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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JUNE 30, 2000 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: 1-14310
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IMATION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1838504
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 IMATION PLACE
OAKDALE, MINNESOTA 55128
(Address of principal executive offices)
(651) 704-4000
(Registrant's telephone number, including area code)
----------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_. No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 35,527,572 shares of Common
Stock, par value $0.01 per share, were outstanding at July 31, 2000.
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IMATION CORP.
INDEX
PAGE(S)
-------
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
for the three and six months ended June 30,
2000 and 1999 3
Condensed Consolidated Balance Sheets as
of June 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash
Flows for the six months ended
June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-12
Report of Independent Accountants 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 14-19
PART II. OTHER INFORMATION 20-21
SIGNATURE 22
EXHIBIT INDEX 23
2
PART I. FINANCIAL INFORMATION
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
Net revenues $309.1 $354.2 $637.9 $695.4
Cost of goods sold 214.3 246.5 440.5 484.8
------ ------ ------ ------
Gross profit 94.8 107.7 197.4 210.6
Operating expenses:
Selling, general and
administrative 64.4 72.1 131.6 151.1
Research and development 16.7 18.9 33.7 38.1
------ ------ ------ ------
Total 81.1 91.0 165.3 189.2
Operating income 13.7 16.7 32.1 21.4
Other (income) and expense:
Interest expense 0.5 0.2 0.9 0.9
Other, net (4.5) (1.2) (12.8) (3.1)
------ ------ ------ ------
Total (4.0) (1.0) (11.9) (2.2)
Income from continuing
operations before taxes 17.7 17.7 44.0 23.6
Income tax provision 3.9 7.0 9.7 9.4
------ ------ ------ ------
Income from continuing
operations 13.8 10.7 34.3 14.2
Income from operations of
discontinued businesses,
net of taxes -- 2.0 -- 4.6
------ ------ ------ ------
Net income $ 13.8 $ 12.7 $ 34.3 $ 18.8
====== ====== ====== ======
Earnings per common
share-basic:
Continuing operations $ 0.39 $ 0.29 $ 0.97 $ 0.37
Net income $ 0.39 $ 0.34 $ 0.97 $ 0.49
Earnings per common
share-diluted:
Continuing operations $ 0.39 $ 0.29 $ 0.95 $ 0.37
Net income $ 0.39 $ 0.34 $ 0.95 $ 0.49
Weighted average basic
shares outstanding 35.0 36.9 35.4 38.1
====== ====== ====== ======
Weighted average diluted
shares outstanding 35.6 37.0 36.1 38.1
====== ====== ====== ======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
3
IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
June 30,
2000 December 31,
(Unaudited) 1999
----------- ------------
ASSETS
Current assets
Cash and equivalents $ 211.3 $ 194.6
Accounts receivable - net 222.1 252.4
Inventories 181.7 191.3
Other current assets 121.4 133.1
-------- --------
Total current assets 736.5 771.4
Property, plant and equipment - net 207.8 212.8
Other assets 133.2 143.4
-------- --------
Total assets $1,077.5 $1,127.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 91.8 $ 104.4
Accrued payroll 16.2 37.0
Short-term debt 23.9 27.3
Other current liabilities 192.3 188.5
-------- --------
Total current liabilities 324.2 357.2
Other liabilities 37.2 44.0
Long-term debt -- 1.1
Shareholders' equity 716.1 725.3
-------- --------
Total liabilities and shareholders' equity $1,077.5 $1,127.6
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
4
IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six months ended
June 30,
---------------------
2000 1999
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34.3 $ 18.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 34.8 47.8
Deferred income taxes 9.3 (0.5)
Inventory, accounts receivable and payable changes 23.3 29.7
Other working capital changes (8.5) (14.0)
Other (2.6) (7.1)
------ ------
Net cash provided by operating activities 90.6 74.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28.7) (30.3)
Proceeds from sale of medical imaging business -- 143.0
Other (0.5) 4.0
------ ------
Net cash (used in) provided by investing activities (29.2) 116.7
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt (3.1) (7.4)
Other borrowings of debt -- 53.0
Other repayments of debt (1.1) (84.0)
Purchases of treasury stock (51.4) (61.5)
Decrease in unearned ESOP shares 4.4 3.8
Exercise of stock options and other 8.1 0.4
------ ------
Net cash used in financing activities (43.1) (95.7)
Effect of exchange rate changes on cash (1.6) (6.9)
------ ------
Net change in cash and equivalents 16.7 88.8
Cash and equivalents - beginning of period 194.6 64.2
------ ------
Cash and equivalents - end of period $211.3 $153.0
====== ======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
5
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FINANCIAL STATEMENTS
The interim consolidated financial statements are unaudited but, in the opinion
of management, reflect all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented. Except as otherwise disclosed herein, these adjustments consist of
normal, recurring items. The results of operations for any interim period are
not necessarily indicative of results for the full year. The consolidated
financial statements and notes are presented as permitted by the requirements
for Form 10-Q and do not contain certain information included in the Company's
annual consolidated financial statements and notes. This Form 10-Q should be
read in conjunction with the Company's consolidated financial statements and
notes included in its 1999 Annual Report on Form 10-K.
2. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period adjusted for ESOP shares not committed.
Diluted earnings per share is computed on the basis of the weighted average
basic shares outstanding plus the dilutive effect of outstanding stock options
using the "treasury stock" method. The following table sets forth the
computation of the weighted average basic and diluted shares outstanding:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
(In millions) 2000 1999 2000 1999
------ ------ ------ ------
Weighted average
shares outstanding 35.7 37.9 36.2 39.1
Weighted average ESOP
shares not committed (0.7) (1.0) (0.8) (1.0)
------ ------ ------ ------
Weighted average
basic shares outstanding 35.0 36.9 35.4 38.1
Dilutive effect of
employee stock options 0.6 0.1 0.7 --
------ ------ ------ ------
Weighted average diluted
shares outstanding 35.6 37.0 36.1 38.1
====== ====== ====== ======
Options to purchase 0.4 million and 2.9 million shares of the Company's common
stock were outstanding as of June 30, 2000 and 1999, respectively, that were not
included in the computation of potential common shares because the effect of the
options would be antidilutive.
6
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30,
2000 December 31,
(In millions) (Unaudited) 1999
----------- ------------
Inventories
Finished goods $ 124.8 $ 123.8
Work in process 19.1 14.6
Raw materials and supplies 37.8 52.9
--------- ---------
Total inventories $ 181.7 $ 191.3
========= =========
Property, Plant and Equipment
Property, plant and equipment $ 978.2 $ 981.2
Less accumulated depreciation (770.4) (768.4)
--------- ---------
Property, plant and equipment - net $ 207.8 $ 212.8
========= =========
4. COMMITMENTS AND CONTINGENCIES
Discussion of legal matters is cross-referenced to this Form 10-Q, Part II, Item
1, Legal Proceedings, and should be considered an integral part of the
Consolidated Financial Statements and Notes.
5. RESTRUCTURING
In the fourth quarter of 1997 and in 1998, the Company recorded charges for the
restructuring of its worldwide operations in order to improve the Company's
competitive position, to focus resources on areas of strength and on growth
opportunities, and to reduce costs and eliminate unnecessary structure.
The following table represents the cumulative activity related to the Company's
1997 and 1998 restructuring programs, adjusted to exclude those activities
specifically related to discontinued operations:
(In millions) Program Cumulative June 30, 2000
Amounts Usage Balance
-------- -------- -------
Severance $ 58.2 $ (52.5) $ 5.7
Asset impairments 55.3 (55.3) --
Other 33.3 (27.3) 6.0
-------- --------- --------
Total $ 146.8 $ (135.1) $ 11.7
======== ========= ========
From the inception of the restructuring plan through June 30, 2000, the Company
has reduced its headcount relating to continuing operations by approximately
1,900, primarily due to the restructuring plan discussed above. During the six
months ended June 30, 2000 the Company made cash payments of approximately $10.0
million related to the activities described above, compared to $16.0 million
paid in the same period in 1999. The majority of the remaining severance and
other payments are expected to be made in 2000.
