Imation: Fiscal 4Q10 Financial Results

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

The Company reported Q4 2010 net revenue of $398.4 million, down 11.8 percent from Q4 2009 and an operating loss of $43.8 million including special charges of $56.2 million, the majority of which were non-cash. The Q4 2010 tax provision included a net non-cash charge of $90.1 million primarily related to establishing a valuation allowance against the Company’s deferred tax assets resulting in a net loss of $137.8 million and a diluted loss per share of $3.63. Excluding the special charges noted above, Q4 2010 operating income would have been $12.4 million and diluted earnings per share would have been $0.22. Cash generated from operations during Q4 2010 was $48.5 million raising the year end cash balance to $304.9 million.

Imation President and Chief Executive Officer Mark Lucas commented: "We finished with a solid fourth quarter, with $12.4 million in operating income, excluding special charges, which was our strongest quarter in over two years. Overall, we are pleased with the foundational progress we have made during recent quarters, preparing the company to undertake our new strategic direction as a global technology company dedicated to helping people and organizations store, protect, and connect their digital world."

"Imation’s strong operational focus through our global ‘Project Xcell’ program has delivered sustainable operational efficiencies, including improved working capital management. This is clearly evident in our strong cash flows as we finished the year with almost $305 million in cash, up over $140 million in just one year. In 2010, we also implemented a disciplined, end-to-end product life cycle management process that has enabled us to more closely manage our product portfolios from concept through end-of-life."

Lucas continued: "As expected, we continued to see revenue declines in our Traditional Storage categories, however, we are encouraged by the opportunities we see in new categories. We have stabilized our gross margins through effective management of each of our product categories, including Traditional Storage, Emerging Storage, and Electronics and Accessories."

"In Traditional Storage, our emphasis has been to optimize both our magnetic and optical media businesses. Imation’s recently announced strategic alliance with TDK to jointly develop and manufacture advanced tape products is just one example of actions we are taking to improve our return on assets in this category. In Emerging Storage, where we see growth potential, we launched a portfolio of highly secure flash and hard drive products in 2010 under our new Defender Collection, addressing the rapidly increasing need for security and protection for data at rest. This line is gaining traction globally, with key placements in both business and government accounts. In Electronics and Accessories, we have rationalized lower margin products such as televisions and other video products, and turned our focus instead to differentiated audio and accessories products such as the new XtremeMac and TDK Life on Record premium audio lines."

Lucas concluded: "In the second half of 2010, we made solid operational improvements and instilled renewed discipline across our global organization. We have rededicated our strategic focus to our storage core as we look for future growth in applications that enable storage, protection, and connectivity for consumers and businesses. We know that we still have considerable work ahead of us and while we expect additional declines in traditional storage in 2011, I’m confident that we have a clear vision as a technology company poised to deliver on the exciting opportunities ahead."

Q4 2010 Results compared with Q4 2009
Net revenue for Q4 2010 was $398.4 million, down 11.8 percent from Q4 2009, driven by price erosion of ten percent and overall volume declines of two percent. From a product perspective, the overall revenue decrease was due primarily to declines of 18 percent in Traditional Storage products partially offset by an increase of 9 percent in Emerging Storage products. From a regional perspective, revenues in the Americas and Europe declined 15 and 22 percent, respectively, primarily from lower sales of traditional storage products. Revenues were flat in North and South Asia.

Gross margin for Q4 2010 was 12.7 percent compared with Q4 2009 gross margin of 15.3 percent, down due to inventory write-offs of $14.2 million which were part of our restructuring plan. Gross margin for Q4 2010 excluding these inventory write-offs would have been 16.3 percent.

Selling, general and administrative (SG&A) expenses for Q4 2010 were $48.6 million, down $6.8 million compared with Q4 2009 of $55.4 million due to our cost reduction and ‘Project Xcell’ efforts.

Research & development (R&D) expenses for Q4 2010 were $3.8 million, down $1.7 million compared with Q4 2009 of $5.5 million.

Litigation settlement charges for Q4 2010 were $2.6 million related to the settlement of a patent infringement dispute.

Restructuring and other charges were $39.4 million in Q4 2010. The charges are primarily non-cash impairments of property, plant and equipment as a result of the Company’s previously announced restructuring plan to discontinue tape coating operations at its Weatherford, Oklahoma facility by April 2011.

Operating loss was $43.8 million in Q4 2010 compared with operating income of $4.5 million in Q4 2009. Adjusting for $56.2 million of charges discussed above (inventory write-offs related to restructuring programs, litigation, restructuring and other charges), adjusted operating income would have been $12.4 million in Q4 2010 compared with adjusted operating income on the same basis of $8.3 million in Q4 2009.

Income tax provision was $94.9 million in Q4 2010 compared with an income tax benefit of $4.6 million in Q4 2009. In addition to the Q4 2010 provision of $4.8 million, the quarter also included $90.1 million of additional net charges comprised of a deferred tax asset valuation allowance of $105.6 million and $5.1 million for taxes related to cash repatriation, offset by a tax benefit of $20.6 million related to restructuring and other charges.

Loss per diluted share from continuing operations was $3.63 in Q4 2010 compared with a diluted income per share from continuing operations of $0.19 in Q4 2009. Adjusting for the impacts of the $56.2 million of inventory write-offs and restructuring and other charges and $90.1 million of net tax charges discussed above, adjusted earnings per diluted share would have been $0.22 in Q4 2010 compared with adjusted earnings per diluted share of $0.24 in Q4 2009.

Cash balances: Ending cash and cash equivalents were $304.9 million as of December 31, 2010, an increase of $141.5 million from $163.4 million as of December 31, 2009, driven by continued working capital improvements and cash earnings.

2011 Restructuring Program
The Company announced a new $35 million restructuring authorization from its Board of Directors to increase efficiency and gain greater focus in support of the go-forward strategy. Major components of the program include charges associated with certain benefit plans, improvements to its global sourcing and distribution network, and costs associated with both further rationalization of its product lines as well as evolving skill sets to align with the new strategy. The vast majority of these charges will be recorded in 2011. The restructuring will result in approximately $30 million of future cash expenditures.