employees (3,181) (3,421)
Retained earnings 54,390 44,944
Accumulated other comprehensive income (loss) 260 (134)
-------- --------
255,668 190,249
Less cost of Common Stock in treasury
November 28, 2004 - 1,869,335 shares;
May 30, 2004 - 1,789,316 shares (16,283) (14,680)
-------- --------
239,385 175,569
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $398,755 $284,935
======== ========
See notes to consolidated financial statements.
4
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
----------------------------------- ---------------------------------
November 28, November 23, November 28, November 23,
2004 2003 2004 2003
---------------- ------------ ------------ ------------
Net revenues $ 75,156 $ 39,894 $ 134,904 $ 62,163
Cost of revenues 39,946 24,316 72,680 38,100
---------------- ------------ ------------ ------------
Gross margin 35,210 15,578 62,224 24,063
Product research and development 6,384 2,759 11,508 5,667
Selling, general and administrative:
Stock based compensation 1,566 155 2,693 241
Non-performance stock based compensation 1,875 1,875
Other selling, general and administrative 15,869 5,581 27,383 10,369
Amortization of intangible assets 1,685 460 3,081 921
Impairment of intangible assets 913 913
---------------- ------------ ------------ ------------
28,292 8,955 47,453 17,198
---------------- ------------ ------------ ------------
Operating income 6,918 6,623 14,771 6,865
Interest and other income 211 238 413 519
Interest and other expense (1,120) (107) (2,134) (229)
Adjustment to gain on prior period sale of division 1,094
---------------- ------------ ------------ ------------
Income before income taxes 6,009 6,754 14,144 7,155
Provision for income taxes 1,875 2,344 4,698 2,483
---------------- ------------ ------------ ------------
NET INCOME $ 4,134 $ 4,410 $ 9,446 $ 4,672
================ ============ ============ ============
Net Income per Common Share:
Basic $ 0.15 $ 0.18 $ 0.35 $ 0.19
================ ============ ============ ============
Diluted $ 0.15 $ 0.17 $ 0.34 $ 0.18
================ ============ ============ ============
See notes to consolidated financial statements.
5
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
--------------------------------------
November 28, November 23,
2004 2003
----------------- -----------------
OPERATING ACTIVITIES
Net income $ 9,446 $ 4,672
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,398 3,121
Stock based compensation 2,693 241
Loss on sale and disposal of assets 370 22
MRID profit sharing contribution 1,875
Impairment of intangible asset 913
Change in discount on note receivable (41)
Amortization of debt issuance costs 149
Adjustment to prior period gain on sale of division (1,094)
Change in operating assets and liabilities net of effects from the purchase of MRID:
(Increase) decrease in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts (12,979) 3,904
Increase in inventories and prepaid expenses and other assets (2,750) (3,004)
Increase (decrease) in accounts payable and accrued expenses 5,695 (1,077)
----------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,716 7,838
INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,399) (2,374)
Collection of note receivable 4,000
Purchase of Invivo, net of cash acquired (99)
Purchase of MRID, net of cash acquired (38,317)
Investment in patent and production rights (536)
Cash in lieu of fractional shares (10)
----------------- -----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (43,361) 1,626
FINANCING ACTIVITIES
Proceeds from sale of Common Stock, including exercise of stock options 850 2,786
Proceeds from employees - Executive Stock Purchase Plan 240 304
Purchase of Treasury Stock (1,603) (1,779)
Payment to obtain debt financing (155)
Proceeds from long term borrowings 45,000
Principal payments on note payable and long-term debt (21,140) (139)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,192 1,172
EFFECT OF EXCHANGE RATE CHANGES ON CASH 341
----------------- -----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,112) 10,636
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,868 88,514
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,756 $ 99,150
================= =================
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Issuance of note payable as consideration for purchase of MRID due in 2007 $ 5,000
=================
See notes to consolidated financial statements.
6
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
For Six Months Ended November 28, 2004
(Dollars in Thousands)
(Unaudited)
Accumulated Notes
Additional Other Receivable Compre-
Common Paid-in Retained Comprehensive Treasury from hensive
Stock Capital Earnings Income (Loss) Stock Employees Income
--------- ---------- ------------------------------------- ----------- ---------
BALANCES AT MAY 30, 2004 $ 2,707 $ 146,153 $ 44,944 $ (134) $ (14,680) $ (3,421)
Comprehensive income:
Net income 9,446 9,446
Gain on derivatives, net of tax benefit 53 53
Unrealized gain on foreign currency
translation 341 341
---------
Total comprehensive income $9,840
=========
Issuance of 331,673 shares of Common Stock, 34 816
related to exercises of stock options and
stock based compensation
Issuance of 2,460,889 shares for purchase of MRID 246 51,851
Repayments of notes receivable 240
Restricted Stock 2,402
Cash in lieu of fractional shares (10)
Treasury stock, upon exercise of stock options (1,603)
--------- ---------- --------- ------------- ---------- -----------
BALANCES AT NOVEMBER 28, 2004 $ 2,987 $ 201,212 $ 54,390 $ 260 $ (16,283) $ (3,181)
========= ========== ========= ============= ========== ===========
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 November
28, 2004 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 28, 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 30, 2004, filed on Form 10-K and
Form 10-K/A on August 13, 2004 and October 12, 2004, respectively.
It is the Company's policy to reclassify prior period consolidated
financial statements to conform to current year presentation.
Note B - Acquisition
On July 16, 2004, the Company completed its purchase of MRI Devices
Corporation ("MRID"), a privately held company. MRID is a leading manufacturer
of radio frequency (RF) coils and related sub-systems for magnetic resonance
imaging (MRI) systems. As a result of the acquisition, MRID became a
wholly-owned subsidiary of the Company. The deal was structured as a cash and
stock transaction which included a $45.0 million cash payment, a three-year $5
million promissory note and 2,460,889 shares of Company common stock, of which
about 88,500 shares (the "Plan Shares") were allocated to fund an employee
benefit plan for MRID employees. The value of the Plan Shares of about $1.9
million was recorded as compensation expense as a result of accelerating the
vesting requirements during the three months ended November 28, 2004. The
remaining 2,372,389 shares were issued as consideration with a value of $50.2
million based on the average closing stock price for two days prior to and after
the measurement date which was determined to be June 9, 2004 in accordance with
Emerging Issues Task Force (EITF) No. 99-12. Fifty percent of the stock is
restricted from sale for two years and the other fifty percent for three years.
