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Imation Posts Loss in Q4 2010

Imation Corp. announced financial results for its fourth quarter ended December 31, 2010.

Imation trades on the NASDAQ under the symbol IMN.

For more information visit: www.imation.com


Edited press release follows:

Imation Reports Fourth Quarter 2010 Financial Results

Recaps ‘Foundation Building’ Progress Announces $35 million Restructuring Program

OAKDALE, Minn.–Imation Corp. (NYSE:IMN) today released financial results for the quarter ended December 31, 2010. All financial information included in this press release reflect the continuing operations of the Company for all periods presented unless otherwise indicated.

The Company reported Q4 2010 net revenue of $398.4 million, down 11.8 percent from Q4 2009 and an operating loss of $43.8 million including special charges of $56.2 million, the majority of which were non-cash. The Q4 2010 tax provision included a net non-cash charge of $90.1 million primarily related to establishing a valuation allowance against the Company’s deferred tax assets resulting in a net loss of $137.8 million and a diluted loss per share of $3.63. Excluding the special charges noted above, Q4 2010 operating income would have been $12.4 million and diluted earnings per share would have been $0.22 (see Tables Five and Six). Cash generated from operations during Q4 2010 was $48.5 million raising the year end cash balance to $304.9 million.

Imation President and Chief Executive Officer Mark Lucas commented: “We finished with a solid fourth quarter, with $12.4 million in operating income, excluding special charges, which was our strongest quarter in over two years. Overall, we are pleased with the foundational progress we have made during recent quarters, preparing the company to undertake our new strategic direction as a global technology company dedicated to helping people and organizations store, protect, and connect their digital world.”

“Imation’s strong operational focus through our global ‘Project Xcell’ program has delivered sustainable operational efficiencies, including improved working capital management. This is clearly evident in our strong cash flows as we finished the year with almost $305 million in cash, up over $140 million in just one year. In 2010, we also implemented a disciplined, end-to-end product life cycle management process that has enabled us to more closely manage our product portfolios from concept through end-of-life.”

Lucas continued, “As expected, we continued to see revenue declines in our Traditional Storage categories, however, we are encouraged by the opportunities we see in new categories. We have stabilized our gross margins through effective management of each of our product categories, including Traditional Storage, Emerging Storage, and Electronics and Accessories.”

“In Traditional Storage, our emphasis has been to optimize both our magnetic and optical media businesses. Imation’s recently announced strategic alliance with TDK to jointly develop and manufacture advanced tape products is just one example of actions we are taking to improve our return on assets in this category. In Emerging Storage, where we see growth potential, we launched a portfolio of highly secure flash and hard drive products in 2010 under our new Defender Collection, addressing the rapidly increasing need for security and protection for data at rest. This line is gaining traction globally, with key placements in both business and government accounts. In Electronics and Accessories, we have rationalized lower margin products such as televisions and other video products, and turned our focus instead to differentiated audio and accessories products such as the new XtremeMac and TDK Life on Record premium audio lines.”

Lucas concluded, “In the second half of 2010, we made solid operational improvements and instilled renewed discipline across our global organization. We have rededicated our strategic focus to our storage core as we look for future growth in applications that enable storage, protection, and connectivity for consumers and businesses. We know that we still have considerable work ahead of us and while we expect additional declines in traditional storage in 2011, I’m confident that we have a clear vision as a technology company poised to deliver on the exciting opportunities ahead.”

Imation has outlined its strategic direction in a separate press release also issued this morning.

Q4 2010 Results compared with Q4 2009

Net revenue for Q4 2010 was $398.4 million, down 11.8 percent from Q4 2009, driven by price erosion of ten percent and overall volume declines of two percent. From a product perspective, the overall revenue decrease was due primarily to declines of 18 percent in Traditional Storage products partially offset by an increase of 9 percent in Emerging Storage products. From a regional perspective, revenues in the Americas and Europe declined 15 and 22 percent, respectively, primarily from lower sales of traditional storage products. Revenues were flat in North and South Asia.

