Wednesday, October 24th 2012

Imation Announces Third Quarter Results, Acceleration of Its Strategic Transformation

Imation Corp. (NYSE: IMN) a global scalable storage and data security company, today made several announcements: third quarter financial results; the realignment of its global business into two new business units; a cost reduction program; and increased focus on data storage and security including exploring strategic options for its consumer electronic brands and businesses.

The Company reported Q3 2012 net revenue of $248.2 million, down 19.6 percent from Q3 2011, an operating loss of $6.5 million including a benefit in restructuring and other charges of $3.6 million, and a diluted loss per share of $0.17. Excluding the net benefit in restructuring and other charges, Q3 2012 operating loss would have been $10.1 million and diluted loss per share would have been $0.26 (see Tables Five and Six for Non-GAAP measures).

Imation President and Chief Executive Officer Mark Lucas commented: "Our revenues came in below our expectations in most product lines and in all regions. While weak macro-economic conditions were a factor, we are certainly not satisfied with this performance. Given our soft results it is now not likely that we will return to total company revenue growth in the near term."

Strategic Initiatives
Lucas commented, "Our traditional media businesses are declining faster than we anticipated driving the need to accelerate our transformation through the following actions. First, we are reorganizing into two channel-focused business units; second, we are implementing an aggressive cost reduction program; and finally we will explore strategic options for our consumer electronic brands and businesses. These actions will further focus the Company on Secure and Scalable Storage with large, growing markets and higher margins. The third quarter all-time high margins achieved in Secure and Scalable Storage provides concrete evidence of the potential of this market. Based on Imation's strong competency in data storage, we are confident in our strategy to transform the Company into a data storage and data security company."

Organizational Realignment into Global Business Units - To better align the Company with its key commercial and consumer channels, Imation will realign its organizational structure into two business units: Tiered Storage and Security Solutions (TSS), which will focus on small and medium business, enterprise and government customers; and Consumer Storage and Accessories (CSA), which will focus on retail channels.

Said Lucas, "Imation is undergoing a transformation to build a long-term platform for growth and increased margins. We are realigning our organization into two business units to provide a more focused customer-centric structure that leads to faster decision-making, clearer accountability, a more nimble organization and increased efficiency worldwide. We are fortunate to have two highly skilled and experienced leaders to head up the business units."

Leading the new TSS business unit will be Ian Williams, currently Imation vice president, global marketing and product management. Williams, who joined the Company in early 2011, has a deep data storage background. Greg Bosler, currently Imation senior vice president, global business management, will lead the CSA business. Bosler brings extensive experience in retail sales, marketing and general management; he has been with Imation since 2009.

Cost Reduction Program - In conjunction with the realignment of the business structure, the Company is also taking actions to right-size its operations with the goal of reducing operating expenses by approximately 25 percent. The program will address process improvements globally, product line rationalization and infrastructure, and include a reduction of approximately 20 percent of Imation's global workforce. The staff reductions are expected to occur in 2013. Impacted employees will be provided financial support and outplacement assistance.

The company anticipates it will incur cash charges up to $40 million, with total charges expected to be $50 million to $60 million.

According to Lucas, "Our more focused business units will allow us to operate more efficiently, right-size our operating expense levels and forge a path to improved profitability."

Increased Focus on Data Storage and Security - As the Company intensifies its focus and investment in data storage and security, management will also explore strategic alternatives for its consumer electronic brands and businesses.

Lucas said, "We are assessing strategic options for our consumer electronic lines in order to focus our attention and resources on data storage and security in all our distribution channels."

The Company will continue to evaluate potential asset impairments during the fourth quarter. The Company has total acquired intangible assets including goodwill of approximately $325 million. If the analysis indicates an impairment, a material non-cash charge could be incurred in the fourth quarter.

Q3 2012 Financial Results
Net revenue for Q3 2012 was $248.2 million, down 19.6 percent from Q3 2011. From a regional perspective, Americas revenue decreased 17.0 percent, Europe revenue decreased 22.0 percent, North Asia revenue decreased 17.7 percent and South Asia revenue decreased 29.9 percent.

Gross margin for Q3 2012 was 18.4 percent, relatively flat from 18.5 percent in Q3 2011. Gross margins continued to improve in our Secure and Scalable Storage products as well as our AVI products, however, these were offset by modest declines in our traditional storage gross margins.

Selling, general and administrative (SG&A) expenses for Q3 2012 were $50.7 million, down $2.0 million compared with Q3 2011 expenses of $52.7 million.

Research and development (R&D) expenses for Q3 2012 were $5.1 million, relatively unchanged compared with Q3 2011 expenses of $5.3 million.

Restructuring and other charges were a benefit of $3.6 million in Q3 2012 due primarily to adjustment of an acquisition-related contingent liability. Restructuring and other charges were $7.5 million in Q3 2011.

Operating loss was $6.5 million in Q3 2012 compared with an operating loss of $8.3 million in Q3 2011. Excluding the impact of restructuring and other charges described in Tables Five and Six for Non-GAAP measures, adjusted operating loss would have been $10.1 million in Q3 2012 compared with adjusted operating loss on the same basis of $0.8 million in Q3 2011.

Income tax benefit was $0.3 million in Q3 2012 compared with income tax provision of $2.1 million in Q3 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 $0.17 in Q3 2012 compared with $0.38 in Q3 2011. Excluding the impact of restructuring and other charges described in Tables Five and Six for Non-GAAP measures, adjusted loss per diluted share would have been $0.26 in Q3 2012 compared with adjusted loss per diluted share of $0.18 in Q3 2011.

Cash and cash equivalents ending balance was $186.3 million as of September 30, 2012, down $25 million during the quarter driven primarily by a final payment associated with a 2009 litigation settlement.
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