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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________ .
COMMISSION FILE NUMBER: 1-14310
-------------------------------
IMATION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1838504
41-1838504 (I.R.S. Employer
(State or other jurisdiction of Identification No.)
1 IMATION PLACE
OAKDALE, MINNESOTA 55128
(Address of principal executive offices)
(651) 704-4000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_. No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 35,239,320 shares of Common
Stock, par value $0.01 per share, were outstanding at October 30, 2000.
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<PAGE>
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, 2000 and 1999 3
Condensed Consolidated Balance Sheets as
of September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended
September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-12
Report of Independent Accountants 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 14-20
PART II. OTHER INFORMATION 21
SIGNATURE 22
EXHIBIT INDEX 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 288.5 $ 346.0 $ 926.4 $ 1,041.4
Cost of goods sold (1) 220.8 235.1 661.3 719.9
--------- --------- -------- --------
Gross profit 67.7 110.9 265.1 321.5
Operating expenses:
Selling, general and
administrative (1) 92.6 69.1 224.2 220.2
Research and development 15.5 19.1 49.2 57.2
Restructuring 19.9 -- 19.9 --
--------- --------- -------- --------
Total 128.0 88.2 293.3 277.4
Operating (loss) income (60.3) 22.7 (28.2) 44.1
Other (income) and expense:
Interest income (4.2) (2.1) (10.7) (6.9)
Interest expense 0.8 0.5 1.7 1.4
Other, net (5.5) 1.3 (11.8) 3.0
--------- --------- -------- --------
Total (8.9) (0.3) (20.8) (2.5)
(Loss) income from continuing
operations before income taxes (51.4) 23.0 (7.4) 46.6
Income tax (benefit) provision (17.0) 9.2 (7.3) 18.6
--------- --------- -------- --------
(Loss) income from continuing
operations (34.4) 13.8 (0.1) 28.0
Income from operations of
discontinued businesses,
net of taxes -- -- -- 4.6
Loss on disposal of discontinued
businesses, net of taxes -- (3.0) -- (3.0)
--------- --------- -------- --------
Net (loss) income $ (34.4) $ 10.8 $ (0.1) $ 29.6
========= ========= ======== ========
(Loss) earnings per common share basic:
Continuing operations $ (0.99) $ 0.38 $ -- $ 0.74
Net (loss) income $ (0.99) $ 0.29 $ -- $ 0.79
(Loss) earnings per common share diluted:
Continuing operations $ (0.99) $ 0.37 $ -- $ 0.74
Net (loss) income $ (0.99) $ 0.29 $ -- $ 0.78
Weighted average basic
shares outstanding 34.8 36.5 35.2 37.6
========= ========= ======== ========
Weighted average diluted
shares outstanding 34.8 37.1 35.2 37.8
========= ========= ======== ========
</TABLE>
(1) The three and nine month periods ended September 30, 2000 include special
charges of $7.9 million in cost of goods sold and $2.3 million in selling,
general, and administrative expenses related to the Company's restructuring
program (see Note 5). In addition, selling, general, and administrative expenses
include $31.0 million in amortization costs related to computer software being
abandoned (see Note 10).
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
3
<PAGE>
IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
ASSETS
Current assets
Cash and equivalents $ 212.2 $ 194.6
Accounts receivable - net 189.7 252.4
Inventories 156.0 191.3
Other current assets 128.4 133.1
------------ ----------
Total current assets 686.3 771.4
Property, plant and equipment - net 203.3 212.8
Other assets 124.4 143.4
------------ ----------
Total assets $1,014.0 $1,127.6
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 78.2 $ 104.4
Accrued payroll 14.2 37.0
Short-term debt 26.3 27.3
Other current liabilities 204.7 188.5
------------ ----------
Total current liabilities 323.4 357.2
Other liabilities 29.6 44.0
Long-term debt - 1.1
Shareholders' equity 661.0 725.3
------------ ----------
Total liabilities and shareholders' equity $1,014.0 $1,127.6
========= ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
4
<PAGE>
IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine months ended
September 30,
-------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (0.1) $ 29.6
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 78.9 68.9
Deferred income taxes (12.9) (14.7)
Restructuring and other special charges 30.1 --
Inventory, accounts receivable and payable changes 53.8 8.7
Other working capital changes (20.5) (23.0)
Other (8.2) (14.4)
------ -------
Net cash provided by operating activities 121.1 55.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (39.2) (46.5)
Proceeds from sale of businesses -- 201.9
Other (4.0) 3.1
----- ---------
Net cash (used in) provided by investing activities (43.2) 158.5
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt (0.4) (10.6)
Other borrowings of debt -- 53.0
Other repayments of debt (1.1) (84.8)
Purchases of treasury stock (66.0) (76.3)
Decrease in unearned ESOP shares 7.6 5.0
Exercise of stock options and other 5.9 8.2
------- --------
Net cash used in financing activities (54.0) (105.5)
Effect of exchange rate changes on cash (6.3) (5.1)
------- --------
Net change in cash and equivalents 17.6 103.0
Cash and equivalents - beginning of period 194.6 64.2
------- -------
Cash and equivalents - end of period $212.2 $167.2
======= =======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
5
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FINANCIAL STATEMENTS
The interim consolidated financial statements are unaudited but, in the opinion
of management, reflect all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented. Except as otherwise disclosed herein; these adjustments consist of
normal, recurring items. The results of operations for any interim period are
not necessarily indicative of results for the full year. The consolidated
financial statements and notes are presented as permitted by the requirements
for Form 10-Q and do not contain certain information included in the Company's
annual consolidated financial statements and notes. This Form 10-Q should be
read in conjunction with the Company's consolidated financial statements and
notes included in its 1999 Annual Report on Form 10-K.
2. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period adjusted for ESOP shares not committed.
Diluted earnings per share is computed on the basis of the weighted average
basic shares outstanding plus the dilutive effect of outstanding stock options
using the "treasury stock" method. The following table sets forth the
computation of the weighted average basic and diluted shares outstanding:
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
---- ---- ---- ----
Weighted average
shares outstanding 35.4 37.4 35.9 38.6
Weighted average ESOP
shares not committed (0.6) (0.9) (0.7) (1.0)
----- ----- ----- -----
Weighted average
basic shares outstanding 34.8 36.5 35.2 37.6
Dilutive effect of
employee stock options -- 0.6 -- 0.2
----- ----- ----- -----
Weighted average diluted
shares outstanding 34.8 37.1 35.2 37.8
===== ===== ===== =====
Options to purchase 4.5 million shares of the Company's common stock were
outstanding as of September 30, 2000 that were not included in the computation
of potential common shares for the three and nine months ended September 30,
2000, because the effect of the options would be antidilutive due to the
Company's net loss.
6
<PAGE>
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
September 30,
2000 December 31,
(In millions) (Unaudited) 1999
----------- ------------
Inventories
Finished goods $ 108.8 $ 123.8
Work in process 18.1 14.6
Raw materials and supplies 29.1 52.9
---------- ------------
Total inventories $ 156.0 $ 191.3
========== ============
Property, Plant and Equipment
Property, plant and equipment $ 952.1 $ 981.2
Less accumulated depreciation (748.8) (768.4)
---------- ------------
Property, plant and equipment - net $ 203.3 $ 212.8
========== ============
4. COMMITMENTS AND CONTINGENCIES
Discussion of legal matters is cross-referenced to this Form 10-Q, Part II, Item
1, Legal Proceedings, and should be considered an integral part of the
Consolidated Financial Statements and Notes.
5. RESTRUCTURING CHARGES AND OTHER SPECIAL CHARGES
In the third quarter of 2000, the Company recorded a $19.9 million restructuring
charge to rationalize its manufacturing operations, streamline its
organizational structure and write-down impaired assets. The charges include
$14.4 million for employee separation programs related to a headcount reduction
of approximately 420 employees. In addition, certain contract positions will
also be elimated. The reduction in employee positions affects all business units
and corporate staff, with approximately 60 percent of the headcount reductions
due to rationalization of manufacturing within the Data Storage and Information
Management business. In the period, the Company also recorded $10.2 million in
special charges comprised of $7.9 million of inventory write-downs in cost of
goods sold and $2.3 million of charges in selling, general and administrative
expense. The Company expects to record approximately $2.0 million in additional
charges in the fourth quarter in connection with this restructuring plan.
The following table represents the cumulative activity related to the Company's
2000 restructuring program:
(In millions) Program Cumulative September 30, 2000
Amounts Usage Balance
-------- ---------- -----------
Severance $ 14.4 $ (0.7) $ 13.7
Asset impairments 3.1 (3.1) --
Other 2.4 (0.1) 2.3
-------- --------- ---------
Total $ 19.9 $ (3.9) $ 16.0
======== ========= =========
During the three months ended September 30, 2000, the Company made $0.8 million
of cash payments related to the activities described above. The majority of the
severance and other payments associated with the 2000 restructuring are expected
to be completed by the end of the first quarter of 2001.
