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 SEPTEMBER 30, 1996 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
---------------
IMATION CORP.
(Exact name of registrant as specified in its charter)
A DELAWARE 41-1838504
CORPORATION
(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)
(612) 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: 42,852,952 shares of Common
Stock, par value $0.01 per share, were outstanding at October 31, 1996.
IMATION CORP.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three and
nine month periods ended September 30, 1996 and 1995 3
Consolidated Balance Sheets as of September
30, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Report of Independent Accountants 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10
PART II. OTHER INFORMATION 19
SIGNATURE 20
PART I. FINANCIAL INFORMATION
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Amounts)
(Unaudited)
Three months ended Nine months ended
September 30 September 30
-------------------- ------------------------
1996 1995 1996 1995
--------- --------- ----------- ----------
Net revenues $ 559.3 $ 546.2 $ 1,696.6 $ 1,687.9
Cost of goods sold 362.7 364.5 1,105.0 1,099.1
------- -------- ---------- ----------
Gross profit 196.6 181.7 591.6 588.8
Operating expenses:
Selling, general and
administrative 133.5 129.1 423.4 405.6
Research and development 38.6 53.9 132.1 168.2
Restructuring charges -- -- 53.9 --
------- -------- ---------- ----------
Total 172.1 183.0 609.4 573.8
Operating income (loss) 24.5 (1.3) (17.8) 15.0
Interest expense and other 2.5 4.3 7.9 14.2
------- -------- ---------- ----------
Income (loss) before tax and
minority interest 22.0 (5.6) (25.7) 0.8
Income tax provision (benefit) 10.2 (2.4) (5.4) 0.3
Minority interest -- (1.4) (0.4) (2.0)
------- -------- ---------- ----------
Net income (loss) $ 11.8 $ (1.8) $ (19.9) $ 2.5
======= ======== ========== ==========
Earnings (loss) per share $ .29 $ (.04) $ (.48) $ .06
======= ======== ========== ==========
Weighted average shares
outstanding (1) 40.8 42.0 41.5 42.0
======= ======== ========== ==========
Unaudited pro forma information assuming tax benefit based on a purely
separate return basis:
Nine months ended
September 30, 1996
------------------
Income (loss) before tax and
minority interest $(25.7)
Income tax provision (benefit) 3.0
Minority interest (1.6)
-------
Net income (loss) $(27.1)
=======
(1) The number of weighted average shares outstanding used in the computation of
earnings per share prior to July 1, 1996 is one-tenth the weighted average
number of 3M shares outstanding based on the distribution of one share of
Imation Corp. for ten shares of 3M pursuant to the spin-off on July 1, 1996.
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
(In Millions)
September 30,
1996 December 31,
(Unaudited) 1995
-------- --------
ASSETS
Current Assets
Cash and equivalents $ 126.8 $ --
Accounts receivable - net 482.8 479.5
Inventories
Finished goods 206.3 244.0
Work in process 67.0 81.2
Raw materials and supplies 98.2 101.1
-------- --------
Total inventories 371.5 426.3
Other current assets 109.7 48.8
-------- --------
Total current assets 1,090.8 954.6
Property, Plant and Equipment 1,672.8 1,868.3
Less accumulated depreciation (1,198.7) (1,355.1)
-------- --------
Property, plant and equipment - net 474.1 513.2
Other Assets 32.7 73.7
-------- --------
Total Assets $1,597.6 $1,541.5
======== ========
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 192.8 $ 125.9
Accrued payroll 43.9 44.4
Income taxes payable 10.4 --
Short-term debt 17.2 --
Other current liabilities 175.2 125.9
-------- --------
Total current liabilities 439.5 296.2
Other Liabilities 80.0 96.6
Long-Term Debt 166.3 --
Commitments and Contingencies
Shareholders' Equity
Common Stock - $.01 par value 0.4 --
Additional paid in capital 992.6 --
Retained earnings 11.8 --
Unearned ESOP shares (47.5) --
Cumulative translation adjustment (45.5) (46.1)
Net investment by 3M -- 1,194.8
-------- --------
Total shareholders' equity 911.8 1,148.7
Total Liabilities and Equity $1,597.6 $1,541.5
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Nine months ended
September 30
------------------
1996 1995
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(19.9) $ 2.5
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 137.7 141.5
Deferred income taxes (3.2) (2.5)
Restructuring and other one-time charges 76.4 --
Working capital changes 88.1 (24.9)
Other (14.2) 9.4
------ ------
Net cash provided by operating activities 264.9 126.0
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (115.9) (135.4)