7
6. SALE OF THE MEDICAL IMAGING AND PHOTO COLOR SYSTEMS SEGMENT
On November 30, 1998, the Company sold its worldwide Medical Imaging Systems
business (the Medical Imaging Sale) to Eastman Kodak Company (Kodak). In
connection with the sale, Kodak acquired the assets and assumed the liabilities
of the Company's Medical Imaging Systems business in North America, Latin
America and Asia, including manufacturing facilities in Oregon and Minnesota and
all the outstanding shares of Cemax-Icon, Inc. (Cemax), a wholly-owned
subsidiary of the Company. The formal closings of the sale of the Company's
Medical Imaging Systems business in Europe (European Businesses) to Kodak
occurred on a country-by-country basis in the first quarter of 1999. Under the
terms of the Asset Purchase Agreement (as defined below), beginning December 1,
1998, Kodak was entitled to the operating results and cash flows of the European
Businesses. Excluded from the Medical Imaging Sale was the Company's medical
imaging/photo color manufacturing facility in Ferrania, Italy (the Ferrania
Facility), at which the Company agreed to manufacture wet laser and x-ray film
and hardware pursuant to an exclusive supply agreement (the Ferrania Supply
Agreement) with Kodak. In exchange for retaining the Ferrania Facility and
pursuant to certain conditions, Kodak agreed to pay the Company up to $25.0
million at such time as it was sold.
Under the terms of the asset purchase agreement dated as of July 31, 1998 and
amended and restated as of November 30, 1998 between the Company and Kodak (as
amended and restated, the Asset Purchase Agreement), Kodak paid the Company
$532.2 million in cash prior to December 31, 1998, of which $18.0 million
represented a nonrefundable deposit under the Ferrania Supply Agreement. Of the
$532.2 million cash proceeds, the Company was restricted from using $143.0
million until the European Businesses were legally transferred to Kodak in the
first quarter of 1999; this amount is shown as proceeds from sale of business in
the Condensed Consolidated Statement of Cash Flows for the six months ended June
30, 1999.
On August 2, 1999, the Company closed on the sale of its worldwide Photo Color
Systems business, together with the Ferrania Facility, the Ferrania Supply
Agreement and certain other associated businesses, to Schroder Ventures, through
Schroder Ventures' wholly owned affiliate, Ferrania Lux, S.A.R.L. In connection
with this transaction, the Company recorded a loss of $3.0 million, net of
income tax benefits of $7.1 million, in the third quarter of 1999. This
transaction is expected to generate after-tax cash of approximately $50.0
million, $25.0 million of which arises out of payment from Kodak related to the
sale of the Ferrania Facility.
Kodak has challenged the Company's claim for the full $25.0 million as well as
claims for other amounts which the Company believes are due from Kodak in
connection with the Medical Imaging Sale. The Company has retained cash, as
reflected in its financial statements, which it collected on behalf of Kodak in
an amount approximately equal to the disputed items. While the Company cannot
predict with certainty the ultimate outcome of these disputed items, it believes
its positions are supported by the applicable contractual terms.
In connection with the sale of the Medical Imaging and Photo Color Systems
businesses, the Company receives reimbursement for certain transition services
and distribution agreements that the Company has agreed to provide Kodak for up
to a period of two years, and Schroder Ventures while it integrates accounting
and information systems. Kodak and Schroder Ventures,
8
at their options, may terminate the transition services agreements with respect
to individual categories of service upon prior notice, the length of which
varies according to the nature of the service. Reimbursements for these
transition services are generally presented as a reduction of general and
administrative expenses in the Consolidated Statements of Operations.
As a result of the sale of the Photo Color Systems business and the Ferrania
Facility, the Company has completed the disposition of its Medical Imaging and
Photo Color Systems segment. As such, the Company's Consolidated Statements of
Operations for the three and six month periods in 1999, have been reclassified
to present Photo Color Systems and the Medical Imaging Systems businesses as
discontinued operations.