7
<PAGE>
In 1997 and 1998, the Company recorded charges for the restructuring of its
worldwide operations. This is discussed in the Company's 1999 Form 10-K. The
remaining restructuring balance at September 30, 2000 was $4.4 million for
severance and $3.8 million for other payments. During the nine months ended
September 30, 2000 the Company made cash payments of approximately $13.3 million
related to these activities, compared to $18.3 million paid in the same period
in 1999.
Since inception of the 1997 restructuring plan, the Company has reduced its
headcount relating to continuing operations by approximately 2,100, primarily
due to the restructuring plans discussed above.
6. SALE OF THE MEDICAL IMAGING AND PHOTO COLOR SYSTEMS SEGMENT
On November 30, 1998, the Company sold its worldwide Medical Imaging Systems
business (the Medical Imaging Sale) to Eastman Kodak Company (Kodak). Excluded
from the Medical Imaging Sale was the Company's medical imaging/photo color
manufacturing facility in Ferrania, Italy (the Ferrania Facility), at which the
Company agreed to manufacture wet laser and x-ray film and hardware pursuant to
an exclusive supply agreement (the Ferrania Supply Agreement) with Kodak. In
exchange for retaining the Ferrania Facility and pursuant to certain conditions,
Kodak agreed to pay the Company up to $25.0 million at such time as it was sold.
Under the terms of the asset purchase agreement dated as of July 31, 1998 and
amended and restated as of November 30, 1998 between the Company and Kodak,
Kodak paid the Company $532.2 million in cash prior to December 31, 1998. Of the
$532.2 million cash proceeds, the Company was restricted from using $143.0
million until the first quarter of 1999; this amount is shown as a component of
proceeds from sale of businesses in the Condensed Consolidated Statement of Cash
Flows for the nine months ended September 30, 1999.
On August 2, 1999, the Company closed on the sale of its worldwide Photo Color
Systems business, together with the Ferrania Facility, the Ferrania Supply
Agreement and certain other associated businesses, to Schroder Ventures, through
Schroder Ventures' wholly owned affiliate, Ferrania Lux, S.A.R.L. As a result of
this transaction, the Company recorded a loss of $3.0 million, net of income tax
benefits of $7.1 million, in the third quarter of 1999.
Kodak has challenged the Company's claim for the full $25.0 million as well as
claims for other amounts which the Company believes are due from Kodak in
connection with the Ferrania Facility and Medical Imaging sales. The Company has
retained cash, as reflected in its financial statements, which it collected on
behalf of Kodak in an amount approximately equal to the disputed items. While
the Company cannot predict with certainty the ultimate outcome of these disputed
items, it believes its positions are supported by the applicable contractual
terms.
8
<PAGE>
The results of discontinued operations for the three and nine month periods
ended September 30, 1999 were as follows (in millions):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ -------------------
<S> <C> <C>
Net revenues $ - $ 124.7
Income before taxes - 9.3
Income tax provision - 4.7
--------- ---------
Income from discontinued operations, net of tax $ - $ 4.6
Loss on disposal of discontinued businesses,
including operating losses of $4.9 million during
phase-out period (less applicable income tax
benefits of $7.1 million) (3.0) (3.0)
--------- --------
Total discontinued operations $ (3.0) $ 1.6
========= ========
(Loss) earnings per common share - basic $(0.09) $ 0.05
(Loss) earnings per common share - diluted $(0.08) $ 0.04
-
</TABLE>
7. COMPREHENSIVE (LOSS) INCOME
The components of total comprehensive (loss) income are shown below. The net
unrealized loss on available-for-sale securities and the cash flow hedging gain
balance of a $2.2 million loss as of September 30, 2000 is recorded net of $1.3
million in deferred income tax benefits.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
(In millions) 2000 1999 2000 1999
------- ------- ------- -------
Net (loss) income $ (34.4) $ 10.8 $ (0.1) $ 29.6
Changes in cumulative
translation adjustments (8.5) 7.9 (10.5) (7.7)
Cash flow hedging - net 0.3 -- 0.1 --
Unrealized loss on available-
for sale securities - net (0.4) -- (2.3) --
------- ------- ------- -------
Comprehensive (loss) income $ (43.0) $ 18.7 $ (12.8) $ 21.9
======= ======= ======= =======
Accumulated other comprehensive (loss) income consists of the following:
<TABLE>
<CAPTION>
Foreign Unrealized Loss Accumulated
Currency Cash on Available Other
Translation Flow for Sale Comprehensive
Adjustment Hedging Securities (Loss) Income
---------- -------- ---------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 $ (82.1) $ -- $ -- $ (82.1)
First quarter 2000 change (0.5) (0.1) -- (0.6)
---------- -------- ---------- --------------