The cash portion of the consideration was financed through our credit facility
that was amended effective May 2004 to expand the aggregate committed amount by
$30 million to $130 million. MRID's results of operations have been included in
our consolidated financial statements since the date of acquisition of July 16,
2004. Management believes that, in addition to the financial benefits, the
acquisition of MRID will provide an expanded high value add product portfolio
that will serve the broader MRI market. In addition, Intermagnetics expects to
add incremental value to this acquisition through the integration with the
global sales team that the Company assumed in its acquisition of Invivo Corp.
effective January 27, 2004. The following represents the initial allocation of
the total purchase price to the assets acquired and liabilities assumed:
8
(In thousands)
--------------
Consideration:
Cash paid to MRID shareholders $ 44,177
Issuance of Intermagnetics Common Stock to MRID Shareholders
(2,372,389 shares at $21.17) 50,222
Promissory note payable (payable in three years from closing date) 5,000
Transaction costs paid 983
--------------
Total purchase price $ 100,382
==============
Allocated to:
Working capital, less inventory $ 14,903
Inventory 7,351
Property and equipment 6,991
Deferred tax liability (10,555)
Long-term debt (2,783)
Intangible assets:
Trade name/Trademarks 970
Product trade name 3,290
Original equipment manufacturer customer (OEM) relationships 9,300
Know-how and core technology 11,280
Product technology and design 1,960
Goodwill 57,675
--------------
Total $ 100,382
==============
The allocation of the purchase price is based on initial fair value
estimates of the assets and liabilities acquired. The Company plans on
finalizing the purchase price allocation from its acquisition of MRID by the end
of its fiscal year which ends May 29, 2005.
The following (unaudited) pro forma consolidated income statements have
been prepared in accordance with SFAS No. 141 "Business Combinations" as if the
acquisition of MRID occurred at the beginning of the earliest period presented:
Six Months Ended
-------------------------------------------
November 28 November 23
2004 2003
-------------------- --------------------
Net revenues $ 141,364 $ 118,804
========= =========
Net income $ 10,102 $ 10,105
========= =========
Earnings per share:
Basic $ 0.36 $ 0.37
========= =========
Diluted $ 0.36 $ 0.36
========= =========
In the above pro forma consolidated income statements, net income for
the six months ended November 28, 2004 includes $2.7 million of non-recurring
charges net of tax which primarily consists of $1.2 million for a stock
contribution made to a profit sharing plan for original MRID employees prior to
change of control; about $600,000 for an impairment charge on the acquired MRID
trade name; and about $900,000 for other acquisition related charges.
The above pro forma results do not include any anticipated revenue synergies.
9
Note C - Earnings Per Common Share
In July 2004, the Company's Board of Directors declared a three-for-two
split on all outstanding shares of its common stock. The split was completed in
the form of a fifty percent stock dividend, effective August 17, 2004 to
shareholders of record on July 23, 2004. The consolidated financial statements
and related notes have been adjusted to retroactively reflect this stock
dividend in all numbers of shares, prices per share and earnings per 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 Six Months Ended
---------------------------------- ------------------------------------
November 28, November 23, November 28, November 23,
2004 2003 2004 2003
--------------- --------------- ---------------- -----------------
Income available to
Common shareholders $ 4,134 $ 4,410 $ 9,446 $ 4,672
=============== =============== ================ =================
Weighted average shares 27,979,535 25,069,418 27,334,721 24,897,333
Dilutive potential Common
Shares:
Warrants 77,912 31,784 73,919 20,285
Restricted stock 2,165 2,561 677 1,515
Stock options 418,901 578,364 391,868 523,260
--------------- --------------- ---------------- -----------------
Adjusted weighted average
shares 28,478,513 25,682,127 27,801,185 25,442,393
Net income per Common Share:
Basic $ 0.15 $ 0.18 $ 0.35 $ 0.19
=============== =============== ================ =================
Diluted $ 0.15 $ 0.17 $ 0.34 $ 0.18
=============== =============== ================ =================
As of November 28, 2004 the Company had 1,294,650 shares of performance
based 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 greater than eight percent over the next five fiscal years. For 1,131,000
of these shares, the vesting schedule in fiscal years 2003 through 2007 is 0%,
0%, 15%, 20% and 65% respectively. For 163,650 of these shares, the vesting
schedule in fiscal years 2003 through 2007 is 0%, 0%, 0%, 40% and 60%
respectively. In the current year, management has determined that it is probable
that performance targets will be met, and has recognized expense in the three
and six months ended November 28, 2004 of $1,421,000 and $2,402,000. Additional
shares of restricted stock may be granted to newly hired key employees.
As of November 28, 2004 the Company had granted 20,802 shares of
restricted common stock to the Board of Directors. These shares are vesting over
a 5 year timeframe at 10%, 10%, 10%, 10%, and 60%, respectively. For the three
months ended November 28, 2004 and November 23, 2003 and the corresponding six
months ended, the Company recognized expense of $7,500, $3,750 and $15,000 and
$7,500, respectively.
As of November 28, 2004 the Company had outstanding 23,250 shares of
restricted common stock to certain employees. These shares are vesting over time
ranging from 1 to 3 years. For the three months ended November 28, 2004 and
November 23, 2003 and the corresponding six months ended, the Company recognized
expense of $28,400, $16,400 and $57,600 and $34,100, respectively.
10
Note D - Product Warranty
The Company accrues for possible future claims arising under terms of
various warranties (one to three years) made in connection with the sale of
products. The following table is a reconciliation of the change in the aggregate
accrual for product warranty for the six months ended November 28, 2004:
Three Months Six Months
Ended Ended
(Dollars in thousands) November 28, 2004 November 28, 2004
--------------------- -----------------------
Balance at beginning of period $ 3,145 $ 3,189
Reserves acquired from
acquisition of MRID Corp. - 87
Warranty expense 347 605
Cost of warranty performed (313) (702)
--------------------- -----------------------
$ 3,179 $ 3,179
===================== =======================
Note E - Long-term Debt
On July 16, 2004, the Company borrowed $45.0 million from its amended
unsecured credit facility to partially finance the acquisition of MRID. As a
result of the acquisition, the Company assumed from MRID a $3.1 million term
loan note due in October 2007. The term loan is unsecured, except for a negative
pledge that the Company will not use their Gainesville, Florida facility as
collateral for any additional financing. The note also includes a prepayment
penalty of 2% to 5%, depending on the year of prepayment. Up to 20% of the note
payable can be prepaid annually without penalty. The note bears interest at
5.85% and is payable in monthly installments of about $11,000 with the balance
due in October 2007.
