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, 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: 41,930,187 shares of Common
Stock, par value $0.01 per share, were outstanding at July 31, 1996.
This report contains 26 pages numbered sequentially from this cover page. The
exhibit index is set forth on page 24.
IMATION CORP.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Historical Statements of Operations for
the three and six month periods ended
June 30, 1996 and 1995 3
Historical Balance Sheets as of
June 30, 1996 and December 31, 1995 4
Historical Statements of Cash Flows for
the six month periods ended June 30,
1996 and 1995 5
Notes to Historical Financial Statements 6
Report of Independent Accountants 8
Pro Forma Statement of Operations
for the three month period ended
June 30, 1996 9
Pro Forma Statement of Operations
for the six month period ended
June 30, 1996 10
Pro Forma Balance Sheet as of June 30, 1996 11
Notes to Pro Forma Financial Statements 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 15
PART II. OTHER INFORMATION 24
PART I. FINANCIAL INFORMATION
IMATION CORP.
HISTORICAL STATEMENTS OF OPERATIONS
(In Millions)
(Unaudited)
Three months ended Six months ended
June 30 June 30
----------------- -------------------
1996 1995 1996 1995
------ ------ -------- --------
Net revenues $561.2 $565.0 $1,137.3 $1,141.7
Cost of goods sold 368.5 370.4 742.3 734.6
------ ------ -------- --------
Gross profit 192.7 194.6 395.0 407.1
Operating expenses:
Selling, general and
administrative 159.2 138.6 289.9 276.5
Research and development 45.6 57.9 93.5 114.3
Restructuring charges 43.5 - 53.9 -
------ ------ -------- --------
Total 248.3 196.5 437.3 390.8
Operating (loss) income (55.6) (1.9) (42.3) 16.3
Interest expense and other 2.2 4.7 5.4 9.9
------ ------ -------- --------
(Loss) income before tax and
minority interest (57.8) (6.6) (47.7) 6.4
Income tax (benefit) provision (19.7) (2.8) (15.6) 2.7
Minority interest (0.3) (0.6) (0.4) (0.6)
------ ------ -------- --------
Net (loss) income $(37.8) $ (3.2) $ (31.7) $ 4.3
====== ====== ======== ========
Unaudited pro forma information assuming tax benefit based on a purely separate
return basis:
Three months Six months
ended June 30, ended June 30,
1996 1996
-------------- --------------
(Loss) income before tax and
minority interest $(57.8) $(47.7)
Income tax (benefit) provision (11.9) (7.2)
Minority interest (1.2) (1.6)
------- -------
Net (loss) income $(44.7) $(38.9)
======= =======
The accompanying notes to historical financial statements are an integral part
of these statements.
IMATION CORP.
HISTORICAL BALANCE SHEETS
(In Millions)
June 30,
1996 December 31,
(Unaudited) 1995
----------- ------------
ASSETS
Current Assets
Accounts receivable - net $ 476.3 $ 479.5
Inventories
Finished goods 244.1 244.0
Work in process 74.2 81.2
Raw materials and supplies 89.9 101.1
------- --------
Total inventories 408.2 426.3
Other current assets 92.8 48.8
------- --------
Total current assets 977.3 954.6
Property, Plant and Equipment 1,829.7 1,868.3
Less accumulated depreciation (1,334.0) (1,355.1)
-------- --------
Property, plant and equipment - net 495.7 513.2
Other Assets 46.1 73.7
-------- --------
Total Assets $1,519.1 $1,541.5
======== ========
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 111.7 $ 125.9
Accrued payroll 44.3 44.4
Other current liabilities 165.8 125.9
------ -------
Total current liabilities 321.8 296.2
Other Liabilities 88.1 96.6
Commitments and Contingencies
Equity 1,109.2 1,148.7
-------- --------
Total Liabilities and Equity $1,519.1 $1,541.5
======== ========
The accompanying notes to historical financial statements are an integral part
of these statements.
IMATION CORP.
