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, 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)
A DELAWARE 41-1838504
CORPORATION (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
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: 40,570,571 shares of Common
Stock, par value $0.01 per share, were outstanding at October 31, 1997.
IMATION CORP.
INDEX
PAGE(S)
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
for the three and nine months ended
September 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets as
of September 30, 1997 and December 31, 1996 4
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-10
Report of Independent Accountants 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 12-21
PART II. OTHER INFORMATION 22
SIGNATURE 24
EXHIBITS 25-27
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,
------------- -------------
1997 1996 1997 1996
------ ------ -------- --------
Net revenues $529.5 $559.3 $1,632.0 $1,696.6
Cost of goods sold 338.3 362.7 1,048.8 1,105.0
------ ------ -------- --------
Gross profit 191.2 196.6 583.2 591.6
Operating expenses:
Selling, general and
administrative 144.8 133.5 420.4 423.4
Research and development 78.4 38.6 156.6 132.1
Restructuring charges - - - 53.9
------ ------ -------- --------
Total 223.2 172.1 577.0 609.4
Operating income (loss) (32.0) 24.5 6.2 (17.8)
Other income and expense:
Interest expense 3.9 4.0 10.1 11.4
Other, net 1.6 (1.5) 3.8 (3.5)
------- ------- -------- ---------
Total 5.5 2.5 13.9 7.9
Income (loss) before tax and
minority interest (37.5) 22.0 (7.7) (25.7)
Income tax provision (benefit) 1.2 10.2 14.6 (5.4)
Minority interest - - - (0.4)
------- ------- --------- ---------
Net income (loss) $(38.7) $ 11.8 $ (22.3) $ (19.9)
======= ======= ========= =========
Earnings (loss) per share $(0.97) $ 0.29 $ (0.56) $ (0.48)
======= ======= ========= =========
Weighted average shares
outstanding 38.7 40.8 39.7 41.5
======= ======= ========= ========
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)
September 30,
1997 December 31,
(Unaudited) 1996
-------- --------
ASSETS
Current Assets
Cash and equivalents $ 43.1 $ 61.7
Accounts receivable - net 483.4 479.6
Inventories 417.5 392.8
Other current assets 137.1 94.5
-------- --------
Total current assets 1,081.1 1,028.6
Property, Plant and Equipment - net 449.2 480.1
Other Assets 134.4 64.6
-------- --------
Total Assets $1,664.7 $1,573.3
======== ========
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 183.2 $ 194.1
Accrued payroll 47.7 41.9
Income taxes payable 10.5 7.6
Short-term debt 29.2 26.5
Other current liabilities 173.9 151.2
-------- --------
Total current liabilities 444.5 421.3
Other Liabilities 113.9 98.6
Long-Term Debt 262.1 123.1
Commitments and Contingencies
Shareholders' Equity
Common stock, $0.01 par value 0.4 0.4
September 30, 1997: 42,927,627 shares issued
December 31, 1996: 42,879,880 shares issued
Additional paid-in capital 1,026.3 1,011.5
Retained earnings (accumulated deficit) (12.5) 11.2
Unearned ESOP shares (39.9) (46.6)
Cumulative translation adjustment (71.7) (46.2)
Treasury stock, at cost
September 30, 1997: 2,382,088 shares (58.4) -
-------- --------
Total shareholders' equity 844.2 930.3
-------- --------
Total Liabilities and Shareholders' Equity $1,664.7 $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)
Nine months ended
September 30,
-------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (22.3) $ (19.9)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 111.4 137.7
Restructuring and other one-time charges 41.7 76.4
Working capital changes (62.3) 88.1
Other 12.7 (17.4)
-------- --------
Net cash provided by operating activities 81.2 264.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (92.8) (115.9)
Capitalized software (64.8) -
Acquisition, net of cash acquired (29.0) -
Other 1.5 6.2
-------- --------
Net cash used in investing activities (185.1) (109.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt 2.0 16.2
Borrowings of long-term debt 1,275.8 249.3
Repayments of long-term debt (1,141.5) (82.0)
Purchases of treasury stock (60.9) -
Reissuances of treasury stock 1.3 -
Decrease in unearned ESOP shares 6.7 -
Employee stock plans 0.2 -
Loan to ESOP - (50.0)
Net cash paid to 3M - (155.9)
-------- --------
Net cash provided by (used in) financing activities 83.6 (22.4)
Effect of exchange rate changes on cash 1.7 (6.0)
-------- --------
Net change in cash and equivalents (18.6) 126.8
Cash and equivalents - beginning of period 61.7 -
-------- --------
Cash and equivalents - end of period $ 43.1 $ 126.8
======== ========
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
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 (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 28, 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 and one-time charges
recorded in 1997 and 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. 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