Other 6.2 (7.6)
------ ------
Net cash used in investing activities (109.7) (143.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt 16.2 --
Borrowings of long-term debt 249.3 --
Repayment of long-term debt (82.0) --
Loan to ESOP (50.0) --
Net cash (paid to) received from 3M (155.9) 8.0
------ ------
Net cash (used in) provided by financing activities (22.4) 8.0
Effect of exchange rate changes on cash (6.0) 9.0
------ ------
Net change in cash and equivalents 126.8 --
Cash and equivalents - beginning of period -- --
------ ------
Cash and equivalents - end of period $126.8 $ --
====== ======
SUPPLEMENTAL NON-CASH DISCLOSURE
Pursuant to the spin-off on July 1, 1996, certain assets and liabilities with a
net value of $6.2 million were retained by 3M, primarily related to certain
deferred tax assets of $26.9 million and severance obligations of $23.9 million.
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FINANCIAL STATEMENTS
On June 18, 1996, the Board of Directors of Minnesota Mining and Manufacturing
Company ("3M") approved the spin-off of Imation Corp., a Delaware corporation
(the "Company"), which is comprised of substantially all of the businesses
previously operated within 3M's data storage and imaging systems groups. To
effectuate the transaction, the Board of Directors of 3M declared a dividend
payable to the holders of record of 3M common stock as of June 28, 1996, based
upon a ratio of one share of the Company's common stock, par value $0.01 per
share (the "Common Stock") for every ten shares of 3M common stock owned on the
record date. Effective July 1, 1996, all of the outstanding shares of Common
Stock were distributed to 3M stockholders (the "Distribution"). 3M and the
Company have entered into a number of agreements to facilitate the Distribution
and the transition of the Company to an independent business enterprise.
Descriptions of the various agreements are set forth under the caption
"Relationships Between 3M and the Company After the Distribution" contained in
the Company's Information Statement in the Form 10 Registration Statement filed
with the Securities and Exchange Commission on June 21, 1996.
The consolidated financial statements for periods prior to July 1, 1996 reflect
the assets, liabilities, revenues, and expenses that were directly related to
the Company as it was operated within 3M. In cases involving assets and
liabilities not specifically identifiable to any particular business of 3M, only
those assets and liabilities actually transferred to the Company in the
Distribution were included in the Company's balance sheets prior to July 1,
1996. Regardless of the allocation of these assets and liabilities, however, the
Company's consolidated statements of operations for periods prior to July 1,
1996 include all of the related costs of doing business including an allocation
of certain general corporate expenses of 3M which were not directly related to
these businesses, including costs for corporate logistics, corporate research
and development, information technologies, finance, legal and corporate
executives. Management believes these allocations were made on a reasonable
basis. All material inter-company transactions and balances between the
Company's businesses have been eliminated. The financial information included
herein for periods prior to July 1, 1996 may not necessarily be indicative of
the financial position, results of operations or cash flows of the Company in
the future or what the financial position, results of operations or cash flows
would have been if the Company had been a separate, independent company during
the periods presented.
As of July 1, 1996, the effective date of the Distribution, the transfer of
certain non-U.S. operations were pending subject to receipt of consents or
approvals or satisfaction of other applicable foreign requirements. The Company
is in the process of obtaining these consents and approvals and making the
appropriate governmental filings and expects to finalize these foreign transfers
in due course. The Company's consolidated financial statements reflect the
consummation of all such transactions. The Company and 3M have entered into an
agreement that allows for the businesses not yet transferred to continue to
operate and for the Company to realize any income or losses generated from such
businesses following the effective date of the Distribution. The Company
believes that the delay in consummating these transfers will have no material
impact on the Company's consolidated financial position or results of
operations.
