Imation: Fiscal 2Q13 Financial Results

Imation Corp. released financial results for the quarter and first six months ended June 30, 2013

Imation president and CEO Mark Lucas commented: "Imation’s second quarter performance was in line with our expectations. Our transformation continues and we are seeing signs of progress. We are focused on high-growth market segments in storage and security, and have dedicated teams launching differentiated products to meet customer needs globally."

For the second quarter, Imation reported net revenue of $211.7 million, down 15.0% from Q2 2012, break-even operating income, including special charges of $5.1 million, and a diluted loss per share from continuing operations of $0.04. Excluding special charges, Q2 2013 operating income swung to a profit of $5.1 million and diluted earnings per share from continuing operations totaled $0.11.

For the six months ended June 30, 2013, Imation reported net revenue of $436.1 million, down 14.9% compared with the same period last year, an operating loss of $14.7 million, including special charges of $9.3 million, and a diluted loss per share from continuing operations of $0.43. Excluding special charges, the operating loss for the six months ended June 30, 2013 would have been $5.4 million and diluted loss per share from continuing operations would have been $0.20.

Operating results for Q2 and the first half of 2013 include the reversal of an accrual of $13.6 million for copyright levies as a result of an Italian Court ruling, discussed further below.

The Consumer Storage and Accessories (CSA) business performed better than expected in the second quarter given industry dynamics. Revenues were down 27.2%; however, gross margins and cash generation continued to be strong for this unit.

Tiered Storage and Security Solutions (TSS) business posted revenue growth of almost 7% for the quarter driven by the added revenues from the acquisition of Nexsan, and second-quarter gross margins were 21.7%, up from 19.6% in the prior-year period. The company expects continued margin gains as revenue of higher-margin products increases in the Nexsan and Mobile Security product portfolios.

Continued Lucas: "Going forward, the TSS segment is the growth engine of Imation, and we are making investments to advance those product portfolios. We are leveraging our international channels, expanding our sales force and introducing new products in both Nexsan and Imation Mobile Security. We remain committed to becoming a key player in storage and security, and are confident our transformation is on track."

As part of the company’s focus on storage and security, Imation is moving forward with plans to divest the Memorex and XtremeMacconsumer electronics brands. Further, Imation continues to right-size the organization and implement cost-savings initiatives. SG&A expenses declined in the second quarter, reflecting benefits of these cost cutting programs.

Detailed Q2 2013 Analysis
As a result of the planned consumer electronics divestitures, the financial results for those operations are now presented as discontinued operations. The following financial results are presented for continuing operations for the current and prior periods unless otherwise indicated.

Net revenue for Q2 2013 was $211.7 million, down 15.0% from Q2 2012. From a segment perspective, TSS grew 6.9% and CSA declined 27.2%. Foreign currency exchange negatively impacted total Q2 2013 revenues by 3.3 percent.

Gross margin for Q2 2013 of 26.1% includes the reversal of a levy accrual of $13.6 million or 6.4% of net revenue. This particular reversal of a portion of the company’s European levy accrual was triggered due to the culmination of various events including the final outcome of an Italian court ruling to which Imation was not a party. TSS gross margin for Q2 2013 was 21.7% up from 19.6% in Q2 2012. CSA gross margin was 30.2% and included the levy accrual reversal compared to 20.1% in Q2 2012.

Selling, general and administrative (SG&A) expenses in Q2 2013 were $46.5 million, down $0.8 million compared with Q2 2012 expenses of $47.3 million. The reduction was driven by Imation’s cost reduction efforts and prior intangible write-offs, which reduced these costs by approximately $8.8 million, mostly offset by the Nexsan operating expenses added as a result of the acquisition.

R&D expenses in Q2 2013 were $4.3 million, down $1.2 million compared with Q2 2012 expenses of $5.5 million as the company reduced legacy R&D and increased investments on high margin projects in TSS primarily through the Nexsan acquisition.

Special charges were $5.1 million in Q2 2013 compared with Q2 2012 charges of $4.3 million.

Operating income was break-even in Q2 2013 compared with an operating loss of $7.5 million in Q2 2012. Excluding the impact of special charges, operating income swung to a profit of $5.1 million in Q2 2013 compared with adjusted operating loss on the same basis of $3.2 million in Q2 2012.

Income tax provision was $1.1 million in Q2 2013 compared with income tax provision of $0.2 million in Q2 2012. 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 U.S. results in either period. The provision is higher in Q2 2013 due to improved profitability and the mix of taxable income (loss) by country.

Discontinued operations was an after tax loss of $3.3 million in Q2 2013 compared with a $2.5 million loss in Q2 2012. Discontinued operations represent the direct results of the XtremeMac and Memorex consumer electronics businesses.

Loss per diluted share from continuing operations was $0.04 in Q2 2013 compared with $0.25 in Q2 2012. Excluding the impact of special charges, adjusted earnings per diluted share would have been $0.11 in Q2 2013 compared with a loss of $0.14 in Q2 2012.

Cash and cash equivalents balance was $94.4 million as of June 30, 2013, down $3.8 million during the quarter, driven primarily by payments for restructuring and share repurchase.