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| IMGC > SEC Filings for IMGC > Form 10-Q on 6-Jan-2004 | All Recent SEC Filings |
6-Jan-2004
Quarterly Report
Intermagnetics General Corporation ("Intermagnetics", "Company", "we" or "us") makes forward-looking statements in this document. Typically, we identify forward-looking statements with words like "believe," "anticipate," "perceive," "expect," "estimate" and similar expressions. Unless a passage describes a historical event, it should be considered a forward-looking statement. These forward-looking statements are not guarantees of future performance and involve important assumptions, risks, uncertainties and other factors that could cause the Company's actual results for fiscal year 2003 and beyond to differ materially from those expressed in the forward-looking statements. These important factors include, without limitation, the assumptions, risks, and uncertainties set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other assumptions, risks, uncertainties and factors disclosed throughout this report.
Except for our continuing obligations to disclose material information under federal securities laws, we are not obligated to update these forward-looking statements, even though situations may change in the future. We qualify all of our forward-looking statements by these cautionary statements.
Company Overview
The Company operates in three reportable operating segments: Magnetic Resonance Imaging (MRI), Instrumentation, and Energy Technology. The MRI segment consists primarily of the manufacture and sale of magnet systems (by the IGC-Magnet Business Group) and radio frequency coils (by IGC-Medical Advances Inc.). These products are used principally in the medical diagnostic imaging market. 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.
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, 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 23, 2003 and November 24, 2002, these systems comprised approximately 0.0% and 8.1%, 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.
The provision for warranty for potential defects with our manufactured products is based on historical experience for the period the product was under warranty during the fiscal year. The Company believes this reserve is adequate based on the evaluation criteria, procedures in place to control the manufacturing process and pre-testing of newly developed products to ensure their manufacturability prior to commercial introduction. If product quality declines, the Company may require additional provisions.
The Company recorded a provision amounting to about $2.0 million for potential environmental remediation for businesses disposed of during fiscal 2002. 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 15% 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
Sales increased about $3.2 million or 8.8%, to $39.9 million, for the three months ended November 23, 2003, from $36.7 million for the same period last year. This increase was achieved through contributions from each segment which was driven by increased product demand as well as additional government funding in our Energy Technology segment.
For the six months ended November 23, 2003, sales decreased $9.7 million or 13.5% to $62.2 million from $71.9 million for the same period last year. This decrease is primarily driven by the first quarter decline in MRI segment sales as a result of the anticipated decrease in magnet shipments, partially offset by increased sales from our Instrumentation segment and additional funding received in our Energy Technology segment.
MRI Segment Sales
Sales during the quarter for the MRI segment increased $1.1 million or 3.4%, to $32.3 million compared to the same quarter last year. This increase is largely due to a $1.6 million increase in RF-Coil sales primarily to our original equipment manufacturing customers. Although total magnet shipments increased over the second quarter of last year, an unfavorable magnet mix partially offset the increase in RF coil sales.
For the six months ended November 23, 2003, MRI segment sales decreased $14.8 million or 24.0% to $46.8 million from the same six month period last year. This decrease is primarily the result of the previously disclosed planned decline in magnet shipments during the first quarter. This amounted to 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. This decrease was partially offset by a strong increase in RF-Coil sales of about $1.8 million.
Instrumentation Segment Sales
Instrumentation segment sales for the three months ended November 23, 2003, increased $1.6 million, or 31.7% to $6.6 million over the same period last year. This increase is primarily due to continued sales growth in our vacuum markets in Asia and domestically, as well as developing strength in the semiconductor market.
For the six months ended, sales increased $2.8 million or 29.7% to $12.4 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 as well as increasing demand in the semiconductor market.
Energy Technology Segment Sales
Sales of the Energy Technology segment increased $573,000 and $2.2 million for the three and six months ended November 23, 2003, respectively over their corresponding periods last year as result of additional funding received on existing programs primarily involving HTS devices.
Gross Margin
Overall, gross margin increased $1.4 million to about $15.6 million or 39% of sales for the three months ended November 23, 2003 from $14.1 million or 39% of sales for the same period last year. Increased RF-Coil sales contributed to an increase for the MRI segment of about $550,000. The Instrumentation segment added to this increase by $775,000 through an improved performance primarily from within the vacuum product line. The Energy Technology segment experienced a gross profit increase of nearly $100,000 resulting from increased funding on our existing HTS programs.
During the six months ended, gross margin decreased by about $3.7 million to $24.1 million or 39% of sales from $27.7 million or 39% of sales for the same six month period last year. Reduced magnet shipments during the first quarter and lower average selling prices resulting from the new contract with Philips Medical Systems combined with the inability to fully absorb fixed costs during this planned decline in production was partially offset by an increase in RF-Coil sales, resulting in a MRI segment decrease of $6.7 million. Partially offsetting this decline, the Instrumentation segment increased $1.7 million primarily through improved sales in the vacuum market. In addition, the Energy Technology segment increased $1.4 million relating to $1.2 million of funding received for costs that were expensed in prior periods as well as increased funding on our existing HTS programs.