HISTORICAL STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six months ended
June 30
------------------
1996 1995
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(31.7) $ 4.3
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation 94.5 93.6
Deferred taxes 5.3 0.8
Restructuring and other one-time charges 46.5 -
Working capital changes (14.4) (60.1)
Other changes (15.3) 5.5
----- -----
Net cash provided by operating activities 84.9 44.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (79.1) (92.4)
Other (0.2) (7.0)
----- -----
Net cash used in investing activities (79.3) (99.4)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash (paid to) received from 3M (0.9) 53.1
Effect of exchange rate changes on cash (4.7) 2.2
----- -----
Net change in cash and equivalents $ - $ -
===== =====
The accompanying notes to historical financial statements are an integral part
of these statements.
IMATION CORP.
NOTES TO HISTORICAL 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 included in the Form 10 Registration
Statement filed with the Securities and Exchange Commission on June 21, 1996.
The historical financial statements of the Company 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 historical balance sheets. Regardless of the
allocation of these assets and liabilities, however, the Company's historical
statements of operations 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. These allocations were based on a
variety of factors including, for example, personnel, space, time and effort,
and sales volume. 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 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.
The interim historical 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 (see Note 2), consist of normal, recurring items. The
results of operations for any interim period are not necessarily indicative of
results for the full year. The historical 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 historical 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.
Unaudited pro forma statements of operations for the three and six month periods
ended June 30, 1996 and unaudited pro forma balance sheet as of June 30, 1996
which make adjustments to the historical financial statements of the Company as
if the Distribution had occurred on dates prior to July 1, 1996 are included
elsewhere is this Form 10-Q.
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 the 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. For the first six months 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. In the
second quarter of 1996, the Company recorded $43.5 million of restructuring
charges related primarily to employee separation programs and $22.5 million of
one-time charges associated with start-up activities.
The Company's separation programs are expected to result in employee reductions
of approximately 1,600 employees. The most significant reductions relate to
voluntary separation plans offered to most of the Company's United States
employees. Approximately 840 employees have accepted this offer and about 700
were separated by June 30, 1996 and received approximately $16 million in
termination benefits. The remainder of the expected separations primarily relate
to announced manufacturing rationalizations in the United States and Italy with
the majority of the separations and related payments to occur after June 30,
1996. Approximately $23.9 million of accrued separation costs will be paid by 3M
subsequent to the Distribution. See pro forma financial statements elsewhere in
this Form 10-Q.
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, including to purchase certain overseas
assets in connection with the Distribution, to repay certain indebtedness
assumed by the Company, and to fund a portion of the Company's ESOP. 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.
XXXXX
Coopers & Lybrand L.L.P., the Company's independent accountants, have performed
a review of the unaudited interim historical 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 historical balance sheet of the
businesses to comprise Imation Corp. (as described in Note 1 to the condensed
historical financial statements) as of June 30, 1996, and the related condensed
historical statements of operations for the three- and six-month periods ended
June 30, 1996 and 1995, and cash flows for the six-month periods ended June 30,
1996 and 1995. These historical 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 historical 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 historical balance sheet as of December 31, 1995, and the related
historical 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 historical financial statements. In our opinion,
the information set forth in the accompanying condensed historical balance sheet
as of December 31, 1995, is fairly stated in all material respects in relation
to the historical balance sheet from which it has been derived.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
August 2, 1996
IMATION CORP.
PRO FORMA STATEMENT OF OPERATIONS
(In Millions Except for Per Share Data)
(Unaudited)
Three months ended June 30, 1996
---------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
Net revenues $561.2 $561.2
Cost of goods sold 368.5 - 368.5
------- ------ ------
Gross profit 192.7 - 192.7
Operating expenses:
Selling, general and
administrative 159.2 159.2
Research and development 45.6 45.6
Restructuring charges 43.5 43.5
-------- ------ ------
Total 248.3 - 248.3
Operating (loss) income (55.6) - (55.6)
Interest expense and other 2.2 $ 0.4 (a) 2.6
------- ------ ------
(Loss) income before tax and
minority interest (57.8) (0.4) (58.2)
Income tax (benefit) provision (19.7) (0.1) (b) (12.0)
7.8 (c)
Minority interest (0.3) (0.9) (c)(e) (1.2)
------- ------ -------
Net (loss) income $(37.8) $(7.2) $(45.0)
======= ====== =======
Net (loss) income per share $(1.07)(d)
The accompanying notes to the pro forma financial statements are an integral
part of these statements.
IMATION CORP.