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. These adjustments, except for the restructuring and other one-time
charges recorded in 1996, 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 financial statements and notes.
This Form 10-Q should be read in conjunction with the Company's historical
financial statements and notes included in its Form 10 Registration Statement
filed with the Securities and Exchange Commission on June 21, 1996.
2. RESTRUCTURING CHARGES AND OTHER ONE-TIME CHARGES
In late 1995, the Company initiated a review of all of its operations, including
its organizational structure, manufacturing operations, products and markets,
with the goal of maximizing its cash flows and improving net income. In
connection with this review, the Company adopted a reorganization plan to
rationalize its manufacturing operations, streamline its organizational
structure and write-off impaired assets.
The Company has recorded one-time pre-tax charges of approximately $240 million
based upon the timing criteria required for the recognition of restructuring
charges or upon incurrence for other one-time charges. The Company recorded $166
million of these charges in its 1995 consolidated statement of operations
primarily for the write-down of assets associated with its manufacturing
rationalization programs. In the first and second quarters of 1996, the Company
recorded $53.9 million of restructuring charges related primarily to employee
separation programs and $22.5 million of one-time charges associated with
start-up activities. No additional restructuring or one-time charges were
recorded in the third quarter of 1996. Substantially all of the restructuring
charges have either been utilized by the Company or retained by 3M pursuant to
the spin-off.
3. FINANCING ARRANGEMENT
On July 1, 1996, the Company entered into a $350 million revolving credit
facility with a syndicate of banks which expires on June 30, 2001. There is no
collateral required and no principal amortization prior to expiration of the
facility. Borrowings under the facility are to be used for working capital needs
and other general corporate purposes. Borrowings under the credit facility bear
interest based on the London interbank offered rate (LIBOR) or the
administrative agent bank's base rate, plus an applicable margin based on the
Company's interest coverage ratio. The agreement contains financial covenants
that include a maximum debt to capital ratio, a minimum interest coverage ratio,
and a minimum consolidated tangible net worth. As of September 30, 1996, the
Company had a principal balance of $163 million outstanding under the credit
facility. In addition, the Company had various borrowing arrangements in its
international locations with a total balance outstanding as of September 30,
1996 of $20.5 million.
4. SUBSEQUENT EVENT
Effective October 11, 1996, the Company acquired Luminous Corporation, a
developer and marketer of desktop software to the prepress, print production,
printing, and graphic arts industries. The acquisition was accounted for by the
purchase method with consideration being paid in the form of cash and common
stock of the Company. In the fourth quarter of 1996, the Company will recognize
a non-deductible charge of approximately $12 million for the write-off of the
purchase price allocated to in-process research and development. Exclusive of
the research and development charge, it is expected that this acquisition will
not have a significant impact on the Company's operating results in 1996.