Product Research and Development
Product research and development declined $467,000 or 14.5% to $2.8 million from $3.2 million for the three months ended November 23, 2003. This decrease primarily resulted from increased third party funding of about $714,000 for continued development on magnet systems, partially offset by increased spending on various HTS projects in our Energy Technology segment amounting to $306,000. Although internal spending declined actual technology development efforts increased as a result of additional third party funding.
For the six months ended, product research and development decreased about $1.0 million or 15.4% from $6.7 million for the same period last year. This decrease primarily resulted from increased third party funding of about $1.2 million for continued development on magnet systems, partially offset by increased spending on various HTS projects in our Energy Technology segment amounting to $120,000. Although 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 November 23, 2003, selling, general and administrative expenses, increased $784,000 from prior year or nearly 16.0% to $5.7 million. This increase is primarily due to increases in staffing, incentive compensation including commissions and relocation costs in filling open positions in our MRI Segment totaling about $660,000. In addition, professional and consulting fees increased about $180,000.
Selling, general and administrative expenses increased about $1.3 million or 14% to $10.6 million for the six months ended November 23, 2003 from $9.3 million for the same period last year. This increase is primarily driven by increases in staffing, incentive compensation and relocation costs in filling various open positions of approximately $1.2 million.
Operating income
For the three months ended November 23, 2003, operating income increased $1.1 million or 20.3% over the same period last year primarily due to improved sales, reduced research and development expense as a result of increased third party funding, partially offset by increased selling, general and administrative costs.
During the six months ended November 23, 2003, operating income decreased nearly $4.0 million from $10.8 million to $6.9 million. This decrease was primarily the result of the reduced magnet sales in our MRI segment during the first quarter. Offsetting to the MRI 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.
Interest and other
Interest and other income of $238,000 for the current quarter was consistent with the same period last year, but decreased $156,000 for the six months ended November 23, 2003 to $519,000. This decrease is primarily driven by the continued decline in the interest rate environment partially offset by our larger cash balances.
During the three months ended November 24, 2002, The Company sold its remaining shares of Ultralife Batteries Inc. and realized a pre-tax loss of $2.1 million. During the same quarter, the Company realized a $537,000 gain resulting from a favorable settlement of trade litigation.
Our effective tax rate of 34.7% for the six months ended November 23, 2003 was unchanged from the previous year. We expect our effective tax rate to remain the same as we continue to review effective tax strategies.
Liquidity and Capital Commitments
For the six months ended November 23, 2003, we generated $7.8 million in cash from operating activities compared to $8.4 million of cash generated in the same period last year. The decrease in cash generated, which was primarily driven by the decrease in earnings and non-cash expenses of $3.7 million, was partially offset by a decrease in working capital items of $3.1 million. In the current period, cash generated by investing activities of $1.6 million increased $1.8 million from the $190,000 of cash used during the same period last year primarily from collecting 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. This was partially offset by plant, property and equipment purchases of $2.4 million. During the same six month period last year, investing activities consisted of about $1.6 million of plant, property and equipment purchases partially offset by proceeds from the sale of available-for-sale securities of $1.4 million. Financing activities for the six months ended November 23, 2003, generated $1.2 million which primarily comprised $2.8 million of proceeds received from exercised options partially offset by $1.8 million of treasury stock. This is compared to the $7.1 million of cash
used in the same period last year which mainly consisted of $4.4 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 November 23, 2003 consisted of capital equipment commitments of approximately $1.2 million. 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. 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 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.
At November 23, 2003, we had a $50 million unsecured line of credit with three banks. Borrowings under the line bear interest at the London Interbank Offered Rate (LIBOR) plus an applicable margin or prime plus an applicable margin, at our option. The line was not in use during the six months ended November 23, 2003. This line of credit was replaced by the $100 million credit facility executed on December 17, 2003 as discussed below.
On December 17, 2003, we entered into a definitive agreement to acquire all the outstanding common stock of Invivo Corporation ("Invivo"). The deal is structured as an all cash transaction valued at $22.00 per share which creates a fully diluted enterprise value of approximately $152 million. It is management's intention to finance this acquisition through a combination of cash on hand, and a recently obtained $100 million unsecured credit facility underwritten by a group of commercial lenders. Invivo designs, manufactures and markets monitoring systems that measure and display vital signs of patients in medical settings, particularly during magnetic resonance imaging procedures. We anticipate closing on this acquisition in late January 2004.
On December 17, 2003, we entered into a Credit Facility with a group of commercial lenders under which the 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 are to be used for the acquisition of Invivo Corporation including direct costs associated with the acquisition and this credit facility, refinance existing debt of the Company and of Invivo Corporation, and to provide working capital for general corporate requirements of the Company. This facility replaces our existing unsecured $50.0 million line of credit. See also Note H in the Company's notes to consolidated financial statements.
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