Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
IMN > SEC Filings for IMN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for IMATION CORP

Form 10-Q for IMATION CORP


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview
Imation is a global scalable storage and data security company. Our portfolio includes tiered storage and security offerings for business and products designed to manage audio and video information in the home. Imation reaches customers in more than 100 countries through a global distribution network and well recognized brands. As used herein, the terms "Imation," "Company," " we," "us" or "our" mean Imation Corp. and its subsidiaries unless the context indicates otherwise.
We have announced the realignment of our global business into two new business units, a cost reduction program to be initiated during the fourth quarter of 2012 and our increased focus on data storage and security including exploring strategic options for our consumer electronics brands and businesses. See Note
16 - Subsequent Event to the Condensed Consolidated Financial Statements for further information.


Table of Contents

Executive Summary

Consolidated Results of Operations for the Three Months Ended September 30, 2012
Net revenue of $248.2 million for the three months ended September 30, 2012 was down 19.6 percent compared with $308.6 million in the same period last year.

Operating loss was $6.5 million for the three months ended September 30, 2012 compared with operating loss of $8.3 million in the same period last year.

Diluted loss per share was $0.17 for the three months ended September 30, 2012 compared with diluted loss per share of $0.38 for the same period last year.

Consolidated Results of Operations for the Nine Months Ended September 30, 2012
Net revenue of $800.5 million for the nine months ended September 30, 2012 was down 15.6 percent compared with $948.1 million in the same period last year.

Operating loss was $25.7 million for the nine months ended September 30, 2012 compared with operating loss of $21.0 million in the same period last year.

Diluted loss per share was $0.81 for the nine months ended September 30, 2012 compared with diluted loss per share of $0.89 for the same period last year.

Cash Flow/Financial Condition for the Nine Months Ended September 30, 2012
Cash and cash equivalents totaled $186.3 million as of September 30, 2012 compared with $223.1 million at December 31, 2011.

Cash used in operating activities was $22.6 million for the nine months ended September 30, 2012 compared with cash used in operating activities of $31.6 million in the same period last year.

Outlook
Overall, we expect revenue in full year 2012 to decline when compared with full year 2011. In addition to revenue declines due to our maturing product lines, there are several continuing macro economic factors in play including the broad-based European economic downturn, a soft global IT environment, negative currency impacts and a weak U.S. retail environment. These factors have made it particularly difficult to project operating income in 2012. In this environment we are also cautious about revenues and we no longer expect that the Company will return to revenue growth as we exit 2012 and enter 2013.
On October 24, 2012, we announced the realignment of our global business into two new business units to be effective at year-end, a cost reduction program to be initiated during the fourth quarter of 2012 and implemented during 2013, and our increased focus on data storage and security including exploring strategic options for our consumer electronics brands and businesses. The cost reduction program will be part of the realignment of our business structure and is expected to reduce operating expenses by approximately 25 percent. The program will address product line rationalization and infrastructure, and include a reduction of approximately 20 percent of our global workforce. We anticipate we will incur cash charges of up to $40 million, with total charges expected to be between $50 million and $60 million, the majority of which will occur in 2013. This restructuring action will include between $15 million and $25 million for severance and one-time termination benefits, between $5 million and $15 million for asset impairments and between $20 million and $25 million for other charges.

Results of Operations
Net Revenue
                                           Three Months Ended                               Nine Months Ended
                                             September 30,                                    September 30,
(Dollars in millions)                       2012           2011      Percent Change         2012           2011      Percent Change

Net revenue $ 248.2 $ 308.6 (19.6 )% $ 800.5 $ 948.1 (15.6 )%

Our worldwide revenue for the three months ended September 30, 2012 decreased compared with the same period last year, driven primarily by declines in our maturing traditional storage products, as well as several continuing macro-economic factors including the broad-based European economic downturn, a soft global IT environment, negative currency impacts and a weak U.S. retail environment. Revenue from secure and scalable storage products decreased due to continued market place


