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Imation Reports Q2 2016 Results

Imation Corp. announced financial results for its second quarter ended June 30, 2016.

For more information visit: www.imation.com


Unedited press release follows:

Imation Reports Second Quarter 2016 Financial Results

Nexsan’s UNITY™ Private Cloud Product Launched

Registered Investment Advisor Subsidiary Established

OAKDALE, Minn., Aug. 8, 2016 — Imation Corp. (NYSE: IMN) today released financial results for the second quarter ended June 30, 2016.

Overview
Our Nexsan subsidiary released the UNITY™ product line, a next-generation storage platform that combines the performance, scalability and value of DRAM and Flash along with private cloud file system synchronization and true data mobility support. These features, in addition to universal connectivity for Fibre Channel, Ethernet and SAS, and advanced services including NAS and SAN, are all integrated into a single product. This unique product will provide multi-site enterprise n-Way Sync., 24X7 secured access to the enterprise private cloud for all mobile devices, tablets and PC, eliminate the drudgery of using unpopular and aging VPN technologies. The final product is expected to be ready by Q4 this year.

The second quarter revenue was $10.6 million, relatively flat from the prior quarter, down 37.3 percent from Q2 2015 due to our strategic decision to shutter Nexsan segment’s underperforming regions and exit low-margin portions of the business to focus on next-generation UNITY™ product. Gross margin percentage improved by 350 basis points from 40.8 percent to 44.3 percent. Selling, general and administrative expenses declined by $8.8 million, or 51.4 percent year over year, and the operating loss from continuing operations (excluding special charges) was reduced by $6.3 million to $6.8 million from a loss of $13.1 million in Q2, 2105. The company’s cash balance and short term investments totaled $56.2 million as of June 30, 2016.

Imation’s Interim Chief Executive Officer Robert Fernander commented, “Though Q2 revenues were flat compared to the prior quarter, we are delighted with our progress in reducing the operating loss, a significant milestone towards achieving a cash flow break even at Nexsan.  Gross margin improvements, the UNITY™ product introduction and a transformation of our go to market architecture support our transition from stabilization to growth.”

During the second quarter of 2016, Imation’s newly formed asset management subsidiary received approval from the SEC as a registered investment advisor. To lead the subsidiary, Imation has recruited a leading senior executive to spearhead the formation of the next generation alternative investment platform.

Detailed Q2 2016 Analysis
The following financial results are for continuing operations, including Nexsan and the corporate holding company, for the current and prior periods unless otherwise indicated.

Net revenue for Q2 2016 was $10.6 million, down 37.3 percent from Q2 2015. The decrease was due to the strategic decision to shutter underperforming regions and exit low margin portions of the business.

Gross margin for Q2 2016 was 44.3 percent, 350 basis points better than Q2 2015. The improvement was primarily driven by the supply chain improvement, eliminating low margin revenues and product mix changes.

Selling, general and administrative expenses in Q2 2016 were $8.3 million, down $8.8 million (or 51.4 percent) compared to Q2 2015 expenses of $17.1 million. The decrease stemmed primarily from corporate cost reduction and underperformed region exits.

Research and development (R&D) expenses in Q2 2016 were $3.2 million, up from $2.9 million in Q2 2015, reflecting the Company’s increased investment in the UNITY™ product.

Special charges were a benefit of $1.0 million in Q2 2016 compared to a charge of $0.9 million in Q2 2015. Special charges in Q2 2016 were chiefly related to the property tax refund for the former Oakdale headquarters and pension settlement costs.

Operating loss from continuing operations was $5.8 million in Q2 2016 compared to a loss of $14.0 million in Q2 2015. Excluding the impact of special charges described above, the adjusted operating loss would have been $6.8 million in Q2 2016 compared with an adjusted operating loss on the same basis of $13.1 million in Q2 2015.

Income tax expense was a benefit of $0.5 million in Q2 2016 compared with $0.0 million income tax expense in Q2 2015. The benefit of $0.5 million was mostly offset by the tax expense related to the discontinued operations.

Discontinued operations had a gain (after-tax) in Q2 2016 of $0.6 million compared with a loss of $3.3 million (after-tax) in Q2 2015. Discontinued operations include the results of the IronKey business, which was sold, and the legacy Storage Media and Accessories businesses which Imation closed down.

Loss per share from continuing operations was $0.17 in Q2 2016 compared with a loss per share of $0.34 in Q2 2015. Excluding the impact of special items, the adjusted loss per share would have been $0.20 in Q2 2016 compared with a loss per share of $0.32 in Q2 2015.