Gross margin for Q4 2010 was 12.7 percent compared with Q4 2009 gross margin of 15.3 percent, down due to inventory write-offs of $14.2 million which were part of our restructuring plan. Gross margin for Q4 2010 excluding these inventory write-offs would have been 16.3 percent (see Tables Five and Six).

Selling, general and administrative (SG&A) expenses for Q4 2010 were $48.6 million, down $6.8 million compared with Q4 2009 of $55.4 million due to our cost reduction and ‘Project Xcell’ efforts.

Research & development (R&D) expenses for Q4 2010 were $3.8 million, down $1.7 million compared with Q4 2009 of $5.5 million.

Litigation settlement charges for Q4 2010 were $2.6 million related to the settlement of a patent infringement dispute.

Restructuring and other charges were $39.4 million in Q4 2010. The charges are primarily non-cash impairments of property, plant and equipment as a result of the Company’s previously announced restructuring plan to discontinue tape coating operations at its Weatherford, Oklahoma facility by April 2011.

Operating loss was $43.8 million in Q4 2010 compared with operating income of $4.5 million in Q4 2009. Adjusting for $56.2 million of charges discussed above (inventory write-offs related to restructuring programs, litigation, restructuring and other charges), adjusted operating income would have been $12.4 million in Q4 2010 compared with adjusted operating income on the same basis of $8.3 million in Q4 2009 (see Tables Five and Six).

Income tax provision was $94.9 million in Q4 2010 compared with an income tax benefit of $4.6 million in Q4 2009. In addition to the Q4 2010 provision of $4.8 million, the quarter also included $90.1 million of additional net charges comprised of a deferred tax asset valuation allowance of $105.6 million and $5.1 million for taxes related to cash repatriation, offset by a tax benefit of $20.6 million related to restructuring and other charges.

Loss per diluted share from continuing operations was $3.63 in Q4 2010 compared with a diluted income per share from continuing operations of $0.19 in Q4 2009. Adjusting for the impacts of the $56.2 million of inventory write-offs and restructuring and other charges and $90.1 million of net tax charges discussed above, adjusted earnings per diluted share would have been $0.22 in Q4 2010 compared with adjusted earnings per diluted share of $0.24 in Q4 2009 (see Tables Five and Six).

Cash balances: Ending cash and cash equivalents were $304.9 million as of December 31, 2010, an increase of $141.5 million from $163.4 million as of December 31, 2009, driven by continued working capital improvements and cash earnings (see Table Four).

2011 Restructuring Program

The Company announced today a new $35 million restructuring authorization from its Board of Directors to increase efficiency and gain greater focus in support of the go-forward strategy. Major components of the program include charges associated with certain benefit plans, improvements to its global sourcing and distribution network, and costs associated with both further rationalization of its product lines as well as evolving skill sets to align with the new strategy. The vast majority of these charges will be recorded in 2011. The restructuring will result in approximately $30 million of future cash expenditures.

Webcast and Replay Information

A teleconference and webcast with associated slide presentation is scheduled for 9:00 AM Central Time today, February 1, 2011 and will be available on the Internet on a listen-only basis at www.ir.Imation.com or www.streetevents.com. The Company’s fourth quarter financial results will be discussed and additional information will be provided in regard to the Company’s strategy.

A taped replay of the teleconference will be available beginning at 1:00 PM Central Time on February 1, 2011 until 5:00 PM Central Time on February 8, 2011 by dialing 866-837-8032 (access code 1500232). All remarks made during the teleconference will be current at the time of the teleconference and the replay will not be updated to reflect any subsequent developments.

