Imation: Fiscal 1Q16 Financial Results

Imation Corp. released financial results for the first quarter ended March 31, 2016.

Overview
During the first quarter of 2016, Imation completed its legacy business wind down on time and under budget. The financial results related to the legacy businesses are reported as discontinued operations. Going forward, Imation will operate as a holding company with a subsidiary (Nexsan) engaged in the business of global storage. At the corporate level, there is an ongoing strategic review as Imation expects to seek and explore new opportunities that will allow it to pursue a diverse range of business opportunities and deploy its excess cash.

The first quarter revenue from Nexsan was $10.7 million, down 31.8% from Q1 2015 due to the strategic decision to shutter underperforming regions and exit low-margin portions of the business.

Gross margin percentage improved by 290 basis points from 38.2% to 41.1%. Selling, general and administrative expenses declined by $6.2 million, or 37% year over year, and the operating loss from continuing operations (excluding special charges) was reduced by $4.2 million to $9.6 million from a loss of $13.8 million year over year.

The company’s cash balance and short term investments totaled $63 million as of March 31, 2016.

Interim CEO Robert Fernander commented: “The quarter was successful on multiple fronts. First, the wind down of our legacy businesses is complete and the financial results are aligned with our expectations. Second, the storage industry has reacted positively to the launch of our UNITY product – the first unified storage solution with secure enterprise file sync and share for true data mobility support; this serves as an endorsement of our 2015 strategic acquisition of Connected Data. Third, our investment at Clinton Lighthouse Fund has yielded a $1.6 million profit (net of fees) in less than two months, exceeding upside expectations. Fourth, we have come to an amicable settlement with Spearpoint Management LLC and have retired the shareholder lawsuit they brought against the prior board of directors and management team. Finally, we have started our investment and activist initiatives outside of Imation’s core business areas, and we are fully engaged in executing our long-term strategy: helping investors in struggling businesses improve their returns.”

Detailed Q1 2016 Analysis
The following financial results are for continuing operations, including Nexsan and the corporate holding company, for the current and prior periods unless otherwise indicated.

Net revenue for Q1 2016 was $10.7 million, down 31.8% from Q1 2015. The decrease was due to exiting certain unprofitable regions and eliminating low margin transactions. Imation expects the revenue to increase in Q2.

Gross margin for Q1 2016 was 41.1%, 290 basis point better than Q1 2015. The new management team has focused on supply chain optimization and profitable geographies and partnerships. Going forward, the company anticipates continued gross margin increases.

Selling, general and administrative expenses in Q1 2016 were $10.6 million, down $6.2 million (or 37%) compared to Q1 2015 expenses of $16.8 million. The decrease stemmed primarily from extensive cost reduction efforts, and management expects our SG&A expenses to continue to decline for the rest of 2016.

R&D expenses in Q1 2016 were $3.4 million, up from $3.0 million in Q1 2015, reflecting the company’s increased investment in future and higher margin, differentiated storage products.

Special charges were $6.8 million in Q1 2016 compared to $0.6 million in Q1 2015. Special charges in Q1 2016 were chiefly related to restructuring consulting fees and pension settlement costs. Management expects the restructuring consulting fees will be immaterial for the rest of 2016.

Operating loss from continuing operations was $16.4 million in Q1 2016 compared to a loss of $14.4 million in Q1 2015. Excluding the impact of special charges described above, the adjusted operating loss would have been $9.6 million in Q1 2016 compared with an adjusted operating loss on the same basis of $13.8 million in Q1 2015.

Income tax expense was a benefit of $1.6 million in Q1 2016 compared with $0.1 million income tax expense in Q1 2015. The benefit of $1.6 million was mostly offset by the tax expense related to the discontinued operations.

Discontinued operations had a loss (after-tax) in Q1 2016 of $0.7 million excluding a non-cash cumulative translation adjustment of $75.7 million compared with a gain of $1.1 million (after-tax) in Q1 2015. Discontinued operations include the results of the IronKey business, which was sold, and the legacy Storage Media and Accessories businesses which Imation closed down.

Loss per share from continuing operations was $0.40 in Q1 2016 compared with a loss per share of $0.38 in Q1 2015. Excluding the impact of special items, the adjusted loss per share would have been $0.21 in Q1 2016 compared with a loss per share of $0.36 in Q1 2015.

Cash and short-term investment balance was $63.0 million as of March 31, 2016, down slightly from $70.4 million at year end, driven primarily by the operating loss.

Fernander concluded: “We are on the path we set out to maximize shareholder value, and we look forward to continued progress on this agenda throughout 2016.”