Balance, March 31, 2000 (82.6) (0.1) -- (82.7)
Second quarter 2000 change (1.5) (0.1) (1.9) (3.5)
---------- -------- ---------- --------------
Balance, June 30, 2000 (84.1) (0.2) (1.9) (86.2)
Third quarter 2000 change (8.5) 0.3 (0.4) (8.6)
---------- -------- ---------- --------------
Balance, September 30, 2000 $ (92.6) $ 0.1 $ (2.3) $ (94.8)
========== ======== ========= ==============
</TABLE>
9
<PAGE>
8. BUSINESS SEGMENT INFORMATION
The Company's continuing businesses are organized, managed and internally
reported as three segments differentiated primarily by their products and
services, but also by the markets they serve. These segments, whose results are
shown below, are Data Storage and Information Management, providing removable
data storage products for use in the mobile and desktop, network and enterprise
data center markets; Color Technologies, whose principle products include
printing and color proofing systems, printing films and plates for the graphic
arts marketplace, and carbonless paper, such as multi-part business forms; and
Digital Solutions and Services, which provides 24-hour technical service and
support for equipment sold by the Company as well as by other third party
equipment vendors, and document imaging products for large format engineering
documentation.
<TABLE>
<CAPTION>
(1)Divested
Business Data Digital Business,
Segment Storage and Solutions Corporate,
Information Third Information Color and Other and Total
(In millions) Quarter Management Technologies Services Unallocated Company
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues: 2000 $ 201.2 $ 64.8 $ 22.7 (0.2) $ 288.5
1999 235.7 81.2 27.4 1.7 346.0
--------------------------------------------------------------------------------------------------------------
Operating 2000 (3.6) $ 3.4 $ 0.6 $ (60.7) $ (60.3)
income(loss) 1999 16.0 8.4 (0.5) (1.2) 22.7
--------------------------------------------------------------------------------------------------------------
(1)Divested
Business Nine Data Digital Business,
Segment Months Storage and Solutions Corporate,
Information to Information Color and Other and Total
(In millions) Date Management Technologies Services Unallocated Company
----------------------------------------------------------------------------------------------------------------
Net revenues 2000 $ 645.8 $ 209.2 $ 71.4 $ 0.0 $ 926.4
1999 693.3 255.9 87.9 4.3 1,041.4
----------------------------------------------------------------------------------------------------------------
Operating 2000 $ 15.6 $ 16.6 $ (0.7) $ (59.7) $ (28.2)
income(loss) 1999 22.4 27.5 (1.8) (4.0) 44.1
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Divested Business, Corporate, Other and Unallocated (Corporate) amounts
for net revenues and operating income (loss) primarily include the results for
certain businesses not included in the Company's disclosable business segments
and, in 1999, general overhead which was previously allocated to the Photo Color
business. Included in the nine months to date 2000 Corporate operating income
(loss) is a one-time benefit of approximately $2 million from the conclusion of
a development project, net of a manufacturing capacity adjustment. Included in
third quarter 2000 Corporate operating income (loss) are the accelerated
software amortization, restructuring and other special charges discussed in
Notes 5 and 10.
Intersegment revenues are not material. The proportion of total assets by
segment has not changed materially from December 31, 1999.
10
<PAGE>
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective
January 1, 2000. The Company also adopted SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133," effective July 1, 2000. SFAS No. 133 requires that all
derivatives, including foreign currency exchange contracts, be recognized on the
balance sheet at fair value. Derivatives that are not hedges must be recorded at
fair value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of underlying assets or liabilities through
income or recognized in other comprehensive income in stockholders' equity until
the underlying hedged item is recognized in income. The ineffective portion of a
derivative's change in fair value is to be immediately recognized in income.
Upon adoption at January 1, 2000, the Company recorded a cumulative-effect-type
loss adjustment in accumulated other comprehensive (loss) income to recognize
the fair value of foreign currency contracts designated as cash-flow hedging
instruments. The adjustment did not have a significant impact on the Company's
financial position or results of operations at adoption. Accumulated net
deferred losses, in other comprehensive loss in stockholders' equity, on foreign
currency cash-flow hedges at September 30, 2000 were not significant. Amounts
reclassified into income for the nine months ended September 30, 2000 were not
significant.
