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Go To | Public Relations | Investor Relations | 1996 Fourth Quarter Earnings |
Thank you Bill and good morning. Like Bill, I am pleased to report the results of Imation for the fourth quarter of 1996, our second quarter as an independent company. These positive results demonstrate that the steps we have been taking towards achieving the financial improvement outlined in our business plan are working. Before I get into the results in detail, let me clarify that my comments will relate to the adjusted results of the company which exclude restructuring costs and one-time special charges. In the supplementary data we have provided for you a reconciliation of reported results to adjusted results for both the 4th qtr and total year. The restructuring costs and one-time special charges were $76 million in the 1st half of the year for asset write-offs and employee separation costs and $12 million in the 4th qtr for the R&D write-off related to the Luminous acquisition. All other costs are included in normal operating costs including $42 million for recurring start-up expenses. These expenses are for establishing the corporate brand and activities to design and implement more efficient business processes. Since these will continue for a few quarters, like last quarter we have included these in our normal operating expense indices. Let me start by stating that we ended the year at 127% of our economic profit improvement goal for 1996, with all components meeting or exceeding their goals. $65 million in economic profit improvement was achieved this year, $5 million from revenue growth, $30 million from cost reductions, and $30 million from improved asset management. Sales were 100% of plan, operating income 107% of plan and cash flow better than plan. An excellent start financially for the first six months as an independent company. In the fourth quarter, Imation had sales growth of 4.3% and operating income of $25 million or 4.3% to sales. This is a $23 million improvement in operating income over the same quarter last year. And on the same basis net income was $11.4 million or $.28 per share - an improvement of $.26 per share over last year. On a year to date basis, net income and earnings per share were $40 million and $.97 per share, an $.89 per share improvement for the year. These results reflect that Imation is on track towards our three year financial improvement plan and we're actually ahead in some areas. That plan is to improve economic profit by $150 million during the three year period of 1996 through 1998 from a 1995 base year, and is driven by three main components: revenue growth, cost reductions, and asset management. In each component we achieved or exceeded the targeted performance for 1996. I would now like to review each area. Revenue Growth The first component of our economic profit improvement plan is revenue growth. And in the three year plan our target is to obtain a modest annual revenue growth of 3-5%. We continue to track on that goal with 4.3% growth in the 4th quarter following 2.4% growth in the 3rd. Driven by volume growth of almost 10%, we achieved the highest quarterly sales in over 3 years. In addition, both U.S. and International operations had $ growth, for the second quarter in a row. This is despite a negative translation impact of 3% on international revenues. Leading this growth were our four key new product platforms of Travan, Dryview, Rainbow and LS-120, each of which contributed in the quarter. Our goal for 1996 was to have these platforms represent 10% of the total company sales by year-end. After a fourth quarter result of almost 16%, 11% of sales for the year was achieved. Pricing pressure continues as expected in the 4-5% range - not unusual in the markets in which we participate. 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 year with economic profit improvement of $5 million from revenue growth, 100% achievement of plan. Cost Reductions The three year plan provides for a pre-tax reduction in costs of $150 million, with $30 million targeted for 1996. This plan includes the recurring start-up expenses that we had anticipated for establishing the Imation brand and activities to design more efficient business processes. During 1996 we exceeded our cost reduction target by over 80%, with a pre-tax reduction of $55 million. This represents the impact of establishing a significantly lower cost structure globally, a lower than anticipated headcount, improved factory performance, lower material costs and slightly higher than planned start-up costs. After tax, our savings efforts in 1996 generated improved economic profit of $30 million. Management believes there is more to be done in 1997 and our target pre-tax cost reduction is an additional $70 million as previously stated. Key percent to sales indices like gross margin, R&D and S,G&A (excluding start-up costs) continue to improve toward the financial model that is included in our plan. In particular our 4th quarter factory cost operating improvements more than offset the negative impact of price erosion. This is the first time we have achieved this result for many years. Fourth quarter research and development spending of $39 million reflects the efficiencies and productivity we have obtained by the consolidation of 14 labs into 7. S,G&A costs continue to reflect the use of 3M services including information technology and logistics and as I mentioned earlier, included $42 million of startup. By the end of 1997, our