Imation: Fiscal 1Q08 Financial Results

Imation Corp. released financial results for the quarter ended March 31, 2008.

Highlights for Q1 include the following:

• Revenue of $530.9 million was up 25.8 percent compared with Q1 2007 revenue of $421.9 million. Growth was driven by optical and consumer electronics products primarily due to the TDK Recording Media and Memcorp acquisitions which closed in Q3 2007 as well as currency benefits.
• Q1 2008 operating income of $19.5 million and diluted earnings per share of $0.29 are compared with $23.6 million of operating income and diluted EPS of $0.44 in Q1 2007. Operating income in Q1 2008 included restructuring and other charges of $0.7 million. Diluted EPS included restructuring and other charges of $0.04 in Q1 2008.
• Cash generated from operations for the first quarter was $32.8 million and approximately 830,000 shares were repurchased during the quarter for $19.4 million.

Commenting on the results, Imation President and CEO Frank Russomanno said: "We are pleased with our Q1 earnings in the face of challenging economic conditions. We benefited from the TDK Recording Media acquisition, our restructuring actions and improved margins in optical and flash products. These factors helped offset declines in our legacy magnetic tape formats. Our gross margin improved over two percentage points compared with Q4, even on seasonally lower revenue. Operating expenses of $78.5 million were as expected and we anticipate further improvement as we continue to integrate our acquisitions."

"Revenue growth in the quarter was driven by our TDK Recording Media and Memcorp acquisitions as well as currency benefits. We saw softening demand from our enterprise tape customers in the financial services sector both in the U.S. and Europe. Europe was softer than planned in optical products as well, despite positive currency benefits. As expected, our flash business declined and profit margins improved as we continued our previously announced rationalization of our U.S. consumer flash business."

"We are pleased with our progress to date in our acquisition integration as well as the transformation of Imation to a brand and product management company. We remain committed to the financial targets for FY 2008," he concluded.

Comparison of GAAP to Non-GAAP Financial Measures
The Non-GAAP financial measurements are provided to assist in understanding the impact of restructuring and other charges on our actual results of operations when compared with prior periods. We believe that adjusting for these items will assist investors in making an evaluation of our performance on a comparable basis against prior periods. This information should not be construed as an alternative to the reported results, which have been determined in accordance with accounting principles generally accepted in the United States of America.

Net Revenue was $530.9 million, up 25.8 percent from Q1 2007, driven by the TDK Recording Media and Memcorp acquisitions which closed in Q3 2007. Revenue in the Americas segment, which represented 40.4 percent of total revenue in the quarter, was relatively flat from the comparable period a year ago. Revenue from the Europe segment, which represented 33.2 percent of total revenue in the quarter, increased 23.4 percent driven by the TDK Recording Media acquisition. Revenue growth of 78.3 percent in the Asia Pacific segment, which represented 21.5 percent of total revenue in the quarter, was also driven by the TDK Recording Media acquisition. Revenue from the Electronic Products segment, a new operating segment resulting from the Memcorp acquisition, was $25.8 million or 4.9 percent of total revenue in the quarter. The Q1 2008 total revenue growth as compared with Q1 2007 was generated by overall volume growth of approximately 29 percent and favorable currency impact of five percent, partially offset by price erosion of eight percent.

Gross Margin of 18.6 percent was down from 19.4 percent in Q1 2007, but up 2.1 percentage points from 16.5 percent in Q4 2007. Our gross margin as a percent of revenue decreased in Q1 2008 as compared with the first quarter of 2007, driven by changes in our product mix and by reduced gross profits in our legacy magnetic tape formats. Our gross margin as a percent of revenue increased sequentially from the fourth quarter of 2007, driven by product mix shifts, improved margins in our optical products and currency benefits during the quarter.

Selling, General & Administrative (SG&A) spending was $71.9 million or 13.5 percent of revenue, compared with $45.2 million or 10.7 percent of revenue in Q1 2007 and $71.8 million or 10.2 percent of revenue in Q4 2007. The increase in expense from Q1 2007 was due to several factors including the addition of TDK Recording Media and Memcorp SG&A expenses and intangible asset amortization as well as spending for integrating the acquisitions and incremental brand investments. These items were partially offset by synergies achieved from acquisition integration as well as spending declines elsewhere.

Research & Development (R&D) spending was $6.6 million or 1.2 percent of revenue, compared with $12.4 million or 2.9 percent of revenue reported in Q1 2007. The decrease in R&D expense is due to the result of savings from restructuring actions initiated in the second quarter of 2007 as the Company focuses its activities primarily on development of new magnetic tape formats.

Operating Income was $19.5 million, compared with operating income of $23.6 million reported in Q1 2007. The operating income decline was driven by reduced gross profits in our legacy magnetic tape formats. In addition, our Electronic Products segment incurred a loss of $2.7 million in the seasonally soft first quarter. Total operating income included restructuring and other expense of $0.7 million compared with $0.6 million in Q1 2007. Adjusting for the impact of these expenses, operating income was $20.2 million compared with $24.2 million for Q1 2007 (see table entitled Reconciliation of GAAP to Adjusted Results above).

Non-Operating Income/Expense and Income Taxes: Non-operating expense of $1.2 million in Q1 2008 is compared with $1.5 million of non-operating income in Q1 2007. The change relates primarily to a reduction in interest income. The effective tax rate in Q1 2008 was 39.9 percent compared with 37.5 percent in Q1 2007. The effective tax rate increased due to one-time tax effects primarily associated with restructuring and other charges.

Diluted Earnings per Share was $0.29 for Q1 2008 compared with $0.44 diluted EPS in Q1 2007. Adjusting for the above noted impact of restructuring and other expense and the one-time tax effects, diluted earnings per share was $0.33 for Q1 2008 compared with $0.45 for Q1 2007 (see table entitled Reconciliation of GAAP to Adjusted Results above).

Cash Flow, Working Capital and Balance Sheet: Cash flow generated from operations totaled $32.8 million in Q1 2008 compared with $6.2 million in Q1 2007. Cash flow used in investing activities in Q1 2008 included $8.0 million related to the purchase of the minority interests in our Imation Japan subsidiary. During the quarter we also paid $31.3 million to fully repay the notes payable associated with the Memcorp acquisition. Depreciation and amortization was $12.6 million for the quarter. We repurchased approximately 830,000 shares during the quarter for $19.4 million and dividends of $6.0 million were paid in Q1 2008. Our cash balance as of March 31, 2008 was $105.5 million.

2008 Business Outlook

• This business outlook, which is unchanged from the outlook issued in January 2008, is subject to the risks and uncertainties described below.
• Revenue is targeted at approximately $2.4 billion, representing growth of approximately 16 percent over 2007.
• Operating income, including restructuring and other charges, is targeted to be in the range of $95 million to $105 million. We anticipate restructuring and other charges to be in the range of $4 million to $6 million for 2008.
• Diluted earnings per share is targeted between $1.51 and $1.68 which includes the negative impact of approximately $0.08 from restructuring and other charges.
• Capital spending is targeted in the range of $15 million to $20 million.
• The tax rate is anticipated to be in the range of 35 percent to 37 percent, absent any one-time tax items that may occur in the future.
• Depreciation and amortization expense is targeted to be in the range of $48 million to $52 million.

Imation Corp.