September 30,
1997 December 31,
(Unaudited) 1996
---------- ---------
(In millions)
Inventories
Finished goods $ 276.9 $ 248.1
Work in process 64.1 57.3
Raw materials and supplies 76.5 87.4
---------- ---------
Total inventories $ 417.5 $ 392.8
========== =========
Property, Plant and Equipment
Property, plant and equipment $ 1,729.4 $ 1,709.9
Less accumulated depreciation (1,280.2) (1,229.8)
---------- ----------
Property, plant and equipment - net $ 449.2 $ 480.1
========== =========
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
September 30, 1997, the effective interest rate on the $255.0 million in debt
outstanding under the Company's revolving credit facility was 6.4% 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 highly
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. ACQUISITION
On August 15, 1997, the Company acquired all of the outstanding common shares of
Cemax-Icon, Inc. (Cemax) through a merger of a wholly-owned subsidiary of the
Company with and into Cemax. Cemax designs, manufactures and markets medical
imaging and information systems which electronically acquire, archive,
distribute and display medical images throughout hospitals, outpatient
facilities and integrated delivery networks.
The initial purchase price was approximately $51.8 million, comprised of $29.0
million in cash (net of cash acquired) and non-cash amounts consisting of $9.2
million of the Company's previous investment in Cemax preferred shares and $13.6
million related to the fair value of approximately 971,000 stock options and
warrants issued to replace stock options and warrants granted by Cemax. In
addition, the Company issued certain contingent payment rights which allow Cemax
stockholders to receive additional payments of up to a total of $44.8 million if
Cemax attains certain revenue targets in the twelve month periods ended June 30,
1998 and 1999. At the election of the Cemax stockholders, the contingent
payments are payable in cash or the Company's common stock.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values. The
Company allocated $41.7 million of the purchase price to in-process research and
development projects that had not yet reached technological feasibility and had
no alternative future uses, which resulted in a non-recurring, non-tax
deductible charge recorded in the third quarter. The excess of the initial
purchase price over net assets acquired and in-process research and development
of approximately $17.7 million was allocated to goodwill and is being amortized
over seven years. Any additional payments pursuant to the contingent payment
rights will be recorded as additional goodwill when the contingencies are met.
The Cemax operating results are included in the Company's consolidated results
of operations from August 15, 1997. The following table reflects unaudited pro
forma results of operations of the Company and Cemax assuming that the
acquisition had taken place at the beginning of each of the fiscal years for
each period presented. The pro forma information excludes the non-recurring
charge of $41.7 million related to the purchased in-process research and
development.
Nine Months Ended
September 30,
-------------
(In millions, except per share data) 1997 1996
-------- --------
Net revenues $1,648.9 $1,711.5
Net income (loss) 13.4 (23.0)
Earnings (loss) per share 0.34 (0.55)
These unaudited pro forma results of operations have been prepared for
informational purposes only and do not purport to be indicative of the results
of operations that actually would have resulted had the acquisition been made at
the beginning of 1997 or 1996, or of the results of operations that may occur in
the future.
9. SUBSEQUENT EVENT
On October 30, 1997, the Company announced it plans to restructure its worldwide
operations. Based on preliminary plans, the Company expects that restructuring
activities will include workforce reductions of approximately 1,000 to 1,500
people and selected asset write-offs. The Company expects the pre-tax charge
related to the restructuring to be approximately $200 million with most of these
charges being recognized in the fourth quarter of 1997 in accordance with
generally accepted accounting principles.
10. 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 September 30, 1997, and the related
consolidated statements of operations for the three and nine months ended
September 30, 1997 and 1996, and condensed consolidated statements of cash flows
for the nine months ended September 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
October 30, 1997
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 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 during the
three year period ending December 31, 1998. This goal was based on anticipated
cost reductions and the
Company's objectives for improved revenue growth and improved asset utilization.
