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 JUNE 30, 1997 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 of incorporation) (I.R.S. Employer
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: 40,771,586 shares of Common
Stock, par value $0.01 per share, were outstanding on July 31, 1997.
IMATION CORP.
INDEX
PAGE(S)
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
for the three and six month periods
ended June 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets as
of June 30, 1997 and December 31, 1996 4
Condensed Consolidated Statements of Cash
Flows for the six month periods ended
June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-9
Report of Independent Accountants 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11-20
PART II. OTHER INFORMATION 21-22
SIGNATURE 23
EXHIBITS 24-26
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------- -------------------
1997 1996 1997 1996
------ ------ -------- --------
Net revenues $554.8 $561.2 $1,102.5 $1,137.3
Cost of goods sold 361.8 368.5 710.5 742.3
------ ------ -------- --------
Gross profit 193.0 192.7 392.0 395.0
Operating expenses:
Selling, general and
administrative 142.6 159.2 275.6 289.9
Research and development 40.4 45.6 78.2 93.5
Restructuring charges - 43.5 - 53.9
------ ------ -------- --------
Total 183.0 248.3 353.8 437.3
Operating income (loss) 10.0 (55.6) 38.2 (42.3)
Other income and expense:
Interest expense 3.8 3.7 6.2 7.4
Other, net (1.8) (1.5) 2.2 (2.0)
------- ------- -------- ---------
Total 2.0 2.2 8.4 5.4
Income (loss) before tax and
minority interest 8.0 (57.8) 29.8 (47.7)
Income tax provision (benefit) 3.6 (19.7) 13.4 (15.6)
Minority interest - (0.3) - (0.4)
------- ------- --------- ---------
Net income (loss) $ 4.4 $(37.8) $ 16.4 $ (31.7)
======= ======= ========= =========
Earnings (loss) per share $ 0.11 $(0.90) $ 0.41 $ (0.76)
======= ======= ========= =========
Weighted average shares
outstanding 39.8 41.9 40.3 41.9
======= ======= ========= ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share Amounts)
June 30,
1997 December 31,
(Unaudited) 1996
--------- --------
ASSETS
Current Assets
Cash and equivalents $ 66.4 $ 61.7
Accounts receivable - net 485.8 479.6
Inventories 403.1 392.8
Other current assets 104.3 94.5
--------- --------
Total current assets 1,059.6 1,028.6
Property, Plant and Equipment - net 455.0 480.1
Other Assets 97.5 64.6
--------- --------
Total Assets $1,612.1 $1,573.3
========= ========
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 169.5 $ 194.1
Accrued payroll 42.5 41.9
Income taxes payable 9.5 7.6
Short-term debt 27.3 26.5
Other current liabilities 149.2 151.2
--------- --------
Total current liabilities 398.0 421.3
Other Liabilities 111.0 98.6
Long-Term Debt 233.8 123.1
Commitments and Contingencies
Shareholders' Equity - net 869.3 930.3
Shares issued:
June 30, 1997: 42,924,909
December 31, 1996: 42,879,880
--------- --------
Total Liabilities and Shareholders' Equity $1,612.1 $1,573.3
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six months ended
June 30,
-------------------
1997 1996
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 16.4 $(31.7)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 74.3 94.5
Deferred income taxes (0.3) 5.3
Restructuring and other one-time charges - 76.4
Working capital changes (60.5) (44.3)
Other 15.0 (15.3)
------- -------
Net cash provided by operating activities 44.9 84.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (62.8) (79.1)
Capitalized software (33.3) -
Other 0.4 (0.2)
------- -------
Net cash used in investing activities (95.7) (79.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt 0.8 -
Borrowings of long-term debt 649.0 -
Repayment of long-term debt (538.2) -
Purchases of treasury shares (61.0) -
Decrease in unearned ESOP shares 4.9 -
Employee stock plans and other 0.2 -
Net cash paid to 3M - (0.9)
------- -------
Net cash provided by (used in) financing activities 55.7 (0.9)
Effect of exchange rate changes on cash (0.2) (4.7)
------- -------
Net change in cash and equivalents 4.7 -
Cash and equivalents - beginning of period 61.7 -
------- -------
Cash and equivalents - end of period $ 66.4 $ -
======= =======
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 - BASIS OF PRESENTATION
Imation Corp. (the "Company") became an independent, publicly held company as of
July 1, 1996 (the "Distribution Date"), when Minnesota Mining and Manufacturing
("3M") spun off its data storage and imaging businesses as an independent,
publicly held company (the "Distribution"). One share of the Company's common
stock was issued for every ten shares of 3M stock outstanding to stockholders of
record on June 18, 1996. 3M and the Company have entered into a number of
agreements to facilitate the transition of the Company to an independent
business enterprise. Descriptions of the various agreements are set forth under
the caption "Relationship Between 3M and the Company" contained in the Company's
1996 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
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. 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 results of operations or cash flows of the
Company if it had been a separate, independent company during the periods prior
to July 1, 1996.