Description of Tables

Table One – Consolidated Statements of Operations

Table Two – Consolidated Balance Sheets

Table Three – Supplemental Segment and Product Information

Table Four – Operations, Cash Flow and Additional Information

Table Five – Non-GAAP Financial Measures

Table Six – Non-GAAP Financial Measures

Non-GAAP Financial Measures

The Non-GAAP financial measurements (adjusted gross margin, adjusted operating income (loss) and adjusted earnings (loss) per diluted share) are provided to assist in understanding the impact of certain items on Imation’s actual results of operations when compared with prior periods (see Tables Five and Six). Management believes this will assist investors in making an evaluation of Imation’s performance against prior periods on a comparable basis by adjusting for these items. Management understands that there are material limitations on the use of Non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance. These Non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from Non-GAAP measures used by other companies. In addition, these Non-GAAP measures are not based on any comprehensive set of accounting rules or principles. This information should not be construed as an alternative to the reported results, which have been determined in accordance with accounting principles generally accepted in the United States of America.

About Imation Corp.
Imation Corp. (NYSE:IMN) is a leading global technology company dedicated to helping people and organizations store, protect and connect their digital world. The Company’s portfolio of data storage and security products, electronics and accessories reaches customers in more than 100 countries through a powerful global distribution network. Imation Corp.’s global brand portfolio includes the Imation, Memorex, XtremeMac, and TDK Life on Record brands. Additional information about Imation is available at www.imation.com.

Table One
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except for per share amounts)
(Unaudited)
Three Months Ended Twelve Months Ended
December 31 December 31
2010 2009 2010 2009
Net revenue $ 398.4 $ 451.7 $ 1,460.9 $ 1,649.5
Cost of goods sold 347.8 382.5 1,234.5 1,385.5
Gross profit 50.6 69.2 226.4 264.0
Operating expense:
Selling, general and administrative 48.6 55.4 202.5 229.7
Research and development 3.8 5.5 16.4 20.4
Goodwill impairment - - 23.5 -
Litigation settlement 2.6 - 2.6 49.0
Restructuring and other 39.4 3.8 51.1 26.6
Total 94.4 64.7 296.1 325.7
Operating (loss) income (43.8 ) 4.5 (69.7 ) (61.7 )
Other (income) and expense:
Interest income (0.2 ) (0.2 ) (0.8 ) (0.7 )
Interest expense 0.9 1.0 4.2 2.9
Other, net (1.6 ) 1.0 3.3 12.8
Total (0.9 ) 1.8 6.7 15.0
(Loss) income before income taxes (42.9 ) 2.7 (76.4 ) (76.7 )
Income tax provision (benefit) 94.9 (4.6 ) 81.9 (32.7 )
(Loss) income from continuing operations (137.8 ) 7.3 (158.3 ) (44.0 )
Discontinued operations:
(Loss) income from operations of discontinued businesses, net of
income taxes
- (0.6 ) (0.2 ) 1.8
(Loss) income from discontinued operations - (0.6 ) (0.2 ) 1.8
Net (loss) income $ (137.8 ) $ 6.7 $ (158.5 ) $ (42.2 )
(Loss) earnings per common share – basic:
Continuing operations $ (3.63 ) $ 0.19 $ (4.19 ) $ (1.17 )
Discontinued operations - (0.02 ) (0.01 ) 0.05
Net income (3.63 ) 0.18 (4.19 ) (1.13 )
(Loss) earnings per common share – diluted:
Continuing operations $ (3.63 ) $ 0.19 $ (4.19 ) $ (1.17 )
Discontinued operations - (0.02 ) (0.01 ) 0.05
Net income (3.63 ) 0.18 (4.19 ) (1.13 )
Weighted average shares outstanding
Basic 38.0 37.6 37.8 37.5
Diluted 38.0 37.7 37.8 37.5
Table Two
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
December 31, December 31,
2010 2009
ASSETS
Current assets
Cash and cash equivalents $ 304.9 $ 163.4
Accounts receivable, net 258.8 314.9
Inventories 203.3 235.7
Other current assets 74.2 164.4
Total current assets 841.2 878.4
Property, plant and equipment, net 66.9 109.8
Intangible assets, net 320.4 337.3
Goodwill - 23.5
Other assets 22.5 44.8
Total assets $ 1,251.0 $ 1,393.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 219.2 $ 201.4
Other current liabilities 172.3 170.5
Total current liabilities 391.5 371.9
Other liabilities 77.8 94.7
Total liabilities 469.3 466.6
Shareholders’ equity 781.7 927.2
Total liabilities and shareholders’ equity $ 1,251.0 $ 1,393.8
Table Three
IMATION CORP.
SUPPLEMENTAL SEGMENT AND PRODUCT INFORMATION
(Dollars in millions)
(Unaudited)
Three months ended