PRO FORMA STATEMENT OF OPERATIONS
(In Millions Except for Per Share Data)
(Unaudited)
Six months ended June 30, 1996
---------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
Net revenues $1,137.3 $1,137.3
Cost of goods sold 742.3 742.3
--------- ----- --------
Gross profit 395.0 - 395.0
Operating expenses:
Selling, general and
administrative 289.9 289.9
Research and development 93.5 93.5
Restructuring charges 53.9 53.9
--------- ----- --------
Total 437.3 - 437.3
Operating (loss) income (42.3) - (42.3)
Interest expense and other 5.4 $ 0.8 (a) 6.2
--------- ----- --------
(Loss) income before tax and
minority interest (47.7) (0.8) (48.5)
Income tax (benefit) provision (15.6) (0.3)(b) (7.5)
8.4 (c)
Minority interest (0.4) (1.2)(c)(e) (1.6)
--------- ------ --------
Net (loss) income $ (31.7) $(7.7) $ (39.4)
========= ====== ========
Net (loss) income per share $ (0.94)(d)
========
The accompanying notes to the pro forma financial statements are an integral
part of these statements.
IMATION CORP.
PRO FORMA BALANCE SHEET
(In Millions)
(Unaudited)
June 30, 1996
-----------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
Current Assets
Cash and equivalents $ 250.0 (f) $ 73.0
(24.0)(g)
(153.0)(h)
Accounts receivable - net $ 476.3 - (i) 476.3
Inventories 408.2 408.2
Other current assets 92.8 (1.9)(j) 81.6
(0.2)(k)
(9.1)(l)
-------- ------- --------
Total current assets 977.3 61.8 1,039.1
Property, Plant and Equipment - net 495.7 495.7
Other Assets 46.1 (14.6)(j) 30.4
(1.1)(k)
-------- ------- --------
Total Assets $1,519.1 $ 46.1 $1,565.2
======== ======= ========
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 111.7 - (i) $ 111.7
Accrued payroll 44.3 44.3
Other current liabilities 165.8 $ (15.7)(g) 126.2
(23.9)(l)
-------- ------- --------
Total current liabilities 321.8 (39.6) 282.2
Other Liabilities 88.1 (8.3)(g) 79.8
Long-Term Debt 250.0 (f) 290.0
40.0 (m)
Commitments and Contingencies
Equity
Net investment by 3M 1,109.2 (153.0)(h) -
(16.5)(j)
(1.3)(k)
14.8 (l)
(999.3)(n)
46.1 (o)
Common stock 0.4 (n) 0.4
Additional paid-in capital 998.9 (n) 998.9
Cumulative translation - net (46.1)(o) (46.1)
Unearned ESOP shares (40.0)(m) (40.0)
-------- ------- --------
Total equity 1,109.2 (196.0)(p) 913.2
-------- ------- --------
Total Liabilities and Equity $1,519.1 $ 46.1 $1,565.2
======== ======= ========
The accompanying notes to the pro forma financial statements are an integral
part of these statements.
IMATION CORP.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
1. FINANCIAL STATEMENTS
The pro forma financial statements make adjustments to the historical
(unaudited) balance sheet as of June 30, 1996 and to the historical (unaudited)
statements of operations for the three and six month periods ended June 30, 1996
as if the Distribution had occurred on June 30, 1996 for the purposes of the pro
forma balance sheet and January 1, 1995 for purposes of the pro forma statements
of operations.
The pro forma financial statements should be read in conjunction with the
historical financial statements of the Company and the notes thereto contained
elsewhere in this Report on Form 10-Q. The pro forma financial information is
presented for information purposes only and may not reflect the future results
of operations or financial position of the Company or what the results of
operations or financial position would have been had the Company's businesses
been operated as a separate, independent company.
2. PRO FORMA ADJUSTMENTS
(a) Represents an adjustment of the allocation of 3M's interest expense
to reflect an estimate of the weighted average interest rate the Company would
have experienced during the periods presented. The interest rates used were 6.6%
and 7.0% for the three and six months ended June 30, 1996, respectively. These
rates represent 3M's historical weighted average rates during these periods as
adjusted to reflect the higher cost of borrowing the Company expects to incur on
a stand-alone basis. The interest calculation is based on the Company's
estimated non-ESOP debt level of $250 million.