plan is to replace these activities with more effective and efficient business processes and systems designed specifically for our business and customer needs. It is this activity that we are investing in and we incurred start-up costs of $8 million in the 4th quarter, of which $4.5 million was capitalized as part of other assets as we begin the implementation phase. For the total year we spent $22 million for new business processes of which $17.5 million was expensed as part of S,G&A. Our investment in establishing the Imation brand is proceeding as planned and accounted for the vast majority of the remaining $24.5 million of the start-up expenses included in S,G&A. We continue to test the effectiveness of this spending as we proceed with Imation 3M dual branding in 1997 and ultimately full Imation branding by July 2001. Asset Management 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 are well underway in that project but in the mean time continue to take actions that reduce our corporate investment in accounts receivable, inventory and fixed assets. A three day improvement in days sales outstanding was achieved this year - a first step in a 13 day reduction planned for the three year period. Days of inventory on hand increased slightly, a short term impact as we took the steps that were necessary to insure retaining customer service levels (especially outside the U.S.) during this spin-off process. Our goal for the three year period is to reduce days of inventory by 14 days. Continued prudent fixed capital management resulted in a $33 million reduction in net fixed assets for the year. Our fixed asset base is now $480 million, slightly better than the $500 million target. Overall improved asset management contributed $30 million in economic profit (including an $18 million one time benefit from 1995 asset write-offs), well above plan for the year. Our capital expenditures in 1996 were $167 million and depreciation was $181 million. For 1997 we expect manufacturing capital expenditures to be lower but we expect investments in IT fixed assets of approximately $30 million, resulting in additions to fixed assets similar to 1996 and matched by depreciation. On the balance sheet, cash and debt reflect the impact of the improved income and asset management. Debt was reduced by $34 million in the quarter. The balance sheet of Imation remains strong with cash of $62 million. Our tax rate was 45.9% for the year and 49.8% for the quarter. Significant progress has been made in establishing the structure of Imation to optimize tax effectiveness in future years. The higher than expected tax rate reflects the historical mix of generating profits in high tax rate countries and losses in low tax rate countries. The opportunities are clear, the structure is set and we are proceeding on a plan to transition our global business to take full advantage of the tax effective structure we have established. This implementation is complex and must be staged appropriately from a legal perspective and in conjunction with planned operational improvement activities. For 1996 local currency revenue growth and income contributions were generated by all regions of the world with each business contributing to the improvement - a well balanced result. Average shares outstanding for the earnings per share computation was 40.7 million, similar to the number outstanding in the third quarter. We are pleased to announce this morning that the Imation Board of Directors has authorized a share repurchase program of up to 2 million shares. These shares will be used for employee stock plans and general corporate purposes. In conclusion; Imation has a solid start as a new company and we have built on our strong financial foundation. We are confident that our 3 year plan, while aggressive, is doable. We remain focused on meeting our goals, while we are also making the necessary changes to be the leader in the imaging and information industry in 1998 and beyond. Additional information about Imation is available on the company's web site at http://www.imation.com. To receive stock quote updates, recent earnings and news releases, corporate information and related shareholder services, call Imation's toll-free shareholder information line at 1-888-IMN-NYSE(1-888-466-6973). Certain portions of these comments which do not relate to historical financial information may be deemed to constitute forward looking statements which are subject to various factors that could cause actual result in the future to differ materially from these statements. Among these factors are the company's ability to meet its cost reduction and revenue growth targets, its ability to establish itself as an independent public company, competitive industry conditions including historical price erosion in certain product categories, foreign currency fluctuations, and the market acceptance of newly introduced products as well as various factors set forth in the Company's Information Statement included in the Form 10 Registration Statement, filed with the Securities and Exchange Commission on June 21, 1996. Imation™, Travan™, and DryView™, are registered trademarks of Imation Corp. Rainbow™ is a trademark of Imation Corp. Go To | General Press Releases | Imation Corp. Reports $581.6 Million In Revenues... | Consolidated Statements Of Operations | Fourth Quarter 1996 Bill Monahan, Chairman & Chief Executive Officer | Fourth Quarter 1996 Jill Burchill, Chief Financial Officer |
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