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Go To | Public Relations | Investor Relations | 1996 Third Quarter Earnings |
(as prepared for delivery) In the third quarter, Imation had operating income of $24.5 million and margins of 4.4% to sales. This is a significant improvement from the loss we incurred last year. And we achieved net income of $11.8 million or $.29 per share - an improvement of over $13 million from the same quarter last year where we experienced a loss - of $.04 per share. On a year to date basis, the net income and earnings per share improvement (excluding restructuring and one time charges) were $26 million and $.63 cents respectively. Our overall financial goal is to improve economic profit by $150 million during the three year period of 1996, 1997 and 1998, and is driven by three main components: cost reductions, revenue growth and asset management. Achieving this goal will result in operating margins in the 8-10% range and earnings per share growth exceeding 15% per year. In the third quarter we achieved economic profit improvement of $12 million from cost reductions, $2 million from revenue growth and $9 million from improved asset management, for a total of $23 million in improvement. So all three components contributed to our improvement goals! And on a year to date basis, in three quarters of our 12 quarter plan, we have achieved $45 million of the $150 million goal. Before I get to the results in detail, let me clarify that in the third quarter we did not have any special charges or restructuring costs related to the spin-off. All of the 1996 charges were included in the first and second quarter results. Start-up costs have been included in S,G&A as part of our normal operating expenses. They relate to special brand and identity activities and to designing more efficient business processes. Since they will continue for a few quarters, we will include these in our normal operating expense indices. Now I will review the results and start by discussing the contribution from revenue growth. As many of you know our goal in this early phase is to obtain annual revenue growth of 3-5% . We have made significant progress towards that goal with 2.4 percent revenue growth in the third quarter. The volume growth of almost 9 percent is the highest since 1993 . And this is the first quarter in over eleven that we have achieved positive growth in both our U.S. and International Operations - despite a negative translation impact of 2.8 percent on international revenues. All regions of the world contributed to revenue growth and improved margins. Leading this growth were our four key new product platforms of Travan, Dryview, Rainbow and LS-120. Our goal for 1996 was to have these platforms represent 10% of the total company sales by year-end. After the third quarter results of 13%, we now have 10% of our year-to-date sales generated from these new platforms. Pricing has continued to erode at a rate of around 5% per year - normal in the markets that we participate in. Despite this we are starting to achieve the revenue growth trend change that we put forth in our plan. And so we ended our first independent quarter with $2 million of economic profit improvement resulting from revenue growth. Cost reductions, or setting up a lower cost structure in Imation - is also a key component of our financial improvement plan. The after tax economic profit contribution from cost reductions was $12 million this quarter and represents a $22 million pre-tax reduction in actual costs. Management reviewed all areas of the company and is taking actions to establish an appropriate cost effective structure. These actions, along with continued unit cost decreases in these businesses generated the reduction. Operating costs for R&D and S,G&A were $11 million less than the same quarter last year and are on plan. We continue to work the business model towards our goals. Gross margin improved by almost two full percentage points as compared to the third quarter of 1995. This improvement was driven mainly by productivity improvements, production volume increases, reduced spending, and lower raw material costs. These gains were partially offset by price erosion and foreign currency impacts. The factory consolidations in our plan are beginning to occur and we expect to see the full impact of those savings in the second half of 1997. Research and development spending was $39 million for the quarter and $132 million year to date or 7.7% to sales and on plan. In the fourth quarter we will recognize a special non tax deductible write-off of approximately $12 million relating to the in process R&D component of our recent Luminous acquisition. Start-up costs related to identity and business process improvements are recorded in S,G&A and were $19 million this quarter, up from $13 million in the second quarter. We expect these start-up costs to continue through 1997 but at a declining level. Excluding these costs, S,G&A expenses declined by over 11% compared to the third quarter last year. The third economic profit driver is asset management. Key to future operating efficiencies and improved asset management is establishing new information technology and supply chain business processes. We define the supply chain as all those activities that occur beginning with the purchase of raw materials and ending with the collection of accounts receivables. Our goal is to redesign our processes reducing that cycle time from 165 days to 125 days by the end of 1998 and under 100 days by the year 2000. This effort, while it requires investment in the beginning, will deliver approximately $200 million in working capital reductions when fully implemented. For this quarter $9 million in economic profit was created by a reduction in the level of assets we employ with $5 million of this coming in the area of fixed assets. The remaining $4 million of economic profit improvement came from a four day reduction in DSO as compared to last year and a $117 million reduction in inventories since last year, $37 million of the reduction occurring this quarter. On the balance sheet, the cash and current liabilities are higher than previous quarters in part because some of the spin-off transactions were not finalized before the end of the quarter. In addition, because of reduced capital spending and improved asset management, our debt (short and long term) totals $184 million. Our tax rate of 46% for the quarter is driven by income generation in countries with high rates - mainly Italy. We are structuring Imation to optimize tax effectiveness in future years. This implementation is complex and must be staged in conjunction with operational improvement activities. Another financial achievement this quarter was the funding of our ESOP with $50 million. The trustees used this money to purchase 2.2 million shares of our stock which will be used to match employee contributions in 401K plans for the next 3-4 years. Average shares outstanding for earnings per share computation was 40.8 million, 1 million shares lower than the average outstanding at spin-off. This reduction represents the shares which were purchased by the ESOP trustee and which are not considered in this calculation until such a time as they are used in the benefit plans. We expect the average shares outstanding for EPS purposes to be similar in the fourth quarter. The results show we are continuing on plan and we are progressing towards our goals.. Let me summarize: First, economic profit improvement was $23 million in the third quarter, $45 million year to date with all three components (revenue growth, cost reductions and asset management) contributing. Secondly, earning per share for the quarter was $.29, an improvement of $.33 over last year , with year to date earnings per share excluding special charges of $.69., up from $.06 in 1995, and lastly, our financial position is strong for this our first independent quarter.
Certain portions of these comments which do not relate to historical financial information may be deemed to constitute forward looking statements that are subject to various factors that could cause actual results in the future to differ materially from these statements. Among these factors are the company's ability to meet its cost reduction or revenue growth targets, the competitive pricing environment, foreign currency fluctuations, and the market acceptance of newly introduced products as well as various factors set forth in the CompanyĆs Information Statement included in the Form 10 Registration Statement, filed with the Securities and Exchange Commission of June 21, 1996, in the section titled 'SPECIAL FACTORS.' Go To | Earnings Report | CEO's Comments | Balance Sheet |
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