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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 MARCH 31, 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
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IMATION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1838504
(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)
(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: 35,744,327 shares of Common
Stock, par value $0.01 per share, were outstanding at April 28, 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 months ended
March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheets as
of March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash
Flows for the three months ended
March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-11
Report of Independent Accountants 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 13-17
PART II. OTHER INFORMATION 18
SIGNATURE 19
EXHIBIT INDEX 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Net revenues $ 328.8 $ 341.2
Cost of goods sold 226.2 238.3
------- -------
Gross profit 102.6 102.9
Operating expenses:
Selling, general and
administrative 67.2 79.0
Research and development 17.0 19.2
------- -------
Total 84.2 98.2
Operating income 18.4 4.7
Other (income) and expense:
Interest expense 0.4 0.7
Other, net (8.3) (1.9)
------- -------
Total (7.9) (1.2)
Income from continuing
operations before taxes 26.3 5.9
Income tax provision 5.8 2.4
------- -------
Income from continuing
operations 20.5 3.5
Income from discontinued
operations, net of taxes -- 2.6
------- -------
Net income $ 20.5 $ 6.1
======= =======
Earnings per common share-
basic:
Continuing operations $ 0.57 $ 0.09
Discontinued operations $ -- $ 0.07
------- -------
Net income $ 0.57 $ 0.16
======= =======
Earnings per common share- diluted:
Continuing operations $ 0.56 $ 0.09
Discontinued operations $ -- $ 0.07
------- -------
Net income $ 0.56 $ 0.16
======= =======
Weighted average basic
shares outstanding 35.8 39.2
======= =======
Weighted average diluted
shares outstanding 36.6 39.3
======= =======
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
3
<PAGE>
IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 200.4 $ 194.6
Accounts receivable - net 231.6 252.4
Inventories 177.4 191.3
Other current assets 132.3 133.1
---------- ----------
Total current assets 741.7 771.4
Property, plant and equipment - net 206.0 212.8
Other assets 134.8 143.4
---------- ----------
Total assets $ 1,082.5 $ 1,127.6
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 90.7 $ 104.4
Accrued payroll 15.2 37.0
Short-term debt 28.7 27.3
Other current liabilities 208.9 188.5
---------- ----------
Total current liabilities 343.5 357.2
Other liabilities 35.6 44.0
Long-term debt -- 1.1
Shareholders' equity 703.4 725.3
---------- ----------
Total liabilities and shareholders' equity $ 1,082.5 $ 1,127.6
========== ==========
</TABLE>
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)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20.5 $ 6.1
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18.2 23.5
Deferred income taxes 10.4 1.8
Inventory, accounts receivable and payable changes 18.0 8.5
Other working capital changes (5.7) (13.5)
Other (1.0) (23.0)
------- -------
Net cash provided by operating activities 60.4 3.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14.0) (18.9)
Proceeds from sale of business -- 143.0
Other 0.6 11.3
------- -------
Net cash (used in) provided by investing activities (13.4) 135.4
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt 1.4 (3.0)
Other borrowings of debt -- 53.0
Other repayments of debt (1.4) (84.0)
Purchases of treasury stock (47.7) (41.9)
Decrease in unearned ESOP shares 3.8 2.1
Exercise of stock options 2.0 --
------- -------
Net cash used in financing activities (41.9) (73.8)
Effect of exchange rate changes on cash 0.7 (0.3)
------- -------
Change in cash and equivalents 5.8 64.7
Cash and equivalents - beginning of period 194.6 64.2
------- -------
Cash and equivalents - end of period $ 200.4 $ 128.9
======= =======
</TABLE>
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 Employee Stock Ownership Plan
(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
March 31,
------------------
(In millions) 2000 1999
------ ------
Weighted average
shares outstanding 36.6 40.3
Weighted average ESOP
shares not committed (0.8) (1.1)
----- -----
Weighted average
basic shares outstanding 35.8 39.2
Dilutive effect of
employee stock options 0.8 0.1
----- -----
Weighted average diluted
shares outstanding 36.6 39.3
===== =====
6
<PAGE>
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
March 31,
2000 December 31,
(In millions) (Unaudited) 1999
------------ ------------
Inventories
Finished goods $ 121.9 $ 123.8
Work in process 16.3 14.6
Raw materials and supplies 39.2 52.9
------------ ------------
Total inventories $ 177.4 $ 191.3
============ ============
Property, plant and equipment
Property, plant and equipment $ 978.9 $ 981.2
Less accumulated depreciation (772.9) (768.4)
------------ ------------
Property, plant and equipment - net $ 206.0 $ 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
In the fourth quarter of 1997 and in 1998, the Company recorded charges for the
restructuring of its worldwide operations in order to improve the Company's
competitive position, to focus resources on areas of strength and on growth
opportunities, and to reduce costs and eliminate unnecessary structure.