Table of Contents

price degradation of commodity flash products. From a product perspective, the decrease in revenue included declines in traditional storage products of $48.2 million comprising $29.8 million from optical products, $8.6 million from magnetic products and $9.8 million from other traditional storage products such as audio/video tape, as well as decreased revenue from audio and video information products of $8.5 million and secure and scalable products of $3.7 million.
Our worldwide revenue for the nine months ended September 30, 2012 decreased compared with the same period last year, driven by factors described above. From a product perspective, the decrease in revenue included declines in traditional storage products of $122.6 million comprising $66.0 million from optical products, $29.7 million from magnetic products and $26.9 million from other traditional storage products, as well as $16.0 million from audio and video information products and $9.0 million from secure and scalable storage products. Revenue for the nine months ended September 30, 2012 compared with the same period last year was not significantly impacted by foreign currency translation.

Gross Profit
                                         Three Months Ended                           Nine Months Ended
                                           September 30,                                September 30,
(Dollars in millions)                     2012          2011     Percent Change       2012         2011       Percent Change
Gross profit                          $    45.7       $ 57.2          (20.1 )%     $   154.2     $ 165.2           (6.7 )%
Gross margin                               18.4 %       18.5 %                          19.3 %      17.4 %

Gross profit decreased for the three months ended September 30, 2012 compared with the same period last year primarily due to lower revenue in all major product categories, as well as lower gross margins on traditional storage products, partially offset by higher gross margins on secure and scalable storage products. Gross profit during the three months ended September 30, 2011 included levy benefits of $7.2 million and the sale of certain non-strategic intellectual property which provided a net gain of $2.4 million. Gross margin was flat for the three months ended September 30, 2012 compared with the same period last year. Gross margins for traditional storage products decreased 1.9 points to 18.0 percent of sales compared with the same period last year, primarily due to levy benefits in 2011. Gross margins for secure and scalable storage products rose 6.4 points to 22.0 percent of sales compared with the same period last year, primarily due to a shift in product mix to products with higher gross margins such as mobile security. Gross margins for audio and video information products rose 0.8 points to 15.9 percent of sales compared with the same period last year, primarily due to product mix as a result of revenue growth in higher margin headphones and other accessories. Gross profit decreased for the nine months ended September 30, 2012 compared with the same period last year, primarily due to lower revenue from all major product categories, offset partially by higher gross margins on all major product categories. Gross profit during the nine months ended September 30, 2011 was aided by levy benefits of $12.7 million.
Gross margin increased for the nine months ended September 30, 2012 compared with the same period last year due to a shift in product mix to higher gross margin products along with improved gross margins in secure and scalable storage and audio and video information. Gross margins for traditional storage products were flat at 19.4 percent of sales compared with the same period last year. Gross margins for secure and scalable storage products rose 6.5 points to 20.6 percent of sales compared with the same period last year due to favorable changes in product mix as a result of revenue growth in our mobile security products. Gross margins for audio and video information products rose 2.4 points to 16.7 percent of sales compared with the same period last year due to favorable changes in product mix as a result of revenue growth in higher margin headphones, cases and other accessories.

Selling, General and Administrative (SG&A)
                                         Three Months Ended                            Nine Months Ended
                                           September 30,                                 September 30,
(Dollars in millions)                     2012          2011      Percent Change       2012         2011       Percent Change
Selling, general and administrative   $    50.7       $ 52.7           (3.8 )%      $   160.2     $ 150.8             6.2 %
As a percent of revenue                    20.4 %       17.1 %                           20.0 %      15.9 %

SG&A expense decreased for the three months ended September 30, 2012 compared with the same period last year primarily due to lower advertising and sales costs and lower employee benefits, partially offset by the additional ongoing SG&A expense of $2.4 million related to our acquired businesses. SG&A expense increased for the nine months ended September 30, 2012 compared with the same period last year primarily due to the additional ongoing SG&A expense of $10.7 million and intangible amortization of $2.2 million related to


Table of Contents

our acquired businesses, partially offset by lower sales costs and lower employee benefits. SG&A expense for the nine months ended September 30, 2011 benefited from the reversal of a bad debt reserve of $2.7 million.