The Company's unsecured Credit Facility contains mandatory prepayment
provisions whereby certain amounts borrowed must be repaid upon the occurrence
of certain specified events and conditions. The Company shall make mandatory
prepayments in an amount equal to; 100% of net insurance proceeds not applied to
the repair or replacement of damaged properties; 100% of net proceeds from asset
sales other than assets sold in the normal course of business and proceeds from
asset sales to the extent that such proceeds are reinvested in a like asset
within six months; 100% of the net proceeds from the issuance of any debt or
equity (other than certain permitted debt or equity issuances if the leverage
ratio of the Company after giving effect thereto is less than or equal to 2.25
to 1.0) and 50% of annual excess cash flow, with such percentage to be reduced
to 0% in the event the Company's leverage ratio is reduced to or below 2.00 to
1.0.
11
As of November 28, 2004, the Company had the following long-term debt
outstanding:
As of
--------------------------
(In thousands) November 28, May 30,
------------- 2004 2004
---- ----
Long-Term Debt:
Mortgages and notes payable $ 8,261 $ 5,744
Term loan ($25 million) 22,188 24,062
Revolving line of credit ($105 milllion) 58,000 32,000
------------ -------
Total long-term debt 88,449 61,806
Less current maturities 8,244 4,171
------------ -------
Long-term debt excluding current maturities $ 80,205 $57,635
============ =======
In addition to the long-term debt noted above, the Company issued a
$5.0 million three-year note payable that accrues interest at LIBOR plus 0.5% in
conjunction with the acquisition of MRI Devices.
As of November 28, 2004, the Company had $46.4 million additional
borrowing capacity under its unsecured credit facility which is net of $565,000
of standby letters of credit issued to the Company's insurance agent as
collateral for potential workers' compensation claims.
Note F - New Accounting Pronouncements
On December 16, 2004, the FASB issued Statement No. 123 (revised 2004),
Share-Based Payment. Statement 123(R) would require us to measure all employee
stock-based compensation awards using a fair value method and record such
expense in our consolidated financial statements. In addition, the adoption of
Statement 123(R) will require additional accounting related to the income tax
effects and additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. Statement 123(R) is effective beginning in our
second quarter of fiscal 2006. The adoption of Statement 123(R) could have a
material impact on our consolidated financial position, results of operations
and cash flows.
On December 16, 2004, the FASB issued Statement No. 153, Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 29. Statement 153 addresses
the measurement of exchanges of non-monetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. Statement 153 is effective for non-monetary asset exchanges beginning
in our second quarter of fiscal 2006. Management is in the process of evaluating
the effect SFAS 153 will have on the Company's financial position and results of
operations.
In November 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 151, "Inventory costs - An
Amendment of ARB No. 43 Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement requires that those items
be recognized as current-period charges. In addition, this Statement requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The provisions of
this statement shall be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Management is in the process of evaluating
the effect SFAS 151 will have on the Company's financial position and results of
operations.
12
Note G - 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.
(Dollars in Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
November 28, November 23, November 28, November 23,
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Net income (as reported) $ 4,134 $ 4,410 $ 9,446 $ 4,672
Add recorded non-cash stock compensation, net of tax 2,247 101 2,983 157
Less non-cash stock compensation
under SFAS No. 123, net of tax (2,537) (488) (3,675) (1,010)
---------------- ---------------- ---------------- ----------------
Pro forma Net Income $ 3,844 $ 4,023 $ 8,754 $ 3,819
Earnings per Common Share (as reported):
Basic $0.15 $0.18 $0.35 $0.19
================ ================ ================ ================
Diluted $0.15 $0.17 $0.34 $0.18
================ ================ ================ ================
Earnings per Common Share (pro forma):
Basic $0.14 $0.16 $0.32 $0.15
================ ================ ================ ================
Diluted $0.14 $0.16 $0.32 $0.15
================ ================ ================ ================
Note H - Segment and Related Information
The Company operates in four reportable segments: Magnetic Resonance
Imaging (MRI), Medical Devices, Instrumentation, and Energy Technology. The MRI
segment consists primarily of the manufacture and sale of low temperature
superconducting ("LTS") magnets (by the IGC-Magnet Business Group). Previously,
this segment also included the manufacture and sale of radio frequency coils (by
IGC-Medical Advances Inc. "IGC-MAI" and recently acquired MRI Devices Corp.
"MRID" which are now included in the Medical Devices segment). All prior year
data has been restated to reflect this change.
The Medical Devices segment now consists of one collectively managed
entity with a universal brand identity of "Invivo". Invivo's management team
concentrates on the collective growth, revenues and profitability of the Medical
Device enterprise within Intermagnetics. The operating components of Invivo are:
Invivo Patient Care (IPC) and Invivo Diagnostic Imaging (IDI). Invivo Patient
Care designs, manufactures and sells patient monitors, primarily for use in MRI
suites and for centralized nursing monitoring stations. In addition, Invivo
Patient Care sells radio frequency coils manufactured by Invivo Diagnostic
Imaging (formally IGC-MAI and MRID). Invivo Diagnostic Imaging designs,
manufactures and sells Radio Frequency (RF) coils, for use with an MRI magnet.
Invivo Diagnostic Imaging also sells coils to Original Equipment Manufactures
(OEM).
13
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. On December 15,
2004, the Company, as approved by its Board of Directors, entered into a
definitive agreement to sell Polycold. (See Footnote L).