The following table represents the cumulative activity related to the Company's
1997 and 1998 restructuring programs, adjusted to exclude those activities
specifically related to discontinued operations:
(In millions) Program Cumulative March 31, 2000
Amounts Usage Balance
------- ------- -------
Severance $ 58.2 $ (48.2) $ 10.0
Asset impairments 55.3 (55.3) --
Other 33.3 (25.2) 8.1
------- ------- -------
Total $ 146.8 $(128.7) $ 18.1
======= ======= =======
From the inception of the restructuring plan through March 31, 2000, the Company
has reduced its headcount relating to continuing operations by approximately
1,800. During the three months ended March 31, 2000 the Company made cash
payments of $3.2 million related to the activities described above, compared to
$13.2 million paid in the same period in 1999. Remaining severance and other
payments are expected to be made throughout the balance of 2000.
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). In
connection with the sale, Kodak acquired the assets and assumed the liabilities
of the Company's Medical Imaging Systems business in North
7
<PAGE>
America, Latin America and Asia, including manufacturing facilities in Oregon
and Minnesota and all the outstanding shares of Cemax-Icon, Inc. (Cemax), a
wholly-owned subsidiary of the Company. The formal closings of the sale of the
Company's Medical Imaging Systems business in Europe (European Businesses) to
Kodak occurred on a country-by-country basis in the first quarter of 1999. Under
the terms of the Asset Purchase Agreement (as defined below), beginning December
1, 1998, Kodak was entitled to the operating results and cash flows of the
European Businesses. 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 (as
amended and restated, the Asset Purchase Agreement), Kodak paid the Company
$532.2 million in cash prior to December 31, 1998, of which $18.0 million
represented a nonrefundable deposit under the Ferrania Supply Agreement. Of the
$532.2 million cash proceeds, the Company was restricted from using $143.0
million until the European Businesses were legally transferred to Kodak in the
first quarter of 1999; this amount is shown as proceeds from sale of business
in the Condensed Consolidated Statement of Cash Flows for the three months ended
March 31, 1999.
The Company recorded a pre-tax gain of $65.0 million ($36.4 million after
taxes), net of related costs, in 1998 from the Medical Imaging Sale. The related
costs included $40.8 million for the impairment of certain manufacturing assets
which were not sold to Kodak, determined based on estimated recoverable costs.
In addition, these costs included the write-off of capitalized software costs of
$27.9 million which were directly related to the Medical Imaging Systems
business, reflecting the abandonment of certain functionality and utility,
pension and other curtailment and settlement costs related to employees
transferred to Kodak of $16.9 million, and other costs of the transaction.
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. In connection
with this transaction, the Company recorded a loss of $3.0 million, net of
income tax benefits of $7.1 million, in 1999.This transaction is expected to
generate after-tax cash of approximately $50.0 million, $25.0 million of which
arises out of payment from Kodak related to the sale of the Ferrania Facility.
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 Medical Imaging Sale. 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>
In connection with the sale of the Medical Imaging and Photo Color Systems
businesses, the Company receives reimbursement for certain transition services
and distribution agreements that the Company has agreed to provide Kodak for up
to a period of two years, and Schroder Ventures while it integrates accounting
and information systems. Kodak and Schroder Ventures, at their options, may
terminate the transition services agreements with respect to individual
categories of service upon prior notice, the length of which varies according to
the nature of the service. Reimbursements for these transition services are
generally presented as a reduction of general and administrative expenses in the
Consolidated Statements of Operations.
As a result of the sale of the Photo Color Systems business and the Ferrania
Facility, the Company has completed the disposition of its Medical Imaging and
Photo Color Systems segment. As such, the Company's Consolidated Statements of
Operations for the three months ended March 31, 1999 have been reclassified to
present Photo Color Systems and the Medical Imaging Systems businesses as
discontinued operations. Income from operations of discontinued businesses
include interest expense allocations based on the ratio of net assets of
discontinued operations to consolidated net assets plus debt.
The results of discontinued operations for the three-month period ended March
31, 1999 were as follows (in millions):
Net revenues $ 60.8
Income before taxes 4.9
Income tax provision 2.3
------
Income from discontinued
operations, net of taxes $ 2.6
======
Earnings per common share-
basic $ 0.07
Earnings per common share-
diluted $ 0.07
7. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2000 and 1999
was as follows:
Three months ended
March 31,
------------------
(In millions) 2000 1999
------ ------
Net income $ 20.5 $ 6.1
Changes in cumulative
translation adjustments (0.5) (6.1)
Cash flow hedging (0.1) --
------ -----
Comprehensive
income $ 19.9 $ --
====== =====
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 media, services and solutions for use in the mobile and desktop,
network and enterprise data center markets; Color Technologies (formerly Product
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,
professional services, and document imaging products for large format
engineering documentation.
