Imation: Fiscal 3Q11 Financial Results

Imation Corp. released financial results for the quarter ended September 30, 2011.

* During Q2 2011 the company changed the name of the emerging storage product category to secure and scalable storage to better reflect the company’s direction and future product offerings.
** During Q3 2011 the company changed the name of the electronics and accessories product category to audio and video information to better reflect the Company’s direction and future product offerings.

The Company reported Q3 2011 net revenue of $308.6 million, down 9.8 percent from Q3 2010, an operating loss of $8.3 million, including litigation settlement and restructuring and other charges of $7.5 million, and a diluted loss per share of $0.38.

Excluding the litigation settlement and restructuring and other charges, Q3 2011 operating loss would have been $0.8 million and diluted loss per share would have been $0.18 (see Tables Five and Six for non-GAAP measures). Operating results also reflected levy benefits and a gain from the sale of certain non-strategic intellectual property described below.

Imation President and Chief Executive Officer Mark Lucas commented: "We continued to deliver growth in our secure and scalable storage products during the quarter, though these revenues have not yet offset the declines in our traditional product categories. We remain committed to our goal of returning to revenue growth by the end of 2012. Within our traditional storage business, we continue to experience industry wide optical cost pressures, however, these impacts were offset in the quarter by the combined benefits of a reversal of European levies and our implementation of price increases. Overall, we are seeing continuing improvement of gross margins in secure and scalable storage and audio and video information products. We remain focused on steadily improving gross margins over the long term."

"We are making progress in our strategic transformation to a global technology company. We have invested this year in key technology platforms in secure and scalable storage, including our acquisition of IronKey’s security hardware business and a new strategic partnership with IronKey for online services, which we completed this month. These actions augment our recent acquisitions of the assets of MXI Security and ENCRYPTX, creating a significant technology leadership position for securing mobile data and mobile workspaces. We also acquired certain assets of ProStor Systems, including InfiniVault, adding to our new line of multi-tiered data-archive and data-protection appliances designed for small-and medium-sized businesses, launching in early 2012."

"I am confident we are taking both the strategic and operational actions necessary to successfully execute on our vision," Lucas concluded.

Q3 2011 Results Compared with Q3 2010

Net revenue for Q3 2011 was $308.6 million, down 9.8 percent from Q3 2010. Revenue was positively impacted by foreign currency translation of four percent. During Q3 2011, the Company changed the name of the electronics and accessories product category to audio and video information to better reflect the Company’s direction and future product offerings. From a product perspective, traditional storage revenue decreased 11.7 percent, scalable and secure storage revenue increased 3.4 percent, and audio and video information revenue decreased 12.9 percent. Within audio and video information, revenue from video products declined nearly 100 percent due to planned product rationalization while all other audio and video information products grew 7.9 percent. From a regional perspective, Americas revenue decreased 20.3 percent, Europe revenue decreased 5.2 percent, North Asia revenue increased 3.9 percent and South Asia revenue increased 8.3 percent.

Gross margin for Q3 2011 was 18.5 percent compared with 16.2 percent for Q3 2010. Overall gross margin for Q3 2011 was impacted by a number of factors. Optical gross margins improved as a result of European levy benefits in an amount of $7.2 million and price increases which, in total, were substantially offset by optical supplier cost increases. Gross margin was also impacted by the sale of certain non-strategic intellectual property which provided a net gain of $2.4 million and higher gross margins in several product categories including secure and scalable storage and audio and video information.

Selling, general and administrative (SG&A) expenses
for Q3 2011 were $52.7 million, up $3.4 million compared with Q3 2010 expenses of $49.3 million due primarily to the additional ongoing SG&A expense related to Imation’s acquired businesses.

Research & development (R&D) expenses for Q3 2011 were $5.3 million, up $1.0 million compared with Q3 2010 expenses of $4.3 million as a result of the Company’s investment to support growth initiatives in secure and scalable storage products including the recent acquisitions.

Litigation settlement charges for Q3 2011 were $2.0 million related to the settlement of litigation with Advanced Research Corp.

Restructuring and other charges were $5.5 million in Q3 2011. Restructuring and other charges include $4.3 million related to the Company’s previously announced restructuring programs, $0.9 million related to a pension settlement and $0.3 of acquisition and integration costs.

Operating loss was $8.3 million in Q3 2011 compared with an operating loss of $2.3 million in Q3 2010. Excluding the litigation settlement and restructuring and other charges discussed above, adjusted operating loss would have been $0.8 million in Q3 2011 compared with adjusted operating income on the same basis of $2.0 million in Q3 2010 (see Tables Five and Six for non-GAAP measures).

Income tax provision was $2.1 million in Q3 2011 compared with an income tax benefit of $0.9 million in Q3 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 2011 U.S. results.

Loss per diluted share from continuing operations was $0.38 in Q3 2011 compared with a loss per diluted share from continuing operations of $0.06 in Q3 2010. Excluding the impacts of the litigation settlement and restructuring and other charges discussed above, adjusted loss per diluted share would have been $0.18 in Q3 2011 compared with adjusted earnings per diluted share of $0.02 in Q3 2010 (see Tables Five and Six).

Cash and cash equivalents ending balance was $232.9 million as of September 30, 2011, a decrease of $24.9 million during the quarter driven by working capital changes, a payment related to the 2009 Philips settlement and treasury stock purchases.