Imation: Fiscal 2Q09 Financial Results

Imation Corp. released financial results for the quarter ended June 30, 2009.

Key points for Q2 include the following:

• Revenue of $427.9 million was down 21.8 percent compared with Q2 2008 revenue of $547.0 million.
• Sales, general and administrative (SG&A) expense of $60.1 million was down 17.3 percent or $12.6 million compared with Q2 2008.
• Operating loss of $57.6 million and diluted loss per share of $0.98 in Q2 2009 compared with operating income of $12.2 million and diluted earnings per share of $0.19 in Q2 2008. Operating loss in Q2 2009 included a litigation settlement charge of $49 million or $0.81 per diluted share and restructuring and other charges of $9.8 million or $0.16 per diluted share (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results below).
• Operating income was $1.2 million excluding the litigation settlement charge and restructuring and other charges above (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results below).
• Total cash and cash equivalents were $89.2 million at June 30, 2009.

Commenting on the results, Imation vice chairman and CEO Frank Russomanno said: “We are pleased that Imation returned to operating profitability in the second quarter, excluding special charges. While the ongoing economic crisis has continued to impact our revenues in both our commercial and consumer channels, our aggressive cost-containment and restructuring actions have been effective, resulting in a SG&A reduction of more than 17 percent, helping to offset the revenue challenges.”

“In Q2, our legacy storage media business, including magnetic tape, continued to experience declines at rates similar to first quarter. Our margins for both magnetic tape and optical media remained stable, driven by the continued benefits of our magnetic manufacturing optimization program and our optical brand consolidation strategy. We saw encouraging growth in our removable hard disk drive business, led by the RDX format, where Imation was selected by two major OEMs as the exclusive supplier of RDX drives and media for their storage systems.”

“Our financial position remains strong with cash of $89.2 million.”

“As we previously announced, we entered into a settlement agreement with Philips to resolve a complex series of disputes in multiple jurisdictions regarding cross-licensing and patent infringement related to recordable optical media. We took a charge of $49.0 million in Q2 related to this litigation settlement. We are pleased to settle this very costly and distracting litigation and to eliminate an ongoing risk for the Company.”

“Going into the second half of the year, we are focused on our strategy to leverage our strong global brand portfolio, including Imation, Memorex, TDK Life on Record and XtremeMac. We will continue to focus on achieving profitable growth with new product offerings for both the commercial and consumer channels, spanning storage, accessories, and consumer electronics,” Russomanno concluded.

Net revenue for Q2 2009 was $427.9 million, down 21.8 percent from Q2 2008, driven by price erosion of approximately eleven percent, volume declines of approximately seven percent and unfavorable currency impacts of approximately four percent. From a product perspective, the decrease was driven primarily by declines in magnetic and optical products. Revenue in the Americas segment, which represented 39.6 percent of total revenue in the quarter, decreased 10.9 percent from Q2 2008. Revenue from the Europe segment, which represented 27.6 percent of total revenue in the quarter, decreased 36.4 percent from Q2 2008 driven mainly by declines in optical and magnetic products. Revenue from the Asia Pacific segment, which represented 21.8 percent of total revenue in the quarter, decreased 17.8 percent from Q2 2008. Revenue from the Electronic Products segment, which represented 11.1 percent of total revenue in the quarter, decreased 18.4 percent from Q2 2008.

Gross margin of 15.4 percent of revenue in Q2 2009 was down 1.9 percentage points from 17.3 percent in Q2 2008 as expected, driven primarily by continued revenue declines in higher margin tape products. Gross margin declined in Q2 2009 compared with Q1 2009 mainly due to expected seasonal shifts in product mix along with slightly lower margins on tape products partly offset by increased margins on electronic products.

Selling, general & administrative (SG&A) spending was $60.1 million or 14.0 percent of revenue in Q2 2009, compared with $72.7 million or 13.3 percent of revenue in Q2 2008. The decrease in SG&A expense from Q2 2008 was primarily due to benefits from restructuring actions and aggressive cost control. SG&A included litigation expense of $6.5 million and $2.3 million in Q2 2009 and Q2 2008, respectively, and $13.0 million and $3.0 million for the first six months of 2009 and 2008, respectively, related primarily to the Philips dispute.

Research & development (R&D) spending was $4.7 million or 1.1 percent of revenue in Q2 2009, compared with $6.0 million or 1.1 percent of revenue in Q2 2008.

Litigation settlement charge of $49.0 million was recorded in Q2 2009. The company entered into a confidential settlement agreement ending all legal disputes with Philips Electronics N.V., U.S. Philips Corporation and North American Philips Corporation. The companies had been involved in a complex series of disputes in multiple jurisdictions regarding cross-licensing and patent infringement related to recordable optical media. The settlement provides resolution of all claims and counterclaims filed by the parties without any finding or admission of liability or wrongdoing by any party. As a term of the settlement, Imation will pay Philips $53 million over a period of three years. As a result of the settlement, Imation recorded a charge in the second quarter of 2009, based on the present value of these payments, of $49 million. The pre-tax cash impact for 2009 will be approximately $16.5 million, occurring during the second half of the year. In addition, the Company’s joint venture with Moser Baer International, Global Data Media, will be wound down by the end of the year as a result of these actions. GDM contributed revenue of $57.5 million and net income of approximately $2.0 million for the six months ended June 30, 2009. Management does not expect any other changes to Imation’s optical business model as a result of this settlement.

Restructuring and other charges were $9.8 million in Q2 2009 compared with $4.0 million in Q2 2008. The charges in 2009 relate to costs from our previously announced restructuring programs.

Operating loss was $57.6 million in Q2 2009 compared with operating income of $12.2 million in Q2 2008. The loss was driven by the litigation settlement and restructuring charges discussed above. Total operating loss/income included restructuring and other expense of $9.8 million in Q2 2009 compared with $4.0 million in Q2 2008. Adjusting for the impact of the litigation settlement charge and restructuring and other expenses, operating income was $1.2 million in Q2 2009 compared with operating income of $16.2 million in Q2 2008.

Non-operating expense and income taxes: Non-operating expense was $3.4 million in Q2 2009 compared with $1.6 million in Q2 2008. The increase in expense relates primarily to foreign currency losses. The effective tax rate was 39.5 percent in Q2 2009 compared with 32.1 percent in Q2 2008. The increase was primarily due to the mix of taxable loss/income by country.

Diluted loss per share was $0.98 in Q2 2009 compared with diluted earnings per share of $0.19 in Q2 2008. Adjusting for the above noted litigation settlement charge and restructuring and other charges, diluted loss per share was $0.01 in Q2 2009 compared with diluted earnings per share of $0.26 in Q2 2008 (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results above).

Cash and cash flows: Ending cash and cash equivalents were $89.2 million as of June 30, 2009, down $13.8 million from $103.0 million as of March 31, 2009. Cash used in operations in Q2 2009 was $9.4 million driven by $6.8 million paid for restructuring costs and seasonal changes in our working capital. Depreciation and amortization totaled $10.6 million and capital spending was $1.8 million for Q2 2009. In addition, an amendment to our credit facility was completed during the quarter such that the facility now provides a more consistent amount of credit availability.