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To Imation's shareholders, customers, partners and employees:
On July 1, 1996, we launched Imation Corp. -- an exciting new company in the imaging and information industry. I am very pleased to report to you the successes of our first year; success driven by our customers and our employees. We started with a solid foundation, a heritage of innovation, strong market positions in our businesses, solid technology, financial strength and a global presence in more than sixty countries.
1996 was a year of intense activity and accomplishment as we successfully spun off from 3M. We created a new company, a new name and identity, and launched numerous new product platforms. We also are creating a new culture designed to lead the global imaging and information industry, a culture that is customer-driven and capable of aggressively bringing innovative solutions to a fast-paced marketplace. Further, we are increasing our competitiveness through managing our product portfolio. I am particularly proud to report that while implementing enormous change, we have maintained our customers' loyalty. Their transition to a partnership with Imation is well underway. We are pleased with the progress we made in our first six months as an independent company.
Revenues increased 3.4 percent compared with the same period a year earlier--the first growth these businesses have experienced in more than three years.
The success of our new product platforms has been a key factor in this renewed growth. Travan™ data cartridges, DryView™ laser imagers, Rainbow™ digital color proofers, and LS-120 diskettes contributed 11 percent of revenue for all of 1996, up from only 2 percent in 1995.
For all of 1996, operating income, before special charges, increased $66.4 million over 1995, and earnings per share increased from $.08 to $.97 per share.
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Prior to the spin-off, we set an aggressive financial goal for our new company: to improve our economic profit (after-tax operating profit less a charge for the cost of operating capital) by $150 million from the end of 1995 to the end of 1998. In 1996, cost reductions contributed $30 million towards our goal; revenue growth, $5 million; and improved asset utilization, $30 million; for a total economic profit improvement of $65 million. This means we already have achieved more than a third of our three-year goal.
We have a strong leadership team, experienced in managing change. We also have formed a strong board of directors, actively engaged in our success. With our committed employees around the world, we have made a solid start. By focusing our efforts on aligning our cost structure to our opportunities, on generating profitable growth and on changing the culture, we see every opportunity to be a leader in the imaging and information industry.
We also intend to be a more open company, communicating our goals and our progress to all stakeholders. As you read this, our Company's first Annual Report, you will learn more about Imation, a new company borne of 3M innovation. I am confident you will catch the excitement of Imation!
Sincerely,
William T. Monahan
Chairman and Chief Executive Officer
March 13, 1997
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Chairman and CEO Bill Monahan shares his views on questions often asked by investors, customers, partners and employees:
How is Imation different today from the way it used to be as part of 3M?
Bill: First, let me tell you what hasn't changed. We retain the strong values we learned at 3M, a solid financial position and a heritage of innovation. We build on our strong market position in each of the areas in the imaging and information industry in which we compete--in printing and publishing, medical imaging, removable storage media, and private label photo film. We have the 3M brand on which to build and we bring about 5,000 patents and patent applications worldwide with access to thousands more through licensing agreements. We have global distribution and service capability, world-class manufacturing, and over 9,000 dedicated employees.
The essence of our company is to be customer driven--to deliver innovative solutions that make our customers' workflows more efficient. We have the opportunity of a lifetime to design the company specifically for the imaging and information industry--an opportunity that our competitors have not had. So, the business model we have begun to implement aligns our cost structure with our growth opportunities and optimizes for speed to market. We also are changing the culture--to become end-user/customer focused and global in an extremely open, integrated and challenging environment.
What does it take to succeed in the imaging and information industry?
This industry is very competitive, innovation is constant, and time to market is critical. Instead of a two to four year development cycle, we're talking about six to 18 months maximum required to develop and deliver solutions to the industry. Our customers are moving rapidly from conventional, analog-based point products to digital workflow solutions. They need partners who can quickly deliver lower-cost/high-value solutions and lead them into the digital age.
What are your financial goals?
Near term, we have an aggressive three year plan--going from the end of 1995 through 1998--to improve our economic profit by $150 million. That will come from returning these businesses to a profitable growth track, implementing a reduced cost structure and improving asset utilization. Our plan is to leverage the success of our new product platforms, increase our international penetration, expand our customer base and alliances to achieve revenue growth in the near term and accelerating that growth in the future.
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What is economic profit and why is it such an important financial measure for Imation?
Economic profit is after tax operating profit less a charge for the cost of capital. We focus on economic profit because it captures both the income statement--earnings per share--and the balance sheet--asset utilization. We recognize that earnings growth must provide the required return on capital for our investors and economic profit measures that. By linking compensation to economic profit improvement, we have a powerful tool to focus employees.