Since the beginning of 1996, the Company's economic profit has improved by
approximately $70.6 million, with $38.1 million of the improvement coming from
cost reductions and $40.2 million from improved asset management, partially
offset by $7.7 million due to revenue declines. The Company's progress toward
these goals has been negatively impacted in 1997 as a result of a number of
factors discussed below in "Results of Operations". While the Company believes
the stated goal of improving economic profit by $150 million is an appropriate
goal for the Company's businesses, it is not expected that this goal will be
achieved by the end of 1998.
On October 30, 1997 the Company announced it plans to restructure its worldwide
operations to reduce its structure and costs to a more appropriate level given
current business conditions. Restructuring activities will include workforce
reductions of approximately 1,000 to 1,500 people and selected asset write-offs.
The Company expects to record a pre-tax charge associated with the restructuring
of approximately $200 million with most of these charges being recognized in the
fourth quarter of 1997 in accordance with generally accepted accounting
principles.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following table displays the components of the Company's consolidated
statements of operations as a percentage of net revenues. The adjusted 1997
percentages exclude the impact of the non-recurring write-off of $41.7 million
of in-process research and development related to the acquisition of Cemax-Icon,
Inc. ("Cemax") in August 1997.
Three Months Ended
September 30,
----------------------
Adjusted
1997 1996
------ ------
Net revenues 100.0% 100.0%
Cost of goods sold 63.9% 64.8%
------ ------
Gross profit 36.1% 35.2%
Operating expenses:
Selling, general
and administrative 27.3% 23.9%
Research and development 7.0% 6.9%
------ ------
Total 34.3% 30.8%
Operating income 1.8% 4.4%
Other income and expense:
Interest expense 0.7% 0.7%
Other, net 0.3% (0.2%)
------ -------
Total 1.0% 0.5%
Income before tax and
minority interest 0.8% 3.9%
Income tax provision 0.2% 1.8%
------ ------
Net income 0.6% 2.1%
====== ======
Net revenues for the third quarter of 1997 were $529.5 million, a decrease of
$29.8 million or 5.3 percent from the same period in 1996. Volume increases of
4.7 percent were more than offset by price declines of 6.1 percent and the
negative effect of changes in currency exchange rates of 3.9 percent. Volume
growth was positively impacted by increased sales of the Company's digital
products including DryView(TM) laser imagers and high-end data storage products,
while volume growth was negatively impacted by lower demand for certain products
in the Company's analog imaging business, including graphic arts film and
plates, conventional x-ray and photographic film, as well as certain
lower-capacity data storage products. The Company's growth portfolio (including
Travan(TM) data cartridges,
DryView(TM) laser imagers, Rainbow(TM) color proofers, 120 megabyte
SuperDisk(TM), Luminous pre-press software and Cemax-Icon image management
systems) represented approximately 19 percent of revenues in the quarter, up
from 15 percent in the second quarter of 1997 and up from 13 percent in the
third quarter of 1996. Pricing declines of 6.1 percent were higher than the
pricing declines of 5.1 percent in the third quarter of 1996, driven by higher
pricing declines in the United States.
Net revenues in the United States decreased 2.1 percent with volume increases of
3.7 percent more than offset by pricing declines of 5.8 percent. Pricing
declines were greatest with respect to graphic arts film and plate products,
conventional x-ray film and photographic film products, but also resulted from
pricing adjustments by the Company for low end data storage products to more
competitive levels. Internationally, net revenues decreased 8.9 percent.
International volume growth was 5.6 percent which was more than offset by price
declines of 6.4 percent. Changes in currency exchange rates negatively impacted
international revenues by 8.1 percent. International revenues accounted for 45.6
percent of the Company's third quarter 1997 revenues, as compared to 47.4
percent for third quarter 1996.
Based on currency exchange rates as of September 30, 1997, changes in currency
exchange rates will continue to negatively impact revenues and earnings in the
fourth quarter of 1997 as compared to the same period in 1996.
Gross profit in the third quarter of 1997 was $191.2 million or 36.1 percent of
revenues. Gross profit in the third quarter of 1996 was $196.6 million or 35.2
percent of revenues. The increase in gross profit margin of 0.9 percent is
primarily due to productivity improvements in the Company's manufacturing
operations and lower raw material prices, partially offset by sales price
declines and a $2.7 million write-down of CD-Recordable inventory due to
industry price declines.