*****
Coopers & Lybrand L.L.P., the Company's independent accountants, have performed
a review of the unaudited interim consolidated financial statements included
herein and their report thereon accompanies this filing.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Imation Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of
Imation Corp. (the Company) as of September 30, 1996, and the related condensed
consolidated statements of operations for the three- and nine-month periods
ended September 30, 1996 and 1995, and cash flows for the nine-month periods
ended September 30, 1996 and 1995. 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 condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of operations and cash flows for the year then
ended (not presented herein); and in our report dated March 29, 1996, 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, 1995, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
October 30, 1996
IMATION CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
On June 18, 1996, the Board of Directors of Minnesota Mining and Manufacturing
Company ("3M") approved the spin-off of Imation Corp., a Delaware corporation
(the "Company"), which is comprised of substantially all of the businesses
previously operated within 3M's data storage and imaging systems groups. To
effectuate the transaction, the Board of Directors of 3M declared a dividend
payable to the holders of record of 3M common stock as of June 28, 1996, based
upon a ratio of one share of the Company's common stock, par value $0.01 per
share (the "Common Stock") for every ten shares of 3M common stock owned on the
record date. Effective July 1, 1996, all of the outstanding shares of Common
Stock were distributed to 3M stockholders (the "Distribution"). Following the
Distribution, the Company began operations as an independent, publicly held
company. Prior to July 1, 1996, the financial statements reflect the results of
operations, financial position and cash flows of the businesses transferred to
the Company from 3M as they operated within 3M. As a result, the financial
statements of the Company prior to July 1, 1996 have been carved out from the
financial statements of 3M using the historical results of operations and
historical basis of the assets and liabilities of such businesses. The Company's
statements of operations prior to July 1, 1996 include all of the related costs
of doing business, including charges for the use of facilities and for employee
benefits, and include an allocation of certain general corporate expenses of 3M
which were not directly related to these businesses including costs for
corporate logistics, corporate research and development, information
technologies, finance, legal and corporate executives. Management believes these
allocations were made on a reasonable basis.
As of July 1, 1996, the effective date of the Distribution, the transfer of
certain non-U.S. operations were pending subject to receipt of consents or
approvals or satisfaction of other applicable foreign requirements. The Company
is in the process of obtaining these consents and approvals and making the
appropriate governmental filings and expects to finalize these foreign transfers
in due course. The Company's consolidated financial statements reflect the
consummation of all such transactions. The Company and 3M have entered into an
agreement that allows for the businesses not yet transferred to continue to
operate and for the Company to realize any income or losses generated from such
businesses following the effective date of the Distribution. The Company
believes that the delay in consummating these transfers will have no material
impact on the Company's consolidated financial position or results of
operations.
The financial information for periods prior to July 1, 1996 included herein,
however, may not necessarily be indicative of the results of operations,
financial position and cash flows of the Company in the future or what the
results of operations, financial position and cash flows would have been had the
Company been a separate, independent company during the periods presented.
STRATEGIC REORGANIZATION
In late 1995, the Company initiated a review of all of its operations, including
its organizational structure, manufacturing operations, products and markets,
with the goal of maximizing its cash flows and improving net income. In
connection with this review, the Company adopted a reorganization plan to
rationalize its manufacturing operations, streamline its organizational
structure and write-off impaired assets.
The Company has recorded one-time pre-tax charges of approximately $240 million
based upon the timing criteria required for the recognition of restructuring
charges or upon incurrence for other one-time charges. The Company recorded $166
million of these charges in its 1995 statement of operations, primarily for the
write-down of assets associated with its manufacturing rationalization programs.
The remainder, primarily related to employee separations for direct employees of
the Company and one-time charges associated with start-up activities, has been
recorded in the first six months of 1996. No additional restructuring or
one-time charges were recorded in the third quarter of 1996.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995:
The following table displays the components of the Company's consolidated
statements of operations as a percentage of total revenues.
Three Months Ended
September 30,
--------------------
1996 1995
------ ------
Net revenues 100.0% 100.0%
Cost of goods sold 64.8% 66.7%
----- -----
Gross profit 35.2% 33.3%
Operating expenses:
Selling, general
and administrative 23.9% 23.6%
Research and development 6.9% 9.9%
----- -----
Total 30.8% 33.5%
Operating income (loss) 4.4% (0.2%)
Interest expense and other 0.5% 0.8%
----- -----
Income (loss) before tax
& minority interest 3.9% (1.0%)
Income tax provision (benefit) 1.8% (0.4%)
Minority interest - (0.3%)
----- -----
Net income (loss) 2.1% (0.3%)
===== =====
Net revenues for the third quarter of 1996 were $559.3 million, an increase of
$13.1 million or 2.4 percent from the same period in 1995. This represented the
first quarter over quarter increase in revenues in the last eleven quarters.
Volume increases of 8.8 percent were offset by price declines of 5.1 percent and
the negative effect of changes in currency exchange rates of 1.3 percent. Volume
growth was at the highest rate of increase in the past two years and was
primarily due to newly introduced products (principally DryView(TM) laser
imagers and Travan(TM) data cartridges).
