Imation: Fiscal 4Q14 Financial Results

Imation Corp. released financial results for the fourth quarter and year ended December 31, 2014.

For Q4 2014, it reported net revenue of $197.0 million, down 15.4% from Q4 2013. Operating loss from continuing operations totaled $12.1 million, or $0.35 per diluted share, in Q4 2014, including special charges of $2.1 million, or $0.05 per diluted share. This compares to operating income from continuing operations of $21.1 million, or $0.47 per diluted share, in Q4 2013, which included special benefits of $9.5 million, or $0.22 per diluted share. Operating results in Q4 2013 also benefited from a reversal of an accrual of $9.4 million for copyright levies as a result of a favorable court ruling in France. The company had a cash balance of $114.6 million as of December 31, 2014, and generated positive operating cash flows during the fourth quarter.

For the full year 2014, revenue was $729.5 million, down 15.3% from 2013, and operating loss from continuing operations was $104.1 million, or $2.74 diluted loss per share. Special charges for the full year were $53.6 million. Excluding these special charges, 2014 operating loss from continuing operations would have been $50.5 million, and diluted loss per share from continuing operations would have been $1.43.

CEO Mark Lucas commented: “In 2014, we continued to execute our strategic transformation and to invest in our business to facilitate our return to revenue growth. The transformation has been a multi-year process designed to establish Imation as a global leader in storage and security. During the fourth quarter we continued to see positive sales momentum in our storage and security portfolio with both sequential and year-over-year growth in our IronKeymobile security products and our Nexsan hybrid storage solutions. We will continue to further strengthen our TSS business unit to fuel profitable growth over the long term.”

The company’s consumer and commercial storage media revenues continued their expected secular decline in Q4 2014. However, within CSA, Audio and Accessories revenue grew 17.4% over Q4 2013 and within TSS, storage and security Solutions revenue grew 10.1% over Q4 2013.

Business Segment Overview
Lucas said: “Further penetrating higher growth markets where we can bring our enterprise commercial storage solutions to customers remains a top priority. In mobile security, our IronKey products stand poised to benefit from the growing demand for BYOD (bring your own device) solutions.

“In our storage solutions business, we continued to gain traction with the global rollout of the Assureon product family and the successful launch of the NST 4000, as well as growing demand for our storage solutions in a number of key industry verticals, including media & entertainment, healthcare, and video surveillance.”

“In our consumer business, Imation’s legacy products continue to generate meaningful cash flow and we continue to introduce new audio and accessories products which had another strong quarter of growth. We introduced the LINKPower Drive, our first mobile storage product that provides additional storage and power for iOS compatible devices. The new additions to our product portfolio have been well received since debuting earlier this year at the Consumer Electronics Show,” concluded Lucas.

Detailed Q4 2014 Analysis

• Net revenue was $197.0 million, down 15.4% from Q4 2013. Foreign currency exchange rates negatively impacted Q4 2014 revenue by 4% compared to Q4 2013.
• Gross margin was 20.1%, down 3.7 percentage points from 23.8% in Q4 2013. CSA gross margin was 21.1%, down from 28.0% in Q4 2013. CSA gross margin in Q4 2013 benefited from a reversal of an accrual of $9.4 million, or 7.2%, for copyright levies as a result of a favorable court ruling in France. TSS gross margin was 18.9%, up from 18.2% in Q4 2013 due to the storage and security product portfolio.
• Selling, general and administrative expenses were $44.5 million, up $5.0 million due mainly to additional investments in storage and security portfolio compared with Q4 2013 levels of $39.5 million. During the quarter the company continued to focus on cost reductions in its legacy businesses while strategically investing in its storage and security Solutions to accelerate growth. Over the last three years Imation’s legacy media operating expenses have been reduced by over $100 million.
• R&D expenses were $5.1 million, up $1.0 million from $4.1 million in Q4 2013, which reflects the company’s increased investment in higher margin projects in storage and security Solutions. The company continued to invest in new product development in its priority businesses and has reduced R&D expense associated with legacy media products.
• Special charges were $2.1 million compared to $9.5 million of income in Q4 2013, primarily related to a $9.8 million gain on the sale of land in Q4 2013 at a previously closed facility.
• Operating loss from continuing operations was $12.1 million compared with operating income of $21.1 million in Q4 2013. Excluding the impact of the special items described above, adjusted operating loss from continuing operations would have been $10.0 million in Q4 2014 compared with an adjusted operating gain from continuing operations of $11.6 million in Q4 2013. Operating results in Q4 2013 benefited from a reversal of an accrual of $9.4 million for copyright levies as a result of a favorable court ruling in France.
• Income tax expense was $1.3 million compared with an income tax expense of $1.9 million in Q4 2013. The expense in Q4 2014 is primarily due to the mix of taxable income by country. 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 U.S. results in either period.
• Discontinued operations were breakeven compared with a loss of $2.5 million in Q4 2013. Discontinued operations include both the results of the XtremeMac and Memorex consumer electronics businesses which were sold.
• Loss per diluted share from continuing operations was $0.35 compared with earnings from continuing operations per diluted share of $0.47 in Q4 2013. Excluding the impact of the special items described above, loss per diluted share from continuing operations would have been $0.30 in Q4 2014 compared with earnings per diluted share from continuing operations of $0.25 in Q4 2013 (See Tables Five and Six for non-GAAP measures).
• Cash and cash equivalents balance was $114.6 million as of December 31, 2014, up $3.9 million during the quarter. The company had positive operating cash flows during Q4 2014.

Full Year Summary
For the full year ended December 31, 2014, Imation reported net revenue of $729.5 million, down 15.3% compared with 2013, an operating loss of $104.1 million, including special charges of $53.6 million, and a diluted loss per share of $2.74 from continuing operations. Excluding special charges, the operating loss for the year ended December 31, 2014 would have been $50.5 million and diluted loss per share would have been $1.43 from continuing operations. For the year ended December 31, 2013, it reported net revenue of $860.8 million, an operating loss of $20.1 million, and a diluted loss per share of $0.60 from continuing operations. Excluding special charges, the operating loss for the year ended December 31, 2013 would have been $8.6 million and diluted loss per share would have been $0.37 from continuing operations.