<TABLE>
<CAPTION>
Business Data Digital
Segment Storage and Solutions Corporate,
Information First Information Color and Other and
(In millions) Quarter Management Technologies Services Unallocated Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues 2000 $233.2 $70.4 $25.0 $0.2 $328.8
1999 219.9 88.9 30.8 1.6 341.2
- --------------------------------------------------------------------------------------------
Operating 2000 $12.5 $5.2 $(0.7) $1.4 $18.4
income(loss) 1999 0.7 6.1 (0.8) (1.3) 4.7
- --------------------------------------------------------------------------------------------
</TABLE>
The 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 general overhead
which was previously allocated to the Photo Color business. Included in 2000
Corporate operating income is a one-time benefit of approximately $2 million
from the conclusion of a development project, net of a manufacturing capacity
adjustment.
Intersegment revenues are not material. Total assets by segment have not changed
materially from December 31, 1999.
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. 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.
10
<PAGE>
Upon adoption at January 1, 2000, the Company recorded a cumulative-effect-type
loss adjustment in accumulated other comprehensive loss 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 March 31, 2000 were not significant. Amounts reclassified
into income for the three months ended March 31, 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. INCOME TAXES
The tax rate for the first quarter and expected for the full-year 2000 is 22
percent, down from the 1999 full-year rate of 39 percent. The decline resulted
from tax benefits associated with changes to the Company's European structure
after the sale of the Medical Imaging and Photo Color businesses and the
Ferrania Facility.
11. NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff Accounting
bulletin No. 101, "Revenue Recognition." An amendment in March 2000 delayed the
effective date until the second quarter of 2000. The Company is reviewing the
requirements of this standard and has not yet determined the impact of this
standard 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.
11
<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. and its subsidiaries (the "Company") as of March 31, 2000, and the
related consolidated statements of operations and condensed consolidated
statements of cash flows for the three months ended March 31, 2000 and 1999.
These consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income and 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
April 25, 2000
12
<PAGE>
IMATION CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net revenues of $328.8 million declined 3.6 percent from last year's $341.2
million. The decline was due to several factors including foreign currency
impacts and softness in the Color Technologies and Digital Solutions and
Services segments. Partially offsetting the decline was continued growth in the
Data Storage and Information Management segment. International revenue was
$161.7 million, up 3.5 percent. Net revenue outside North America was up in all
geographies in local currency. On a dollar basis, revenues in Latin America and
Asia recorded double-digit increases.
Data Storage and Information Management revenues increased by 6 percent to
$233.2 million from $219.9 million a year ago. Foreign currency had a negative
effect. On a local currency basis, revenues were up 9 percent. Media sales grew
by 13.6 percent on the strength of demand for the 9840 tape cartridge
(Enterprise), DLTtape (Network) and optical media (Mobile/Desktop). Hardware
revenue, a small portion of the segment, was down versus last year due primarily
to lower SuperDisk drive sales.
Color Technologies revenues declined by $18.5 million to $70.4 million from
$88.9 million a year ago. The planned outsourcing of the plates and film
products, which began in 1999, was a significant factor. In addition, the
implementation of tighter inventory management methods by some distributors also
had a negative impact.
Digital Solutions and Services revenues declined $5.8 million to $25.0 million.
The decline resulted from the ongoing transition in the large format document
imaging business from analog to digital.
Gross profit of $102.6 million was flat with the $102.9 million a year ago,
though gross margin percentage improved to 31.2 percent from 30.2 percent a year
ago. The improvement in gross margin percentage comes from a combination of
manufacturing improvements and SuperDisk profit improvements. The one-point
improvement was achieved despite the negative changes in product mix and the
negative impact of foreign currency.
Selling, general and administrative (SG&A) expenses declined $11.8 million, or
15 percent from $79.0 million last year to $67.2 million in the current quarter.
1999 SG&A included IT and advertising investments that declined. SG&A expenses
also benefited by approximately $2 million in the quarter due to the positive
impact from the conclusion of a development project, net of a manufacturing
capacity adjustment. SG&A expenses, as a percentage of revenue, may be
negatively impacted by 1 to 1.5 percentage points during the balance of 2000 due
to declining demand for transition services associated with the divestiture of
the Medical Imaging and Photo Color Systems businesses.