Net revenues in the United States increased 1.5 percent with volume increases of
4.8 percent partially offset by pricing declines of 3.3 percent.
Internationally, net revenues increased 3.3 percent. Volume increases of 13.2
percent were partially offset by price declines of 7.1 percent and a 2.8 percent
negative effect of changes in currency exchange rates. International revenues
accounted for 47.4 percent of third quarter 1996 revenues, up from 46.9 percent
of total revenues for third quarter 1995.
Gross profit in the third quarter of 1996 was $196.6 million or 35.2 percent of
revenues, an increase of 1.9 percentage points from the third quarter of 1995.
This increase is due to lower employee headcount, increased volume and lower raw
material costs driven by better utilization and lower prices, partially offset
by negative pricing pressure, foreign currency impacts and a negative impact
from the sale of the Company's Sulmona, Italy facility.
Selling, general and administrative expenses were $133.5 million or 23.9 percent
of revenues, up 0.3 percentage points from the same period in 1995. Cost savings
from reduced sales related costs, reduced employee headcount and the benefit
realized from establishing a lower overhead cost structure were more than offset
by start-up costs of $19.3 million related to supply chain development and
identity development which are expected to continue through 1997. See additional
discussion in "Future Outlook".
Research and development costs totaled $38.6 million or 6.9 percent of revenues
in the third quarter of 1996, down $15.3 million or 3.0 percentage points from
the same period in 1995. This decrease is due to the implementation of a more
efficient research and development cost structure including consolidation of
laboratories from fourteen to seven, and higher than normal spending in 1995
reflecting investments made in a number of the Company's new products which came
to market during 1995 and early 1996. See additional discussion in "Future
Outlook".
Operating income for the third quarter of 1996 was $24.5 million, or 4.4 percent
of net revenues. This represents a $25.8 million increase from the $1.3 million
operating loss in the same period in 1995.
Third quarter non-operating expense was $2.5 million, down $1.8 million from the
same quarter last year. This decrease was due to an increase in other income of
$1.2 million, primarily interest income and currency transaction gains, and to
lower interest expense due to lower average debt outstanding and a lower
effective interest rate. Interest expense prior to July 1, 1996 was based on an
assumed $250 million in outstanding debt and 3M's effective interest rate during
the period. The allocation of interest expense for periods prior to July 1, 1996
is more fully discussed in Note 6 of the Notes to Historical Financial
Statements included in the Company's Form 10 Registration Statement.
The Company's effective tax rate was 46.4 percent compared to 42.3 percent in
the third quarter of 1995. This increase is due to higher effective rates in
certain international tax jurisdictions.
Net income in the third quarter of 1996 was $11.8 million, or $.29 per share.
This represents an improvement of $13.6 million or $0.33 per share from the same
period in 1995.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995:
The following table sets forth the Company's consolidated statements of
operations, restructuring and other one-time charges and the resulting adjusted
balances for the nine month period ended September 30, 1996 with comparative
balances for the nine month period ended September 30, 1995. The adjusted
balances are also presented as a percentage of revenues as are the results for
the comparable period of 1995.