The Company maintains a foreign currency exposure management policy that allows
for the use of derivative instruments, principally forward exchange contracts.
These contracts, ranging in duration from one to twelve months, are entered into
to fix the U.S. dollar amount of the eventual cash flows resulting from such
transactions. All derivatives are recognized on the balance sheet at their fair
value. The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge items. This process includes linking all
derivatives to booked or forecasted transactions. The Company also formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be highly
effective as a hedge, the Company discontinues hedge accounting prospectively,
with gains and losses that were accumulated in other comprehensive income
recognized in current period income.
10. CAPITALIZED SOFTWARE AMORTIZATION
During the third quarter of 2000, the Company determined that it would abandon
certain components of its current computer software system by the end of 2000.
Accordingly, the Company has shortened the estimated useful life of a large
portion of its capitalized software such that this portion of the software will
be fully amortized by December 31, 2000. The Company recorded $31.0 million in
pre-tax charges in third quarter 2000 related to the amortization of this
software being abandoned. The Company anticipates the fourth quarter 2000 charge
related to this software to be $35.0 million. Expected annual savings from the
total charges are approximately $9.0 million. These are all non-cash charges.
11
<PAGE>
11. NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition." An amendment in June
2000 delayed the effective date until the fourth quarter of 2000. In addition,
in October 2000, the SEC staff issued "Staff Accounting Bulletin No. 101:
Revenue Recognition in Financial Statements - Frequently Asked Questions and
Answers." The Company is reviewing the requirements of this bulletin and has not
yet determined the impact on its consolidated financial statements.
****
PricewaterhouseCoopers LLP, the Company's independent accountants, has performed
a review of the unaudited interim consolidated financial statements included
herein and their report thereon accompanies this filing. This report is not a
"report" within the meaning of Sections 7 and 11 of the 1933 Act and the
independent accountants liability under Section 11 does not extend to it.
12
<PAGE>
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, 2000, and the related
consolidated statements of operations for each of the three-month and nine-
month periods ended September 30, 2000 and 1999 and condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 2000 and
1999. These 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 auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 1999, and the related consolidated statements of operations, shareholders'
equity and comprehensive income, and of cash flows for the year then ended (not
presented herein), and in our report dated January 27, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
October 24, 2000
13
<PAGE>
IMATION CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
In the third quarter of 2000, the Company recorded accelerated amortization
associated with the abandonment of certain capitalized software, as well as
restructuring and other special charges (see Notes 5 and 10). The following
table displays the results of operations as reported compared to the results
excluding these charges.
Three months ended Nine months ended
September 30, 2000 September 30, 2000
------------------ ------------------
(In millions) Reported Adjusted Reported Adjusted
-------- -------- -------- --------
Net revenues $ 288.5 $ 288.5 $ 926.4 $ 926.4
Gross profit 67.7 75.6 265.1 273.0
Selling, general and
administrative 92.6 59.3 224.2 190.9
Research and development 15.5 15.5 49.2 49.2
Restructuring 19.9 -- 19.9 --
-------- -------- -------- --------
Operating (loss) income (60.3) 0.8 (28.2) 32.9
Other (income) and expense (8.9) (8.9) (20.8) (20.8)
Income tax (benefit) provision (17.0) (4.4) (7.3) 5.3
-------- -------- -------- --------
(Loss) income from continuing
operations (34.4) 14.1 (0.1) 48.4
Diluted (loss) earnings $ (0.99) $ 0.40 $ -- $ 1.35
per share
The Company has engaged the investment banking firm of Goldman, Sachs & Co. to
assist in exploring strategic alternatives, such as financial restructuring,
stock repurchases, spin-offs, joint ventures, and business combinations.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net revenues of $288.5 million declined 16.6 percent from last year revenues of
$346.0 million. The decline was primarily due to softness in the demand for the
Company's mature products in the Data Storage and Information Management and the
Color Technologies business segments. In addition, accelerated pricing pressure
and foreign currency effects negatively impacted sales during the period.
Data Storage and Information Management revenues declined $34.5 million to
$201.2 million from $235.7 million a year ago. The revenue decline was primarily
due to lower sales of mature technology products, increased pricing pressures,
negative currency translation, and lower SuperDisk drive hardware sales.
Strength of demand for the 9840 tape cartridge, DLTtape and optical media
partially offset the decline.
14
<PAGE>
Color Technologies revenues were $64.8 million as compared to $81.2 million a
year ago. The $16.4 million decline from third quarter 1999 was primarily due to
lower sales of analog proofing, and plates and film products.
