Imation: Fiscal 3Q08 Financial Results

Imation Corp. released financial results for the quarter ended September 30, 2008.

Key Points for Q3 2008 include the following:

• Q3 2008 revenue was $527.5 million compared with $525.5 million in Q3 2007.
• Operating loss for Q3 2008 was $8.7 million compared to operating income of $16.3 million for Q3 2007. The Q3 2008 loss included charges of $16.3 million related mainly to previously announced restructuring actions. Excluding these charges operating income would have been $7.6 million in Q3 2008 (see table entitled Reconciliation of GAAP to Adjusted Results).
• Diluted loss per share was $0.16 for Q3 2008 compared with $0.24 diluted earnings per share in Q3 2007. Adjusting for the impacts of restructuring and related charges in Q3 2008 of $0.27 per share, diluted earnings per share would have been $0.11 for Q3 2008 compared with $0.23 for Q3 2007 (see table entitled Reconciliation of GAAP to Adjusted Results).
• Total cash was $112.8 million as of September 30, 2008. Cash generated from operations for Q3 2008 was $8.6 million.
• Based on results year-to-date and a weak economic outlook, the Company has revised its outlook downward for the full year
• The Company is in the process of analyzing its cost structure to further reduce operating expenses. Additional information including potential restructuring charges, timing and impacts will be disclosed in the coming weeks as plans are finalized.

Commenting on the quarter, Imation President and CEO Frank Russomanno said: "Revenue and earnings were substantially below the Company’s previous expectations as the Company noted in its press release of October 9th. Demand slowed across several sectors in the U.S. and Europe and more recently in Japan. We have been negatively impacted by a slowdown in consumer spending for consumer electronics and optical media. For example, late in the quarter, some retailers canceled or deferred orders for consumer electronic products as they positioned themselves for a possible weaker holiday season. This situation contributed to a loss for the Electronic Products segment in Q3. Once again, sales of tape products were hurt, particularly as data center customers in several large banks and financial services firms deferred or stopped purchasing, which impacted sales of some of our higher margin products. We expect the same factors that affected us in Q3 to continue to impact our business in Q4. As a result, we will not meet our previous full year outlook, and have adjusted it accordingly."

"As we continue to benchmark ourselves against companies with brand portfolios and those with significant distribution businesses across both commercial and consumer markets, we have established a target business model in line with our strategic direction. Given our year-to-date performance as well as current market and industry conditions, we cannot simply grow our way into that business model. As a result, we intend to reduce total operating expenses to drive profitable growth as a lean and fast acting company focused on delivering acceptable gross margins and improved operating profit and return on invested capital. We will have more information to share in the coming weeks."

"While the current economic environment is challenging, we remain firmly committed to our strategic direction for Imation. And I believe it is more important than ever to remain on course. While we are disappointed with our near term results, we continue to make progress in several key areas including manufacturing cost reductions, acquisition integration, new product introductions and building the brands. This progress reinforces our confidence in our ability to implement the long term strategy of building a global portfolio of branded products in both commercial and consumer markets," Russomanno 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 related items 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.

Third Quarter and YTD 2008 Financial Highlights
Given the present uncertainty surrounding the global economy and stock price volatility, the Company is performing impairment testing for its intangible assets including goodwill. It is possible that impairments could be identified and recorded in either Q3 or Q4 2008. Therefore, the third quarter results are subject to the completion of this analysis which is expected prior to the filing of the Company’s 10-Q in early November.

Net Revenue was $527.5 million in the third quarter of 2008, relatively unchanged from the third quarter of 2007 revenue of $525.5 million. The third quarter of 2008 included one additional month of TDK recording media as compared to the third quarter of 2007. This resulted in a revenue increase of approximately $42 million which was offset primarily by declines in magnetic product sales. Our Americas region revenue totaled approximately $199 million in the quarter, down 19 percent from last year primarily due to declines in magnetic product sales. European revenue totaled approximately $167 million in the quarter, up 10 percent from last year with growth driven by our GDM joint venture. Asia Pacific revenue totaled approximately $99 million, up 17 percent driven by TDK recording media revenue. Revenue from the Electronic Products segment was approximately $62 million, up 47 percent. For the nine-month period ended September 30, 2008, revenue was $1,605.4 million, up 18 percent from the same period last year driven primarily by the TDK recording media and Memcorp acquisitions.

Gross Margin of 15.5 percent in the third quarter of 2008 was down from 17.3 percent in the second quarter of 2008 and 16.3 percent in the third quarter of 2007 due to product mix changes and the inventory write-off associated with the restructuring. For the nine-month periods ended September 30, 2008 and 2007, gross margins were 17.1 percent and 17.6 percent respectively.