December 31,

Three months ended

December 31,

2010 2009 % Change
Revenue % Total Revenue % Total
Americas $ 192.5 48.3 % $ 225.2 49.9 % -14.5 %
Europe 78.7 19.8 % 100.3 22.2 % -21.5 %
North Asia 88.4 22.2 % 87.6 19.4 % 0.9 %
South Asia 38.8 9.7 % 38.6 8.5 % 0.5 %
Total $ 398.4 100.0 % $ 451.7 100.0 %
Revenue % Total Revenue % Total
Traditional storage
Optical products $ 161.4 40.5 % $ 194.1 43.0 % -16.8 %
Magnetic products 90.2 22.6 % 108.9 24.1 % -17.2 %
Other traditional storage 15.2 3.8 % 21.3 4.7 % -28.6 %
Total traditional storage 266.8 66.9 % 324.3 71.8 % -17.7 %
Emerging storage 54.5 13.7 % 50.0 11.1 % 9.0 %
Electronics and accessories 77.1 19.4 % 77.4 17.1 % -0.4 %
Total $ 398.4 100.0 % $ 451.7 100.0 %

Operating Income
(Loss)

OI %

Operating Income
(Loss)

OI %
Americas $ 9.4 4.9 % $ 11.8 5.2 % -20.3 %
Europe 0.6 0.8 % (0.8 ) -0.8 %

NM

North Asia 7.3 8.3 % 5.7 6.5 % 28.1 %
South Asia 1.0 2.6 % 0.9 2.3 % 11.1 %
Corp/Unallocated (1) (62.1 ) NM (13.1 ) NM

NM

Total $ (43.8 ) -11.0 % $ 4.5 1.0 %
Gross Margin Gross Margin
Traditional storage 18.4 % 18.4 %
Emerging storage 11.9 7.4
Electronics and accessories 12.1 7.6
Inventory write-offs related to restructuring programs (3.6 ) -
Total 12.7 % 15.3 %
Twelve months ended

December 31,

Twelve months ended

December 31,

2010 2009 % Change
Revenue % Total Revenue % Total
Americas $ 712.9 48.8 % $ 834.2 50.5 % -14.5 %
Europe 289.8 19.8 % 370.5 22.5 % -21.8 %
North Asia 315.2 21.6 % 306.9 18.6 % 2.7 %
South Asia 143.0 9.8 % 137.9 8.4 % 3.7 %
Total $ 1,460.9 100.0 % $ 1,649.5 100.0 %
Revenue % Total Revenue % Total
Traditional storage
Optical products $ 619.3 42.3 % $ 738.0 44.8 % -16.1 %
Magnetic products 347.8 23.8 % 406.0 24.6 % -14.3 %
Other traditional storage 62.8 4.3 % 77.7 4.7 % -19.2 %
Total traditional storage 1,029.9 70.4 % 1,221.7 74.1 % -15.7 %
Emerging storage 207.5 14.3 % 165.4 10.0 % 25.5 %
Electronics and accessories 223.5 15.3 % 262.4 15.9 % -14.8 %
Total $ 1,460.9 100.0 % $ 1,649.5 100.0 %

Operating Income
(Loss)

OI %

Operating Income
(Loss)