Cash and short-term investment balance was $56.2 million as of June 30, 2016, down $6.8 million during the quarter, driven by primarily operating losses and, to a lesser extent, the remaining charges from the Company’s restructuring and an unrealized loss on the Company’s short-term investment portfolio.

Year-To-Date Summary
For the six months ended June 30, 2016, Imation reported net revenue of $21.3 million, down 34.7 percent compared with the same period last year. Operating loss from continuing operations totaled $22.2 million for the six months ended June 30, 2016, including special charges of $5.8 million, and a diluted loss per share from continuing operations of $0.56. For the six months ended June 30, 2015, Imation reported net revenue of $32.6 million, an operating loss from continuing operations of $28.4 million, including special charges of $1.5 million, and a diluted loss per share from continuing operations of $0.72 (See Tables Five and Six for non-GAAP measures).

Fernander concluded, “We are on the path we set out to maximize shareholder value, and we look forward to continued progress on this agenda throughout 2016.”

Webcast and Replay Information
A teleconference is scheduled for 10:00 AM Eastern Time today, August 8, 2016, and will be available on the Internet on a listen-only basis at: https://www.webcaster4.com/Webcast/Page/1401/16470

A taped replay of the teleconference will be available at 12:00 PM Eastern Time on August 8, 2016, until August 15, 2016, by dialing 877-344-7529 or 412-317-0088 (conference ID 10090642). 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 – Additional Information
Table Five – Non-GAAP Financial Measures
Table Six – Non-GAAP Financial Measures

About Imation Corp.
Imation (IMN) is a holding company that also is involved in asset management.  The Company’s Nexsan subsidiary is engaged in global data storage and data security business. At the corporate level, there is an ongoing strategic review as Imation expects to seek and explore new opportunities that will allow it to pursue a diverse range of business opportunities and deploy its excess cash. For more information, visit www.imation.com.

Risk and Uncertainties
Certain information contained in this press release which does not relate to historical financial information may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause our actual results in the future to differ materially from our historical results and those presently anticipated or projected. We wish to caution investors not to place undue reliance on any such forward-looking statements. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements to reflect events or circumstances arising after such date. Risk factors include various factors set forth from time to time in our filings with the Securities and Exchange Commission including the following: Our ability to successfully implement our strategy; our ability to grow our business in new products with profitable margins and the rate of revenue decline for certain existing products; our ability to meet future revenue growth, gross margin and earnings targets; the ability to quickly develop, source, introduce and deliver differentiated and innovative products; our potential dependence on third parties for new product introductions or technologies in order to introduce our own new products; our ability to successfully implement restructuring plans; foreign currency fluctuations; the ready availability and price of energy and key raw materials or critical components including the effects of natural disasters and our ability to pass along raw materials price increases to our customers; continuing uncertainty in global and regional economic conditions; our ability to identify, value, integrate and realize the expected benefits from any acquisition which has occurred or may occur in connection with our strategy; the possibility that our goodwill and intangible assets or any goodwill or intangible assets that we acquire may become impaired; the ability of our security products to withstand cyber-attacks; the loss of a major customer, partner or reseller; changes in European law or practice related to the imposition or collectability of optical levies; the seasonality and volatility of the markets in which we operate; significant changes in discount rates and other assumptions used in the valuation of our pension plans; changes in tax laws, regulations and results of inspections by various tax authorities; our ability to successfully defend our intellectual property rights and the ability or willingness of our suppliers to provide adequate protection against third party intellectual property or product liability claims; the outcome of any pending or future litigation and patent disputes; our ability to access financing to achieve strategic objectives and growth due to changes in the capital and credit markets; limitations in our operations that could arise from compliance with the debt covenants in our credit facilities; our ability to retain key employees; increased compliance with changing laws and regulations potentially affecting our operating results; failure to adequately protect our information systems from cyber-attacks; the effect of the announcement of our review of strategic alternatives; the effect of the proxy contest for the election of directors at our annual meeting and other activist shareholder activities; and the volatility of our stock price due to our results or market trends.

Imation, Nexsan, Assureon, NST, UNITY are trademarks of Imation Corp. All other trademarks are the property of their respective owners.