Selling, general and administrative (SG&A) expenses were $144.8 million or 27.3
percent of revenues. SG&A expenses in the third quarter of 1996 were $133.5
million or 23.9 percent of revenues. The increase is primarily attributable to
costs associated with the Company's launch of its SuperDisk program and costs
attributable to information technology infrastructure development in order to
support the Company's new worldwide information systems.
Research and development costs totaled $78.4 million or 14.8 percent of revenues
in the third quarter of 1997. Included in third quarter 1997 research and
development is the write-off of $41.7 million of in-process research and
development related to the acquisition of Cemax. Excluding this write-off,
research and development costs would have been $36.7 million or 7.0% of
revenues, down $1.9 million but up 0.1 percentage points from the same period in
1996 and in line with the Company's expectations.
The operating loss for the third quarter of 1997 was $(32.0) million. Excluding
the write-off of in-process research and development related to the acquisition
of Cemax, operating income would have been $9.7 million or 1.8 percent of
revenues. This represents a $14.8 million decrease over operating income of
$24.5 million in the third quarter of 1996.
Third quarter 1997 interest expense was $3.9 million, down $0.1 million from the
same quarter last year. Average debt outstanding was higher in the third quarter
of 1997 as compared to the same period of 1996 while the effective interest rate
was slightly lower. Capitalized interest in the third quarter of 1997 was
approximately $1.2 million. No interest was capitalized in the same period of
1996.
The net other income and expense in the third quarter of 1997 totaled $1.6
million of expense. In the same period of 1996, net other income and expense was
$1.5 million of income.
Excluding the impact of the non-recurring, non-tax deductible write-off of $41.7
million of in-process research and development related to the acquisition of
Cemax, the Company's effective tax rate in the third quarter of 1997 was 28.6
percent, compared to 46.4 percent in the third quarter of 1996. The third
quarter 1997 rate reflects the impact of lowering the expected annual effective
tax rate to 43 percent from the 45 percent used for the six months ended June
30, 1997.
Net loss in the third quarter of 1997 was $(38.7) million, or $(0.97) per share.
Excluding the impact of the $41.7 million write-off of in-process research and
development related to the acquisition of Cemax, net income would have been $3.0
million, or $0.08 per share. Net income in the comparable period of 1996 was
$11.8 million, or $0.29 per share.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 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 1997 percentages
exclude the impact of the non-recurring write-off of $41.7 million of in-process
research and development related to the acquisition of Cemax. The 1996
percentages exclude the impact of $76.4 million of pretax one-time charges
recorded in the nine months ended September 30, 1996, with $7.9 million recorded
as cost of goods sold, $14.6 million recorded as selling, general and
administrative expenses and $53.9 million recorded as restructuring charges.
After taxes, these charges totaled $48.6 million.
Nine Months Ended
September 30,
-------------
Adjusted Adjusted
1997 1996
-------- --------
Net revenues 100.0% 100.0%
Cost of goods sold 64.3% 64.7%
------ ------
Gross profit 35.7% 35.3%
Operating expenses:
Selling, general
and administrative 25.8% 24.1%
Research and development 7.0% 7.7%
------ ------
Total 32.8% 31.8%
Operating income 2.9% 3.5%
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 2.1% 3.0%
Income tax provision 0.9% 1.3%
Minority interest - -
------ ------
Net income 1.2% 1.7%
====== ======
On a year to date basis, net revenues were $1,632.0 million, a decrease of $64.6
million or 3.8 percent from the same period in 1996. Volume increases of 5.3
percent were more than offset by price declines of 5.2 percent and the negative
effect of changes in currency exchange rates of 3.9 percent. Volume growth
benefited from strong sales growth of the Company's digital products including
DryView laser imagers and high-end data storage products while it was negatively
impacted by the Company's decision in the first quarter of
1997 to reduce sales in certain low margin product lines and by lower demand for
certain lower-capacity data storage products and conventional medical imaging
and graphic arts film products. Overall price declines remained at approximately
5.2 percent in the nine months ended September 30, 1997 as compared to the same
period of 1996 and is consistent with the Company's expectations.
Net revenues in the United States decreased 1.7 percent with volume increases of
2.2 percent more than offset by pricing declines of 3.9 percent.