The results of discontinued operations for the three and six month periods ended
June 30, 1999 were as follows (in millions):
Three months ended Six months ended
June 30, 1999 June 30, 1999
------------------ ----------------
Net revenues $ 63.9 $ 124.7
Income before taxes 4.4 9.3
Income tax provision 2.4 4.7
------- -------
Net income from discontinued operations $ 2.0 $ 4.6
======= =======
Basic and diluted earnings
per common share $ 0.05 $ 0.12
======= =======
7. COMPREHENSIVE INCOME
The components of total comprehensive income are shown below. The unrealized
loss on available-for-sale securities and the cash flow hedging balance of a
$2.1 million loss as of June 30, 2000 is recorded net of $1.0 million in
deferred income tax benefits.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
(In millions) 2000 1999 2000 1999
------- ------- ------- -------
Net income $ 13.8 $ 12.7 $ 34.3 $ 18.8
Changes in cumulative
translation adjustments (1.5) (9.5) (2.0) (15.6)
Unrealized loss on available-
for-sale securities - net (1.9) -- (1.9) --
Cash flow hedging - net (0.1) -- (0.2) --
------- ------- ------- -------
Comprehensive income $ 10.3 $ 3.2 $ 30.2 $ 3.2
======= ======= ======= =======
Accumulated other comprehensive earnings (loss) consists of the following:
Foreign Unrealized Loss Accumulated
Currency Cash on Available Other
Translation Flow for Sale Comprehensive
Adjustment Hedging Securities Earnings(Loss)
----------- ------- --------------- --------------
Balance, December 31, 1999 $(82.1) $ -- $ -- $(82.1)
First quarter 2000 change (0.5) (0.1) -- (0.6)
------ ------ ------ ------
Balance, March 31, 2000 (82.6) (0.1) -- (82.7)
Second quarter 2000 change (1.5) (0.1) (1.9) (3.5)
------ ------ ------ ------
Balance, June 30, 2000 $(84.1) $ (0.2) $ (1.9) $(86.2)
====== ====== ====== ======
9
8. BUSINESS SEGMENT INFORMATION
The Company's continuing businesses are organized, managed and internally
reported as three segments differentiated primarily by their products and
services, but also by the markets they serve. These segments, whose results are
shown below, are Data Storage and Information Management, providing removable
data storage media for use in the mobile and desktop, network and enterprise
data center markets; Color Technologies, whose principle products include
printing and color proofing systems, printing films and plates for the graphic
arts marketplace, and carbonless paper, such as multi-part business forms; and
Digital Solutions and Services, which provides 24-hour technical service and
support for equipment sold by the Company as well as by other third party
equipment vendors, and document imaging products for large format engineering
documentation.
Business Data Digital
Segment Storage and Solutions (1)Corporate,
Information Second Information Color and Other and Total
(In millions) Quarter Management Technologies Services Unallocated Company
- --------------------------------------------------------------------------------------------------------
Net revenues 2000 $211.4 $ 74.0 $ 23.7 -- $309.1
1999 237.7 85.8 29.7 $ 1.0 354.2
- --------------------------------------------------------------------------------------------------------
Operating 2000 $ 6.7 $ 8.0 $ (0.6) $ (0.4) $ 13.7
Income (loss) 1999 5.7 13.0 (0.5) (1.5) 16.7
- --------------------------------------------------------------------------------------------------------
Business Six Data Digital
Segment Months Storage and Solutions (1)Corporate,
Information to Information Color and Other and Total
(In millions) Date Management Technologies Services Unallocated Company
- --------------------------------------------------------------------------------------------------------
Net revenues 2000 $444.6 $144.4 $ 48.7 $ 0.2 $637.9
1999 457.6 174.7 60.5 2.6 695.4
- --------------------------------------------------------------------------------------------------------
Operating 2000 $ 19.2 $ 13.2 $ (1.3) $ 1.0 $ 32.1
Income (loss) 1999 6.4 19.1 (1.3) (2.8) 21.4
- --------------------------------------------------------------------------------------------------------
(1) The Corporate, Other and Unallocated (Corporate) amounts for net revenues
and operating income (loss) primarily include the results for certain businesses
not included in the Company's disclosable business segments and, in 1999,
general overhead which was previously allocated to the Photo Color business.
Included in 2000 Corporate operating income is a one-time benefit of
approximately $2 million from the conclusion of a development project, net of a
manufacturing capacity adjustment.
Intersegment revenues are not material. Total assets by segment have not changed
materially from December 31, 1999.
10
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective January
1, 2000. SFAS No. 133 requires that all derivatives, including foreign currency
exchange contracts, be recognized on the balance sheet at fair value.
Derivatives that are not hedges must be recorded at fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair value
of underlying assets or liabilities through income or recognized in other
comprehensive income in shareholders' equity until the underlying hedged item is
recognized in income. The ineffective portion of a derivative's change in fair
value is to be immediately recognized in income. Upon adoption at January 1,
2000, the Company recorded a cumulative-effect-type loss adjustment in
accumulated other comprehensive loss to recognize the fair value of foreign
currency contracts designated as cash-flow hedging instruments. The adjustment
did not have a significant impact on the Company's financial position or results
of operations at adoption. Accumulated net deferred losses, in other
comprehensive loss in shareholders' equity, on foreign currency cash-flow hedges
at June 30, 2000 were $0.2 million, net of tax. Amounts reclassified into income
for the six months ended June 30, 2000 were not significant.
