Imation: Fiscal 1Q11 Financial Results

Imation Corp. released financial results for the quarter ended March 31, 2011.

The Company reported Q1 2011 net revenue of $316.5 million, down 13.5 percent from Q1 2010, an operating loss of $3.4 million, including special charges of $3.7 million, and a diluted loss per share of $0.19. Excluding the special charges, Q1 2011 operating income would have been $0.3 million and diluted loss per share would have been $0.10 (see Tables Five and Six).

Imation President and Chief Executive Officer Mark Lucas commented: "We continue to make progress on our previously outlined strategy to transform Imation into a global technology company focused on profitable growth opportunities in data storage, protection and connectivity. In our emerging storage product category, we saw promising revenue growth for both removable hard disk drives and our Defender secure storage portfolio. We secured several key placements of these new storage solutions in large corporate and international government accounts during the quarter. We also saw continued margin improvements in both our emerging storage and our electronics and accessories product categories.

"In line with our strategy to invest in technology platforms, both organically and inorganically, in February we completed the acquisition of the assets of Encryptx, a leader in encryption and security solutions for removable storage devices and removable storage media. We continue to evaluate opportunities for additional acquisitions focused in data protection, storage hardware, removable hard disk drive systems and related software.

"We are also implementing our new strategic tape partnership with TDK, which we announced in January, to collaborate on the development and manufacturing of high-capacity magnetic tape. We have successfully discontinued Imation tape manufacturing at our Weatherford, Okla., site while smoothly scaling up production at TDK’s Japan location. While the Japanese earthquake and tsunami created temporary local business disruptions, the TDK tape manufacturing operations were unaffected and our tape supply remains strong."

Mr. Lucas continued: "We are, however, beginning to see significant raw material price increases for products sourced in Asia. This is especially affecting petroleum-based products such as optical media and we, therefore, expect increasing pressure on margins in our optical business. Imation has already initiated price increases and will continue to evaluate and take additional actions as necessary to attempt to mitigate the situation."

"We are committed to implementing the strategy required to transform the Company. We have a solid operational foundation and are making good progress on our strategy, but we have much work ahead. I remain confident that we will successfully execute on our vision, building long-term value for shareholders, employees and customers," concluded Lucas.

Q1 2011 Results compared with Q1 2010
Net revenue for Q1 2011 was $316.5 million, down 13.5 percent from Q1 2010, driven by price erosion of 9 percent and overall volume declines of 6 percent, offset by foreign currency impact of 2 percent. From a product perspective, traditional storage revenue decreased 15.4 percent, emerging storage revenue decreased 8.3 percent, and electronics and accessories revenue decreased 8.5 percent. From a regional perspective, Americas revenue decreased 11.5 percent and Europe revenue decreased 28.1 percent driven by optical products. North Asia revenue decreased 8.7 percent and revenue increased 2.2 percent in South Asia.

Gross margin for Q1 2011 was 17.1 percent compared with Q1 2010 gross margin of 16.9 percent. Gross margin for Q1 2011 was impacted by inventory write-offs of $1.2 million which were part of the Company’s restructuring plans. Gross margin for Q1 2011 excluding these inventory write-offs would have been 17.4 percent (see Tables Five and Six).

Selling, general and administrative (SG&A) expenses for Q1 2011 were $50.2 million, down $2.9 million compared with Q1 2010 of $53.1 million due to cost reduction efforts.

Research & development (R&D) expenses for Q1 2011 were $4.7 million, up $0.3 million compared with Q1 2010 of $4.4 million as a result of the Company’s planned organic investment.

Goodwill impairment of $1.6 million was related to the acquisition of the assets of Encryptx. The operations of Encryptx were integrated into the Company’s existing Americas-Commercial reporting unit. The Company’s net tangible assets exceed its market capitalization and as a result the carrying amount of the reporting unit before the acquisition exceeded its fair value. Therefore, the Company immediately performed an impairment test on the Americas-Commercial reporting unit including Encryptx and determined that the newly acquired goodwill was impaired.

Restructuring and other charges were $0.9 million in Q1 2011. The charges are related to the Company’s previously announced restructuring plans.

Operating Loss was $3.4 million in Q1 2011 compared with operating income of $0.2 million in Q1 2010. Adjusting for $3.7 million of charges discussed above (inventory write-offs related to restructuring programs, goodwill impairment and restructuring and other charges), adjusted operating income would have been $0.3 million in Q1 2011 compared with adjusted operating income on the same basis of $4.2 million in Q1 2010 (see Tables Five and Six).

Income tax provision was $1.7 million in Q1 2011 compared with an income tax benefit of $1.1 million in Q1 2010. The 2011 income tax provision represents tax expense related to income outside the United States. The Company maintains a valuation allowance related to its U.S. deferred tax assets and therefore no tax provision or benefit was recorded related to its Q1 2011 U.S. results.

Loss per diluted share from continuing operations was $0.19 in Q1 2011 compared with a loss per diluted share from continuing operations of $0.07 in Q1 2010. Adjusting for the impacts of the $3.7 million of inventory write-offs, goodwill impairment and restructuring and other charges, discussed above, adjusted loss per diluted share would have been $0.10 in Q1 2011 compared with adjusted earnings per diluted share of $0.0 in Q1 2010 (see Tables Five and Six).

Cash and cash equivalents ending balance was $285.5 million as of March 31, 2011, a decrease of $19.4 million from $304.9 million as of December 31, 2010. The decrease in cash was expected due to seasonal incentive payments, pension funding, treasury stock purchases, and the Encryptx acquisition.