Internationally, net revenues decreased 6.0 percent. International volume growth
of 8.6 percent was partially offset by price declines of 6.6 percent, resulting
in local currency growth of 2.0 percent. Changes in currency exchange rates
negatively impacted international revenues by 8.0 percent. International
revenues accounted for 48.2 percent of total revenues compared with 49.3 percent
in the same period of 1996.
Gross profit for the first nine months of 1997 was $583.2 million or 35.7
percent of revenues. Excluding the one-time charges of $7.9 million recorded in
the first nine months of 1996, gross profit in that period would have been
$599.5 million or 35.3 percent of revenues. The gross profit margin in the first
nine months of 1997 was positively impacted by productivity improvements in the
Company's manufacturing operations, lower raw material prices and reduced sales
in certain low margin product lines. These positive impacts were partially
offset by lower than expected demand in the desktop tape back-up segment
resulting in under-utilization of a tape production facility in the second
quarter of 1997 and due to increased sales of DryView laser imagers, which have
a lower than average gross margin.
Selling, general and administrative expenses were $420.4 million or 25.8 percent
of revenues. Excluding the $14.6 million of one-time costs recorded in the first
nine months of 1996, SG&A expenses in that period would have been $408.8 million
or 24.1 percent of revenues. The increase is primarily attributable to costs
associated with the Company's launch of its SuperDisk program and costs
attributable to information technology infrastructure development in order to
support the Company's new worldwide information systems.
Research and development costs totaled $156.6 million or 9.6 percent of revenues
in the first nine months of 1997. Excluding the write-off of $41.7 million of
in-process research and development related to the acquisition of Cemax,
research and development costs would have been $114.9 million or 7.0 percent of
revenues, down $17.2 million or 0.7 percentage points from the same period in
1996 and in line with the Company's expectations.
The Company recorded restructuring charges of $53.9 million in the first nine
months of 1996 reflecting costs for certain voluntary employee separation
programs. No such charges were recorded in the first nine months of 1997. As
discussed in the "General Overview" section above, however, on October 30, 1997
the Company announced it plans to restructure its worldwide operations. Based on
preliminary plans, the Company expects to record pre-tax restructuring charges
of approximately $200 million, with most of these charges being recognized in
the fourth quarter of 1997.
Operating income for the first nine months of 1997 was $6.2 million compared to
an operating loss of $(17.8) million in the same period of 1996. Excluding the
special one-time charges of $41.7 million and $76.4 million that were recorded
in the first nine months of 1997 and 1996, respectively, operating income would
have been $47.9 million for the first nine months of 1997 compared to $58.6
million in the same period of 1996.
Interest expense for the first nine months of 1997 was $10.1 million, down $1.3
million from the same period of 1996. This decrease is due to capitalized
interest of approximately $1.5 million in the first nine months of 1997, while
no interest was capitalized in the same period of 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 nine months of 1997 totaled $3.8
million of expense, compared to $3.5 million of income in the comparable period
of 1996. The 1997 expense is primarily due to transaction losses due to foreign
currency exposures offset by interest income.
Excluding the impact of the special one-time charges recorded in 1997 and 1996,
the Company's effective tax rate for the first nine months of 1997 was 43.0
percent, compared to 44.2 percent in the same period in 1996.
Year to date net loss in 1997 was $(22.3) million, or $(0.56) per share. Net
loss in the comparable period of 1996 was $(19.9) million, or $(0.48) per share.
Excluding the after-tax impact of the one-time charges of $41.7 million and
$48.6 million recorded year to date in 1997 and 1996, respectively, net income
in the first nine
months of 1997 would have been $19.4 million, or $0.49 per share, compared to
$28.7 million or $0.69 per share in the comparable period in 1996.
FINANCIAL POSITION
The Company had 3.6 months of inventory on hand at September 30, 1997, up from
3.2 months at December 31, 1996. This increase is primarily due to temporarily
higher inventory levels of products in the Company's growth portfolio. The
accounts receivable days sales outstanding was 80 days at September 30, 1997, up
from 77 days at December 31, 1996. Other current assets increased approximately
$42.6 million from December 31, 1996 primarily due to an increase in income
taxes refundable and deferred taxes.