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 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 consolidated financial statements and notes. The year end
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the Company's
consolidated financial statements and notes included in its 1996 Annual Report
on Form 10-K.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30,
1997 December 31,
(Unaudited) 1996
---------- ---------
(In millions, except share amounts)
Inventories
Finished goods $ 271.0 $ 248.1
Work in process 61.2 57.3
Raw materials and supplies 70.9 87.4
---------- ---------
Total inventories $ 403.1 $ 392.8
========== ==========
Property, Plant and Equipment
Property, plant and equipment $ 1,710.3 $ 1,709.9
Less accumulated depreciation (1,255.3) (1,229.8)
---------- ----------
Property, plant and equipment - net $ 455.0 $ 480.1
========== ==========
Shareholders' Equity
Common stock $ 0.4 $ 0.4
Additional paid-in capital 1,012.5 1,011.5
Retained earnings 27.6 11.2
Unearned ESOP shares (41.8) (46.6)
Cumulative translation adjustment (68.4) (46.2)
Treasury stock, at cost
June 30, 1997: 2,480,641 shares (61.0) -
---------- ----------
Total shareholders' equity $ 869.3 $ 930.3
========== ==========
3. 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.
4. MASTER LEASE AND SECURITY AGREEMENT
In March 1997, the Company entered into a Master Lease and Security Agreement in
connection with the construction of a new research and development facility at
the Company's headquarters site. Construction is expected to be completed in
June 1998, at which time the lease payments will commence. The Company has the
option to purchase the facility at the end of the lease term, March 2002. In the
event the Company chooses not to exercise this purchase option, the Company is
obligated to arrange for the sale of the facility and has guaranteed the lessor
a sale price of $58.5 million.
5. INTEREST RATE SWAP AGREEMENT
Effective March 25, 1997, the Company entered into an interest rate swap
agreement with a financial institution. The notional amount of the interest rate
swap agreement is $100 million with the Company paying fixed rate and receiving
variable rate. The agreement expires March 31, 2000. Net payments or receipts
under the agreement are recorded as adjustments to interest expense. As of June
30, 1997, the effective interest rate on the $231.0 million in debt outstanding
under the Company's revolving credit facility was 6.43%, including the effect of
the interest rate swap agreement.
6. EARNINGS PER SHARE
The number of weighted average shares outstanding used in the computation of
earnings per share (EPS) for periods prior to July 1, 1996 is equal to one-tenth
the weighted average number of 3M shares outstanding based on the distribution
ratio of one share of Imation Corp. for every ten shares of 3M pursuant to the
spin-off on July 1, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". This statement establishes standards for computing
and presenting basic and diluted earnings per share for financial statements
issued for periods ending after December 15, 1997. The adoption of this
statement is not expected to have a material effect on the Company's reported
EPS.
7. DERIVATIVE ACCOUNTING POLICY
The Company uses, or may use, interest rate swaps and foreign currency and
commodity forward and option contracts to manage risks generally associated with
interest rate, exchange rate and commodity market
volatility. All hedging instruments are designated as, and effective as, hedges
and are fully correlated as required by generally accepted accounting
principles. Instruments that do not qualify for hedge accounting are marked to
market with changes recognized in current earnings. The Company does not hold or
issue derivative financial instruments for trading purposes and is not a party
to leveraged derivatives.
Realized and unrealized gains and losses on foreign currency and commodity
forward and option contracts for qualifying hedge instruments are deferred until
offsetting gains and losses on the underlying transactions are recognized in
earnings. These gains and losses generally are recognized as an adjustment to
cost of goods sold for inventory related hedge transactions, or in stockholders'
equity for hedges of net investments in international companies. Cash flows
attributable to these financial instruments are included with cash flows of the
associated hedged items. For interest rate swaps, the differential paid or
received on the swaps is recognized on an accrual basis as an adjustment to
interest expense. Gains and losses on terminated interest rate swaps are
amortized and reflected in interest expense over the remaining term of the
underlying debt.
8. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform with the current year presentation.
*****
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 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, 1997, and the related consolidated
statements of operations for the three and six month periods ended June 30, 1997
and 1996, and condensed consolidated statements of cash flows for the six month
periods ended June 30, 1997 and 1996. 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 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, 1996, and the
related consolidated statements of operations and cash flows for the year then
ended (not presented herein); and in our report dated February 14, 1997, 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, 1996, 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
July 30, 1997
ITEM 2. 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 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. The financial information included herein for periods prior to July 1,
1996 may not necessarily be indicative of the results of operations or cash
flows of the Company had the Company been a separate, independent company during
the periods prior to July 1, 1996.
At the time of the Distribution, the Company established an overall financial
goal of improving the Company's economic profit (measured as after-tax operating
income in excess of a charge for the use of capital) by $150 million over a
three year period ending December 31, 1998, from the base year ended December
31, 1995. This goal is based on anticipated cost reductions and the Company's
objectives for improved revenue growth and improved asset utilization.
During the second quarter of 1997, the Company improved economic profit by $2.9
million over the second quarter of 1996. Cost reductions and improved asset
management generated approximately $1.2 million and $2.9 million, respectively,
of this improvement, partially offset by a decline in revenues. Since December
31, 1995, economic profit has improved by approximately $75.2 million, with
$37.0 million of the improvement coming from cost reductions and $38.6 million
from improved asset management, partially offset by a decline in revenues.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1996
The following table displays the components of the Company's consolidated
statements of operations as a percentage of total revenues. The adjusted 1996
percentages exclude the impact of $66.0 million of pretax special one-time
charges recorded in the second quarter of 1996. Of these charges, $7.9 million
were recorded as cost of goods sold, $14.6 million as selling, general and
administrative expenses and $43.5 million as restructuring charges. On an
after-tax basis, these charges totaled $42.5 million.
Three Months Ended
June 30,
--------------------
Adjusted
1997 1996
---- ----
Net revenues 100.0% 100.0%
Cost of goods sold 65.2% 64.3%
------ ------
Gross profit 34.8% 35.7%
Operating expenses:
Selling, general
and administrative 25.7% 25.8%
Research and development 7.3% 8.1%
------ ------
Total 33.0% 33.9%
Operating income 1.8% 1.8%
Other income and expense:
Interest expense 0.7% 0.7%
Other, net (0.3%) (0.3%)
------- -------
Total 0.4% 0.4%
Income before tax and
minority interest 1.4% 1.4%
Income tax provision 0.6% 0.7%
Minority interest - (0.1%)
------ -------
Net income 0.8% 0.8%
====== ======
Net revenues for the second quarter of 1997 were $554.8 million, a decrease of
$6.4 million or 1.1 percent from the same period in 1996. Volume increases of
7.9 percent were more than offset by price declines of 4.6 percent and the
negative effect of changes in currency exchange rates of 4.4 percent. Volume
growth of 7.9 percent was consistent with volume growth experienced for the full
year 1996 and was more than twice the volume growth in the first quarter of
1997. Strong sales growth of digital imaging products (including DryView(TM)
laser imagers) and high-end data storage products were partially offset by
weaker than expected demand for certain lower-capacity data storage products.
The Company's growth portfolio (primarily Travan(TM) data cartridges, DryView
laser imagers, Rainbow(TM) color proofers, 120 megabyte SuperDisk(TM) and
Luminous pre-press software) represented approximately 15 percent of revenues
for the quarter, up from approximately 10 percent of revenues in the second
quarter of 1996 and down from approximately 16 percent of revenues in the first
quarter of 1997. Price erosion of 4.6 percent improved from the price erosion
experienced in the second quarter of 1996 of 4.9 percent and is consistent with
the Company's expectation of of overall price declines of approximately 5
percent.
Net revenues in the United States decreased 1.3 percent with volume increases of
1.5 percent more than offset by pricing declines of 2.8 percent.
Internationally, net revenues decreased 1.0 percent. International volume growth
was the highest in more than two years at 14.6 percent which was partially
offset by price declines of 6.7 percent, resulting in local currency growth of
7.9 percent. The negative effect of changes in currency exchange rates impacted
international revenues by 8.9 percent. International revenues accounted for 49.4
percent of second quarter 1997 revenues, compared to 49.3 percent for the second
quarter of 1996.
