Imation: Fiscal 2Q10 Financial Results

Imation Corp. released financial results for the quarter ended June 30, 2010.

Key points for Q2 2010 include the following:

• Revenue of $354.4 million was down 11 percent compared with Q2 2009 of $400 million.
• Gross margin of 16.5 percent was up compared with Q2 2009 gross margin of 15.9 percent.
• Selling, general and administrative expenses were $51.5 million, down $7.7 million or 13 percent compared with Q2 2009.
• A goodwill impairment non-cash charge of $23.5 million or $0.38 per diluted share was recorded.
• Net loss from continuing operations was $15.7 million or $0.42 per diluted share compared with a net loss from continuing operations of $38.3 million or $1.02 per diluted share in Q2 2009.
• Total cash and cash equivalents were $251.3 million, up $87.9 million from December 31, 2009.

Imation Chief Executive Officer Mark Lucas, appointed to the position in May 2010, commented: “While we continue to make progress in the evolution of our business model including gross margin and cost control, we clearly need to drive stronger revenue. Our cash flow has remained strong, finishing the quarter with more than $250 million of cash and no debt.”

“I’m very pleased to be leading Imation and am excited about the opportunities ahead for our company. I believe our core capabilities – including leading storage technologies, a strong global brand portfolio, deep channel strength in both retail and commercial, and our powerful global distribution network – can be further leveraged as we move Imation forward,” concluded Lucas.

Segment reporting change and goodwill impairment
During the period, the Company realigned its corporate segments and reporting structure with how the business will be managed going forward. As part of this reorganization, the Company combined its Electronic Products segment with its Americas segment, and separated the Asia Pacific segment into North Asia and South Asia regions. Each of these segments has responsibility for selling all product lines. A financial history of the new segments is provided in Table Six.

The Electronic Products reporting unit, which contained $23.5 million of goodwill, was combined with the Americas Consumer reporting unit as part of the realignment requiring the Company to test goodwill for impairment. The Americas Consumer reporting unit had a fair value significantly less than book value prior to the combination and therefore once combined an impairment was triggered. The goodwill impairment non-cash charge of $23.5 million ($14.2 million after-tax) is not allocated to any segment.

The Company changed its product revenue disclosures to the categories noted below and is also including product gross margin disclosures. These disclosures are aligned with how the business is now managed.

• Traditional storage products – Magnetic, Optical and other traditional storage products
• Emerging storage products – Flash and hard disk related storage products
• Electronics and accessories – Electronic products and accessories

Q2 2010 Results versus Q2 2009
Net revenue for Q2 2010 was $354.4 million, down 11 percent from Q2 2009, driven by price erosion of nine percent and overall volume declines of three percent partially offset by favorable currency impacts of one percent. From a product perspective, the overall revenue decrease was due primarily by declines of 14 percent in traditional storage products and 23 percent in electronics and accessories driven by planned rationalization of lower gross margin video products, partially offset by an increase of 31 percent in emerging storage products.

Gross margins for Q2 2010 were 16.5 percent compared with Q2 2009 gross margins of 15.9 percent. The increase in gross margins was due to higher margins in emerging storage products as well as electronics and accessories. Gross margins in traditional storage products were stable overall, with improvements in optical products offset by declines in magnetic products.

Operating expenses for Q2 2010 were $55.4 million, down $8.5 million, or 13 percent compared to Q2 2009, due to reduced litigation expense related to a litigation settlement in July 2009 and ongoing restructuring and cost control actions. In 2009, a litigation settlement charge of $49.0 million was recorded. At that time, 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.

Restructuring and other charges were $3.4 million in Q2 2010 compared with $9.8 million in Q2 2009. The charges relate to costs from previously announced restructuring programs.

Operating loss was $23.8 million in Q2 2010 compared with $59.3 million in Q2 2009. Adjusting for the impact of the goodwill impairment charge and restructuring and other charges, operating income was $3.1 million in Q2 2010. Adjusting for the impact of the litigation settlement and restructuring and other charges in Q2 2009, operating loss was $0.5 million (see Table Two).

Net loss per diluted share from continuing operations was $0.42 in Q2 2010 compared with a diluted loss per share from continuing operations of $1.02 in Q2 2009. Adjusting for the above noted goodwill impairment charge in Q2 2010, the litigation settlement charge in Q2 2009 and restructuring and other charges in both periods, earnings per diluted share was $0.02 in Q2 2010 compared with a loss per diluted share of $0.05 in Q2 2009 (see Table Two).

Cash balances: Ending cash and cash equivalents were $251.3 million as of June 30, 2010, an increase of $87.9 million from $163.4 million as of December 31, 2009, driven by continued working capital improvements as well as earnings.