(In Millions Except per Share Data)
Nine Months Ended September 30, Percent of Revenues
--------------------------------------------- -------------------
1996 One-Time 1996 1996
Historical Charges Adjusted 1995 Adjusted 1995
---------- -------- -------- -------- -------- -----
Net revenues $1,696.6 $ - $1,696.6 $1,687.9 100.0% 100.0%
Cost of goods sold 1,105.0 (7.9) 1,097.1 1,099.1 64.7% 65.1%
-------- ------ -------- -------- ----- -----
Gross profit 591.6 7.9 599.5 588.8 35.3% 34.9%
Operating expenses:
Selling, general
and administrative 423.4 (14.6) 408.8 405.6 24.1% 24.0%
R&D 132.1 - 132.1 168.2 7.7% 10.0%
Restructuring chgs 53.9 (53.9) - - - -
-------- ------ -------- -------- ----- -----
Total 609.4 (68.5) 540.9 573.8 31.8% 34.0%
Oper. Income (loss) (17.8) 76.4 58.6 15.0 3.5% 0.9%
Int. exp. and other 7.9 - 7.9 14.2 0.5% 0.9%
-------- ------ -------- -------- ----- -----
Income (loss) before tax
& minority interest (25.7) 76.4 50.7 0.8 3.0% 0.0%
Income taxes (5.4) 27.8 22.4 0.3 1.3% 0.0%
Minority interest (0.4) - (0.4) (2.0) 0.0% (0.1%)
-------- ------ -------- -------- ----- -----
Net income (loss) $ (19.9) $ 48.6 $ 28.7 $ 2.5 1.7% 0.1%
======== ====== ======== ======== ===== =====
Earnings (loss)
per share $ (0.48) $ 1.17 $ 0.69 $ 0.06
======== ======= ======== ========
On a year-to-date basis, net revenues totaled $1,696.6 million, an increase of
$8.7 million or 0.5 percent from the same period in 1995. Volume increases of
7.2 percent were offset by price declines of 5.2 percent and 1.5 percent from
the negative effect of changes in currency exchange rates. Volume increases were
driven primarily by newly introduced products (principally DryView(TM) laser
imagers and Travan(TM) data cartridges).
Net revenues in the United States increased 1.9 percent with volume increases of
5.5 percent partially offset by pricing declines of 3.6 percent.
Internationally, net revenues decreased 0.8 percent. Volume increases of 8.9
percent were more than offset by price declines of 6.8 percent and a 2.9 percent
negative effect of changes in currency exchange rates. International revenues
accounted for 49.3% of total revenues compared with 50.0% in the same period in
1995.
Gross profit for the first nine months of 1996 was $591.6 million. This includes
special one-time charges of $7.9 million related to the write off of certain
packaging materials in connection with the Distribution. Excluding these
charges, gross profit would have been $599.5 million or 35.3 percent of
revenues, an increase of 0.4 percentage points from the first nine months of
1995. This increase was primarily due to productivity improvements, volume
increases and lower raw material costs driven by better utilization and lower
prices, partially offset by lower selling prices and negative impact of changes
in currency exchange rates.
Selling, general and administrative expenses were $423.4 million. Excluding
special one-time charges of $14.6 million related to the spin-off, selling,
general and administrative expenses would have been $408.8 million or 24.1
percent of revenues, an increase of 0.1 percentage points from the same period
in 1995. Reduced sales related costs, reduced employee headcount and the benefit
realized from establishing a lower overhead cost structure were more than offset
by start-up costs of $32.0 million related to supply chain development and
identity development which are expected to continue through 1997. See additional
discussion in "Future Outlook".
Research and development costs totaled $132.1 million or 7.7 percent of revenues
in the first nine months of 1996, down $36.1 million or 2.3 percentage points
from the same period in 1995. This decrease is due to the implementation of a
more efficient research and development cost structure including consolidation
of laboratories from fourteen to seven, and higher than normal spending in 1995
reflecting investments made in a number of the Company's new products which came
to market during 1995 and early 1996. See additional discussion in "Future
Outlook".
The Company recorded restructuring charges of $53.9 million in the first nine
months of 1996. These charges primarily relate to employee separation programs.
See additional discussion in "Strategic Reorganization".
The operating loss for the first nine months of 1996 was $17.8 million.
Excluding restructuring charges of $53.9 million and special one-time charges of
$22.5 million, the Company would have had operating income of $58.6 million or
3.5 percent of revenues. This represents a $43.6 million increase from operating
income in the same period in 1995 which totaled $15.0 million.
