Imation: Fiscal 3Q09 Financial Results

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

Key points for Q3 include the following:

• Revenue of $401.3 million was down 15.7 percent compared with Q3 2008 revenue of $475.9 million.
• Operating income of $1.7 million and diluted loss per share of $0.01 in Q3 2009 compared with operating loss of $11.0 million and diluted loss per share of $0.20 in Q3 2008. Operating income includes restructuring and related charges in Q3 2009 and Q3 2008 of $7.5 million, or $0.15 per diluted share, and $16.3 million, or $0.27 per diluted share, respectively (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results below).
• Total cash and cash equivalents were $111.0 million at September 30, 2009 compared with $96.6 million at December 31, 2008.
• The wind down of the Global Data Media (GDM) joint venture was completed and the GDM current and historic results have been reclassified into discontinued operations.

Commenting on the results, Imation Vice Chairman and CEO Frank Russomanno said: “We are encouraged by our solid results in Q3 as we continue to improve our profitability and cash flows in a difficult economic environment.

“In our storage business, the rate of decline in our optical revenue moderated from recent quarters and we continued to deliver strong gross margins reflecting the success of our brand consolidation strategy. Our magnetic tape business continued to be under pressure, with revenue declines in the same range as recent quarters. We are pleased with the momentum we are beginning to see in our removable hard drive business, including our selection by major OEMs to supply RDX drives and media for their server products. Our electronics and accessories business has steadily improved this year and we continued to see margin improvement in Q3. As expected, revenues are down in this business, reflecting the challenging retail environment as well as our more selective approach to this category.

“We continue to see the benefits of the actions we have taken, especially our aggressive cost reduction efforts. In addition, as a result of our previously disclosed settlement with Philips we lowered legal costs. During the quarter we strengthened our financial position by generating $21.8 million of cash with cash ending the quarter at $111 million. We achieved these results despite an initial outflow of $20 million associated with the $53 million legal settlement with Philips."

“We are encouraged by the results of the actions we have taken thus far, but clearly we have more work to do. As we move into Q4 and beyond, we remain focused on transforming the company and improving our profitability and working capital efficiency in order to drive cash generation across our businesses,” Russomanno concluded.

Net revenue for Q3 2009 was $401.3 million, down 15.7 percent from Q3 2008, driven by volume declines of approximately three percent, price erosion of approximately eleven percent and unfavorable currency impacts of approximately two percent. From a product perspective, the decrease was driven primarily by declines in magnetic and optical products. Revenue in the Americas segment, which represented 40.4 percent of total revenue in the quarter, decreased 13.1 percent from Q3 2008. Revenue from the Europe segment, which represented 23.8 percent of total revenue in the quarter, decreased 25.3 percent from Q3 2008 driven mainly by declines in magnetic products. Revenue from the Asia Pacific segment, which represented 22.8 percent of total revenue in the quarter, decreased 7.9 percent from Q3 2008. Revenue from the Electronic Products segment, which represented 13.0 percent of total revenue in the quarter, decreased 16.0 percent from Q3 2008.

Gross margin of 16.1 percent of revenue in Q3 2009 was down 0.4 percentage points from 16.5 percent in Q3 2008, driven primarily by continued revenue declines in higher margin tape products. Gross margin remained relatively flat in Q3 2009 compared with Q2 2009 mainly due to improved margins on optical products, offset by revenue declines in higher margin tape products.

Selling, general & administrative (SG&A) spending was $50.4 million or 12.6 percent of revenue in Q3 2009, compared with $69.6 million or 14.6 percent of revenue in Q3 2008. The decrease in SG&A expense from Q3 2008 resulted from ongoing restructuring and cost control actions, reduced litigation expense due to the Philips settlement along with some one-time benefits and expense deferrals.

Research & development (R&D) spending was $4.9 million or 1.2 percent of revenue in Q3 2009, compared with $5.6 million or 1.2 percent of revenue in Q3 2008.

Restructuring and other charges were $7.5 million in Q3 2009 compared with $14.3 million in Q3 2008. The charges in 2009 are associated with our previously announced restructuring programs to reduce selling, general and administrative expenses and relate mainly to pension settlements and severance costs.

Operating income was $1.7 million in Q3 2009 compared with operating loss of $11.0 million in Q3 2008. Adjusting for the impact of restructuring and other charges and fiscal 2008 inventory write-offs, operating income was $9.2 million in Q3 2009 compared with operating income of $5.3 million in Q3 2008 (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results above).

Non-operating expense and income taxes: Non-operating expense was $2.2 million in Q3 2009 compared with $2.0 million in Q3 2008. The effective tax rate was 40.0 percent in Q3 2009 compared with 43.1 percent in Q3 2008. The tax rates are higher than normal due to the impacts of restructuring and other charges and the mix of taxable loss/income by country.

Discontinued operations during the quarter were related to the wind down of the GDM joint venture. The wind down resulted from the Philips litigation settlement on July 13, 2009. GDM was a joint venture marketing company for optical media products created with Moser Baer India Ltd. (MBI). Since the inception of the joint venture in 2003, Imation held a 51 percent ownership in the business. As the controlling shareholder, the Company has consolidated the results of the joint venture in the financial statements. Loss from discontinued operations was $0.1 million in Q3 of 2009 compared to income from discontinued operations of $1.5 million in Q3 of 2008.

Diluted loss per share from continuing operations was $.01 in Q3 2009 compared with $0.20 in Q3 2008. Total diluted loss per share in Q3 2009 was $0.01 compared with $0.16 in Q3 2008. Adjusting for the restructuring and other charges and inventory write-offs, total diluted earnings per share was $0.14 in Q3 2009 compared with $0.11 in Q3 2008 (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results above).

Cash and cash flows: Ending cash and cash equivalents were $111.0 million as of September 30, 2009, an increase of $21.8 million from $89.2 million as of June 30, 2009 driven by improvements in working capital and earnings partially offset by the $20 million previously disclosed litigation settlement payment. Depreciation and amortization totaled $10.9 million and capital spending was $2.0 million for Q3 2009.