(b) Reflects an adjustment to the income tax (benefit) provision
associated with the change in interest expense described in (a) above.
(c) Represents an adjustment to the income tax (benefit) provision to
reflect taxes on a purely separate return basis, including establishing a
valuation allowance for certain deferred tax assets, and the resulting impact on
minority interest.
(d) Represents the net (loss) income per share on an assumed 41.9
million weighted average number of shares outstanding of the Company's Common
Stock. This is based on 3M's weighted average number of shares outstanding
adjusted for the distribution of one share of the Company's stock for every ten
shares of 3M common stock outstanding.
(e) The historical and pro forma statements of operations reflect
minority interests in Japan and Korea since the Company's operations in such
countries were conducted by 3M through joint ventures in which third parties had
minority interests. The Company has an agreement in principle with 3M's joint
venture partners in Japan providing for the purchase by 3M's joint venture
partners of an aggregate minority interest equal to 40% following the
Distribution. Accordingly, the Company expects its future statements of
operations to continue to reflect minority interests in Japan. In Korea, the
transfer of the Company's operations has not yet occurred and is subject to the
approval of 3M's joint venture partner. The ultimate form of operations is
currently being negotiated and may involve the continuation of a minority
interest. The Company does not believe that the expected future minority
interest in Japan or a failure to effect the transfer in Korea would have a
material adverse effect on the financial position or results of the Company.
(f) Reflects $250 million of debt the Company has incurred or expects
to incur for general corporate purposes on or shortly after the Distribution
Date. Of the $250 million to be borrowed, $153.0 million was used to purchase
from 3M certain assets of the Company located outside the United States where
spin-off transactions were not consummated and to repay intercompany
indebtedness assumed by the Company in connection with the Distribution, and
$24.0 million will be used to pay certain accrued employee benefits.
(g) Reflects payment after the Distribution Date of $24.0 million to
pay certain accrued employee benefits, including $15.7 million of current
liabilities and $8.3 million of other liabilities.
(h) Reflects the net payment to 3M of approximately $153.0 million to
purchase certain assets of the Company located outside the United States where
spin-off transactions were not consummated and to repay intercompany
indebtedness being assumed by the Company in connection with the Distribution.
(i) To provide a more accurate reflection of future financial
statements, the pro forma financial statements do not give effect to the
retention by 3M of certain trade receivables and payables outside the United
States and the agreement by 3M to pay to the Company following the Distribution
an amount corresponding to the amount by which such receivables exceed such
payables.
(j) Represents a valuation allowance necessary to reflect the deferred
tax assets at their estimated realizable value on a purely separate return
basis.
(k) Reflects the net deferred tax assets realized by 3M upon the
Company's purchase of certain assets outside the United States (see (h) above).
(l) Reflects certain accrued employee separation costs to be paid by 3M
and the related deferred tax assets to be realized by 3M upon payment of these
costs.
(m) Reflects funds borrowed by the Company and on-lent to the ESOP and
the adjustment to the Company's equity resulting from the purchase of
outstanding shares of Common Stock by the ESOP which have not been earned by
ESOP participants and allocated to their respective accounts.
(n) Reflects the issuance of approximately 41.9 million shares of
common stock, par value $0.01 per share, as of July 1, 1996. One share of the
Company's Common Stock was issued for every ten shares of 3M's stock. Additional
paid-in capital represents the excess of the historical carrying values of the
Company's net assets at the Distribution Date over the amount reflected as
Common Stock.
(o) Reflects the cumulative translation adjustment included in the net
investment by 3M.
(p) No minority interest has been reflected in the historical or pro
forma balance sheets. While prior to the Distribution the Company's operations
in Japan and Korea were conducted by 3M through joint ventures in which the
third parties own minority interests, the Company currently does not have any
minority interest partners. The Company does, however, have an agreement in
principle with 3M's joint venture partners in Japan providing for the purchase
by the 3M's joint venture partners of an aggregate minority interest up to 40%
following the Distribution. Accordingly, the Company expects its future balance
sheets to reflect minority interests in Japan. In Korea, the transfer of the
Company's operations has not yet occurred and is subject to the approval of 3M's
joint venture partner. The ultimate form of operations is currently being
negotiated and may involve the continuation of a minority interest. The Company
does not believe that the expected future minority interest in Japan or a
failure to effect the transfer in Korea would have a material adverse effect on
the financial position or results of the Company.