OI %
Americas $ 36.8 5.2 % $ 48.3 5.8 % -23.8 %
Europe (0.6 ) -0.2 % 2.4 0.6 % -125.0 %
North Asia 14.9 4.7 % 15.3 5.0 % -2.6 %
South Asia 4.0 2.8 % 2.6 1.9 % 53.8 %
Corp/Unallocated (1) (124.8 ) NM (130.3 ) NM NM
Total $ (69.7 ) -4.8 % $ (61.7 ) -3.7 %
Gross Margin Gross Margin
Traditional storage 18.7 % 18.8 %
Emerging storage 9.7 6.4
Electronics and accessories 12.3 8.8
Inventory write-offs related to restructuring programs (1.0 ) -
Total 15.5 % 16.0 %
NM – Not Meaningful
(1) Corporate and unallocated amounts include inventory write-offs
related to restructuring programs, litigation settlement, goodwill
impairment, research and development expense, corporate expense,
stock-based compensation expense, restructuring and other charges
that are not allocated to the regional markets we serve. We believe
this avoids distorting the operating income for the regional
segments.
Table Four
IMATION CORP.
OPERATIONS, CASH FLOW AND ADDITIONAL INFORMATION
(Dollars in millions)
(Unaudited)
Three Months Ended Twelve Months Ended
(Dollars in millions) December 31 December 31
2010 2009 2010 2009
Operations
Gross Profit $ 50.6 $ 69.2 $ 226.4 $ 264.0
Gross Margin % 12.7 % 15.3 % 15.5 % 16.0 %
Operating (Loss) Income $ (43.8 ) $ 4.5 $ (69.7 ) $ (61.7 )
Operating (Loss) Income % -11.0 % 1.0 % -4.8 % -3.7 %
Tax Rate % NM NM NM 42.6 %
Cash Flow

Net cash provided by operating activities

$

48.5 $ 42.6 $ 151.4 $ 67.5
Net cash (used in) provided by investing activities

$

(2.6 )

$

10.4

$

(13.1 )

$

2.0
Net cash (used in) provided by financing activities -

$

(0.3 )

$

(1.0 )

$

(3.2 )
Cash and cash equivalents – end of period

$

304.9

$

163.4

$

304.9

$

163.4
Capital Spending $ 2.6 $ 1.8 $ 8.3 $ 11.0
Depreciation 4.8 4.8 18.2 19.7
Amortization 5.9 6.0 23.6 23.3
NM – Not Meaningful

Asset Utilization Information *

December 31 December 31
2010 2009
Days Sales Outstanding (DSO) 57 60
Days of Inventory Supply 69 75
Debt to Total Capital 0.0 % 0.0 %

Other Information

Approximate employee count as of December 31, 2010: 1,115
Approximate employee count as of December 31, 2009: 1,210
Book value per share as of December 31, 2010: $ 20.57
Shares used to calculate book value per share (millions): 38.0
Imation did not repurchase shares of its stock in the fourth quarter
of 2010.
Authorization for repurchase of approximately 2.3 million shares
remains outstanding based on latest Board authorization.

* These operational measures, which we regularly use, are provided
to assist in the investor’s further understanding of our
operations.

Days Sales Outstanding is calculated using the count-back method,
which calculates the number of days of most recent revenue that
are reflected in the net accounts receivable balance.

Days of Inventory Supply is calculated using the current period
inventory balance divided by an estimate of the inventoriable
portion of cost of goods sold expressed in days.

Debt to Total Capital is calculated by dividing total debt (long
term plus short term) by total shareholders’ equity and total debt.

Table Five
IMATION CORP.
Non-GAAP Financial Measures
(In millions, except for per share amounts)
(Unaudited)
Three Months Ended Three Months Ended
December 31, 2010 December 31, 2009
GAAP Adj * Non-GAAP GAAP Adj * Non-GAAP
Net revenue $ 398.4 $ - $ 398.4 $ 451.7 $ - $ 451.7
Cost of goods sold 347.8 (14.2 ) 333.6 382.5 - 382.5
Adjusted gross profit $ 50.6 $ 14.2 $ 64.8 $ 69.2 $ - $ 69.2