The Company maintains a foreign currency exposure management policy that allows
for the use of derivative instruments, principally forward exchange contracts.
These contracts, ranging in duration from one to twelve months, are entered into
to fix the U.S. dollar amount of the eventual cash flows resulting from such
transactions. All derivatives are recognized on the balance sheet at their fair
value. The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge items. This process includes linking all
derivatives to booked or forecasted transactions. The Company also formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be highly
effective as a hedge, the Company discontinues hedge accounting prospectively,
with gains and losses that were accumulated in other comprehensive income
recognized in current period income.
10. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
bulletin No. 101, "Revenue Recognition." An amendment in June 2000 delayed the
effective date until the fourth quarter of 2000. The Company is reviewing the
requirements of this standard and has not yet determined the impact of this
standard on its consolidated financial statements.
In June 2000, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," an amendment of FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." The Company
does not expect the amendment to have a material impact on its consolidated
financial statements.
11
****
PricewaterhouseCoopers LLP, the Company's independent accountants, has performed
a review of the unaudited interim consolidated financial statements included
herein and their report thereon accompanies this filing. This report is not a
"report" within the meaning of Sections 7 and 11 of the 1933 Act and the
independent accountants liability under Section 11 does not extend to it.
12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Imation Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of
Imation Corp. (the "Company") as of June 30, 2000, and the related consolidated
statements of operations for the three and six months ended June 30, 2000 and
1999 and condensed consolidated statements of cash flows for the six months
ended June 30, 2000 and 1999. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements for them
to be in conformity with accounting principles generally accepted in the United
States.
We previously audited, in accordance with auditing standards generally accepted
in the United States, the consolidated balance sheet as of December 31, 1999,
and the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for the year then ended (not presented
herein); and in our report dated January 27, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1999, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 25, 2000
13
IMATION CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net revenues of $309.1 million declined 12.7 percent from last year revenues of
$354.2 million. The decline was primarily due to softness in the Company's
mature products in the Data Storage and Information Management and the Color
Technologies business segments. In addition, currency effects and price
reductions negatively impacted revenues.
Data Storage and Information Management revenues declined $26.3 million to
$211.4 million from $237.7 million a year ago. The revenue decline was primarily
due to planned lower SuperDisk drive hardware sales, foreign currency, lower
sales of mature technology media, and price reductions. Strength of demand for
the 9840 tape cartridge, DLTtape, and optical media partially offset the revenue
decline.
Color Technologies revenues were $74.0 million as compared to $85.8 million a
year ago. The $11.8 million decline from second quarter 1999 was primarily due
to lower sales of analog proofing products, plates, and graphic arts film
products. Strong digital proofing products' sales partially offset the overall
decline.
Digital Solutions and Services second quarter 2000 revenues were $23.7 million
as compared to $29.7 million a year ago. The $6.0 million decline from second
quarter 1999 primarily resulted from the ongoing transition in the large format
document imaging business from analog to digital.
Gross profit of $94.8 million declined $12.9 million from $107.7 million a year
ago. The gross margin percentage was relatively flat resulting from product mix
benefits that were offset by the negative impact of foreign currency.
Selling, general and administrative (SG&A) expenses declined $7.7 million, or
10.7 percent from $72.1 million last year to $64.4 million in the current
quarter. SG&A expenses were benefited by cost reductions in information
technology and reductions in variable compensation accruals. SG&A expenses, as a
percentage of revenue, may be negatively impacted by 1.0 to 1.5 percentage
points during the balance of 2000 due to declining demand for transition
services associated with the divestiture of the Medical Imaging and Photo Color
Systems businesses.
Research and development (R&D) costs were $16.7 million, or 5.4 percent of
revenues. This percentage is consistent with recent quarters.
Operating income in the second quarter of 2000 was $13.7 million compared to
$16.7 million for the same period last year. This decline is due to the factors
discussed above.
14
Other income increased to $4.0 million from $1.0 million a year ago. The
increase was primarily due to interest income. Other income also benefited from
modest venture capital gains and other factors during the period.