Selling, General & Administrative (SG&A) spending was $70.4 million or 13.3 percent of revenue in the third quarter of 2008, compared with $61.6 million or 11.7 percent of revenue in the third quarter of 2007. The increase in expense from Q3 2007 was due to spending for acquisition integration, incremental brand investments and additional legal expenses. For the nine-month periods ended September 30, 2008 and 2007, SG&A spending was $215.0 million and $151.5 million respectively.

Research & Development (R&D) spending was $5.6 million or 1.1 percent of revenue during the third quarter of 2008 compared with $8.5 million or 1.6 percent of revenue in the third quarter of 2007. For the nine-month periods ended September 30, 2008 and 2007, R&D spending was $18.2 million and $30.5 million respectively. The reductions were primarily due to savings from restructuring actions initiated in the second quarter of 2007 as the Company focused its R&D activities primarily on development of new magnetic tape formats.

Restructuring and Other Charges was $14.3 million in the third quarter of 2008. These charges related mainly to costs from our previously announced restructuring programs. This is compared to a benefit of $0.7 million in the third quarter of 2007, which was driven by restructuring charges of $3.1 million offset by $3.8 million related to a terminated employment agreement. Total cost of the Q3 2008 restructuring and related charges was $16.3 million which included the $14.3 million of restructuring and other charges and an inventory write-off of $2.0 million, associated with the restructuring activities, that is classified in cost of goods sold.

Operating Loss was $8.7 million in the third quarter of 2008, compared with operating income of $16.3 million in the third quarter of 2007, driven by the factors noted above. Operating loss in the third quarter of 2008 included restructuring and related charges of $16.3 million. Operating income in the third quarter of 2007 included $6.7 million in losses related to USB Flash products. Operating income for the nine months ended September 30, 2008 was $23.0 million compared with $37.3 million for the comparable period in 2007. Excluding the restructuring and related charges noted above, operating income would have been $44.0 million in the first nine months of 2008 as compared with $58.0 million in the same period in 2007 (see table entitled Reconciliation of GAAP to Adjusted Results above).

Diluted Loss per Share was $0.16 in the third quarter of 2008 compared with diluted earnings per share of $0.24 in the third quarter of 2007, due to the factors noted above. Adjusting for the above noted impacts of restructuring and related charges, diluted earnings per share would have been $0.11 for the third quarter of 2008 compared with $0.23 for the third quarter of 2007 (see table entitled Reconciliation of GAAP to Adjusted Results above).

Cash and Cash Flows: Ending cash and cash equivalents were $112.8 million as of September 30, 2008, down $4.9 million from the prior quarter. Net cash provided by operating activities totaled $8.6 million in Q3 2008 and depreciation and amortization was $13.4 million. Dividends of $5.9 million were paid and capital spending was $3.2 million for the third quarter of 2008. Year-to-date cash generated from operations was $86.9 million.

2008 Business Outlook
This outlook, while based on our best estimates at this time, contains a high degree of risk and uncertainty given current global economic conditions. This business outlook is also subject to the risks and uncertainties described at the end of this release.

Actual results will also likely be impacted by additional future restructuring charges associated with the Company’s cost reduction efforts discussed above. Also, further declines in our stock price or deterioration in economic conditions impacting our business outlook increases the possibility of a goodwill impairment in 2008.

• Revenue for 2008 is targeted at approximately $2.165 billion to $2.185 billion. We anticipate Q4 revenue in the range of $560 million to $580 million. Previously, 2008 revenue was targeted at approximately $2.4 billion.
• Operating income, including restructuring and other charges, is targeted to be in the range of $30 million to $37 million for 2008. This includes restructuring and related charges of $21 million which have been incurred in the first three quarters of 2008. We anticipate Q4 operating income in the range of $7 million to $14 million. Previously, 2008 operating income was targeted in the range of $80 million to $90 million including restructuring and other charges in the range of $17 million to $22 million.
• Diluted earnings per share is targeted between $0.44 and $0.56 which includes the negative impact of approximately $0.39 from restructuring and related charges. We anticipate Q4 diluted earnings per share of $0.11 to $0.23. Previously, 2008 diluted earnings per share was targeted between $1.26 and $1.43 which included the negative impact of approximately $0.33 from restructuring and other charges.
• Capital spending is targeted to be approximately $15 million. Previously, capital spending was targeted in the range of $15 million to $20 million.
• The full year tax rate is anticipated to be in the range of 33 percent to 35 percent, absent any one-time tax items that may occur in the future. Previously, the tax rate was anticipated to be in the range of 35 percent to 37 percent.
• Depreciation and amortization expense is targeted to be approximately $50 million. Previously, depreciation and amortization was targeted in the range of $48 million to $52 million.