IMATION CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except for per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2016 2015 2016 2015
Net revenue $ 10.6 $ 16.9 $ 21.3 $ 32.6
Cost of goods sold 5.9 10.0 12.2 19.7
Gross profit 4.7 6.9 9.1 12.9
Operating expense:
Selling, general and administrative 8.3 17.1 18.9 33.9
Research and development 3.2 2.9 6.6 5.9
Restructuring and other (1.0) 0.9 5.8 1.5
Total 10.5 20.9 31.3 41.3
Operating loss from continuing operations (5.8) (14.0) (22.2) (28.4)
Other (income) expense:
Interest income (0.2) (0.1) (0.2) (0.2)
Interest expense - 0.5 - 0.9
Other, net expense 1.1 (0.3) 1.0 0.4
Total 0.9 0.1 0.8 1.1
Loss from continuing operations before income taxes (6.7) (14.1) (23.0) (29.5)
Income tax provision (0.5) - (2.1) 0.1
Loss from continuing operations (6.2) (14.1) (20.9) (29.6)
Discontinued operations:
Loss on sale of discontinued businesses, net of income taxes - 2.4
Loss from discontinued businesses, net of income taxes 0.7 (3.3) (2.4) (2.2)
Reclassification of cumulative translation (0.1) (75.8)
Loss from discontinued operations 0.6 (3.3) (75.8) (2.2)
Net loss $ (5.6) $ (17.4) $ (96.7) $ (31.8)
Loss per common share – basic:
Continuing operations $ (0.17) $ (0.34) $ (0.56) $ (0.72)
Discontinued operations 0.02 (0.08) (2.04) (0.05)
Net loss (0.15) (0.42) (2.60) (0.77)
Loss per common share – diluted:
Continuing operations $ (0.17) $ (0.34) $ (0.56) $ (0.72)
Discontinued operations 0.02 (0.08) (2.04) (0.05)
Net loss (0.15) (0.42) (2.60) (0.77)
Weighted average shares outstanding:
Basic 37.2 41.1 37.2 41.1
Diluted 37.2 41.1 37.2 41.1

IMATION CORP.
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
June 30, December 31,
2016 2015
ASSETS
Current assets:
   Cash and cash equivalents $ 20.5 $ 70.4
   Short term investments 35.7 -
   Accounts receivable, net 7.0 9.8
   Inventories 5.4 8.1
   Other current assets 4.7 19.1
   Current assets of discontinued operations 15.4 44.3
     Total current assets 88.7 151.7
Property, plant and equipment, net 3.1 4.2
Intangible assets, net 3.8 4.2
Goodwill 3.8 3.8
Other assets 0.8 0.8
Non-current assets of discontinued operations 3.0 3.7
     Total assets $ 103.2 $ 168.4
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
   Accounts payable $ 7.6 $ 5.0
   Other current liabilities 17.8 30.5
   Current liabilities of discontinued operations 39.4 74.6
     Total current liabilities 64.8 110.1
Other liabilities 30.4 27.0
Other liabilities of discontinued operations 4.8 6.9
     Total liabilities 100.0 144.0
Commitments and contingencies
Shareholders’ equity 3.2 24.4
     Total liabilities and shareholders’ equity $ 103.2 $ 168.4

IMATION CORP.
SUPPLEMENTAL SEGMENT AND PRODUCT INFORMATION
(Dollars in millions)
(Unaudited)
Three months ended
June 30,
Three months ended
June 30,
2016 2015 % Change
Revenue % Total Revenue % Total
Nexsan $ 10.6 100.0% $ 16.9 100.0% -37.3%
  Total $ 10.6 100.0% $ 16.9 100.0%
Operating
Income (Loss)
OI % Operating
Income (Loss)
OI %
Nexsan $ (4.8) -45.3% $ (5.9) -34.9% -18.6%
Corp/Unallocated (1) (1.0) NM (8.1) NM -87.7%
Total operating loss from continuing operations $ (5.8) -54.7% $ (14.0) -82.8%
Gross Margin Gross Margin
Nexsan 44.3% 40.8%
Six months ended
June 30,
Six months ended
June 30,
2016 2015 % Change
Revenue % Total Revenue % Total
Nexsan $ 21.3 100.0% $ 32.6 100.0% -34.7%
  Total $ 21.3 100.0% $ 32.6 100.0%
Operating Income (Loss) OI % Operating Income (Loss) OI %
Nexsan $ (10.0) -46.9% $ (13.1) -40.2% -23.7%
Corp/Unallocated (1) (12.2) NM (15.3) NM -20.3%
Total operating loss from continuing operations $ (22.2) -104.2% $ (28.4) -87.1%
Gross Margin Gross Margin
Nexsan 42.7% 39.6%
NM – Not Meaningful
(1) Corporate and unallocated operating loss includes costs which are not allocated to the business segment in management’s evaluation of segment performance, such as litigation settlement expense, corporate expense and other expenses.