The tax rate for the second quarter and expected for the full-year 2000 is 22
percent, down from the 1999 full-year rate of 39 percent. The lower tax rate
contributed $0.09 per diluted share to earnings in the second quarter. The
decline resulted from tax benefits associated with changes to the Company's
European structure resulting from the sale of the Medical Imaging and Photo
Color businesses, and the Italian manufacturing facility. Continued tax benefits
from the above actions are expected in future years.
Income from continuing operations in the second quarter of 2000 was $13.8
million, or $0.39 per basic and diluted share, compared with income from
continuing operations of $10.7 million, or $0.29 per basic and diluted share,
for the same period in 1999 for the reasons discussed above.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
On a year to date basis, net revenues of $637.9 million declined 8.3 percent
from last year's $695.4 million. The decline was due to several factors
including softness in mature products in the Data Storage and Information
Management and the Color Technologies business segments, negative effects of
foreign currency, and price reductions. Sales volumes increased in all
geographies outside North America.
Data Storage and Information Management revenues decreased 2.8 percent to $444.6
million from $457.6 million a year ago. The revenue decline was primarily due to
planned lower SuperDisk drive hardware sales and lower sales of mature
technology media. Foreign currency and price reductions also had a negative
effect. Strength of demand for the 9840 tape cartridge, DLTtape, and optical
media partially offset the decline.
Color Technologies revenues were $144.4 million, as compared to $174.7 million a
year ago. The $30.3 million decline was primarily due to lower sales of analog
proofing products, plates, and graphic arts film products. Strong digital
proofing products' sales partially offset the overall decline.
Digital Solutions and Services revenues declined $11.8 million to $48.7 million.
The decrease primarily resulted from the ongoing transition in the large format
document imaging business from analog to digital.
Gross profit of $197.4 million for the first six months of 2000 declined $13.2
million from $210.6 million a year ago, though gross margin percentage improved
to 30.9 percent from 30.3 percent a year ago. The improvement in gross margin
percentage comes from a combination of manufacturing improvements and benefits
of product mix. The improvement was achieved despite the negative impact of
foreign currency.
Selling, general and administrative (SG&A) expenses for the first six months of
2000 were $131.6 million. SG&A declined $19.5 million, or 12.9 percent from
$151.1 million last year. SG&A expenses benefited by cost reductions in
information technology, reductions in variable compensation accruals, and
approximately $2.0 million from the first quarter conclusion of a development
project, net of a manufacturing capacity adjustment.
15
Research and development (R&D) costs for the first six months of 2000 were $33.7
million, within the Company's stated target range of 5-7 percent of revenues.
Operating income for the first six months of 2000 was $32.1 million, as compared
to $21.4 million for the same period last year. This improvement is due to the
factors discussed above. The Company now anticipates year 2000 operating income
growth to be in the range of 6-12 percent, a reduction from the 20 percent
growth disclosed in the Company's Annual Report on Form 10-K.
Other income increased to $11.9 million from $2.2 million a year ago. Venture
capital distributions, which currently are expected to be minimal for the
balance of the year, contributed approximately $7.6 million for the first six
months of 2000. Other income was also benefited by interest income during the
period.
The tax rate for the first six months and expected for the full-year 2000 is 22
percent, down from the 1999 full-year rate of 39 percent. The lower tax rate
contributed $0.21 per share to earnings in the first half of this year. The
decline resulted from tax benefits associated with changes to the Company's
European structure resulting from the sale of the Medical Imaging and Photo
Color businesses, and the Italian manufacturing facility. Continued tax benefits
from the above actions are expected in future years.
Income from continuing operations for the first six months of 2000 was $34.3
million, or $0.97 per basic share and $0.95 per diluted share. This compares
with income from continuing operations of $14.2 million, or $0.37 per basic and
diluted share, for the same period in 1999. The increase is due to the reasons
discussed above.
FINANCIAL POSITION
Working capital of $412.3 million as of June 30, 2000 was relatively unchanged
compared to year-end 1999. Another measure of liquidity, the current ratio, was
2.3 as of June 30, 2000, as compared to 2.2 at December 31, 1999. Inventory days
of supply was unchanged from 76 days at December 31, 1999. Accounts receivable
days sales outstanding was 61 days at June 30, 2000, an improvement from 62 days
at December 31, 1999.