Research and Development (R&D)
                                         Three Months Ended                             Nine Months Ended
                                            September 30,                                 September 30,         Percent
(Dollars in millions)                    2012           2011       Percent Change        2012         2011       Change
Research and development              $    5.1       $    5.3           (3.8 )%      $    17.7      $ 15.0       18.0 %
As a percent of revenue                    2.1 %          1.7 %                            2.2 %       1.6 %

R&D expense decreased for the three months ended September 30, 2012 compared with the same period last year due to lower employee benefits, partially offset by our acquisitions and investment to support growth initiatives in secure and scalable storage products.
R&D expense increased for the nine months ended September 30, 2012 compared with the same period last year due to our acquisitions and investment to support growth initiatives in secure and scalable storage products.

Goodwill Impairment
During 2011, we acquired the assets of MXI Security and the assets of IronKey's secure data storage hardware business. These businesses, along with our Imation Defender brand, make up our Mobile Security reporting unit. The carrying value of our Mobile Security reporting unit includes $31.3 million of goodwill. We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year and if an event occurs or circumstances change that would warrant impairment testing during an interim period. During the three months ended June 30, 2012 we adjusted our internal financial forecast for the Mobile Security reporting unit resulting in a change in timing of the expected cash flows. During the three months ended September 30, 2012, we adjusted our internal financial forecast for the Mobile Security reporting unit reflecting lower expected short-term revenues and slightly lower gross margins as we expand into medium security markets. We considered these factors to be an event that warranted an interim test as to whether the goodwill was impaired.
In evaluating whether goodwill was impaired, we compared the estimated fair value of the Mobile Security reporting unit to its carrying value (Step 1 of the impairment test). In calculating the estimated fair value, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue growth, gross margin percentage, and terminal value growth rate. Our analyses utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. A discount rate of 17.6 percent was used to reflect the relevant risks of the higher growth assumed for this reporting unit. The revenue growth rates in 2012 through 2014, which are forecasted to be significant during that time frame, are important assumptions within the fair value estimations. We utilized a terminal growth rate of 3.5 percent.
The Mobile Security reporting unit carrying amount as of June 30, 2012 was $50.2 million and the indicated excess in fair value over the carrying amount in Step 1 of the impairment test performed during the three months ended June 30, 2012 was 43.3 percent. The Mobile Security reporting unit carrying amount as of September 30, 2012 was $48.5 million and the indicated excess in fair value over carrying amount in Step 1 of the impairment test performed during the three months ended September 30, 2012 was 17.7 percent.
This analysis indicates that this goodwill is not impaired. The projections utilized in the analysis reflect management's best assumptions regarding Mobile Security. To the extent that our projections or other assumptions about future economic conditions, the industry in which Mobile Security operates, or the potential for our growth and profitability in this business vary from actual results, it is possible that our conclusion regarding the recoverability of the remaining goodwill could change, which could have a material effect on our financial position and results of operations.
During the first quarter of 2011, we acquired substantially all of the assets of Encryptx which resulted in goodwill of $1.6 million. The goodwill was allocated to our existing Americas-Commercial reporting unit. Based on an interim goodwill impairment test performed at March 31, 2011, we determined that the goodwill in the Americas-Commercial reporting unit, including the assets of Encryptx, exceeded the implied fair value and, therefore, the goodwill was fully impaired. As a result, a $1.6 million charge was recorded during the nine months ended September 30, 2011 in restructuring and other in the Condensed Consolidated Statements of Operations.