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:
(Dollars in Thousands)
Three Months Ended
-----------------------------------------------------------------------------------
November 28, 2004
-----------------------------------------------------------------------------------
Magnetic Resonance Medical Energy
Imaging Devices Instrumentation Technology Total
--------------------- -------------- --------------- --------------- --------------
Net revenues to external customers:
Magnet systems $ 29,506 $ 29,506
Patient Monitors & RF Coils $ 33,645 33,645
Refrigeration equipment $ 8,980 8,980
Other $ 3,025 3,025
--------------------- -------------- --------------- --------------- --------------
Total 29,506 33,645 8,980 3,025 75,156
Segment operating profit (loss) 1,718 4,635 2,310 (1,745) 6,918
Total assets $ 303,537 $ 73,393 $ 10,223 $ 11,602 $ 398,755
Three Months Ended
-----------------------------------------------------------------------------------
November 23, 2003
-----------------------------------------------------------------------------------
Magnetic Resonance Medical Energy
Imaging Devices Instrumentation Technology Total
--------------------- -------------- --------------- --------------- --------------
Net revenues to external customers:
Magnet systems $ 28,310 $ 28,310
Patient Monitors & RF Coils $ 4,025 4,025
Refrigeration equipment $ 6,582 6,582
Other $ 977 977
------------------ ---------------- ----------------- --------------- --------------
Total 28,310 4,025 6,582 977 39,894
Segment operating profit (loss) 6,958 555 963 (1,875) 6,601
Total assets $ 166,418 $ 4,855 $ 9,218 $ 9,302 $ 189,793
15
Six Months Ended
-----------------------------------------------------------------------------------------
November 28, 2004
-----------------------------------------------------------------------------------------
Magnetic Resonance Medical Energy
Imaging Devices Instrumentation Technology Total
-------------------- --------------- ----------------- --------------- --------------
Net revenues to external customers:
Magnet systems $ 53,608 $ 53,608
Patient Monitors & RF Coils $ 59,516 59,516
Refrigeration equipment $ 17,205 17,205
Other $ 4,575 4,575
-------------------- --------------- ----------------- --------------- --------------
Total 53,608 59,516 17,205 4,575 134,904
Segment operating profit (loss) 5,153 8,642 4,823 (3,847) 14,771
Total assets $ 303,537 $ 73,393 $ 10,223 $ 11,602 $ 398,755
Six Months Ended
-----------------------------------------------------------------------------------------
November 23, 2003
-----------------------------------------------------------------------------------------
Magnetic Resonance Medical Energy
Imaging Devices Instrumentation Technology Total
-------------------- --------------- ----------------- --------------- --------------
Net revenues to external customers:
Magnet systems $ 40,071 $ 40,071
Patient Monitors & RF Coils $ 6,691 6,691
Refrigeration equipment $ 12,392 12,392
Other $ 3,009 3,009
-------------------- --------------- ----------------- --------------- --------------
Total 40,071 6,691 12,392 3,009 62,163
Segment operating profit (loss) 7,134 590 1,556 (2,437) 6,843
Total assets $ 166,418 $ 4,855 $ 9,218 $ 9,302 $ 189,793
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
---------------------------------------------
November 28, 2004 November 23, 2003
--------------------- ---------------------
Reconciliation of income before income taxes:
Total operating profit from reportable segments $ 6,918 $ 6,601
Intercompany profit in ending inventory 22
--------------------- ---------------------
Net operating profit 6,918 6,623
Interest and other income 211 238
Interest and other expense (1,120) (107)
Adjustment to gain on prior period sale of division
--------------------- ---------------------
Income before income taxes $ 6,009 $ 6,754
===================== =====================
Six Months Ended
---------------------------------------------
November 28, 2004 November 23, 2003
--------------------- ---------------------
Reconciliation of income before income taxes:
Total operating profit from reportable segments $ 14,771 $ 6,843
Intercompany profit in ending inventory 22
--------------------- ---------------------
Net operating profit 14,771 6,865
Interest and other income 413 519
Interest and other expense (2,134) (229)
Adjustment to gain on prior period sale of division 1,094
--------------------- ---------------------
Income before income taxes $ 14,144 $ 7,155
===================== =====================
Note I - Goodwill and Other Intangible Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 142 (FAS No. 142), "Goodwill and Other Intangible Assets". FAS No.
142 changed the accounting for goodwill from an amortization method to an
impairment-only approach.
The components of other intangibles are as follows:
(Dollars in Thousands)
As of November 28, 2004
------------------------------------------------------------
Weighted
Gross Carrying Accumulated Average Life
Amount Amortization in Years
------------------- ------------------- ----------------
Amortized intangible assets
Production rights $ 9,250 $ 7,822 5.7
Patents 3,811 1,089 18.0
Unpatented technology 930 930 5.0
Trade names/trademarks 12,470 768 24.6
Product name/trademark 4,640 204 12.6
Know-how and core technology 17,940 1,117 9.3
Product technology and design 4,930 476 6.6
OEM customer relationships 14,950 683 10.5
Order backlog 540 540 0.3
------------------- ------------------- ----------------
$ 69,461 $ 13,629 12.5
=================== ===================
17
Aggregate amortization expense for the three months ended November 28,
2004 and November 23, 2003 and the corresponding six month periods was
$1,685,000 and $460,000 and $3,081,000 and $921,000, respectively. During the
three month period ended November 28, 2004, the Company, through re-branding
exercises and market analysis, determined that the acquired MRI Devices trade
name will no longer be utilized in future branding. As a result, the Company
reduced the net book value of the acquired MRI Devices trade name originally
valued at $970,000 to zero resulting in an impairment charge of $913,000.
ESTIMATED AMORTIZATION EXPENSE:
For the year ending May 2005 $6,452
For the year ending May 2006 $5,283
For the year ending May 2007 $5,150
For the year ending May 2008 $5,138
For the year ending May 2009 $5,103
All intangibles are amortized on a straight line basis.
The changes in the carrying amount of goodwill between May 30, 2004 and November
28, 2004 are as follows:
(In thousands)
MRI
Segment
-------
Goodwill as of May 30, 2004 $118,816
Goodwill acquired on July 16, 2004 with the acquisition of
MRI Devices Corp. (preliminary purchase price allocation) 57,675
Adjustments to purchase price allocation of Invivo 99
--------
Goodwill as of November 28, 2004 $176,590
========
Management has evaluated goodwill for impairment during the quarter
ended November 28, 2004 in accordance with SFAS No. 142 and determined that no
impairment exists.
Note J - Environmental Remediation
In connection with the sale of IGC-AS in October 2001, the Company had
recorded a $1.5 million liability related to environmental investigation and
potential remediation costs to be incurred by the Company under certain property
transfer laws of the State of Connecticut. As a result of recent developments
and environmental site assessments, the Company reduced its current liability
resulting in an adjustment to the gain on a prior period sale of a division of
$1.1 million. As of November 28, 2004, the total remaining reserve for
environmental remediation relating to the divestitures of IGC-APD and IGC-AS was
approximately $548,000.
Note K - 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 28, 2001. SFAS No. 133, as amended, requires that all derivative
instruments be recognized on the balance sheet at their fair value and changes
in fair value be recognized immediately in earnings, unless the derivatives
qualify as hedges in accordance with the Standard. The change in fair value for
those derivatives that qualify as hedges is recorded in shareholders' equity as
other comprehensive income (loss).