The book value of property, plant and equipment as of June 30, 2000 was $207.8
million, relatively unchanged from $212.8 million at December 31, 1999. The
Company repurchased 138,000 shares of common stock during the quarter for $3.7
million under the terms of an existing stock repurchase program. Authorization
to repurchase approximately 3.9 million shares remains under this program.
LIQUIDITY
Cash provided by operating activities was $90.6 million during the six months
ended June 30, 2000 compared with $74.7 million during the same period in 1999.
Depreciation and amortization was $34.8 million in the first six months of 2000,
down from $47.8 million in 1999, due to the sale of the Photo Color business and
other factors (see Note 6 to the Consolidated Financial Statements). Changes in
working capital provided $14.8 million during the first six months of 2000,
relatively unchanged from $15.7 million in the
16
comparable period of 1999. For the six months ended June 30, 2000, the Company
made total cash payments of approximately $10.0 million, associated with its
restructuring program.
Cash used by investing activities was $29.2 million for the six months ended
June 30, 2000 compared with cash provided of $116.7 million in the comparable
period of 1999 which included proceeds from the sale of the Medical Imaging
business of $143.0 million. Capital expenditures of $28.7 million for the first
six months of 2000 decreased $1.6 million from the $30.3 million in the same
period of 1999, in part due to the sale of the Photo Color business.
Net financing activities during the first six months of 2000 used cash of $43.1
million compared with a $95.7 million use of cash in the comparable 1999 period.
Financing activities in 2000 were comprised primarily of the purchase of
treasury stock under an existing repurchase program. In addition to treasury
stock purchases, financing activities in 1999 also included a net usage of cash
of $38.4 million to pay down debt.
The Company has a Loan and Security Agreement (the Loan Agreement) with a group
of banks. The Loan Agreement provides for revolving credit, including letters of
credit, with borrowing availability based on eligible accounts receivable,
inventory and manufacturing machinery and equipment not to exceed $175.0
million. Borrowing availability at June 30, 2000 was $114.6 million. No
borrowings were outstanding under the Loan Agreement at June 30, 2000.
In addition, the Company has arranged for local borrowings of debt for certain
subsidiaries. As of June 30, 2000, $23.9 million of short-term borrowings were
outstanding under such arrangements.
As of June 30, 2000, the Company's ratio of debt to total capital was 3.2
percent as compared with 3.8 percent at December 31, 1999. The Company expects
that cash and equivalents, together with cash flow from operations and
availability of borrowings under its current and future sources of financing,
will provide liquidity sufficient to operate the Company for the foreseeable
future.
DERIVATIVE FINANCIAL INSTRUMENTS
In conjunction with the adoption of SFAS No.133 (see Note 9 to Consolidated
Financial Statements), the Company revised its foreign currency hedging policy
to allow for the hedging of anticipated transactions ("cash flow hedging") in
addition to booked transactions ("transaction hedging"). The Company is
evaluating alternative methods to implement this policy and may expand its use
of cash flow hedging. The objective of the currency hedging is to reduce the
fluctuations in earnings and cash flows caused by volatility in exchange rates;
however, no assurance can be given that these risk management activities will
offset more than a portion of the adverse financial impact.
EURO CONVERSION STATUS
On January 1, 1999, 11 of the 15 member countries of the European Union adopted
the Euro as their new common currency. The Euro is trading on currency exchanges
and can be used for noncash transactions. Local currencies will remain legal
tender until December 31, 2001. By no later than December 31, 2001,
participating countries will issue new Euro-denominated bills for
17
use in cash transactions. By no later than July 1, 2002, participating countries
will begin using the Euro as the legal tender and will withdraw all legacy
currencies.
The Euro conversion may lead to increased competition between countries and
potential erosion of margins as prices in different countries are more
transparent. The Company is reviewing its marketing strategies to address
possible increased competition and is also reviewing and testing its software
compatibility with the Euro conversion. The Company will continue to review the
impact of the conversion to the Euro; however, the Company does not expect that
the Euro conversion will have a material impact on the Company's results of
operations or financial position.
SALE OF MEDICAL IMAGING AND PHOTO COLOR SYSTEMS BUSINESSES
As discussed in Note 6 to the Consolidated Financial Statements, on November 30,
1998, the Company sold its worldwide Medical Imaging Systems business to Eastman
Kodak Company (Kodak). On August 2, 1999, the Company sold its Photo Color
Systems business and the manufacturing facility in Ferrania, Italy, to Schroder
Ventures.