Based on the currency exchange rates as of June 30, 1997, changes in currency
exchange rates from the previous year will continue to negatively impact
revenues and earnings for the remainder of 1997.
The Company expects revenues in the second half of 1997 to exceed revenues from
the same period of 1996, inclusive of the negative impact of changes in currency
rates. The Company has a stated goal of achieving 20 percent of its 1997
revenues from its growth portfolio, as defined above. Both the Company's
expectation for the second half of 1997 and its goal for the key growth
platforms are contingent substantially upon the continued momentum of DryView
sales and the success of SuperDisk drive placement in the second half of 1997.
Gross profit in the second quarter of 1997 was $193.0 million or 34.8 percent of
revenues. Excluding the special one-time charges of $7.9 million recorded in the
second quarter of 1996, gross profit in that period would have been $200.6
million or 35.7 percent of revenues. The decrease in gross profit margin of 0.9
percentage points was due to lower than expected demand in the desk-top tape
back-up segment which resulted in under-utilization of the tape production
facility and the combined mix impact of lower sales of desk-top tape and
increased sales of DryView laser imagers, which have a higher and lower than
average gross margin, respectively.
Selling, general and administrative (SG&A) expenses were $142.6 million or 25.7
percent of revenues. Excluding the $14.6 million of special one-time costs
recorded in the second quarter of 1996, SG&A expenses in that period would have
been $144.6 million or 25.8 percent of revenues. SG&A expenses in both periods
include recurring start-up costs associated with the Company's development of
business processes independent of 3M and it is expected that these start-up
costs will continue throughout 1997.
Research and development expenses totaled $40.4 million or 7.3 percent of
revenues in the first quarter of 1997, a decrease of $5.2 million or 0.8
percentage points from the same period in 1996. This decrease reflects the
efficiencies and productivity the Company has obtained by the consolidation of
laboratories, partially offset by investment in key future technology programs.
The Company recorded restructuring charges of $43.5 million in the second
quarter of 1996 reflecting costs for certain voluntary employee separation
programs. No such charges were recorded in the second quarter of 1997.
Operating income for the second quarter of 1997 was $10.0 million, or 1.8
percent of revenues. This represents a $0.4 million decrease in operating income
from the second quarter of 1996, after excluding the second quarter 1996 special
one-time charges of $66.0 million.
Second quarter 1997 interest expense was $3.8 million, up $0.1 million from the
same quarter last year. Average debt outstanding was lower in the second quarter
of 1997 as compared to the same period of 1996, more than offset by a higher
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 7 of the Notes to
Consolidated Financial Statements included in the Company's 1996 Annual Report
on Form 10-K.
The net other income and expense in the second quarter of 1997 totaled $1.8
million of income, compared to $1.5 million of income in the comparable period
of 1996.
The Company's effective tax rate in the second quarter of 1997 was 45.0 percent,
compared to 46.3 percent in the second quarter of 1996, excluding the special
one-time charges.
Net income in the second quarter of 1997 was $4.4 million, or $0.11 per share.
Net loss in the comparable period of 1996 was $(37.8) million, or $(0.90) per
share. Excluding the special one-time charges of $42.5 million after tax, second
quarter 1996 net income would have been $4.7 million, or $0.11 per share.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996
The following table displays the components of the Company's consolidated
statements of operations as a percentage of total revenues. The 1996 percentages
exclude the impact of $76.4 million of pretax special one-time charges recorded
in the six months ended June 30, 1996. Of these charges, $7.9 million were
recorded as cost of goods sold, $14.6 million as selling, general and
administrative expenses and $53.9 million as restructuring charges. On an
after-tax basis, these charges totaled $48.6 million.