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. The historical 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 historical
financial statements of the Company 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 historical
statements of operations 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 as well as the
assumptions underlying the development of the Company's financial statements to
be reasonable.
The financial information included herein, however, may not necessarily reflect
the results of operations, financial position and cash flows of the Company as
it will operate in the future or what the results of operations, financial
position and cash flows would have been had the Company been a separate,
stand-alone entity during the periods presented. This is due to the historical
operation of the Company as part of the larger 3M. The financial information
included herein does not reflect the many significant changes that will occur in
the funding and operations of the Company as a result of the Distribution.
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.
The Company's direct employee reductions are expected to total more than 1,600
positions through already announced voluntary and involuntary separation
programs and through the completion of the Company's manufacturing consolidation
activities. As of July 1, 1996, the Company began separate operations with
approximately 9,700 employees, down from 12,300 at December 31, 1995 and 12,000
at March 31, 1996. This reduction reflects the aforementioned separation plans
as well as the retention by 3M of staff services positions which had been
allocated to the Company as a 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.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1996 AND 1995:
The following table sets forth the Company's historical statements of
operations, restructuring and other one-time charges and the resulting adjusted
balances for the three month period ended June 30, 1996 with comparative
balances for the three month period ended June 30, 1995. The adjusted 1996
balances are also presented as a percentage of revenues as are the results for
the comparable period of 1995.
<TABLE>
<CAPTION>
(In Millions Except Per Share Data)
Three Months Ended June 30, Percent of Revenues
--------------------------------------------- -------------------
1996 One-Time 1996 1996
Historical Charges Adjusted 1995 Adjusted 1995
---------- ----------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $561.2 - $561.2 $565.0 100.0% 100.0%
Cost of goods sold 368.5 $ (7.9) 360.6 370.4 64.3% 65.6%
------ ------ ------ ------ ----- -----
Gross profit 192.7 7.9 200.6 194.6 35.7% 34.4%
Operating expenses:
Selling, general
and administrative 159.2 (14.6) 144.6 138.6 25.8% 24.5%
R&D 45.6 - 45.6 57.9 8.1% 10.2%
Restructuring chgs 43.5 (43.5) - - - -
------ ------ ------ ------ ----- -----
Total 248.3 (58.1) 190.2 196.5 33.9% 34.7%
Oper. (loss) income (55.6) 66.0 10.4 (1.9) 1.8% (0.3%)
Interest exp and other 2.2 - 2.2 4.7 0.4% 0.8%
------ ------ ------ ------ ----- -----
(Loss) income before tax
& minority interest (57.8) 66.0 8.2 (6.6) 1.4% (1.1%)
Income taxes (19.7) 23.5 3.8 (2.8) 0.7% (0.4%)
Minority interest (0.3) - (0.3) (0.6) (0.1%) (0.1%)
------- ------ ------ ------ ----- -----
Net (loss) income $(37.8) $ 42.5 $ 4.7 $ (3.2) 0.8% (0.6%)
======= ====== ====== ====== ===== =====
(Loss) earnings
per share (1) $(0.90) $ 1.01 $ 0.11 $(0.08)
======= ====== ====== ======
(1) Based on an assumed 41.9 million weighted average shares outstanding.
</TABLE>
Net revenues for the second quarter of 1996 were $561.2 million, a decrease of
$3.8 million or 0.7 percent from the same period in 1995. Volume increases of
6.5 percent were more than offset by price declines of 4.9 percent and the
negative effect of changes in currency exchange rates of 2.3 percent. Volume
increases were principally due to newly introduced products (Travan(TM) data
cartridges and DryView(TM) laser imagers). Volume increases were at the highest
rate of increase in recent quarters while price declines were at one of the
lowest rates of decrease in recent quarters.
Net revenues in the United States increased 4.8 percent with volume increases of
8.0 percent partially offset by pricing declines of 3.2 percent.
Internationally, net revenues decreased 5.7 percent. Volume increases of 5.3
percent were more than offset by price declines of 6.5 percent and a 4.5 percent
negative effect of changes in currency exchange rates. International revenues
accounted for 49.3 percent of second quarter 1996 revenues, down from 52.0
percent of total revenues for second quarter 1995.
