Imation: Fiscal 4Q12 Financial Results

Imation Corp. released financial results for its 2012 fourth quarter and fiscal year ended December 31, 2012. The company also provided an update on its continued strategic transformation.

CEO Mark Lucas said: "Imation’s opportunity for higher margin, differentiated products is in our Secure and Scalable Storage portfolio which grew 16.7% in the fourth quarter and rose to 21% of total revenues, up from 15.7% a year earlier. With our recently announced purchase of Nexsan, we expect to derive more revenue from this category in the future. As anticipated, our audio and video information category declined 23.6% and will drop further given the divestitures we are announcing today. We have discussed previously that our traditional storage business is in secular decline; therefore, we are acting with urgency to reduce our cost structure and transform Imation into a company focused on high growth markets in data storage and data security."

Imation reported Q4 2012 net revenue of $299.1 million, down 12.6% from Q4 2011. Special charges were $305.2 million, creating an operating loss of $310.4 million, and a diluted loss per share of $8.34. Special charges included intangible asset impairments of $260.5 million, goodwill impairment of $23.3 million and other charges of $21.4 million. Excluding special charges, Q4 2012 operating loss would have been $5.2 million and diluted loss per share would have been $0.14.

For the full year 2012, revenue was $1.1 billion, down 14.8% from 2011, and the operating loss was $336.1 million, or $9.09 per diluted share. Special charges for the full year were $307.2 million and excluding these special charges, 2012 operating loss would have been $28.9 million, and diluted loss per share would have been $0.90. EBITDA for the year totaled $6.9 million and for the fourth quarter was $2.8 million (See Tables Five and Six for non-GAAP measures).

Transformation Strategy
Imation is currently in the midst of a strategic transformation to build a long-term platform for growth, increased margins and improved profitability. The company is accelerating this transformation through a number of actions including the following:

• Nexsan Acquisition – On December 31, 2012, Imation acquired Nexsan Corporation, a higher margin, disk-based and hybrid disk-and-solid-state storage systems company, to invest in growth platforms for storage solutions. The acquisition is expected to contribute to Imation’s growth in the small- and medium-sized business and distributed enterprise storage markets, and Imation will provide the Nexsan business with global scale and a well-known storage brand.
• Exiting Lower Margin Businesses – As the company intensified its focus on data storage and data security, management announced in the third quarter that Imation would be exploring strategic alternatives for the consumer electronics brands and businesses. Imation has decided to divest its Memorex and XtremeMac consumer electronics businesses. The company will continue its TDK Life on Record business on a more focused basis. Lucas commented: "Divesting the Memorex and XtremeMac consumer electronics brands will allow us to direct our time and resources to the right opportunities in data storage and security, as well as our retail optical business under the Memorex and TDK Life on Record brands."
• Cost Reductions – As previously reported, Imation is aggressively implementing cost savings initiatives to right size the company. Management is targeting to exceed a 25% reduction in operating expenses.
• Business Structure Realignment – Also, as previously announced, to better align the company with its key commercial and retail segments, Imation established two new business units effective January 1, 2013: Tiered Storage and Security Solutions (TSS) and Consumer Storage and Accessories (CSA). The two segments will be independently managed and provide a focused customer-centric structure, resulting in faster decision-making, clear accountability, a more nimble organization and increased efficiency worldwide.

"We are committed to transforming the company and building a sustainable platform for growth, increased margins and long-term shareholder value. Combined, the acquisition of Nexsan, divestiture of certain consumer businesses, improvements in cost structure, and a more efficient business unit model truly represent an acceleration of our transformation strategy. In 2013, we are building on these actions and moving as swiftly as we can to become a major player in data storage and security on a global basis," Lucas concluded.

Detailed Q4 2012 Analysis
Net revenue for Q4 2012 was $299.1 million, down 12.6% from Q4 2011. From a regional perspective, Americas revenue decreased 22.2% driven by optical and consumer electronics revenue reductions; Europe revenue decreased 7.7%; North Asia revenue increased 0.6% and South Asia revenue decreased 3.8%.

Gross margin for Q4 2012 was 16.1%, up from 15.0% in Q4 2011. Gross margin was 16.9% excluding inventory write offs of $2.3 million, which were part of the company’s restructuring program, compared to 17.2% on the same basis in 2011.

Selling, general and administrative expenses for Q4 2012 were $50.5 million, down $2.4 million compared with Q4 2011 expenses of $52.9 million.

R&D expenses for Q4 2012 were $5.1 million, down $0.9 million compared with Q4 2011 expenses of $6.0 million.

Special charges were $305.2 million in Q4 2012 consisting of intangible asset impairments of $260.5 million, goodwill impairment of $23.3 million and $21.4 million of restructuring and other charges. The intangible asset charges, which related primarily to the Memorex International Inc. acquisition in 2006 and TDK Recording Media acquisition in 2007, were driven mainly by an accelerated optical market secular decline. Special charges were $12.3 million in Q4 2011.

Operating loss was $310.4 million in Q4 2012 compared with an operating loss of $12.1 million in Q4 2011. Excluding the impact of special charges described above, adjusted operating loss would have been $5.2 million in Q4 2012 compared with adjusted operating income on the same basis of $0.2 million in Q4 2011.

Income tax benefit was $1.0 million in Q4 2012 compared with income tax benefit of $0.7 million in Q4 2011. 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 2012 U.S. results.

Loss per diluted share was $8.34 in Q4 2012 compared with $0.34 in Q4 2011. Excluding the impact of special charges described above, adjusted loss per diluted share would have been $0.14 in Q4 2012 compared with $0.14 in Q4 2011.

Cash and cash equivalents balance was $108.7 million as of December 31, 2012, down $77.6 million during the quarter, driven primarily by the payment of $104.6 million in cash for the Nexsan acquisition, offset by short-term borrowings of $20.0 million and net cash provided by operations of $14.1 million.

To read the earnings call transcript