18
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
November 28, 2004, the Company had outstanding interest rate swap agreements
with a commercial bank, having a notional principal amount of approximately $4.2
million. Those agreements effectively change the Company's interest rate
exposure on its mortgages due in November 2005 to a fixed 6.88%. The interest
rate swap agreement matures at the time the related notes mature. The fair value
of this interest rate swap increased $96,000 to $(129,000) during the six months
ended November 28, 2004.
On February 5, 2004, the Company entered into a separate interest rate
swap agreement with a commercial bank, having a current notional principal
amount of $22.2 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% plus applicable margins as defined in our credit
agreement. The interest rate swap agreement corresponds with the repayment terms
of the term loan and matures on December 31, 2008. The fair value of this
interest rate swap decreased $15,000 to $238,000 during the quarter ended
November 28, 2004.
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 six months ended November 28, 2004 the Company
recorded an other comprehensive gain of $53,000 net of tax for the two interest
rate swap agreements.
NOTE L - Subsequent Event
On December 15, 2004, the Company entered into a definitive Stock
Purchase Agreement (the "Agreement") with Helix Technology Corporation ("Helix")
whereby Helix has agreed to purchase all of the outstanding shares of capital
stock of IGC-Polycold Systems, Inc ("Polycold") a wholly owned subsidiary of the
Company. Polycold is the sole subsidiary in the Company's Instrumentation
Segment. The transaction is structured as an all cash deal amounting to $49.2
million payable at closing, plus reimbursement of up to $3.3 million in certain
tax obligations of the Company relating to a Section 338(h)(10) election under
the Internal Revenue Code payable at the time the Company makes the election.
Management intends on using a significant portion of the proceeds from the sale
to pay down its long-term debt. As of November 28, 2004, the net book value of
Polycold was about $14.5 million. The transaction, pending regulatory approval
is scheduled to close in mid-February 2005.
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 2005 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 December 15, 2004, we entered into a definitive Stock Purchase
Agreement (the "Agreement") with Helix Technology Corporation ("Helix") whereby
Helix has agreed to purchase all of the outstanding shares of capital stock of
IGC-Polycold Systems, Inc ("Polycold") a wholly owned subsidiary of the Company.
Polycold is the sole subsidiary in the Company's Instrumentation Segment. The
transaction is structured as an all cash deal amounting to $49.2 million payable
at closing, plus reimbursement of up to $3.3 million in certain tax obligations
of the Company relating to a Section 338(h)(10) election under the Internal
Revenue Code payable at the time the Company makes the election. Management
intends on using a significant portion of the proceeds from the sale to pay down
its long-term debt. As of November 28, 2004, the net book value of Polycold was
about $14.5 million. The transaction, pending regulatory approval is scheduled
to close in mid-February 2005.
On July 16, 2004, we completed our purchase of MRI Devices
Corporation ("MRID"), a privately held company. MRID is a leading manufacturer
of radio frequency (RF) coils and related sub-systems for magnetic resonance
imaging (MRI) systems. As a result of the acquisition, MRID became a
wholly-owned subsidiary of the Company. The deal was structured as a cash and
stock transaction which included a $45.0 million cash payment, a three-year $5
million promissory note and 2,460,889 shares of Company common stock, of which
about 88,500 shares (the "Plan Shares") were allocated to fund an employee
benefit plan for MRID employees. The value of the Plan Shares of about $1.9
million was recorded as compensation expense as a result of accelerating the
vesting requirements during the three months ended November 28, 2004. The
remaining 2,372,389 shares were issued as consideration with a value of $50.2
million based on the average closing stock price for two days prior to and after
the measurement date which was determined to be June 9, 2004 in accordance with
Emerging Issues Task Force (EITF) No. 99-12. Fifty percent of the stock is
restricted from sale for two years and the other fifty percent for three years.
The cash portion of the consideration was financed through our credit facility
that was recently amended to expand the aggregate committed amount by $30
million to $130 million. MRID's results of operations have been included in our
consolidated financial statements since the date of acquisition of July 16, 2004
and are included in our discussion on the Results of Operations below.
Management believes that, in addition to the financial benefits, the acquisition
of MRID will provide an expanded high value add product portfolio that will
serve the broader MRI market. In addition, Intermagnetics expects to add
incremental value to this acquisition through the integration with the
world-class global sales team that the Company assumed in its acquisition of
Invivo Corp. effective January 27, 2004.
20
On July 15, 2004, our Board of Directors declared a three-for-two
split on all outstanding shares of our common stock. The split was completed in
the form of a fifty percent stock dividend, effective August 17, 2004 to
shareholders of record on July 23, 2004. All share and per share data included
in this filing have been adjusted to retroactively reflect this stock dividend.
On January 27, 2004, we completed our purchase of Invivo, which was
acquired through a public tender offer. Invivo 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. The acquisition of Invivo substantially expanded our
direct sales team and customer base. Invivo's results of operations have been
included in our consolidated financial statements since the date of acquisition
of January 27, 2004 and are included in our discussion on Results of Operations
below. The total acquisition price for Invivo was $159.2 million including
professional fees and other acquisition related costs. The source of funds for
the acquisition was a combination of our available cash and borrowings totaling
$67 million under our existing $130 million unsecured credit facility.
We operate in four reportable segments: Magnetic Resonance Imaging
("MRI"), Medical Devices, Instrumentation, and Energy Technology. The MRI
segment consists of IGC-MBG which manufactures and sells low temperature
superconducting ("LTS") magnets that are used in MRI systems. Previously this
segment included IGC-MAI and recently acquired MRID which manufactures and sells
Radio Frequency (RF) coils to Original Equipment Manufactures (OEM) which is now
included in the Medical Devices segment. All prior year data has been restated
to reflect this change.
Our Medical Devices segment now consists of one collectively managed
entity with a universal brand identity of "Invivo". Invivo's management team
concentrates on the collective growth, revenues and profitability of the Medical
Device enterprise within Intermagnetics. The operating components of Invivo are:
Invivo Patient Care (IPC) and Invivo Diagnostic Imaging (IDI). Invivo Patient
Care designs, manufactures and sells patient monitors, primarily for use in MRI
suites and for centralized nursing monitoring stations. Invivo Diagnostic
Imaging designs, manufactures and sells Radio Frequency (RF) coils and
associated sub-systems, for use with an MRI magnet. Invivo Diagnostic Imaging
also sells coils to OEM's. The global sales network is a shared-access resource
with Invivo serving both IPC and IDI.