Table of Contents

On October 24, 2012, we announced the acceleration of our strategic transformation, including the realignment of our global business into two new business units, a cost reduction program, and the Company's increased focus on data storage and security including exploring strategic options for its consumer electronics brands and businesses. These actions will be initiated during our fourth quarter 2012 and implemented during 2013. These actions may have a negative impact on the future recoverability of our intangible assets and goodwill. We will evaluate the impact of these actions including the reassessment of our intangible asset useful lives and the recoverability of our intangible assets and goodwill during the fourth quarter of 2012.

Restructuring and Other
                                          Three Months Ended                            Nine Months Ended
                                            September 30,                                 September 30,
(Dollars in millions)                     2012           2011       Percent Change       2012         2011     Percent Change
Restructuring and other               $     (3.6 )     $   5.5          (165.5 )%     $     2.0     $ 16.8          (88.1 )%

Restructuring expense for the three and nine months ended September 30, 2012 was primarily related to our 2011 corporate strategy restructuring program. We incurred severance related costs of $2.8 million and lease termination costs of $0.5 million for the nine months ended September 30, 2012 and other restructuring charges of $0.1 million and $1.2 million for the three and nine months ended September 30, 2012, respectively.
Other charges during the three months ended September 30, 2012 was a benefit of $3.7 million due to the adjustment to the fair value of the contingent consideration related to an acquisition of $5.5 million, partially offset by global process improvement costs of $1.0 million, pension settlement charges of $0.5 million, acquisition and integration costs of $0.1 million and other charges of $0.2 million. Other charges during the three months ended June 30, 2012 totaled $1.2 million, including pension settlement charges of $1.5 million, accelerated amortization related to abandoned intangible assets of $1.3 million, acquisition and integration costs of $0.8 million and other charges of $0.4 million, partially offset by the adjustment to the fair value of the contingent consideration related to an acquisition of $2.8 million. Other charges during the three months ended March 31, 2012 totaled $0.7 million, including acquisition and integration related costs of $0.4 million and charges related to the demolition and site clean-up of our Camarillo, California facility of $0.3 million.
Restructuring expense for the three and nine months ended September 30, 2011 was primarily related to our 2011 corporate strategy restructuring program. During the three and nine months ended September 30, 2011 we incurred severance related costs of $2.4 million and $3.7 million, respectively, lease termination and modification costs of $1.1 million and $1.5 million, respectively, and other charges of $0.8 million and $1.2 million, respectively. Additionally, we incurred other charges unrelated to these programs of $1.2 million and $10.4 million during the three and nine months ended September 30, 2011, respectively. These other charges include a loss on disposal of $7.0 million related to the demolition of our Camarillo, California facility, pension settlements of $1.9 million and acquisition and integration related costs of $1.5 million. In connection with the acceleration of our strategic transformation, on October 22, 2012, the Board of Directors approved a restructuring program in order to realign our business structure and reduce operating expenses by approximately 25 percent. This program will address product line rationalization and infrastructure, and include a reduction of approximately 20 percent of our global workforce. We anticipate we will incur cash charges up to $40 million, with total charges between $50 million and $60 million, the majority of which will occur in 2013.

Operating Loss

                                       Three Months Ended                           Nine Months Ended
                                         September 30,                                September 30,         Percent
(Dollars in millions)                   2012         2011      Percent Change       2012         2011        Change
Operating loss                      $   (6.5 )     $ (8.3 )         (21.7 )%     $ (25.7 )    $ (21.0 )      22.4 %
As a percent of revenue                 (2.6 )%      (2.7 )%                        (3.2 )%      (2.2 )%

Operating loss decreased for the three months ended September 30, 2012 and increased for the nine months ended September 30, 2012 compared with the same period last year primarily due to each item discussed above.