Six Months Ended
June 30,
--------------------
Adjusted
1997 1996
---- ----
Net revenues 100.0% 100.0%
Cost of goods sold 64.4% 64.6%
------ ------
Gross profit 35.6% 35.4%
Operating expenses:
Selling, general
and administrative 25.0% 24.2%
Research and development 7.1% 8.2%
------ ------
Total 32.1% 32.4%
Operating income 3.5% 3.0%
Other income and expense:
Interest expense 0.6% 0.7%
Other, net 0.2% (0.2%)
------ ------
Total 0.8% 0.5%
Income before tax and
minority interest 2.7% 2.5%
Income tax provision 1.2% 1.0%
Minority interest - -
------ ------
Net income 1.5% 1.5%
====== ======
On a year to date basis, net revenues were $1,102.5 million, a decrease of $34.8
million or 3.1 percent from the same period in 1996. Volume increases of 5.7
percent were more than offset by price declines of 4.8 percent and the negative
effect of changes in currency exchange rates of 4.0 percent. Volume growth
benefited from strong sales growth of digital imaging products (including
DryView medical imagers) and high-end data storage products, partially offset by
the Company's decision to reduce sales in certain low margin product lines in
which the Company is operating under a harvest strategy and by weaker than
expected demand for certain lower-capacity data storage products. Price erosion
of 4.8 percent in the
six months ended June 30, 1997 improved from the price erosion experienced in
the same period of 1996 of 5.3 percent and is consistent with the Company's
expectations.
Net revenues in the United States decreased 1.5 percent with volume increases of
1.4 percent more than offset by pricing declines of 2.9 percent.
Internationally, net revenues decreased 4.6 percent. International volume growth
of 9.9 percent was partially offset by price declines of 6.7 percent, resulting
in local currency growth of 3.2 percent. The negative effect of changes in
currency exchange rates impacted international revenues by 7.8 percent.
International revenues accounted for 49.5 percent of total revenues compared
with 50.3 percent in the same period of 1996.
Gross profit for the first six months of 1997 was $392.0 million or 35.6 percent
of revenues. Excluding the special one-time charges of $7.9 million recorded in
the first six months of 1996, gross profit in that period would have been $402.9
million or 35.4 percent of revenues. The gross profit margin in the first six
months of 1997 was impacted positively by unit cost reductions, raw material
price declines and the reduction of sales in certain lower margin product lines,
offset by lower than expected demand in the desk-top tape back-up segment which
resulted in under-utilization of the tape production facility and the combined
mix impact of lower sales of desk-top tape and increased sales of DryView laser
imagers, which have a higher and lower than average gross margin, respectively.
Selling, general and administrative (SG&A) expenses were $275.6 million or 25.0
percent of revenues. Excluding the $14.6 million of special one-time costs
recorded in the first six months of 1996, SG&A expenses in that period would
have been $275.3 million or 24.2 percent of revenues. The increase in SG&A
expenses as a percentage of revenues in the first six months of 1997 is due to
the decline in revenues.
Research and development costs totaled $78.2 million or 7.1 percent of revenues
in the first six months of 1997, down $15.3 million or 1.1 percentage points
from the same period in 1996. This decrease reflects the efficiencies and
productivity the Company has obtained by the consolidation of laboratories,
partially offset by investment in key future technology programs.
The Company recorded restructuring charges of $53.9 million in the first six
months of 1996 reflecting costs for certain voluntary employee separation
programs. No such charges were recorded in the first six months of 1997.
Operating income for the first six months of 1997 was $38.2 million, or 3.5
percent of revenues. This represents a $4.1 million improvement over operating
income in the same period of 1996 of $34.1 million, after excluding the special
one-time charges of $76.4 million that were recorded in the first six months of
1996.
Interest expense for the first six months of 1997 was $6.2 million, down $1.2
million from the same period of 1996. This decrease is due to lower average debt
outstanding in the first six months of 1997 as compared to the same period in
1996. 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 7 of the Notes to Consolidated Financial Statements
included in the Company's 1996 Annual Report on Form 10-K.
The net other income and expense in the first six months of 1997 totaled $2.2
million of expense, compared to $2.0 million of income in the comparable period
of 1996. The 1997 expense is primarily due to transaction losses on foreign
currency exposures partially offset by interest income.
The Company's effective tax rate for the first six months of 1997 was 45.0
percent, compared to 42.5 percent in the same period in 1996, excluding the
special one-time charges.
Year to date net income in 1997 was $16.4 million, or $0.41 per share. Net loss
in the comparable period of 1996 was $(31.7) million, or $(0.76) per share.
Excluding the special one-time charges of $48.6 million after tax, net income in
the first six months of 1996 would have been $16.9 million, or $0.40 per share.
FINANCIAL POSITION
The Company had 3.4 months of inventory on hand at June 30, 1997, up from 3.2
months at December 31, 1996. This increase is due to the ongoing implementation
of plant consolidations, the start-up of outsourcing certain product lines and
the ongoing transition from 65 3M warehouses globally towards the Company's goal
of 29 warehouses. The accounts receivable days sales outstanding was 79 days at
June 30, 1997, up from 77 days at December 31, 1996. Other current assets
increased approximately $9.8 million from December 31, 1996 due to an increase
in deferred taxes.