Our Instrumentation segment provides cryogenic refrigeration
equipment used primarily in ultra-high vacuum applications, industrial coatings,
analytical instrumentation and semiconductor processing and testing through our
wholly-owned subsidiary, IGC-Polycold Systems Inc. ("Polycold").
21
In Energy Technology, our wholly-owned subsidiary, SuperPower, Inc.
("SuperPower") is developing high-temperature superconducting materials and
devices designed to enhance the capacity, reliability and quality of electrical
power transmission and distribution.
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.
REVENUE RECOGNITION
-------------------
The Company recognizes revenue and profit on long-term development
contracts based upon actual costs and earned profit. These types of 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 revenue 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 November 28, 2004, and November 23, 2003, there
were no products sold for which our customer has requested a delay in delivery.
INVENTORY RESERVES
------------------
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.
22
GOODWILL AND INTANGIBLE ASSET IMPAIRMENTS
-----------------------------------------
Goodwill and other long-lived assets are reviewed for impairment
whenever events such as significant changes in the business climate, plant
closures, changes in product offerings, or other circumstances indicate that the
carrying amount may not be recoverable. The Company performs a test for goodwill
impairment annually during the second quarter of each fiscal year. The
determination of whether these assets are impaired involves significant
judgments such as long term revenue projections, weighted average cost of
capital, product cost reductions, market penetration and sufficient product
research and development to keep pace with market demand. Changes in strategy
and/or market conditions may result in adjustments to recorded asset balances.
WARRANTY RESERVES
-----------------
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. In some cases, when historical warranty
information is not available the Company estimates warranty costs based on
spending related to the cost centers responsible for the warranty repair. The
Company believes these reserves are 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.
RESERVE FOR ENVIRONMENTAL REMEDIATION
-------------------------------------
The Company maintains a provision for potential environmental
remediation for businesses disposed of during fiscal 2002 (see also Note J in
the notes to the consolidated financial statements included herein). These
provisions are based upon management's best estimate under the given
circumstances and available information. Our provision 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.
If unexpected costs related to the environmental issues are incurred additional
provisions will be needed.
RESULTS OF OPERATIONS
- ---------------------
Revenues increased about $35.3 million or more than 88%, to $75.2
million, for the three months ended November 28, 2004, from $39.9 million for
the same period last year. This increase was the result of improved revenues
from all of our segments and the inclusion of revenues from Invivo Patient Care
(formally InvivoMDE) and Invivo Diagnostic Imaging (formally IGC-MAI and MRI
Devices).
For the six months ended November 28, 2004, revenues increased $72.7
million or 117% to $134.9 million from $62.2 million for the same period last
year. Again, this increase was the result of improved revenues from all of our
units and the inclusion of Invivo Patient Care (formally InvivoMDE) and Invivo
Diagnostic Imaging (formally IGC-MAI and MRI Devices).
The recent acquisition of MRI Devices and the reorganization of the
Radio Frequency (RF) Coil businesses as well as the use of the Direct Sales
force of Invivo Patient Care to sell RF coils, made it necessary to review the
way the Chief Operating Decision Maker receives information and all the other
criteria required by FAS 131 regarding segment reporting. As a result of this
review we found it necessary to revise our segment presentation. Effective with
this report the MRI Segment consists of MRI magnet revenues, manufacturing and
selling expense. No longer will any Original Equipment Manufactured (OEM) RF
coil information be reported in this segment. The Medical Devices segment will
now have all the RF coil information reported within this segment. Previously
only Direct Sale RF coil information was in this segment. All prior periods have
been restated to reflect this change.
23
MRI SEGMENT REVENUES
--------------------
MRI segment revenues during the three month period ended November 28,
2004 increased $1.2 million or 4% to nearly $30 million compared to $28.3
million in the prior year. This increase is the result of improved product mix.
Reduced selling prices on the 1.5T was more than offset by improved shipments of
the higher field 3.0T magnet.
For the six months ended November 28, 2004, MRI segment revenues
increased $13.5 million or 34.0% to nearly $54 million from the $40 million in
same six month period last year. This increase is primarily related to increased
volume resulting from an abnormally low first quarter in fiscal 2004 related to
the transition of managing supply chain logistics for Philips Medical Systems in
return for an enhanced and extended exclusive supply contract. Additionally,
reduced selling prices on the 1.5T were more than offset by improved shipments
of the higher field 3.0T magnet.
MEDICAL DEVICES REVENUES
------------------------
Our Medical Devices segment provided $33.6 million of revenues for the
quarter ended November 28, 2004 an increase of $29.6 million over the same
period last year. Invivo Diagnostic Imaging provided about $14.1 million from
OEM RF coil revenues an increase of about $10.1 million from the same period
last year due to the addition of coils from the MRID acquisition. Invivo Patient
Care provided about $19.5 million of revenues relating to patient monitors and
direct sales of RF coils compared to none in the same period last year.
For the six months ended November 28, 2004 Medical Devices segment
provided $59.5 million of revenues, an increase of $52.8 million. Invivo
Diagnostic Imaging increased about $14.6 million to $21.3 million primarily the
result of our recent acquisition of MRID. Invivo Patient Care contributed $38.2
million which includes patient monitors and direct sales of RF coils compared to
none in the same period last year.
INSTRUMENTATION SEGMENT REVENUES
--------------------------------
Instrumentation segment revenues for the current quarter ended November
28, 2004, increased $2.4 million or 36.4% to $9.0 million over the same quarter
last year. This increase is primarily due to product revenues and service growth
for vacuum-related products across a broad range of non-semiconductor customers
in Europe, the United States and the Pacific Rim.
For the six months ended, revenues increased $4.8 million or 38.7% to
$17.2 million over the same six month period last year. This increase,
consistent with the current quarter, was primarily driven by continued strength
in our vacuum market.
24
ENERGY TECHNOLOGY SEGMENT REVENUES
----------------------------------
Revenues of the Energy Technology segment increased $2.1 to $3 million
and $1.6 million to $4.6 million for the three and six months ended November 28,
2004, respectively over their corresponding periods last year as a result of a
net increase in government and third-party billable revenue on pre-existing
programs involving HTS devices.