13
<PAGE>
Research and development (R&D) costs were $17.0 million, within the Company's
stated target range of 5-7 percent of revenues. Management continues to expect
ongoing R&D investment as a percent of total revenues to range from 5-7 percent
during the next several years.
Operating income in the first quarter of 2000 was $18.4 million compared to $4.7
million for the same period last year. This improvement is due to the factors
discussed above.
Other income increased to $7.9 million from $1.2 million a year ago. Extensive
venture capital distributions, which currently are expected to be minimal for
the balance of the year, contributed approximately $7 million during the
quarter. In addition, interest income was higher as a result of increased cash
flow.
The tax rate for the first quarter and expected for the full-year 2000 is 22
percent, down from the 1999 full-year rate of 39 percent. The lower tax rate
contributed $0.12 per share to earnings in the first quarter. The decline
resulted from tax benefits associated with changes to the Company's European
structure resulting from the sale of the Photo Color business and the Italian
manufacturing facility. Additional tax benefits from the above actions are
expected in future years.
Income from continuing operations in the first quarter of 2000 was $20.5
million, or $0.57 per basic share and $0.56 per diluted share, compared with
income from continuing operations of $3.5 million, or $0.09 per basic and
diluted share, for the same period in 1999 for the reasons discussed above.
FINANCIAL POSITION
Working capital, current assets minus current liabilities, declined $16.0
million to $398.2 million at March 31, 2000. Other measures of liquidity, the
current and quick ratios, remained unchanged from December 31, 1999 at 2.2 and
1.3, respectively. Inventory days of supply improved to 71 from 76 at December
31, 1999. Accounts receivable days sales outstanding was 63 days at March 31,
2000, essentially flat with the record low at December 31, 1999 of 62 days. The
decline in working capital and indices mentioned above was due both to the
decline in net revenues and working capital initiatives during the three months
ended March 31, 2000.
The book value of property, plant and equipment as of March 31, 2000 was $206.0
million, relatively unchanged from $212.8 million at December 31, 1999. The
debt-to-capital ratio was 3.9% at March 31, 2000 compared to 3.8% at December
31, 1999. The Company repurchased 1.6 million shares of common stock during the
quarter for $47.7 million under the terms of an existing stock repurchase
program. Authorization to repurchase slightly over four million shares remains
under this program.
LIQUIDITY
Cash provided by operating activities was $60.4 million during the three months
ended March 31, 2000 compared with $3.4 million during the same period in 1999.
Depreciation and amortization was $18.2 million in the first three months of
2000, down from $23.5 million in 1999 primarily because of the sale of the Photo
Color business (see Note 6 to the Consolidated Financial Statements). Changes in
working capital provided $12.3 million during the
14
<PAGE>
first three months of 2000, reflecting continued progress on working capital
initiatives and lower revenues, compared to a usage of $5.0 million in the
comparable period of 1999. Other adjustments to reconcile net income to net cash
provided by operating activity in the first quarter of 1999 included a $3.5
million gain on the sale of land and buildings and a $7.1 million
reclassification of an unearned deposit related to a supply agreement with Kodak
from long-term to current. In addition, for the three months ended March 31,
1999, the Company made total cash payments of $14.2 million, including $1.0
million attributed to discontinued operations, associated with its
restructuring.
Cash used by investing activities was $13.4 million for the three months ended
March 31, 2000 compared with cash provided of $135.4 million in the comparable
period of 1999 which included proceeds from the sale of the Medical Imaging
business of $143.0 million. Capital expenditures of $14.0 million for the first
three months of 2000 decreased $4.9 million from the $18.9 million in the same
period of 1999 in part due to the sale of the Photo Color business. Full year
capital spending is now expected to be lower than the $85.0 million disclosed in
the Company's 1999 Annual Report on Form 10-K.
Net financing activities during the first three months of 2000 used cash of
$41.9 million compared with a $73.8 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. Financing activities in
1999 also included a net usage of cash of $34.0 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 March 31, 2000 was $132.7 million. The Loan
Agreement provides for, at the option of the Company, borrowings at either a
floating interest rate based on a defined prime rate or a fixed rate related to
the London Interbank Offering Rate (LIBOR), plus a margin based on the Company's
interest expense coverage. The margins over a defined prime rate and LIBOR range
from zero to 0.75 percent and 1.25 to 2.25 percent, respectively. Letter of
credit fees are equal to the LIBOR margins and a commitment fee of 0.375 percent
per annum is payable on the unused line. Borrowings under the Loan Agreement are
collateralized by substantially all the domestic assets of the Company,
excluding the corporate campus land and buildings, and a pledge of 65 percent of
the stock of certain of the Company's foreign subsidiaries. Covenants include
maintenance of a minimum tangible net worth and borrowing base availability,
with certain restrictions on the incurrence of additional indebtedness, sale of
assets, mergers and consolidation, transactions with affiliates, creation of
liens, and certain other matters. No borrowings were outstanding under the Loan
Agreement at March 31, 2000.
