Imation: Fiscal 4Q08 Financial Results

                                                  Y2008                        Y2007

Imation Corp. released financial results for the fourth quarter and full year ended December 31, 2008.

Key points for Q4 2008 and fiscal year 2008
include the following:

• Revenue of $549.2 million for the fourth quarter of 2008 was down 21.7 percent compared with revenue of $701.8 million for the fourth quarter of 2007. Net revenue for the year ended December 31, 2008 was $2,154.6 million, up 4.5 percent from revenue of $2,062.0 million for the year ended December 31, 2007.
• Operating loss for the fourth quarter of 2008 was $50.8 million, including a goodwill impairment charge of $34.7 million and $9.9 million of restructuring and other charges. This is compared with an operating loss of $70.3 million in the fourth quarter of 2007, which included goodwill impairment charges of $94.1 million and $12.6 million of restructuring and other charges. Excluding these charges, the operating loss for the fourth quarter of 2008 was $6.2 million compared with operating income of $36.4 million on the same basis in the fourth quarter of 2007 (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results below).
• The Company posted a loss of $1.22 per diluted share for the fourth quarter of 2008, including a $0.86 per share negative impact from goodwill impairment and restructuring and other charges. This compares with a diluted loss per share of $1.91 for the fourth quarter of 2007. Excluding goodwill impairment and restructuring and other charges, the Non-GAAP diluted loss per share for the fourth quarter of 2008 would have been $0.36 compared with diluted earnings per share of $0.64 on the same basis in the fourth quarter of 2007 (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results below).
• Total cash was $96.6 million with no debt outstanding as of December 31, 2008.

Commenting on the results, Imation President and CEO Frank Russomanno said: “The significant economic slowdown has affected our results globally for both Q4 and the full year. In addition, the industry softness in storage media we saw earlier in the year continued to affect our results in the fourth quarter. As we indicated previously, our results also include significant charges for goodwill impairment and restructuring actions.”

“While this was a difficult quarter, we did see some positive signs from our brand-focused strategy. Our optical media share continues to rise as we leverage the power of our brands and channel position around the world. In addition, we achieved solid revenue growth in our consumer electronics and accessories business in the quarter.”

“As we manage through this economy, we have three guiding principles. First, we are focused on aggressively reducing costs and conserving cash by simplifying every aspect of our business. Second, we are focused on using our powerful brand portfolio and the strength of our channel relationships to maintain and grow our leading market positions for storage media, especially as retailers consolidate shelf space, brands and vendors. Third, we remain strategically focused on Imation’s transformation to a brand and product management company which includes significant growth in consumer electronics and accessories.”

“We are approaching 2009 cautiously given uncertainty about the breadth and depth of the economic downturn and we have decided not to provide annual guidance for 2009. In the current environment we anticipate a challenging first half of the year.”

“While 2008 has been particularly challenging, we are not scaling back our own belief in what we think this Company can achieve long term. As we have in the past when faced with challenges, this management team will make the necessary changes to improve results and regain our momentum. We remain committed to our strategy and intently focused on implementing the actions necessary to improve our business model as we align our cost structure to our strategic direction,” Russomanno concluded.

Fourth Quarter and YTD 2008 Financial Highlights

Net Revenue was $549.2 million for the fourth quarter of 2008, down 21.7 percent from the fourth quarter of 2007 revenue of $701.8 million driven by the global economic slowdown and industry softness in storage media. The fourth quarter 2008 revenue decline resulted from volume declines of approximately ten percent, price erosion of approximately ten percent and unfavorable currency impacts of approximately two percent. Net revenue for the year ended December 31, 2008 was $2,154.6 million, up 4.5 percent from revenue of $2,062.0 million for the year ended December 31, 2007.

Gross Margin of 13.6 percent in the fourth quarter of 2008 was down 2.9 percent from 16.5 percent in the fourth quarter of 2007. For the years ended December 31, 2008 and 2007, gross margins were 16.2 percent and 17.3 percent, respectively. Reduced margins were mainly due to changes in product mix driven by declining sales of our higher margin legacy tape products as well as lower margins from our consumer electronic products.