Gross profit in the second quarter of 1996 was $192.7 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 $200.6 million or 35.7 percent of
revenues, an increase of 1.3 percentage points from the second quarter of 1995.
This increase is due to productivity improvements, increased volume and lower
raw materials costs, partially offset by negative pricing pressure and foreign
currency impacts.
Selling, general and administrative expenses were $159.2 million. Excluding
special one-time charges of $14.6 million related to start-up activities,
selling, general and administrative expenses would have been $144.6 million or
25.8 percent of revenues, up 1.3 percentage points from the same period in 1995.
This increase is due to additional start-up costs of $12.7 million related to
consulting and identity development which are expected to continue through 1997.
Excluding the one-time charges and additional start-up costs, selling, general
and administrative expenses would have been $131.9 million or 23.5 percent of
revenues, a decrease of $6.7 million or 1.0 percentage point from the second
quarter of 1995. This decrease is a result of reduced sales related costs.
Research and development costs totaled $45.6 million or 8.1 percent of revenues
in the second quarter of 1996, down $12.3 million or 2.1 percentage points from
the same period in 1995. This decrease is due to a 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.
The Company recorded restructuring charges of $43.5 million in the second
quarter of 1996. These charges primarily related to employee separation
programs.
The operating loss for the second quarter of 1996 was $55.6 million. Excluding
restructuring and special one-time charges of $66.0 million, the Company would
have had operating income of $10.4 million or 1.8 percent of net revenues. This
represents a $12.3 million increase from the $1.9 million operating loss in the
same period in 1995.
Second quarter non-operating expense was $2.2 million, down $2.5 million from
the same quarter last year. This decrease was due to an increase in other income
of $1.4 million, primarily related to investment gains, and to lower interest
expense due to 3M's lower effective interest rate. The allocation of interest
expense is more fully discussed in Note 6 of the Notes to Historical Financial
Statements included in the Company's Form 10.
The Company's effective tax rate was 34.1 percent. Excluding restructuring and
other one-time charges, the effective tax rate was 46.3 percent, up from 42.4
percent in the second quarter of 1995. This increase was due primarily to a
shift of profits to higher tax jurisdictions.
Net loss in the second quarter of 1996 was $37.8 million. Excluding
restructuring and other one-time charges, net income would have been $4.7
million resulting in earnings per share of $0.11 (based on an assumed 41.9
million shares outstanding). This represents an improvement of $7.9 million or
$0.19 per share (based on an assumed 41.9 million shares outstanding) from the
same period in 1995.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND 1995:
The following table sets forth the Company's historical statements of
operations, restructuring and other one-time charges and the resulting adjusted
balances for the six month period ended June 30, 1996 with comparative balances
for the six month period ended June 30, 1995. The adjusted 1996 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)
<TABLE>
<CAPTION>
Six Months Ended June 30, Percent of Revenues
--------------------------------------------- -------------------
1996 One-Time 1996 1996
Historical Charges Adjusted 1995 Adjusted 1995
---------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $1,137.3 - $1,137.3 $1,141.7 100.0% 100.0%
Cost of goods sold 742.3 $ (7.9) 734.4 734.6 64.6% 64.3%
-------- ------ -------- -------- ----- -----
Gross profit 395.0 7.9 402.9 407.1 35.4% 35.7%
Operating expenses:
Selling, general
and administrative 289.9 (14.6) 275.3 276.5 24.2% 24.2%
R&D 93.5 - 93.5 114.3 8.2% 10.0%
Restructuring chgs 53.9 (53.9) - - - -
-------- ------ -------- -------- ----- -----
Total 437.3 (68.5) 368.8 390.8 32.4% 34.2%
Oper. (loss) income (42.3) 76.4 34.1 16.3 3.0% 1.5%
Int. exp. and other 5.4 - 5.4 9.9 0.5% 0.9%
-------- ------ -------- -------- ----- -----
(Loss) income before tax
& minority interest (47.7) 76.4 28.7 6.4 2.5% 0.6%
Income taxes (15.6) 27.8 12.2 2.7 1.0% 0.3%
Minority interest (0.4) - (0.4) (0.6) 0.0% (0.1%)
-------- ------ -------- -------- ----- -----
Net (loss) income $ (31.7) $ 48.6 $ 16.9 $ 4.3 1.5% 0.4%
======== ====== ======== ======== ===== =====
(Loss) earnings
per share (1) $ (0.76) $ 1.16 $ 0.40 $ 0.10
======== ====== ======== ========
(1) Based on an assumed 41.9 million weighted average shares outstanding.
