Imation: Fiscal 1Q10 Financial Results

Imation Corp. released financial results for the quarter ended March 31, 2010.

Key points for Q1 include the following:

• Revenue of $365.8 million was down 7.7 percent compared with Q1 2009 revenue of $396.5 million, a substantially lower rate of decline from recent quarters.
• Gross margin of 16.9 percent was flat compared with Q1 2009.
• Operating expenses were $57.5 million or 15.7 percent of revenue in Q1 2010, down $12.5 million compared with $70.0 million or 17.7 percent of revenue in Q1 2009.
• Operating income of $0.2 million and diluted loss per share of $0.07 in Q1 2010 compared with operating loss of $8.6 million and diluted loss per share of $0.34 in Q1 2009. Operating income includes restructuring and other charges in Q1 2010 and Q1 2009 of $4.0 million, or $0.07 per diluted share, and $5.5 million, or $0.10 per diluted share, respectively (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results below).
• Total cash and cash equivalents were $224.2 million at March 31, 2010 compared with $163.4 million at December 31, 2009, an increase of $60.8 million.

Commenting on the results, Imation Vice Chairman and Chief Executive Officer Frank Russomanno said: “We are pleased with the solid start we have had to the year, continuing the momentum we saw in the second half of 2009.”

“Our cash generation in the quarter was excellent. With our continued focus on working capital management, we added an additional $60.8 million to our cash balance, ending the quarter at $224.2 million in cash.”

“Our emerging storage formats of flash and removable and external hard disk drives had significant revenue growth in the quarter. Also, we saw lower revenue declines in our larger traditional storage areas of magnetic and optical compared to 2009. Our revenue in electronics and accessories declined, reflecting our more selective participation in this category, especially in video products.”

“We continue our Company transformation, developing and launching new products in storage, accessories, and electronics while leveraging our technology leadership, global distribution footprint and portfolio of strong brands – including Imation, Memorex, TDK Life on Record, and XtremeMac.”

“We have weathered what we expect to be the worst of the recession and are emerging with a strong financial foundation in place. We have returned to operating profitability, have dramatically improved our cash flow generation, and remain debt free. I am optimistic as I retire from Imation and our current President and COO Mark Lucas assumes responsibility as the Company’s new CEO next month, that our strong financial foundation provides an excellent platform upon which to build for the future,” concluded Russomanno.

Net revenue for Q1 2010 was $365.8 million, down 7.7 percent from Q1 2009, driven by price erosion of approximately ten percent, which is consistent with our historical range, and overall volume declines of approximately one percent, partially offset by favorable currency impacts of approximately three percent. From a product perspective, the overall revenue decrease was driven primarily by declines in optical and magnetic products, partially offset by increases in flash products and removable and external hard drives.

From a segment perspective, revenue in the Americas segment, which represented 37.2 percent of total revenue in the quarter, decreased 10.7 percent from Q1 2009 driven mainly by declines in magnetic and optical products. Revenue from the Asia Pacific segment, which represented 28.1 percent of total revenue in the quarter, decreased 0.2 percent from Q1 2009 driven mainly by declines in magnetic and optical products, partially offset by increases in flash and accessories. Revenue from the Europe segment, which represented 27.7 percent of total revenue in the quarter, decreased 7.5 percent from Q1 2009 driven mainly by declines in optical and magnetic products, partially offset by increases in flash products. Revenue from the Electronic Products segment, which represented 7.0 percent of total revenue in the quarter, decreased 19.0 percent from Q1 2009 driven by planned rationalization of lower gross margin video products.

                                    
Segment and Product Information


 

Gross margin of 16.9 percent of revenue in Q1 2010 remained flat compared to Q1 2009. Gross margins were impacted by lower gross margins on magnetic products, offset by higher margins on optical products.

Operating expenses were $57.5 million or 15.7 percent of revenue in Q1 2010, compared with $70.0 million or 17.7 percent of revenue in Q1 2009. The decrease from Q1 2009 resulted from reduced litigation expense related to the Philips settlement in July 2009 and ongoing restructuring and cost control actions.

Restructuring and other charges were $4.0 million in Q1 2010 compared with $5.5 million in Q1 2009. The restructuring charges in 2009 and 2010 are associated with our previously announced restructuring programs to reduce selling, general and administrative expenses and relate mainly to severance costs. Other charges in 2010 include $2.2 million related to Mr. Russomanno’s retirement announced on March 18, 2010.

Operating income was $0.2 million in Q1 2010 compared with operating loss of $8.6 million in Q1 2009. Adjusting for the impact of restructuring and other charges, operating income was $4.2 million in Q1 2010 compared with an operating loss of $3.1 million in Q1 2009 (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results above).

Non-operating expense and income taxes: Non-operating expense was $3.8 million in Q1 2010 compared with $7.6 million in Q1 2009. Q1 2009 included a reserve of $4.0 million related to a note receivable from one of our commercial partners whose financial condition had significantly deteriorated. The effective tax rate was 30.6 percent in Q1 2010 compared with 21.6 percent in Q1 2009. The change was primarily due to the mix of taxable income/loss by country as well as the tax effects associated with our restructuring and other charges.

Diluted loss per share from continuing operations was $0.07 in Q1 2010 compared with $0.34 in Q1 2009. Total diluted loss per share in Q1 2010 was $0.07 compared with $0.31 in Q1 2009. Adjusting for the restructuring and other charges, diluted earnings per share from continuing operations was $0.00 in Q1 2010 compared with diluted loss per share from continuing operations of $0.24 in Q1 2009 (see table entitled Reconciliation of GAAP to Adjusted Non-GAAP Results above).

Cash and cash flows: Ending cash and cash equivalents were $224.2 million as of March 31, 2010, an increase of $60.8 million from $163.4 million as of December 31, 2009, driven by continued improvements in working capital. Days of working capital (receivables plus inventory) were 127 as of March 31, 2010, compared to 135 days as of December 31, 2009. Depreciation and amortization totaled $10.5 million and capital spending was $2.2 million for Q1 2010.