Digital Solutions and Services third quarter 2000 revenues were $22.7 million as
compared to $27.4 million a year ago. The $4.7 million decline from third
quarter 1999 resulted primarily from the ongoing transition in the large format
document imaging business from analog to digital.
Gross profit in third quarter 2000 was $67.7 million, which includes special
charges of $7.9 million related to inventory write-offs. Excluding special
charges, gross profit was $75.6 million, or 26.2 percent of revenues, compared
to $110.9 million, or 32.1 percent of revenues in the year earlier quarter. The
gross margin percentage decrease resulted from higher price erosion, negative
product mix, and continued negative impacts of foreign currency.
Selling, general and administrative (SG&A) expenses in third quarter 2000 were
$92.6 million. Excluding special charges of $33.3 million, SG&A expenses
declined $9.8 million, or 14.2 percent from $69.1 million last year to $59.3
million in the current quarter. SG&A expenses were primarily benefited by cost
reductions in information technology and reduced variable compensation accruals.
SG&A expenses, as a percentage of revenue, are expected to be negatively
impacted up to 1.0 percentage point during the fourth quarter of 2000 due to
declining demand for transition services associated with the divestiture of the
Medical Imaging Systems business.
Research and development (R&D) costs were $15.5 million, or 5.4% of revenues.
This percentage is consistent with recent quarters.
The Company recorded a $19.9 million restructuring charge to rationalize its
manufacturing operations, streamline its organizational structure and write-off
impaired assets. The charges include $14.4 million for employee separation
programs, $3.1 million for fixed asset write-downs, and $2.4 million for other
business exit costs. The majority of the severance and other payments associated
with the 2000 restructuring are expected to be completed by the end of the first
quarter of 2001. Expected annual savings from the program are approximately
$31.0 million, or approximately $7-8 million per quarter, which are expected to
primarily impact cost of goods sold and SG&A expenses. The Company expects to
realize most of the anticipated cost savings by first quarter 2001. The Company
expects to record approximately $2.0 million in additional charges in fourth
quarter in connection with this restructuring plan.
Operating loss in the third quarter of 2000 was $60.3 million. Excluding special
charges operating income was $0.8 million compared to $22.7 million for the same
period last year. This decline is due to the factors discussed above.
Other income increased to $8.9 million from $0.3 million a year ago. The
increase was primarily due to venture capital distributions of $5.0 million
received during the quarter, as well as interest income.
The tax rate benefit for the third quarter was 33 percent. Excluding special
charges, the tax rate benefit was 45 percent. These tax rates reflect the
Company's revision of its estimated year-to-date and annual effective tax rate
from 22 percent to 10 percent, excluding special charges. This decline resulted
from lower operating income than previously projected.
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Loss from continuing operations in the third quarter of 2000 was $34.4 million.
Excluding restructuring and special charges, income from continuing operations
was $14.1 million, or $0.40 per basic and diluted share, compared with income
from continuing operations of $13.8 million, or $0.38 per basic and $0.37 per
diluted share in 1999 for the reasons discussed above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
On a year to date basis, net revenues of $926.4 million declined 11.0 percent
from last year's $1,041.4 million. The decline was due to several factors,
including softness in mature products in the Data Storage and Information
Management and the Color Technologies business segments, negative effects of
foreign currency, and increased price reductions.
Data Storage and Information Management revenues decreased 6.9 percent to $645.8
million from $693.3 million a year ago. The revenue decline was primarily due to
lower sales of mature technology products, lower SuperDisk drive hardware sales,
negative effects of foreign currency, and increased price reductions. Strength
of demand for the 9840 tape cartridge, DLTtape and optical media partially
offset the decline.
Color Technologies revenues were $209.2 million, down from $255.9 million a year
ago. The $46.7 million decline was due to lower sales of analog proofing, plates
and film products.
Digital Solutions and Services revenues declined $16.5 million to $71.4 million.
The decrease resulted from the ongoing transition in the large format document
imaging business from analog to digital.
Gross profit was $265.1 million, or 28.6 percent of revenues, for the first nine
months of 2000. Excluding special charges of $7.9 million, gross profit was
$273.0 million, or 29.5 percent of revenues, down from $321.5 million, or 30.9
percent of revenues, a year ago. The percentage decline in gross margin resulted
from negative impacts of foreign currency, higher price erosion and negative
changes in product mix.
Selling, general and administrative (SG&A) expenses for the first nine months of
2000 were $224.2 million. Excluding special charges, SG&A expenses of $190.9
million declined $29.3 million, or 13.3 percent, from $220.2 million last year.