Selling, General & Administrative (SG&A) expense in the fourth quarter of 2008 was $75.6 million or 13.8 percent of revenue, compared with $71.8 million or 10.2 percent of revenue in the fourth quarter of 2007. The increase in SG&A expense during the fourth quarter of 2008 compared with the fourth quarter of 2007 was mainly due to additional litigation related legal expense and bad debt expense. For the years ended December 31, 2008 and 2007, SG&A spending was $290.6 million or 13.5 percent of revenue up from $223.3 million or 10.8 percent of revenue, respectively, due primarily to SG&A expense associated with the acquisitions completed in 2007.

Research & Development (R&D) spending in the fourth quarter of 2008 was $5.4 million or 1.0 percent of revenue, compared with $7.7 million or 1.1 percent of revenue reported in the fourth quarter of 2007. For the years ended December 31, 2008 and 2007, R&D spending was $23.6 million or 1.1 percent of revenue and $38.2 million or 1.9 percent of revenue, respectively. The reductions were primarily due to cost 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 were $9.9 million in the fourth quarter of 2008 and $28.9 million for the year ended December 31, 2008 under the Company’s restructuring programs announced in the fourth quarter of 2008 and under previously announced programs. Restructuring and other charges were $12.6 million and $33.3 million in the fourth quarter and year ended December 31, 2007, respectively.

Goodwill Impairment of $34.7 million was recorded in the fourth quarter of 2008. Because of the decline in the Company’s stock price during the fourth quarter, the Company’s total book value was well above its market capitalization, indicating the presence of goodwill impairment which was analyzed and recorded. The Company recorded a goodwill impairment charge of $94.1 million in the fourth quarter of 2007.

Operating Loss for the fourth quarter of 2008 was $50.8 million compared with an operating loss of $70.3 million reported in the fourth quarter of 2007. The operating loss for the fourth quarters of 2008 and 2007 included goodwill impairment and restructuring and other charges of $44.6 million and $106.7 million, respectively. Excluding goodwill impairment and restructuring and other charges noted above, the operating loss would have been $6.2 million in the fourth quarter of 2008 as compared with an operating income of $36.4 million in the fourth quarter of 2007. The operating loss for the year ended December 31, 2008 was $27.8 million compared with operating loss of $33.0 million for the year ended December 31, 2007. Excluding goodwill impairment and restructuring and other charges noted above, operating income would have been $35.8 million for the year ended December 31, 2008 as compared with $94.4 million for the year ended December 31, 2007.

Income Taxes: The tax provision for the fourth quarter and year ended December 31, 2008 resulted in a tax benefit of $7.7 million and $2.0 million, respectively, which includes a tax benefit of $8.4 million associated with the goodwill impairment charge of $34.7 million. The tax provision for the fourth quarter and year ended December 31, 2008 also includes charges for the establishment of valuation allowances in the amount of $5.3 million. The tax provision for the fourth quarter and year ended December 31, 2007 was $0.8 million and $15.8 million, respectively, which include a tax benefit of $4.0 million associated with the goodwill impairment charge of $94.1 million.

Diluted Earnings/Loss per Share (EPS) was a loss of $1.22 for the fourth quarter of 2008 compared with a loss of $1.91 for the fourth quarter of 2007. Excluding goodwill impairment and restructuring and other charges, on a Non-GAAP basis, diluted EPS was a loss of $0.36 and income of $0.64 for the fourth quarters of 2008 and 2007, respectively.

Cash and Cash Flows: Ending cash and cash equivalents were $96.6 million as of December 31, 2008, down $16.2 million during the quarter from $112.8 million as of September 31, 2008. Cash flow used in operations for the fourth quarter of 2008 was $1.8 million. Other uses of cash during the fourth quarter of 2008 included capital spending of $3.9 million and dividends of $3.0 million. Depreciation and amortization totaled $10.6 million for the fourth quarter of 2008.