Where is the growth opportunity for Imation?
Profitable revenue growth is a critical objective for Imation. In the initial period, through 1998, our goal is to move from our past history of declining sales to annual revenue growth. As we develop greater solutions focus for the digital evolution, we see the potential for our annual growth to accelerate by the end of the decade.
Increasing digitization in the imaging and information industry represents an opportunity for growth and a much stronger position for us. As we move from just developing products to delivering solutions for the end-users, we will be using alliances, technology licensing and acquisitions, greater use of software and an enhanced focus on service. We believe that this approach allows us to address a fundamentally larger market opportunity--from a $20 billion marketplace in 1995, to one that we believe will be over $50 billion by the year 2001.
Do you have the products and technologies to get you to that higher growth?
We have the technology and market position that will take us to the first levels of our growth objectives. To get to our long-term revenue growth goals, we will need to add products and solutions that strategically position us for accelerated growth in the information and imaging industry. This is going to be a constant, aggressive journey over the next five years, built on solutions focus, new technologies, greater synergy among our businesses, and greater international penetration supported by alliances, joint ventures and technology acquisitions.
That means we have to be willing to look outside of a business unit, even outside of Imation, to enhance our solutions offerings. Two examples illustrate the point. In conjunction with three development partners, we recently announced development of dry film and plates for the graphic arts industry, based on technology we developed in medical imaging. Late last year we acquired Luminous Corporation, a pre-press software company, that allows us to provide a more complete solution for digital color proofing.
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How are your operating units addressing critical cost reduction, profit and growth goals? Is it top down or is it bottom-up?
We manage our business units around the life cycle of the products that make up each business. If certain product lines are not showing the potential or meeting the returns that we've stated for those businesses, we move the assets and investments from those businesses to opportunities that have much better economic profit potential.
We've found that maintaining a strong position in tough markets and managing your portfolio aggressively are complimentary goals. For example, if you manage standard diskettes aggressively as a harvest business, you have an excellent return opportunity because you leverage other strengths in distribution and worldwide coverage. But it's critical that you put only the right assets and investment in that particular business.
Are you willing to make the tough decisions to get out of some businesses if that's necessary?
Well, we've already made a lot of tough decisions on programs and businesses that were not meeting our objectives. Moving out of five factories, consolidating our laboratories from 14 to seven, exiting certain product lines and programs. And we will continue to review our portfolio investments going forward.
Does the lower cost structure you are implementing limit your ability to get to market faster?
We've found the lower cost structure actually enhances our time to market, because we focus on what the end-user actually needs while leaving behind overhead and structure that is not efficient for the digital market.
How do you compete with much larger companies?
Our business units have been successful against large competitors in the past. Now, our customers tell us they're looking for companies, like Imation, designed specifically to meet their needs, able to move fast and help them meet the challenges of evolving technology.
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What kind of culture do you want at Imation...and how will you achieve it?
When people are spun off into a new company away from the comfortable past, the challenge becomes very clear to everyone on the leadership team as to the amount of change required to create a new company...and the fact that we have to create a continuous change atmosphere to meet our long-term objectives. In addition, we have brought expertise in from outside Imation, in critical areas where we did not have those skills.
I've challenged our leadership team to have every single employee in the company involved in our number one priority--customer focus. We also must become an open, fast-acting and synergistic company rather than focused around individual business units, or what I call silos. Sharing of information and opportunities across businesses has to be encouraged if we're going to move at the pace required for success. And our compensation program is designed so every employee shares in the success of the company as a whole...not just in one product line or one business unit.
What are the core values Imation fosters?
We are building on the core values we inherited from 3M--regard for our employees, concern for the environment, commitment to our community and dedication to our customers. Customers are our number one priority in building the business and are critical to our growth in the imaging information industry. The skills and experience of Imation employees are critical to our success in building a new global company. We also focus on generating a return for our shareholders. I recognize that our reputation with the financial community can help us meet our business goals. Finally, we take corporate citizenship in our communities seriously, whether through educational support reflected in corporate giving or environmental stewardship reflected in operations and product development. For example, our new "dry" film technology that eliminates wet chemical waste is not only the right solution for our customers, it's right for the environment.
Why did you take the job?
I took the job as CEO of Imation because it is a unique challenge to launch a $2.3 billion start-up from scratch. This opportunity--to create a new company and a new culture, to unleash the value in these businesses and to capitalize on the strong foundation we inherited, is an exciting challenge and a once-in-a-lifetime opportunity.
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