SG&A expenses benefited by cost reductions in information technology, reductions
in variable compensation accruals, and approximately $2.0 million from the first
quarter conclusion of a development project, net of a manufacturing capacity
adjustment. SG&A expenses, as a percentage of revenue, are expected to be
negatively impacted up to 1.0 percentage point during the fourth quarter of 2000
due to declining demand for transition services associated with the divestiture
of the Medical Imaging Systems business.
Research and development costs for the first nine months of 2000 were $49.2
million, or 5.3% of revenues.
The Company recorded a $19.9 million restructuring charge to rationalize its
manufacturing operations, streamline its organizational structure and write-off
impaired assets. The charges include $14.4 million for employee separation
programs, $3.1 million for fixed asset write-downs, and $2.4 million for other
business exit costs. The majority of the severance and other payments associated
with the 2000 restructuring are expected to be completed by the
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end of the first quarter of 2001. Expected annual savings from the program are
approximately $31.0 million, or approximately $7-8 million per quarter, which
are expected to primarily impact cost of goods sold and SG&A expenses. The
Company expects to realize most of the anticipated cost savings by first quarter
2001. The Company expects to record approximately $2.0 million in additional
charges in fourth quarter in connection with this restructuring plan.
Operating loss for the first nine months of 2000 was $28.2 million. Excluding
special charges, operating income was $32.9 million compared to $44.1 million
for the same period last year. This decline is due to the factors discussed
above. The Company now expects fourth quarter operating income, excluding
special charges, to be in the range of $2.0 to $6.0 million.
Other income increased to $20.8 million from $2.5 million a year ago. Venture
capital distributions, which currently are expected to be minimal for the
balance of the year, contributed approximately $13 million for the first nine
months of 2000. In addition, interest income contributed $10.7 million during
the year.
The tax rate benefit for the first nine months of 2000 was 98.7 percent.
Excluding special charges, the tax rate for the first nine months and expected
for the full-year 2000 is 10 percent, down from the 1999 full-year rate of 39
percent. The decline from last year's tax rate resulted from tax benefits
associated with changes to the Company's European structure resulting from the
sale of the Medical Imaging and Photo Color Systems businesses, and the Italian
manufacturing facility.
Loss from continuing operations for the first nine months of 2000 was $0.1
million. Excluding special charges, income from continuing operations was $48.4
million, or $1.37 per basic share and $1.35 per diluted share. This compares
with income from continuing operations of $28.0 million, or $0.74 per basic and
diluted share, for the same period in 1999.
FINANCIAL POSITION
Working capital of $362.9 million as of September 30, 2000 is down $51.3 million
as compared to $414.2 million at year-end 1999. This decline is primarily due to
lower inventory days of supply of 66 days, which is down 10 days as compared to
76 days at December 31, 1999, and accounts receivable days sales outstanding of
56 days, which is down 6 days as compared to 62 days at December 31, 1999.
The book value of property, plant and equipment as of September 30, 2000 was
$203.3 million, as compared to $212.8 million at December 31, 1999. This
reduction is primarily due to write-downs associated with the conclusion of a
development project, and the restructuring program discussed in Note 5.
The Company repurchased 0.6 million shares of common stock during the quarter
for $14.6 million under the terms of an existing stock repurchase program.
Authorization to repurchase approximately 3.3 million shares remains under this
program.
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LIQUIDITY
Cash provided by operating activities was $121.1 million during the nine months
ended September 30, 2000 compared with $55.1 million during the same period in
1999. Depreciation and amortization was $78.9 million in the first nine months
of 2000, up from $68.9 million in 1999 primarily because of the $31.0 million
accelerated software amortization charge in the third quarter of 2000. Changes
in working capital provided $33.3 million during the first nine months of 2000,
as compared to $14.3 million used in the comparable period of 1999. For the nine
months ended September, 2000, the Company made total cash payments of $14.1
million associated with its restructuring programs.
Cash used by investing activities was $43.2 million for the nine months ended
September 30, 2000 compared with cash provided of $158.5 million in the
comparable period of 1999, which included proceeds from the sale of the Medical
Imaging and Photo Color Systems businesses of $201.9 million. Capital
expenditures of $39.2 million for the first nine months of 2000 decreased $7.3
million from the $46.5 million in the same period of 1999.
Net financing activities during the first nine months of 2000 used cash of $54.0
million compared with a $105.5 million use of cash in the comparable 1999
period. Financing activities in 2000 were comprised primarily of the purchase of
treasury stock under an existing repurchase program. In addition to treasury
stock purchases, financing activities in 1999 also included a net usage of cash
of $42.4 million to pay down debt.