Non-operating expense for the first nine months of 1996 was $7.9 million, down
$6.3 million from the same period last year. This decrease was due to an
increase in other income of $3.0 million, primarily related to investment gains
prior to the Distribution and interest income, and to lower interest expense due
to a lower effective interest rate. Interest expense prior to July 1, 1996 was
based on an assumed $250 million in outstanding debt and 3M's effective interest
rate during the period. The allocation of interest expense prior to July 1, 1996
is more fully discussed in Note 6 of the Notes to Historical Financial
Statements in the Company's Form 10 Registration Statement.
The Company's effective tax rate was 21.0 percent. Excluding restructuring and
special one-time charges, the Company's effective tax rate was 44.2 percent, up
slightly from the same period of 1995.
Net loss year-to-date 1996 was $19.9 million. Excluding restructuring and
special one-time charges, net income would have been $28.7 million resulting in
earnings per share of $0.69. This represents an improvement of $26.2 million or
$0.63 per share from the same period in 1995.
FINANCIAL POSITION
The Company had 3.0 months of inventory on hand at September 30, 1996, down from
3.4 months at December 31, 1995. Months in inventory have decreased due to
better management of inventories as part of the supply chain development. The
accounts receivable days sales outstanding was 78 days at September 30, 1996,
unchanged from December 31, 1995.
The book value of property, plant and equipment at September 30, 1996 was
$474.1, a decrease of $39.1 million from $513.2 million at December 31, 1995.
This decrease is primarily due to lower capital spending and the sale of the
Company's Sulmona, Italy facility. The decrease from December 31, 1995 in other
assets of $41.0 million was more than offset by the increase in other current
assets of $60.9 million primarily due to changes in deferred tax assets as more
of the temporary differences related to current items.
Accounts payable at September 30, 1996 increased $66.9 million from December 31,
1995. This increase is driven by certain spin-off transactions that were not
finalized prior to the end of the third quarter and payables to 3M for products
and transitional services that were previously eliminated intercompany
transactions. Other current liabilities increased $49.3 million from $125.9
million at December 31, 1995 to $175.2 million at September 30, 1996. This
increase was driven by accruals for the special one-time charges and accruals
for identity development and supply chain development costs.
LIQUIDITY
Prior to July 1, 1996, cash and equivalents and debt were not allocated to the
Company from 3M since 3M uses a centralized approach to cash management and the
financing of its operations. The Company's financing requirements prior to July
1, 1996 are represented by cash transactions with 3M and are reflected in "Net
cash (paid to) received from 3M" in the statements of cash flows. This financial
support was discontinued following the Distribution.
Cash provided by operating activities was $264.9 million during the nine months
ended September 30, 1996, compared to $126.0 million during the same period in
1995. The major non-cash items were depreciation which was $137.7 million
compared to $141.5 million during the first nine months of 1995 and
restructuring and other one-time charges of $76.4 million during the nine months
ended September 30, 1996. Working capital provided $88.1 million for the first
nine months of 1996, an improvement of $113.0 million over the $24.9 million
used in the comparable period of 1995. Cash provided by working capital was
driven by a decrease in inventories and an increase in accounts payable.
Accounts payable are expected to decrease in the fourth quarter in connection
with the finalization of certain spin-off transactions.
Cash used in investing activities was $109.7 million for the first nine months
of 1996 compared to $143.0 million in the comparable period of 1995. Investing
activities included capital expenditures of $115.9 million for the first nine
months of 1996 compared to $135.4 million during the same period of 1995.
Capital expenditures were higher in the nine months ended September 30, 1995
reflecting expenditures made for additional plant capacity for a number of the
Company's new products that came to market during 1995 and early 1996.
Financing activities during the first nine months of 1996 used cash of $22.4
million. Financing activities primarily related to the net borrowing of
approximately $163.0 million under the Company's credit facility and subsidiary
borrowings of $20.5 million primarily from banks outside the United States.
Borrowings were principally used to pay 3M for certain overseas assets in
connection with the Distribution, to repay certain intercompany indebtedness
assumed by the Company in connection with the Distribution, and to fund a
portion of the Company's ESOP.
The Company expects its operations, exclusive of contemplated borrowings, to
generate sufficient funds to meet the Company's operating needs for the next
twelve months, including anticipated capital expenditures. At September 30,
1996, the Company's ratio of total debt to total capital is 17%.