The book value of property, plant and equipment at June 30, 1997 was $455.0, a
decrease of $25.1 million from the December 31, 1996 balance of $480.1 million.
This decrease is primarily due to depreciation in excess of capital spending and
due to the effect of changes in currency rates. Other assets increased $32.9
million from December 31, 1996 due to capitalization of software costs related
to developing business processes independent of 3M.
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 3M" in the consolidated statements of cash flows. This financial
support was discontinued following the Distribution.
Cash provided by operating activities was $44.9 million during the six months
ended June 30, 1997, compared to $84.9 million during the same period in 1996.
Working capital increased $60.5 million in the first six months of 1997, while
working capital increased only $44.3 million in the comparable period of 1996.
Depreciation was $74.3 million in the first six months on 1997 while it was
$94.5 million in the comparable period in 1996. Restructuring and other one-time
charges of $76.4 million reported in the first six months of 1996 were partially
offset by the net loss of $31.7 million reported in that period.
Cash used in investing activities was $95.7 million for the first six months of
1997 compared to $79.3 million in the comparable period of 1996. Investing
activities included capital expenditures of $62.8 million for the first six
months of 1997 compared to $79.1 million during the same period of 1996. It is
expected that capital expenditures will be slightly lower than depreciation for
all of 1997. Capitalized software was $33.3 million in the first six months of
1997, primarily related to establishing information technology systems
independent of 3M. It is expected that capitalized software costs related to
establishing independent systems will continue through the remainder of 1997 and
into 1998. Amortization of these costs will begin when the systems are
implemented, currently expected to be early 1998.
Financing activities during the first six months of 1997 provided cash of $55.7
million. Financing activities primarily related to the net borrowing of $111.6
million and the payment of $61.0 million to
repurchase approximately 2,481,000 of the Company's common shares. In March
1997, the Company's Board of Directors authorized the Company to repurchase up
to six million shares of the Company's common stock.
At June 30, 1997, the Company's ratio of total debt to total capital was 23.1%.
The Company believes this ratio will increase over time due to the cash
requirements for funding future growth opportunities. The Company also believes
it has the financial resources needed to meet its business requirements in the
foreseeable future.
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 market acceptance of newly introduced products, competitive industry
conditions including historical price erosion in certain product categories,
product mix, technological developments in the markets served by the Company,
foreign currency fluctuations, the Company's ability to establish its operations
as an independent company, and the various factors set forth in the Company's
1996 Annual Report on Form 10-K.
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. 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 monetary liability or financial impact 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 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 1997 Annual Meeting of Shareholders held on May 14, 1997, the
shareholders approved the following:
(a) A proposal to elect two Class I directors of the Company to serve
for three-year terms ending in 2000, as follows:
Directors Votes For Votes Withheld
- --------- --------- --------------
Lawrence E. Eaton 34,324,327 252,010
Ronald T. LeMay 34,324,854 251,483
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
1998 - William W. George, Marvin L. Mann and Daryl J. White; and Class III
directors for a term ending in 1999 - Linda W. Hart, William T. Monahan and Mark
A. Pulido.
(b) A proposal to ratify the appointment of Coopers & Lybrand L.L.P. to
serve as independent certified public accountants of the Company for the year
ending December 31, 1997. The proposal received 34,338,399 votes for, and
127,704 against, ratification. There were 110,234 abstentions and no broker
non-votes.
(c) A proposal to approve the Company's 1996 Employee Stock Incentive
Program. The proposal received 22,717,318 votes for, and 6,169,626 against,
ratification. There were 219,269 abstentions and 5,470,124 broker non-votes.
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Report.
(11) A statement regarding the computation of common
shares and common share equivalents. Page 25.
(15) An awareness letter from the Company's independent
accountants regarding unaudited interim financial
statements. Page 26.
(27) Financial data schedule (EDGAR filing only).
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1997.
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 14, 1997 By: /s/ Jill D. Burchill
-------------------------
Jill D. Burchill
Chief Financial Officer
(and principal financial officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------ ------------------------------------------------------
11 A statement regarding the computation of common shares
and common share equivalents. Page 25.
15 An awareness letter from the Company's independent
accountants regarding unaudited interim financial
statements. Page 26.
27 Financial data schedule (EDGAR filing only).