GROSS MARGIN
------------
Consolidated gross margin for the three months ended increased $19.6
million to $35.2 million or 46.8% of net revenues compared to the same period
last year of $15.6 million or 39% of net revenues. The increase in both absolute
dollars and as a percent of net revenues in the MRI segment corresponds to the
increase in revenues, improved product mix as well as the continued benefits of
this segments cost savings efforts, which all combined, contributed about
$700,000 to the increase. The Medical Devices segment contributed $16.7 million
of the increase in consolidated gross margin during the quarter as a result of a
full quarter's contribution from the acquisitions. The Instrumentation segment
increased $1.5 million leveraging off of increased revenues combined with the
continued benefit of this segment's lean manufacturing initiatives. Energy
Technology segment contributed about $900,000 of the increase due to increased
revenue.
During the six months ended, gross margin increased $38.2 million to
$62.2 million or 46% of net revenues from $24.1 million or 39% of net revenues
for the same six month period last year. All segments contributed to this
increase. MRI segment contributed about $6 million to the increase as a result
of increased volume, improved mix and continued cost reduction efforts. Medical
Devices sector increased $29.2 million primarily from the contribution of our
acquisitions. Included in the Medical Devices segment improvement is about
$200,000 of costs incurred for relocating manufacturing operations from our
Arleta, CA facility to our Orlando, FL facility. The Instrumentation segment
contributed about $3 million as a result of increased revenues and continued
lean manufacturing initiatives. Finally, Energy Technology contributed about
$200,000 to the increase resulting from improved revenue.
PRODUCT RESEARCH AND DEVELOPMENT
--------------------------------
Product research and development increased $3.6 million or 131% to $6.4
million for the three months ended November 28, 2004 from $2.8 million for the
same period last year. This increase primarily resulted from increased spending
on various HTS projects in our Energy Technology segment ($829,000), new product
development programs in our MRI segment ($500,000) and the contribution of new
product development in our Medical Devices segment ($2.3 million).
Instrumentation segment remained about the same as last year.
For the six months ended product research and development increased
$5.8 million or 103% to $11.5 million from $5.7 million for the same period last
year. About 40% of this increase is related to additional spending from the MRI
segment of $685,000 relating to new magnet development and the Energy Technology
segment of about $1.6 million relating to existing programs and additional cost
share relating to increased revenue. Medical Devices segment contributed about
$3.6 million of the increase primarily related to the acquisitions.
Instrumentation segment declined slightly as engineering resources were focused
on manufacturing improvements.
25
SELLING, GENERAL AND ADMINISTRATIVE
-----------------------------------
For the three months ended November 28, 2004, selling, general and
administrative expenses including stock based compensation, increased $13.6
million to $19.3 million from $5.7 million for the same period last year. Our
Recent acquisitions of Invivo and MRID account for $8.1 million of the increase.
In addition, a stock contribution made to a profit sharing plan for original
MRID employees, prior to change in control, was recorded as an expense of $1.9
million during the current period as a result of accelerating the vesting
requirements. Performance based stock compensation increased $1.5 million over
the same period last year as well as $1 million related to incentive
compensation. These accruals are based on forecasted performance. Of the
aforementioned expenses, $3.4 million were non cash. Acquisition / integration
related expenses increased about $625,000. Finally, spending increased for
operating costs relating to audit and tax fees, information system expense,
various liability insurances partially offset by reductions in other operating
expenses resulted in an increase of about $500,000 over the same period last
year.
Selling, general and administrative expenses including stock based
compensation increased about $21.3 million or 201% to nearly $32 million for the
six months ended November 28, 2004 from $10.6 million for the same period last
year. The majority of this increase, $13.9 million is related to our recent
acquisition of Invivo Corp. and MRI Devices. In addition, a stock contribution
made to a profit sharing plan, prior to change in control, of a recent
acquisition was recorded as an expense of $1.9 million during the current
period. Performance based stock compensation increased $2.5 million over the
same period last year as well as $1.2 million related to incentive compensation.
These accruals are based on forecasted performance. Acquisition / integration
related expenses increased about $800,000. Finally, spending increased on other
operating costs relating to audit and tax fees, information system expense,
various liability insurances and was partially offset by reductions in other
operating expenses resulting in an increase of about $1.0 million over the same
period last year.
AMORTIZATION OF INTANGIBLE ASSETS
---------------------------------
Amortization expense of $1.7 million and $3.1 million for the three and
six month periods ended November 28, 2004, increased about $1.2 million and $2.2
million, respectively from the three and six month 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 and MRID on July 16, 2004.
IMPAIRMENT OF INTANGIBLE ASSET
------------------------------
During the three month period ended November 28, 2004, management,
through re-branding exercises and market analysis, determined that the acquired
MRI Devices trade name will no longer be utilized. As a result, the company
reduced the net book value of the acquired MRI Devices trade name to zero
resulting in an impairment charge of $913,000.
OPERATING INCOME
----------------
For the second quarter of fiscal year 2005, operating income increased
$295,000 to $6.9 million from $6.6 million for the same period last year. This
increase is primarily due to improved revenues and margins as well as the
inclusion of operations from our two acquisitions, partially offset by internal
acquisition and integration costs combined with the increases in amortization
and stock based compensation.
For the six month period ended November 28, 2004, operating income
increased $7.9 million to $14.8 million from $6.9 million compared to the six
month period ended November 23, 2003. This increase is also primarily due to
improved revenues and margins as well as the inclusion of operations from our
two acquisitions, partially offset by internal acquisition and integration costs
combined with the increases in amortization and stock based compensation.
26
INTEREST AND OTHER
------------------
Interest and other income of $211,000 and $413,000 for the three and
six months ended November 28, 2004 decreased $27,000 and $106,000, respectively
from the corresponding periods last year. This decrease is primarily driven by
our lower cash balances resulting from funding our acquisitions of Invivo and
MRID, partially offset by an improvement in the interest rate environment and
grant income earned by MRID.
Interest and other expense of $1.1 million and $2.1 million for the
three and six months ended November 28, 2004 increased $1.0 million and $1.9
million, respectively from the corresponding three and six month periods last
year. This increase is primarily driven by the interest expense from the $112
million borrowed under our $130 million unsecured credit facility used to
partially finance our acquisition of Invivo and MRID, combined with about $4.4
million of debt assumed in our acquisitions and a $5.0 million three year note
payable accruing interest at LIBOR plus 0.5% issued in conjunction with the MRID
acquisition. As of November 28, 2004, $22.2 million of our term loan and $58.0
million of our revolving line of credit was outstanding under our unsecured
credit facility.