FUTURE OUTLOOK
The Company's overall financial goal is to improve economic profit (which is
measured as operating income after taxes in excess of the Company's cost of
capital) by $150 million by the end of 1998. This goal is based on anticipated
cost reductions, modest revenue growth and improved asset management resulting
from the implementation of the Company's business strategy. The Company
anticipates total cost savings (net of start-up expenses) during the three year
period 1996-1998 of $90 million after taxes; or, $150 million on a pre-tax
basis.
Through the first three quarters of 1996, the Company's economic profit improved
by $45 million. This improvement is driven by cost reductions, increased
revenues and better management of operating capital due to the implementation of
the Company's reorganization plan as well as other management actions.
The Company continues to implement its reorganization plan including the closure
or consolidation of five factory locations, the consolidation of laboratories
from fourteen to seven and a reduction in the number of employees of more than
20%.
As of September 30, 1996, the Company's headcount was 9,400, down from 9,700 it
began with on July 1, 1996 and down from the 12,000 reported at March 31, 1996.
The third quarter reduction reflects the continued impact of previously
announced voluntary separation plans. The reduction from the level reported at
March 31, 1996 reflects the aforementioned separation plans as well as the
retention by 3M of staff services positions which had been allocated to the
Company as part of 3M. In the near term, the majority of the costs related to
the staff services support provided by these employees will continue to be
incurred by the Company through transition support services agreements with 3M.
The Company believes its current staffing levels are appropriate for the near
term.
The third quarter net benefit from establishing a lower cost overhead structure
was approximately $14 million. This benefit was offset by the additional
expenses incurred by the Company to establish itself as an independent public
company. The Company expects to continue to incur these start-up costs through
1997 with the full benefit of the lower cost overhead structure being realized
in 1998.
Also in the third quarter, the Company announced the acquisition of Luminous
Corporation, a pre-press software solutions company. In the fourth quarter of
1996, the Company will recognize a non-deductible charge of approximately $12
million for the write-off of the purchase price allocated to in-process research
and development. Exclusive of the research and development charge, it is
expected that this acquisition will not have a significant impact on operating
results in 1996.
FORWARD-LOOKING STATEMENTS
Certain information, other than the historical information, discussed in this
Report, may constitute forward-looking statements for the purposes of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
statements are subject to various factors which could cause actual results in
the future to differ materially from these statements. Such factors include, but
are not limited to, customer acceptance of the Company's new product platforms,
competitive pricing pressures on the Company's products, technological
developments in the markets served by the Company, the Company's ability to
establish its operations as an independent company, and the various factors set
forth under the caption "Special Factors" contained in the Company's Information
Statement included in the Form 10 Registration Statement filed with the
Securities and Exchange Commission on June 21, 1996 in connection with the
Distribution.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company, in the ordinary course of its business, is the subject of various
pending or threatened legal actions. Although it is impossible to predict the
outcome of any legal proceeding and the Company therefore cannot estimate the
ultimate liability, if any, relating to these various proceedings, the Company
believes that any ultimate liability arising from these actions should not have
a material adverse effect on the financial position of the Company.
Items 2-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Report.
(3.1) Amended By-Laws.
(10.1) Form of Indemnity Agreement between Imation Corp and
each of its directors.
(11) A statement regarding the computation of per share
earnings.
(15) An awareness letter from the Company's independent
accountants regarding unaudited interim financial
statements.
(27) Financial data schedule (EDGAR filing only).
(b) No reports on Form 8-K were filed during the quarter ended September
30, 1996.
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: November 13, 1996 By: /s/ Jill D. Burchill
----------------------------
Jill D. Burchill
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Amended By-Laws
10.1 Form of Indemnity Agreement between Imation Corp. and each of its
directors.
11 A statement regarding the computation of per share earnings.
15 An awareness letter from the Company's independent accountants
regarding unaudited interim financial statements.
27 Financial data schedule (EDGAR filing only).