In addition, certain subsidiaries have arranged borrowings locally outside of
the agreements discussed above. As of March 31, 2000, $28.7 million of
short-term borrowings were outstanding under such arrangements.
As of March 31, 2000, the Company's ratio of debt to total capital was 3.9
percent as compared with 3.8 percent at 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
15
<PAGE>
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 later this year. The objective of the currency hedging is
to reduce the fluctuations in earnings and cash flows 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.
YEAR 2000 COMPLIANCE
As of the date of this filing, the Company has not experienced any significant
Year 2000 problems with its IT or non-IT systems or products, nor has the
Company experienced any significant problems associated with any of its critical
external business relationships. There have not been any significant costs
incurred with respect to remediation during 2000. The Company does not
anticipate significant future problems or costs.
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 noncash 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.
SALE OF MEDICAL IMAGING AND PHOTO COLOR SYSTEMS BUSINESSES
As discussed in Note 6 to the Consolidated Financial Statements, on November 30,
1998, the Company sold its worldwide Medical Imaging Systems business to Eastman
Kodak Company (Kodak). The Company, however, retained its manufacturing facility
in Ferrania, Italy, (the Ferrania Facility) from which the Company agreed to
manufacture x-ray and wet laser medical imaging film for Kodak for a minimum of
two years under a supply agreement which became effective on November 30, 1998.
On August 2, 1999, the Company sold its Photo Color Systems business and the
Ferrania Facility to Schroder Ventures (see Note 6 to the Consolidated Financial
Statements).
Associated with the Company's sale of its Medical Imaging and Photo Color
Systems businesses, the Company receives reimbursement for certain transition
services that the Company has agreed to provide to the respective purchasers as
they integrate those businesses into their organizations. Kodak and Schroder
Ventures, at their option, may terminate their respective transition services
agreements with respect to individual categories of service upon prior notice,
the length of which varies according to the nature of the service. While the
Company can not project with certainty the duration of and expected cost
reimbursements associated with the transition services, or the potential impact
when the transition services agreements are terminated,
16
<PAGE>
SG&A expenses, as a percentage of revenue, may be negatively impacted by 1 to
1.5 percentage points over the next 12 months due to the declining need for
transition services.
FORWARD-LOOKING STATEMENTS
Certain information contained in this report which does not relate to historical
financial information may be deemed to constitute forward looking statements.
The words or phrases "will likely result", "are expected to", "will continue",
"is anticipated", "estimate", "project", "believe" or similar expressions
identify "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ materially
from historical results and those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which speak only as of the date made. Among the
factors that could cause the Company's actual results in the future to differ
materially from any opinions or statements expressed with respect to future
periods are the Company's ability to meeet its cost reduction and revenue growth
targets and its ability to introduce new offerings in a timely manner, to manage
lower SG&A reimbursements from Kodak and Schroder Ventures as transition
services that the Company provides associated with the sale of certain
businesses decline, the resolution of disputes associated with the sale of the
Medical Imaging and Photo Color Systems businesses, 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.
17
<PAGE>
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 March 31, 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 21.
27.1 Financial data schedule
(b) A Form 8-K Current Report dated February 18, 2000 was filed relating to
the Consolidated Financial Statements of the Company and Subsidiaries
as of December 31, 1999 and 1998 and for each of the three years in the
period ended December 31, 1999, together with the Report of Independent
Accountants by PricewaterhouseCoopers LLP.
18
<PAGE>
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: May 15, 2000 By:
/s/ Robert L. Edwards
----------------------------------
Robert L. Edwards
Senior Vice President,
Chief Financial Officer
and Chief Administrative
Officer
19
<PAGE>
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.
20
EXHIBIT 15.1
(PricewaterhouseCoopers LLP Letterhead)
(Minneapolis, MN)
May 15, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated April 25, 2000 on our reviews of the interim
consolidated financial statements of Imation Corp. (the Company) for the three
months ended March 31, 2000 and 1999, and included in the Company's Form 10-Q
for the three months ended March 31, 2000, is incorporated by reference in the
Company's Registration Statements on Form S-8 (Registration Nos. 333-15273,
333-15275, 333-15277 and 333-35591).
Yours very truly,
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
21
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