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Battle Lines Drawn At Imation

Activist investors lament “dismal financial and stock price performance."

Battle Lines Drawn At Imation
Oakdale-based Imation Corp. continues to face declining revenue and ongoing losses. On Wednesday, Imation reported first quarter revenue of $155.4 million, a 13.1 percent decline compared to the first quarter of 2014. Imation posted a net loss of $14.4 million for the quarter, a slight improvement from the $17.5 million that the company lost a year ago.
 
The long-struggling data storage and security company has become a target for activist investors. The New York-based Clinton Group has nominated a slate of three candidates for Imation’s six-member board of directors. The battle comes to a head in two weeks at the company’s annual meeting on May 20.
 
On April 29, the Clinton Group began mailing proxy statements to shareholders and filed a proxy statement with the U.S. Securities and Exchange Commission.
 
In its filing, the Clinton Group did not mince words: “The company’s underperformance, and the destruction of shareholder value, during the tenure of the current CEO, Mark E. Lucas, are indisputable. The stock price is down (70%) since the announcement of his appointment as CEO on March 18, 2010 and down over (20%) per year. Net revenue is down (44%) from 2010 to 2014 with a negative annual decline rate of (14%). Cumulative losses from operations for the five years ended 2014 were ($644) million. The Company has deployed $174 million in four acquisitions during Mr. Lucas’ tenure as CEO, with poor results: one business has been shut down, and the remaining three have all underperformed the Company's expectations with revenue levels below those pre-acquisition despite significant SG&A [selling, general and administrative expenses] investment. Gross margins have declined and spending has increased comparing the last two twelve month periods (ended September 2014 and December 2014), indicating a worsening trend. The list goes on and on.”
 
According to its first quarter numbers, sales in the company’s legacy consumer storage and accessories product line --- including recordable CDs, DVDs and Blu-ray discs, USB flash drives, flash cards and external hard disc drives, speakers and headphones --- dropped 24.8 percent from the same period a year ago.
 
But at $75.2 million, those products still accounted for 48 percent of Imation’s first quarter sales.
 
The company’s only product line to show growth was its Storage and Security Solutions division that saw a 17.5 percent gain in sales, from $27.5 million a year ago to $32.3 million, in the first quarter. The company has touted these products, which include mobile security devices, as the key to its future.
 
In February, the company retained investment bank firm Houlihan Lokey as a financial advisor to “explore options” for the company. As part of the company’s earnings announcement, Imation president and CEO Lucas said the company would soon have some options to present to shareholders.
 
“While we execute on our strategic plan, we also continue to work with our financial adviser, Houlihan Lokey, in exploring all potential strategic alternatives to maximize shareholder value,” said Lucas in a statement. “We are very pleased with the progress to date and the alternatives that have surfaced through this fulsome process, and we look forward to sharing the results and our recommendations when the evaluation is complete in the coming weeks.”
 
But the Clinton Group has not been swayed. Its filing last week also noted: “We have carefully read Imation's proxy materials in an effort to understand how the status quo is a path to prosperity and why the current team deserves the continued collective trust of the shareholders. We were hopeful that there would be nuggets of success to take solace in. Unfortunately, if one were to read their materials without the knowledge of the dismal financial and stock price performance, the conclusion would be that management has been successful in its strategy shift and strategic transformation. Imation management and its directors are asking you to trust them going forward and that there is indeed progress. We do not see it.”
 
Imation’s stock dropped 9.8 percent on Wednesday in the wake of the earnings report to close at $3.70 per share. But on Thursday, the stock was rebounding a bit and was hovering around $4 per share in midday trading.
 
Imation was spun off from Maplewood-based 3M Company in 1996. The data storage and security company reported annual revenue of $729.5 million and a net loss of $114.7 million for 2014.

According to the company’s most recent annual filing, the company had approximately 910 employees as of December 31, 2014. But about 60 percent of the company’s employees work outside the U.S. According to the company’s filing, approximately 360 employees worked in the U.S. and about 550 were employed internationally. 
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