Adjusted gross margin

12.7%

16.3%

15.3%

15.3%

Operating (loss) income $ (43.8 ) $ 56.2 $ 12.4 $ 4.5 $ 3.8 $ 8.3
Adjusted income tax provision (benefit) $ 94.9 $ (90.1 ) $ 4.8 $ (4.6 ) $ 2.2 $ (2.4 )
Adjusted (loss) income from continuing operations $ (137.8 ) $ 146.3 $ 8.5 $ 7.3 $ 1.6 $ 8.9
Adjusted (loss) earnings per common share from continuing operations
Diluted $ (3.63 ) $ 0.22 $ 0.19 $ 0.24
Adjusted weighted average shares outstanding
Diluted 38.0 38.1 37.7 37.7
Twelve Months Ended Twelve Months Ended
December 31, 2010 December 31, 2009
GAAP Adj * Non-GAAP GAAP Adj * Non-GAAP
Net revenue $ 1,460.9 $ - $ 1,460.9 $ 1,649.5 $ - $ 1,649.5
Cost of goods sold 1,234.5 (14.2 ) 1,220.3 1,385.5 - 1,385.5
Adjusted gross profit $ 226.4 $ 14.2 $ 240.6 $ 264.0 $ - $ 264.0

Adjusted gross margin

15.5%

16.5%

16.0%

16.0%

Operating (loss) income $ (69.7 ) $ 91.4 $ 21.7 $ (61.7 ) $ 75.6 $ 13.9
Adjusted income tax provision (benefit) $ 81.9 $ (76.8 ) $ 5.1 $ (32.7 ) $ 28.4 $ (4.3 )
Adjusted (loss) income from continuing operations $ (158.3 ) $ 168.2 $ 9.9 $ (44.0 ) $ 47.2 $ 3.2
Adjusted (loss) earnings per common share from continuing operations
Diluted $ (4.19 ) $ 0.26 $ (1.17 ) $ 0.09
Adjusted weighted average shares outstanding
Diluted 37.8 38.0 37.5 37.6

* See Table Six

Table Six
IMATION CORP.
Non-GAAP Financial Measures
(In millions, except for per share amounts)
(Unaudited)
Operating (loss) income / Adjusted operating income
Three Months Ended Twelve Months Ended
December 31 December 31
2010 2009 2010 2009
Operating (loss) income from continuing operations: $ (43.8 ) $ 4.5 $ (69.7 ) $ (61.7 )
Goodwill impairment - - 23.5 -
Litigation settlement 2.6 - 2.6 49.0
Restructuring and other 39.4 3.8 51.1 26.6

Inventory write-downs related to restructuring programs included
in cost of good sold

14.2 - 14.2 -
Total adjustments 56.2 3.8 91.4 75.6
Adjusted operating income from continuing operations – Non-GAAP $ 12.4 $ 8.3 $ 21.7 $ 13.9
Effect on diluted EPS:
(Loss) income from continuing operations $ (3.63 ) $ 0.19 $ (4.19 ) $ (1.17 )
Goodwill impairment - - 0.37 -
Litigation settlement 0.04 - 0.04 0.82
Restructuring and other 0.68 0.05 0.90 0.44
Inventory write-downs 0.23 - 0.23 -
Deferred tax asset valuation 2.77 - 2.78 -
Tax provision related to cash repatriation 0.13 0.13
Adjusted diluted EPS – Non-GAAP $ 0.22 $ 0.24 $ 0.26 $ 0.09

The Non-GAAP financial measurements (adjusted operating income
(loss) from continuing operations, adjusted diluted EPS) are
provided to assist in understanding the impact of certain items on
Imation’s actual results of operations when compared with prior
periods. Management believes this will assist investors in making
an evaluation of Imation’s performance against prior periods on a
comparable basis by adjusting for these items. Management
understands that there are material limitations on the use of
Non-GAAP measures. Non-GAAP measures are not substitutes for GAAP
measures for the purpose of analyzing financial performance. These
Non-GAAP measures are not in accordance with, or an alternative
for measures prepared in accordance with, generally accepted
accounting principles and may be different from Non-GAAP measures
used by other companies. In addition, these Non-GAAP measures are
not based on any comprehensive set of accounting rules or
principles. This information should not be construed as an
alternative to the reported results, which have been determined in
accordance with accounting principles generally accepted in the
United States of America.

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