Other (Income) and Expense

                                       25
--------------------------------------------------------------------------------
  Table of Contents

                                         Three Months Ended                            Nine Months Ended
                                           September 30,                                 September 30,
(Dollars in millions)                     2012          2011      Percent Change        2012         2011     Percent Change
Interest income                       $    (0.1 )     $ (0.2 )         (50.0 )%     $    (0.4 )    $ (0.6 )        (33.3 )%
Interest expense                            0.6          0.8           (25.0 )%           2.4         2.7          (11.1 )%
Other, net                                 (0.4 )        3.1          (112.9 )%           2.2         6.2          (64.5 )%
Total                                 $     0.1       $  3.7           (97.3 )%     $     4.2      $  8.3          (49.4 )%
As a percent of revenue                       - %        1.2 %                            0.5 %       0.9 %

Other expense decreased for the three and nine months ended September 30, 2012 compared with the same periods last year. Interest income was relatively flat for the three and nine months ended September 30, 2012 compared with the same periods last year. Our interest expense decreased slightly for the three and nine months ended September 30, 2012 compared with the same periods last year due to lower amortization of capitalized fees related to securing our credit facility and decreased imputed interest related to our liability for a litigation settlement. Other, net includes foreign currency losses and proceeds from investments. We attempt to mitigate the exposure to foreign currency volatility through our hedging program; however, our program is not designed to fully hedge our risk and as a result we experience some volatility in other income, especially in periods of significant foreign currency fluctuation. Other, net for the three and nine months ended September 30, 2012 also includes an investment recovery of $0.9 million.

Income Tax (Benefit) Provision
                                          Three Months Ended                              Nine Months Ended
                                            September 30,                                   September 30,
(Dollars in millions)                     2012           2011       Percent Change       2012           2011      Percent Change
Income tax (benefit) provision        $    (0.3 )     $   2.1           (114.3 )%     $   0.6        $   4.5           (86.7 )%
Effective tax rate                          4.5 %       (17.5 )%                         (2.0 )%       (15.4 )%

The change in the effective rate of income tax provision for the three and nine months ended September 30, 2012 compared with the same periods last year was primarily due to the full valuation allowance on U.S. deferred tax assets, lower withholding tax expense, settlements with taxing authorities concluded during 2012 and the mix of taxable income (loss) by country. See Note 10 - Income Taxes to the Condensed Consolidated Financial Statements for further information about the valuation allowance related to the U.S. deferred tax assets.

Segment Results
Our business is organized, managed and internally and externally reported as segments differentiated by the regional markets we serve: Americas, Europe, North Asia and South Asia. Each of these geographic segments has responsibility for selling all of our product lines.
On October 24, 2012, we announced the realignment of our global business into two new business units to better align the Company with our key commercial and consumer channels. The two business units will consist of 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. The realignment will be effective at year-end. We also plan to intensify our focus and investment in data storage and security, and explore strategic alternatives for our consumer electronic brands and businesses currently included in our Audio and video information major product group. We will be assessing the impact of this realignment on our reporting segments during the fourth quarter of 2012. Any changes in our reporting segments will be reported as of December 31, 2012.
We evaluate segment performance based on revenue and operating income (loss). Revenue for each segment is generally based on customer location where the product is shipped. The operating income (loss) reported in our segments excludes corporate and other unallocated amounts. Although such amounts are excluded from the business segment results, they are included in reported consolidated results. Corporate and unallocated amounts include litigation settlement expense, goodwill impairment, intangible asset abandonment, research and development expense, corporate expense, stock-based compensation expense, inventory write-offs related to our restructuring programs and restructuring and other expenses which are not allocated to the segments.
In all of our segments, revenue declined for the three and nine months ended September 30, 2012 due to declines in our maturing traditional storage products, as well as several macro-economic factors including the broad-based European economic


Table of Contents

downturn and its effect on the rest of the world and a soft global IT environment. Revenue from secure and scalable storage decreased due to continued market place price degradation of commodity flash products. Information related to our segments is as follows:

Americas
                                        Three Months Ended                           Nine Months Ended
                                          September 30,                                September 30,
(Dollars in millions)                   2012          2011      Percent Change       2012         2011      Percent Change
Net revenue                          $  117.3      $ 141.4           (17.0 )%     $   373.6     $ 427.3          (12.6 )%
. . .
  Add IMN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for IMN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.