IMATION CORP.
ADDITIONAL INFORMATION
(Dollars in millions)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
Cash and Cash Flow Information – Continuing Operations 2016 2015 2016 2015
Cash and cash equivalents – end of period $ 20.5 $ 89.8 $ 20.5 $ 89.8
Capital spending $ 0.1 $ 0.7 $ 0.2 $ 1.4
Depreciation $ 0.5 $ 1.8 $ 1.0 $ 3.6
Amortization $ 0.1 $ 1.9 $ 0.3 $ 3.8
Asset Utilization Information *
June 30 December 31
2016 2015
Days Sales Outstanding (DSO) 50 32
Days of Inventory Supply 127 132
Debt to Total Capital 0.0% 0.8%
Other Information
Approximate employee count as of June 30, 2016: 220
Approximate employee count as of December 31, 2015: 600
Book value per share as of June 30, 2016: $     0.09
Shares used to calculate book value per share (millions): 37.2
* 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.

IMATION CORP.
Non-GAAP Financial Measures
(In millions, except for per share amounts)
(Unaudited)
Three Months Ended Three Months Ended
June 30, 2016 June 30, 2015
GAAP Adj * Non-GAAP GAAP Adj * Non-GAAP
Net revenue $ 10.6 $ - $ 10.6 $ 16.9 $ - $ 16.9
Cost of goods sold 5.9 - 5.9 10.0 - 10.0
Adjusted gross profit $ 4.7 $ - $ 4.7 $ 6.9 $ - $ 6.9
Adjusted gross margin 44.3% 44.3% 40.8% 40.8%
Adjusted operating loss from continuing operations $ (5.8) $ (1.0) $ (6.8) $ (14.0) $ 0.9 $ (13.1)
Adjusted income tax provision $ (0.5) $ - $ (0.5) $ - $ - $ -
Adjusted loss from continuing operations $ (6.2) $ (1.0) $ (7.2) $ (14.1) $ 0.9 $ (13.2)
Adjusted loss per common share from continuing
operations – diluted $ (0.17) $ (0.19) $ (0.34) $ (0.32)
Adjusted weighted average shares outstanding – diluted 37.2 37.2 41.1 41.1
Six Months Ended Six Months Ended
June 30, 2016 June 30, 2015
GAAP Adj * Non-GAAP GAAP Adj * Non-GAAP
Net revenue $ 21.3 $ - $ 21.3 $ 32.6 $ - $ 32.6
Cost of goods sold 12.2 - 12.2 19.7 - 19.7
Adjusted gross profit $ 9.1 $ - $ 9.1 $ 12.9 $ - $ 12.9
Adjusted gross margin 42.7% 42.7% 39.6% 39.6%
Adjusted operating loss from continuing operations $ (22.2) $ 5.8 $ (16.4) $ (28.4) $ 1.5 $ (26.9)
Adjusted income tax provision $ (2.1) $ - $ (2.1) $ 0.1 $ - $ 0.1
Adjusted loss from continuing operations $ (20.9) $ 5.8 $ (15.1) $ (29.6) $ 1.5 $ (28.1)
Adjusted loss per common share from continuing
operations – diluted $ (0.56) $ (0.41) $ (0.72) $ (0.68)
Adjusted weighted average shares outstanding – diluted 37.2 37.2 41.1 41.1
* See Table Six

IMATION CORP.
Non-GAAP Financial Measures
(In millions, except for per share amounts)
(Unaudited)
Operating income (loss) / Adjusted operating income (loss)
Three Months Ended Six Months Ended
June 30 June 30
2016 2015 2016 2015
Operating loss $ (5.8) $ (14.0) $ (22.2) $ (28.4)
Restructuring and other:
Restructuring - - 0.1
Other (1.0) 0.9 5.8 1.4
Total adjustments (1.0) 0.9 5.8 1.5
Adjusted operating income (loss) – Non-GAAP $ (6.8) $ (13.1) $ (16.4) $ (26.9)
Effect on diluted EPS:
Loss from operations $ (0.17) $ (0.34) $ (0.56) $ (0.72)
Restructuring and other:
Restructuring - - - 0.00
Other (0.03) 0.02 0.16 0.03
Adjusted diluted EPS – Non-GAAP $ (0.20) $ (0.32) $ (0.40) $ (0.68)
EBITDA:
Operating loss from continuing operations (5.8) $ (14.0) $ (22.2) $ (28.4)
Depreciation 0.5 1.8 1.0 3.6
Amortization 0.1 1.9 0.3 3.8
  EBITDA $ (5.2) $ (10.3) $ (20.9) $ (21.0)
Restructuring and other (1.0) 0.9 5.8 1.5
  Adjusted EBITDA $ (6.2) $ (9.4) $ (15.1) $ (19.5)
EBITDA is defined as operating income (loss) less depreciation and amortization. Adjusted EBITDA is defined as EBITDA before restructuring and other .

The Non-GAAP financial measurements (adjusted operating income (loss), adjusted income (loss), adjusted diluted EPS, EBITDA and adjusted EBITDA) 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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