DISCLAIMER - While management believes that the financial goals mentioned here are appropriate for Imation, the goals are not forecasts of Imation's future financial performance and there can be no assurance as to the company's ability to achieve them. Certain information contained in this report may constitute forward-looking statements and as such may involve risks and uncertainties. Important factors exist which may cause ImationÆs actual results to differ from the forward-looking statements contained in this report or in other public statements by the company, including the company's ability to meet its cost reduction, revenue growth and asset utilization targets as well as various factors set forth in the company's information statement Form 10, filed with the Securities and Exchange Commission on June 21, 1996, in the section titled, SPECIAL FACTORS, and MANAGEMENT DISCUSSION AND ANALYSIS.

Thank you Bill and good morning and welcome to the first financial results release of Imation Corp. While we began our separate company operations 33 days ago, I want to remind you that the financial results that we will discuss today represent those results obtained while operating under the 3M corporate environment.

Let me begin by reiterating the financial targets that we have set out for Imation. Our overall financial goal is to improve our economic profit by $150 million over the 3 years beginning with 1996. This goal will be driven by 3 key components - cost reductions, modest revenue growth and improved asset management. Achieving this goal will deliver operating margins of 8-10% and annual earnings per share growth in excess of 15%. Each quarter, we will be reporting our progress towards achieving these goals.

Also for clarification, the financial results published will show the normal full cost presentation including the special, one-time costs. My comments this morning will all relate to the results excluding special, one-time costs - reflecting the normal operating performance of the company.

Now to the results.

For the 2nd quarter of 1996, Imation improved economic profit by $15 million compared to the same period in 1995. This improvement was driven by after tax cost reductions of $7 million and improved asset turnover contributed $8 million. Revenues declined slightly in the quarter and did not contribute to this improvement but factory performance did represent half of the cost reduction improvements. Let me discuss the details of each of these components.

First revenues -
Revenues met our expectations for the quarter, as sales from recently introduced new products represented 8% of total revenue and our goal for the total year is 10%. Local currency revenue growth was 1.6%, however, currency translation reduced revenues by 2.3%. Overall price erosion at 4.9% was the lowest rate of price decline in recent quarters especially in data cartridges and diskettes. In addition, we believe revenue growth was negatively impacted by the defocus caused by the spin-off process - although this factor is difficult to quantify. This defocus was anticipated and year to date revenue is above our internal targets. We are still looking for a trend change in revenues and our plan is for slight growth for the full year.

The second component of our economic profit goal is reducing costs.
Before I review the cost reductions we have achieved, first let me review with you our special charges status. We said that in 1996 we would absorb about $119 million pre tax in special charges and plans to date still support this level. As I indicated earlier, we have separated special charges into two types, one time non-recurring costs like repackaging costs and separation expenses which are recognized on the restructuring, cost of goods sold and S,G&A lines of the p&l and totaled $76 million - we don't expect any more costs of this type the remainder of the year. The other type is costs related to the spin-off but which are expected to continue for a period of time -- like identity costs and consultant fees. These costs were $13 million in the second quarter and were part of S,G&A and they have been included in the operating results that I am discussing.

Now to the cost reduction achievements.
Gross Margin improved by over one percentage point vs. 2nd quarter last year to 35.7% driven mainly by productivity improvements, reduced spending, volume and raw materials costs. These gains were partially offset by negative pricing pressure and foreign currency impacts. In addition in future quarters we expect to start to see the benefits from factory consolidations.

Sales, general and administrative spending (S,G&A), was $145 million including $13 million of costs for consulting and identity development. Without these spin-off costs, S,G&A spending would have decined $7 million. We acheived another $12 million in cost reductions for the second quarter in laboratory expenditures -- bringing us to a total of $19 million in cost reductions before the offset by the $13 million I mentioned earlier. Consolidation of laboratory sites is resulting in more efficiency in spending along with the planned decline of laboratory efforts for products that have recently reached the commercialization stage. For this quarter we also continue to reflect the full absorption of 3M corporate overhead.

The third economic profit driver is asset management.
For the year net asset turnover has improved by 21% driven mainly by asset write offs taken in 1995. Days sales outstanding and days of inventory on hand each showed a decline from the levels of December 1995. Fixed assets after write-offs were down $18 million since the end of 1995 reflecting our close management of capital. For the full year, we are tracking on our capital spending plan of $160 million.

Overall the company met or exceeded targets including gross margin of 35.7% for the quarter and 35.4% year to date, research and development costs of 8.1% for the quarter and 8.2% year to date and S,G&A costs of 25.8% for the quarter and 24.2% year to date. Our goal is to reach a running rate gross margin in the high 30's, 7-8% research and development and S,G&A in the low 20's by the end of 1998.

Financing for Imation has been completed successfully. To date we have utilized $200 million of the $350 million credit line established with an investment grade interest rate. Interest expense as shown on the 2nd quarter p&l reflects Imation's allocated portion of 3M's interest and investment results. As a separate company we expect quarterly interest expense of $3.3 million or .6 percent to sales.

Our income tax rate in the second quarter was 46.3%, higher than the first quarter rate. This is a high rate because the majority of profits were earned in high tax rate countries. We are establishing our company structure to take advantage of tax provisions which allow us to reduce this rate.

So excluding one time charges, the total operating results of the company for the 2nd quarter were net income of $4.7 million resulting in earnings per share of $.11. This compares to a $3.2 million net loss for the same period of 1995, thus a $7.9 million improvement or $.19 per share improvement. This second quarter earnings per share improvement was $.19, nearly twice the first quarter improvement of $.11, and we are encouraged by this acceleration. Year to date net income was $16.9 million excluding special charges resulting in $.40 earnings per share. This is a $12.6 million improvement over 1995.

Net cash flow is reflected as part of 3M and was neutral at the end of the first six months, we expect this to continue for the remainder of 1996.

We have begun changing compensation plans as a financial focus becomes part of the Imation culture. Profit sharing participants will be measured based on economic profit for the 3rd and 4th quarters of 1996. And the entire employee population will have a similar measurement beginning on Jan. 1, 1997. Shortly we expect to announce a stock option award for all employees. We are beginning an employee education program to communicate how they can impact their compensation through economic profit improvements.

Overall we are satisfied with our financial progress in the second quarter. We are encouraged by the trends and with the spin-off behind us, the company is focused on driving the plans that will deliver the $150 million improvement in economic profit and increased earnings per share.

To summarize:

• Economic profit improved $15 million in the 2nd quarter, $22 million year to date, driven by lower costs and improved asset turnover.
• We expect to have about $119 million in special charges in 1996, as planned.
• We are still looking for slight revenue growth in 1996.

Copyright 1996 Imation. All rights reserved.