During the six months ended November 28, 2004, $1.1 million of other
income was recognized resulting from a reduction in the provision for potential
environmental remediation relating to a business disposed of during fiscal 2002
(see also Note J in the notes to the consolidated financial statements included
herein). Management originally estimated this liability based upon information
received from site assessments. During the first quarter ended August 29, 2004,
management determined that the probable risk of loss was only $100,000 which
resulted in a net reduction in the accrual of $1.1 million.
Our effective tax rate of 31.2% and 33.2% for the three and six months
ended November 28, 2004 decreased 3.5% and 1.5% from the same three and six
months periods ended last year. The decrease in the effective tax rate resulted
from the reversal of a $210,000 tax accrual based on a change by management upon
review of certain tax planning strategies. We continue to review effective tax
strategies to minimize our effective tax rate.
LIQUIDITY AND CAPITAL COMMITMENTS
- ---------------------------------
OPERATING ACTIVITIES
--------------------
For the six months ended November 28, 2004, we generated about $10.7
million in cash from operating activities compared to $7.8 million in the same
period last year. The increase in cash from operating activities is primarily
the result of improved earnings partially offset by an unfavorable cash impact
of increased working capital usage in the newly acquired businesses.
INVESTING ACTIVITIES
--------------------
For the six months ended November 28, 2004, investing activities
resulted in the use of $43.3 million in cash compared to generating $1.6 million
in the same period last year. This significant use of cash primarily resulted
from our acquisition of MRID effective July 16, 2004 which included the
following payments:
27
Cash paid:
Cash paid to MRID shareholders $44,177
Transaction costs 983
Less cash acquired from MRID (6,843)
-------
$38,317
=======
Effective December 15, 2004, we announced our agreement to sell our
wholly owned subsidiary IGC-Polycold Systems, Inc. to Helix Technology
Corporation in an all cash deal amounting to $49.2 million plus $3.3 million as
reimbursement for certain tax obligations. It is our intention upon successful
consummation of this transaction to use net proceeds from the sale to pay down a
significant portion of our unsecured revolving line-of-credit.
FINANCING ACTIVITIES
--------------------
Financing activities for the six months ended November 28, 2004,
generated about $23.2 million which primarily comprised $45 million of proceeds
received from long-term borrowings used to partially finance the acquisition of
MRID, net of $21.2 million of principal payments. The remainder of the usage
reflects the cash received from the exercise of stock option more than offset by
the purchase of treasury shares.
See the consolidated statement of cash flows, located elsewhere in this
report for further details on sources and uses of cash.
CAPITAL COMMITMENTS
-------------------
Our capital and resource commitments as of November 28, 2004 consisted
of capital equipment commitments of approximately $853,000. 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.
ADEQUATE RESOURCES
------------------
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 credit facility. 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.
28
RISK FACTORS
- ------------
In addition to the risk factors set forth in the Company's annual
report on Form 10-K and 10-K/A for the year ended May 30, 2004 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,
MRI Devices Corporation (MRID) effective July 16, 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 and MRID 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.
29
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 $130 million credit facility
consisting of a $105 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%
plus applicable margins. See also Note K 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
-----------------------
(a) Evaluation of disclosure controls and procedures
Our Chief Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act)
Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this
quarterly report, have concluded that our disclosure controls and procedures are
effective based on their evaluation of these controls and procedures required by
paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
(b) Changes in internal controls over financial reporting
There have not been any changes in our internal controls over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
30
(c) Section 404 of the Sarbanes-Oxley Act of 2002
This Act requires management's annual review and evaluation of our
internal controls, and an attestation of the effectiveness of these controls by
our independent registered public accounting firm beginning with our Form 10-K
for the fiscal year ending on May 29, 2005. We are dedicating significant
resources, including management time and effort, and incurring substantial costs
in connection with our ongoing Section 404 assessment. We are currently
documenting and testing our internal controls and considering whether any
improvements are necessary for maintaining an effective control environment at
our company. The evaluation of our internal controls is being conducted under
the direction of our senior management. In addition, our management is regularly
discussing the results of our testing and any proposed improvements to our
control environment with our Audit Committee. We will continue to work to
improve our controls and procedures, and to educate and train our employees on
our existing controls and procedures in connection with our efforts to maintain
an effective controls infrastructure at our Company.
PART II: OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders
(a) The 2004 Annual Meeting of shareholders of the Company was held on
November 16, 2004.
(b)(i) At the Annual Meeting, the shareholders of the Company approved
certain amendments to the 2000 Stock Option and Stock Award Plan. The vote
was 11,313,951 FOR; 7,815,835 AGAINST; 122,587 ABSTAIN.
(b)(ii) At the Annual Meeting, the shareholders of the Company approved a
proposal to reincorporate the Company in the State of Delaware. The vote
was 16,047,785 FOR; 2,933,588 AGAINST; 271,301 ABSTAIN.
(b) (iii) At the Annual Meeting, the shareholders of the Company approved a
proposal to increase of the number of authorized shares of common stock of
the Company to be issued to 80,000,000. The vote was 21,345,008 FOR;
2,753,653 AGAINST; 95,887 ABSTAIN.
(b)(iv) At the Annual Meeting, the shareholders of the Company elected to
the Board of Directors all three nominees with the following vote:
-------------------------- ---------------------- --------------------- -------------------- --------------------
BROKER
DIRECTOR FOR WITHHELD ABSTAIN NON-VOTES
-------------------------- ---------------------- --------------------- -------------------- --------------------
John M. Albertine 21,954,611 2,239,938 -- --
-------------------------- ---------------------- --------------------- -------------------- --------------------
Glenn H. Epstein 22,667,137 1,527,412 -- --
-------------------------- ---------------------- --------------------- -------------------- --------------------
Larry G. Garberding 22,158,202 2,036,347 -- --
-------------------------- ---------------------- --------------------- -------------------- --------------------
The terms of the Directors that continued after this Annual Meeting
included; Michael E. Hoffman, Thomas L. Kempner and Sheldon Weinig
31
ITEM 6: Exhibits
(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.
32
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 7, 2005 By: /s/Glenn H. Epstein
----------------------------
Glenn H. Epstein
Chairman and Chief Executive
Officer
Dated: January 7, 2005 By: /s/Michael K. Burke
----------------------------
Michael K. Burke
Executive Vice President and
Chief Financial Officer
33