Associated with the Company's sale of its Medical Imaging and Photo Color
Systems businesses, the Company receives reimbursement for certain transition
services that the Company has agreed to provide to the respective purchasers as
they integrate those businesses into their organizations. Kodak and Schroder
Ventures, at their option, may terminate their respective transition services
agreements with respect to individual categories of service upon prior notice,
the length of which varies according to the nature of the service. While the
Company can not project with certainty the duration of and expected cost
reimbursements associated with the transition services, or the potential impact
when the transition services agreements are terminated, SG&A expenses, as a
percentage of revenue, may be negatively impacted by 1 to 1.5 percentage points
during the balance of 2000 due to the declining need for transition services.
FORWARD-LOOKING STATEMENTS
Certain information contained in this report which does not relate to historical
financial information may be deemed to constitute forward-looking statements.
The words or phrases "will likely result", "are expected to", "will continue",
"is anticipated", "estimate", "project", "believe" or similar expressions
identify "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from historical results, and those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which speak only as of the date made. Among the
factors that could cause the Company's actual results in the future to differ
materially from any opinions or statements expressed with respect to future
periods are the Company's ability to meet its cost reduction and revenue growth
targets and its ability to introduce new offerings in a timely manner, the
resolution of disputes associated with the sale of the Medical Imaging and Photo
Color Systems businesses, the competitive pricing environment, foreign currency
fluctuations, the ability of Imation to secure adequate supply of certain high
demand products, the market acceptance of newly introduced product and service
offerings, the rate of decline for
18
certain existing products, as well as various factors set forth in the Company's
filings with the Securities and Exchange Commission, including its 1999 Annual
Report on Form 10-K and subsequent Form 10-Q filings.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3. "Legal Proceedings" included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
The Company is also the subject of various pending or threatened legal actions
in the ordinary course of its business. All such matters are subject to many
uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of any monetary liability or financial impact that may be incurred by the
Company with respect to these matters. While these matters could materially
affect operating results of any one quarter when resolved in future periods, it
is management's opinion that after final disposition, any monetary liability or
financial impact to the Company beyond that provided in the Condensed
Consolidated Balance Sheet as of June 30, 2000 would not be material to the
Company's financial position or annual results of operations or cash flows.
Items 2-3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 2000 Annual Meeting of Shareholders held on May 16, 2000, the
shareholders approved the following:
(a) A proposal to elect three Class I directors of the Company to serve
for three-year terms ending in 2003, as follows:
Directors Votes For Votes Withheld
- ----------------- --------- --------------
Lawrence E. Eaton 30,957,953 945,019
Michael S. Fields 30,987,090 915,882
Ronald T. Lemay 30,986,282 916,690
There were no broker non-votes. In addition, the terms of the following
directors continued after the meeting: Class II directors for a term ending in
2001 - William W. George, Marvin L. Mann, and Daryl J. White; and Class III
directors for a term ending in 2002 - Richard E. Belluzzo, Linda W. Hart, and
William T. Monahan.
(b) A proposal to ratify the appointment of PricewaterhouseCoopers LLP
to serve as independent accountants of the Company for the year
ending December 31, 2000. The proposal received 31,485,309 votes
for, and 262,469 against, ratification. There were 155,194
abstentions and no broker non-votes.
(c) A proposal to approve the Company's 2000 Stock Incentive Plan. The
proposal received 18,757,314 votes for, and 8,122,316 against,
approval. There were 279,008 abstentions and 4,744,334 broker
non-votes.
Item 5. Not Applicable
20
Item 6(a). Exhibits
The following documents are filed as exhibits to this Report.
15.1 An awareness letter from the Company's independent
accountants regarding unaudited interim financial
statements. Page 24.
27.1 Financial data schedule
(b) No reports on Form 8-K were filed during the quarter ended June 30, 2000.
21
SIGNATURE
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.
Imation Corp.
-------------
(REGISTRANT)
Date: August 3, 2000 By:
/s/ Robert L. Edwards
------------------------------------
Robert L. Edwards
Senior Vice President,
Chief Financial Officer
and Chief Administrative Officer
22
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------------------------------------------------------------
15.1 An awareness letter from the Company's independent accountants
regarding unaudited interim financial statements.
27.1 Financial data schedule.
23