The book value of property, plant and equipment at September 30, 1997 was
$449.2, a decrease of $30.9 million from the December 31, 1996 balance of $480.1
million. This decrease is primarily due to capital spending being lower than
depreciation and to the effect of changes in currency exchange rates. Other
assets increased $69.8 million from December 31, 1996 primarily due to
capitalization of costs related to the design, implementation and testing of the
Company's worldwide information technology systems and from goodwill recorded in
connection with the acquisition of Cemax.
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 condensed consolidated statements of cash flows. This
financial support was discontinued following the Distribution.
Cash provided by operating activities was $81.2 million during the nine months
ended September 30, 1997, compared to $264.9 million during the same period in
1996. This change was primarily due to working capital increasing $62.3 million
in the first nine months of 1997, while working capital decreased $88.1 million
in the comparable period of 1996. Depreciation and amortization was $111.4
million in the first nine months of 1997, as compared to $137.7 million in the
comparable period of 1996.
Cash used in investing activities was $185.1 million for the first nine months
of 1997 compared to $109.7 million in the comparable period of 1996. Investing
activities included capital expenditures of $92.8 million for the first nine
months of 1997 compared to $115.9 million during the same period of 1996.
Capitalized software was $64.8 million in the first nine months of 1997,
primarily related to the design, implementation and testing of the Company's new
information technology systems. It is expected that these capitalized costs will
continue to be incurred through the remainder of 1997 and into 1998.
Amortization of these costs will not begin until the systems are implemented.
Net cash paid in connection with the acquisition of Cemax was $29.0 million.
Financing activities during the first nine months of 1997 provided cash of $83.6
million. Financing activities primarily related to the net borrowing of $136.3
million and the payment of $60.9 million to repurchase approximately 2,481,000
of the Company's common shares.
At September 30, 1997, the Company's ratio of total debt to total capital was
25.7%. The Company expects to maintain an adequate level of liquidity through
cash flows from operations, availability of borrowings under its bank credit
agreement and potential debt and equity financings.
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,
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. Although such matters are subject to many
uncertainties and outcomes that are not predictable with assurance, the Company
does not believe that any such routine legal proceedings to which it is a party
will have a material adverse effect on the Company's financial position or
results of operations.
In addition, the Company has been notified that it is the subject of a
threatened claim by Eastman Kodak Company ("Kodak") involving allegations of
misappropriation of trade secrets. Kodak has alleged that during the period 1993
to May 1996 a retired Kodak employee improperly conveyed trade secrets to the
Italian subsidiary of 3M. This subsidiary was subsequently spun-off as a
subsidiary of the Company in July 1996. The Kodak retiree has entered a guilty
plea in U.S. District Court to criminal charges of misappropriating confidential
Kodak documents and has been sentenced. While Kodak has notified the Company of
the threatened claim, no litigation has yet been filed. It is not possible at
this time to reach any conclusions as to the outcome of this threatened claim.
The Company disputes any liability based on these allegations and intends to
vigorously defend any action that may be filed by Kodak.
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.
4.1 Credit Agreement dated as of July 1, 1996 among the
Company, the Lenders named therein and Citicorp USA,
Inc., as Agent.
4.2 Amendment No. 1 to the Credit Agreement dated as of
July 1, 1996 among the Company, the Lenders named
therein and Citicorp USA, Inc., as Agent.
11 A statement regarding the computation of common
shares and common share equivalents.
15 An awareness letter from the Company's independent
accountants regarding unaudited interim financial
statements.
27 Financial data schedule.
(b) Reports on Form 8-K:
(1) During the quarter ended September 30, 1997,
the Company filed a Report on Form 8-K dated
August 15, 1997 reporting under Item 2 the
Company's acquisition of all of the
outstanding stock of Cemax-Icon, Inc. through
a merger of a wholly-owned subsidiary of the
Company with and into Cemax-Icon, Inc.
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 14, 1997 By: /s/ Jill D. Burchill
-------------------------
Jill D. Burchill
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
4.1 Credit Agreement dated as of July 1, 1996 among the Company, the
Lenders named therein and Citicorp USA, Inc., as Agent.
4.2 Amendment No. 1 to the Credit Agreement dated as of July 1, 1996 among
the Company, the Lenders named therein and Citicorp USA, Inc., as
Agent.
11 A statement regarding the computation of common shares and common share
equivalents.
15 An awareness letter from the Company's independent accountants
regarding unaudited interim financial statements.
27 Financial data schedule.