</TABLE>
On a year-to-date basis, net revenues totaled $1,137.3 million, a decrease of
$4.4 million or 0.4 percent from the same period in 1995. Volume increases of
6.4 percent were offset by price declines of 5.3 percent and 1.5 percent from
the negative effect of changes in currency exchange rates. Volume increases were
principally due to newly introduced products (Travan(TM) data cartridges and
DryView(TM) laser imagers).
Net revenues in the United States increased 2.1 percent with volume increases of
5.9 percent partially offset by pricing declines of 3.8 percent.
Internationally, net revenues decreased 2.7 percent. Volume increases of 7.0
percent were more than offset by price declines of 6.7 percent and a 3.0 percent
negative effect of changes in currency exchange rates. International revenues
accounted for 50.3% of total revenues compared with 51.5% in the same period in
1995.
Gross profit for the first six months of 1996 was $395.0 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 $402.9 million or 35.4 percent of
revenues, a decrease of 0.3 percentage points from the first six months of 1995.
This decline was primarily due to the effect of lower selling prices, partially
offset by productivity improvements, volume increases and other factors.
Selling, general and administrative expenses were $289.9 million. Excluding
special one-time charges of $14.6 million related to start-up activities,
selling, general and administrative expenses would have been $275.3 million or
24.2 percent of revenues, unchanged from the same period in 1995. In addition to
special one-time charges for start up, selling, general and administrative
expenses include additional start-up costs of $12.7 million related to
consulting and identity development which are expected to continue through 1997.
Excluding the special one-time charges and additional start-up costs, selling,
general and administrative expenses would have been $262.6 million or 23.1
percent of revenues, a decrease of $13.9 million or 1.1 percentage points from
the same period of 1995. This decrease is a result of reduced sales related
costs.
Research and development costs totaled $93.5 million or 8.2 percent of revenues
in the first six months of 1996, down $20.8 million or 1.8 percentage points
from the same period in 1995. This decrease is due to a 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.
The Company recorded restructuring charges of $53.9 million in the first six
months of 1996. These charges primarily relate to employee separation programs.
Operating loss for the first six months of 1996 was $42.3 million. Excluding
restructuring and special one-time charges, the Company would have had operating
income of $34.1 million or 3.0 percent of revenues. This represents a $17.8
million increase from operating income in the same period in 1995 which totaled
$16.3 million or 1.5 percent of revenues.
Non-operating expense for the first six months of 1996 was $5.4 million, down
$4.5 million from the same period last year. This decrease was due to an
increase in other income of $1.8 million, primarily related to investment gains,
and to lower interest expense due to 3M's lower effective interest rate. The
allocation of interest expense is more fully discussed in Note 6 of the Notes to
Historical Financial Statements in the Form 10.
The Company's effective tax rate was 32.7 percent. Excluding restructuring and
special one-time charges, the Company's effective tax rate was 42.5 percent,
essentially unchanged from the first six months of 1995.
Net loss year-to-date 1996 was $31.7 million. Excluding restructuring and other
one-time charges, net income would have been $16.9 million resulting in earnings
per share of $0.40 (based on an assumed 41.9 million shares outstanding). This
represents an improvement of $12.6 million or $0.30 per share (based on an
assumed 41.9 million shares outstanding) from the same period in 1995.
FINANCIAL POSITION
The Company had 3.4 months of inventory on hand at June 30, 1996, unchanged from
December 31, 1995. The accounts receivable days sales outstanding was 77 days at
June 30, 1996, down from 78 days at December 31, 1995.
The book value of property, plant and equipment at June 30, 1996 was $495.7, a
decrease from $513.2 million at December 31, 1995. This decrease is due to lower
capital spending. The decrease from December 31, 1995 in other assets of $27.6
million was more than offset by the increase in other current assets of $44.0
million primarily due to changes in deferred tax assets as more of the temporary
differences related to current items. Other current liabilities increased $39.9
million from $125.9 million at December 31, 1995 to $165.8 million at June 30,
1996 due primarily to accruals for the restructuring charges and startup costs.