The Company has a Loan and Security Agreement (the Loan Agreement) with a group
of banks. The Loan Agreement provides for revolving credit, including letters of
credit, with borrowing availability based on eligible accounts receivable,
inventory and manufacturing machinery and equipment not to exceed $175.0
million. Borrowing availability at September 30, 2000 was $97.0 million. No
borrowings were outstanding under the Loan Agreement at September 30, 2000.
In addition, the Company has arranged for local borrowings of debt for certain
subsidiaries. As of September 30, 2000, $26.3 million of short-term borrowings
were outstanding under such arrangements.
As of September 30, 2000, the Company's ratio of debt to total capital was 3.8
percent, unchanged from December 31, 1999. The Company expects that cash and
equivalents, together with cash flow from operations and availability of
borrowings under its current and future sources of financing, will provide
liquidity sufficient to operate the Company for the foreseeable future.
DERIVATIVE FINANCIAL INSTRUMENTS
In conjunction with the adoption of SFAS No. 133 (see Note 9 to Consolidated
Financial Statements), the Company revised its foreign currency hedging policy
to allow for the hedging of anticipated transactions ("cash flow hedging") in
addition to booked transactions ("transaction hedging"). The Company is
evaluating alternative methods to implement this policy and may expand its use
of cash flow hedging in the future. The objective of the currency hedging is to
reduce the fluctuations in earnings and cash flows
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caused by volatility in exchange rates; however, no assurance can be given that
these risk management activities will offset more than a portion of the adverse
financial impact.
EURO CONVERSION STATUS
On January 1, 1999, 11 of the 15 member countries of the European Union adopted
the Euro as their new common currency. The Euro is trading on currency exchanges
and can be used for non-cash transactions. Local currencies will remain legal
tender until December 31, 2001. By no later than December 31, 2001,
participating countries will issue new Euro-denominated bills for use in cash
transactions. By no later than July 1, 2002, participating countries will begin
using the Euro as the legal tender and will withdraw all legacy currencies.
The Euro conversion may lead to increased competition between countries and
potential erosion of margins as prices in different countries are more
transparent. The Company is reviewing its marketing strategies to address
possible increased competition and is also reviewing and testing its software
compatibility with the Euro conversion. The Company will continue to review the
impact of the conversion to the Euro; however, the Company does not expect that
the Euro conversion will have a material impact on the Company's results of
operations or financial position.
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
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the future to differ materially from any opinions or statements expressed with
respect to future periods are the Company's ability to meet its cost reduction
and revenue growth targets, its ability to implement its restructuring program
on a timely basis and to achieve the projected benefits, to manage lower SG&A
reimbursements from Kodak as transition services that the Company provides
associated with the sale of its Medical Imaging Systems business decline, the
resolution of disputes associated with the sale of the Medical Imaging Systems
business, its ability to introduce new offerings in a timely manner, the
competitive pricing environment, foreign currency fluctuations, the ability of
Imation to secure adequate supply of certain high demand products, the market
acceptance of newly introduced product and service offerings, the rate of
decline for certain existing products as well as various factors set forth in
the Company's filings with the Securities and Exchange Commission, including its
1999 Annual Report on Form 10-K and subsequent Form 10-Q filings.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3. "Legal Proceedings" included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
The Company is also the subject of various pending or threatened legal actions
in the ordinary course of its business. All such matters are subject to many
uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain the ultimate aggregate amount
of any monetary liability or financial impact that may be incurred by the
Company with respect to these matters. While these matters could materially
affect operating results of any one quarter when resolved in future periods, it
is management's opinion that after final disposition, any monetary liability or
financial impact to the Company beyond that provided in the Condensed
Consolidated Balance Sheet as of September 30, 2000 would not be material to the
Company's financial position or annual results of operations or cash flows.
Items 2-5. Not Applicable
Item 6(a). Exhibits
The following documents are filed as exhibits to this Report.
15.1 An awareness letter from the Company's independent accountants
regarding unaudited interim financial statements. Page 24.
27.1 Financial data schedule
(b) No reports on Form 8-K were filed during the quarter ended September 30,
2000.
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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 1, 2000 By:
/s/Robert L. Edwards
-----------------------------------
Robert L. Edwards
Senior Vice President,
Chief Financial Officer
and Chief Administrative
Officer
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------------------------------------------------
15.1 An awareness letter from the Company's independent accountants
regarding unaudited interim financial statements.
27.1 Financial data schedule.
23
