Imation: Fiscal 2Q11 Financial Results

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

The company reported Q2 2011 net revenue of $323.0 million, down 8.9 percent from Q2 2010, an operating loss of $9.3 million, including special charges of $10.7 million, and a diluted loss per share of $0.33. Excluding special charges, Q2 2011 operating income would have been $1.4 million and diluted loss per share would have been $0.05.

Imation President and Chief Executive Officer Mark Lucas commented: "Overall, our rate of revenue decline moderated in the quarter, and we saw continued revenue growth in our new lines of secure and scalable data storage products."

"As anticipated, we experienced margin pressure in our optical media business due to the impacts of cost increases for products sourced in Asia. The Company is actively pursuing supply chain alternatives and other actions. Additionally, we are implementing price increases but we expect optical cost and margin pressures will continue."

"In June, we completed the acquisition of the assets of Montreal-based MXI Security, a leader in high-security and privacy technologies. This acquisition represents another significant step in Imation’s strategy to invest in key technology platforms to enable us to meet our global customers’ growing needs for information security, compliance and management. We plan to leverage our MXI Security technologies across a broad range of data storage products. We continue to evaluate opportunities for additional acquisitions focused in data protection, scalable storage hardware and related software."

"We remain committed to and are making steady progress in our strategic transformation to a global technology company. While we have much work ahead, I remain confident that we will successfully execute on our vision," Lucas concluded.

Q2 2011 Results Compared with Q2 2010
Net revenue for Q2 2011 was $323.0 million, down 8.9 percent from Q2 2010, driven by price erosion of seven percent and overall volume declines of eight percent, partially offset by foreign currency benefit of six percent. 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. From a product perspective, traditional storage revenue decreased 10.4 percent, scalable and secure storage revenue increased 13.3 percent, and electronics and accessories revenue decreased 22.2 percent. From a regional perspective, Americas revenue decreased 21.2 percent, Europe revenue remained flat, North Asia revenue increased 9.7 percent and South Asia revenue remained flat.

Gross margin for Q2 2011 was 16.7 percent compared with 16.5 percent for Q2 2010. Gross margin for Q2 2011 was impacted by higher gross margins on flash products as well as lower gross margins on optical products due to supplier cost increases which were partially offset by levy benefits.

Selling, general and administrative expenses for Q2 2011 were $47.9 million, down $3.6 million compared with Q2 2010 expenses of $51.5 million due primarily to the reversal of a bad debt reserve of $2.7 million.

Research & development expenses for Q2 2011 were $5.0 million, up $1.1 million compared with Q2 2010 expenses of $3.9 million as a result of the Company’s planned organic investment to support growth initiatives in secure and scalable data storage products.

Restructuring and other charges were $10.4 million in Q2 2011. During the quarter, the company demolished its Camarillo, California facility in order to make the property more saleable, resulting in a non-cash charge of $7.0 million. Restructuring and other charges also include $1.2 million related to the Company’s previously announced restructuring programs, $1.2 million of acquisition and integration related costs and $1.0 million related to a pension settlement.

Operating Loss was $9.3 million in Q2 2011 compared with an operating loss of $23.8 million in Q2 2010. Adjusting for $10.7 million of special charges (restructuring and other charges discussed above and inventory write-offs related to restructuring programs), adjusted operating income would have been $1.4 million in Q2 2011 compared with adjusted operating income on the same basis of $3.1 million in Q2 2010 (see Tables Five and Six for non-GAAP measures). Operating income for Q2 2010 included $23.5 million of goodwill impairment charges and $3.4 million of restructuring and other charges.

Income tax provision was $0.7 million in Q2 2011 compared with an income tax benefit of $11.0 million in Q2 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 Q2 2011 U.S. results.

Loss per diluted share from continuing operations was $0.33 in Q2 2011 compared with a loss per diluted share from continuing operations of $0.42 in Q2 2010. Adjusting for the impacts of the $10.7 million of inventory write-offs and restructuring and other charges, discussed above, adjusted loss per diluted share would have been $0.05 in Q2 2011 compared with adjusted earnings per diluted share of $0.02 in Q2 2010 (see Tables Five and Six).

Cash and cash equivalents ending balance was $257.8 million as of June 30, 2011, a decrease of $47.1 million from $304.9 million as of December 31, 2010. The decrease in cash was expected due to payments for acquisitions, seasonal incentive payments, pension funding, treasury stock purchases and other working capital changes.