LIQUIDITY
3M uses a centralized approach to cash management and the financing of its
operations. As a result, cash and equivalents and debt were not allocated to the
Company in the historical financial statements. The Company's historical
financing requirements are represented by cash transactions with 3M and are
reflected in "Net cash (paid to) received from 3M" in the historical statements
of cash flows. This financial support was discontinued following the
Distribution.
Cash provided from operating activities was $84.9 million during the six months
ended June 30, 1996, compared to $44.1 million during the same period in 1995.
The major non-cash items are depreciation which provided $94.5 million compared
to $93.6 million during the first six months of 1995 and restructuring and other
one-time charges of $46.5 million during the six months ended June 30, 1996
which more than offset the net loss of $31.7 million. Working capital used $14.4
million for the first six months of 1996, an improvement of $45.7 million over
the $60.1 million used in the comparable period of 1995.
Investing activities, mainly capital expenditures, utilized cash provided by
operations in the amount of $79.3 million for the first six months of 1996
compared to $92.4 million in the comparable period of 1995. These investments
were made to help meet growing global demand for the Company's products, and to
improve manufacturing efficiencies.
The Company expects its operations, exclusive of contemplated borrowings, to
generate sufficient funds to meet the Company's operating needs for the next 12
months, including capital expenditures. The Company has established a $350
million credit facility with a syndicate of banks. To date, the Company borrowed
$205 million under the credit facility to purchase certain assets from 3M
located outside the United States, to repay intercompany indebtedness being
assumed by the Company in connection with the Distribution and to fund working
capital needs. During the third quarter, the Company expects to borrow
additional amounts under the credit facility up to a total of $250 million
non-ESOP related debt for additional start-up costs and to pay certain accrued
employee benefits.
On the Distribution Date, the Company began independent operations with a ratio
of total debt to total capital of approximately 18%. With the additional
expected third quarter borrowings, the ratio of total debt to total capital is
expected to be approximately 21%.
FUTURE OUTLOOK
1996 is a year of transition. The Company has started to implement its
reorganization plan including the closure or consolidation of five factory
locations, the consolidation of laboratories from fourteen to seven, a reduction
of employee count of over 20 percent and utilizing outsourcing for non-core
competencies. Each of these activities are underway and the Company expects that
the most significant changes will occur in the areas of systems and logistics.
Some benefits from the reorganization will be realized in 1996, but the most
significant impacts will occur in 1997 and beyond. It is expected that these
benefits will be partially offset through 1997 by additional expenses the
Company will incur in establishing itself as an independant public company.
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 increased 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, on a pre-tax basis, $30 million
in cost savings in 1996, an additional $70 million in 1997 and an additional $50
million in 1998. The Company, however, does not expect the reorganization plan
to have any meaningful effect on cash flows until 1997, as start-up expenses are
likely to offset any cash generated from reduced costs in 1996. Although
management believes that this goal is appropriate for the Company, there can be
no assurance as to the Company's ability to achieve this goal. See "Forward
Looking Statements."
FORWARD-LOOKING STATEMENTS
Certain information, other than the historical information, discussed in this
Report, may constitute forward-looking statements that are subject to various
factors which could cause actual results to differ materially from the Company's
expectations. 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 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.
(27) Financial data schedule (EDGAR filing only).
(b) No reports on Form 8-K were filed during the quarter ended June 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: August 14, 1996 By: /s/ Jill D. Burchill
Jill D. Burchill
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 476,300
<ALLOWANCES> 0
<INVENTORY> 408,200
<CURRENT-ASSETS> 977,300
<PP&E> 1,829,700
<DEPRECIATION> 1,334,000
<TOTAL-ASSETS> 1,519,100
<CURRENT-LIABILITIES> 321,800
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,109,200
<TOTAL-LIABILITY-AND-EQUITY> 1,519,100
<SALES> 561,200
<TOTAL-REVENUES> 561,200
<CGS> 368,500
<TOTAL-COSTS> 368,500
<OTHER-EXPENSES> 248,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,200
<INCOME-PRETAX> (57,800)
<INCOME-TAX> (19,700)
<INCOME-CONTINUING> (37,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,800)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
