As part of the Company’s focus on data storage and security, Imation is moving forward with plans to divest the Memorex TM and XtremeMac TM consumer electronics brands. Further, Imation continues to aggressively 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 percent from Q2 2012. From a segment perspective, TSS grew 6.9 percent and CSA declined 27.2 percent. Foreign currency exchange negatively impacted total Q2 2013 revenues by 3.3 percent.Gross margin for Q2 2013 of 26.1 percent includes the reversal of a levy accrual of $13.6 million or 6.4 percent 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 percent up from 19.6 percent in Q2 2012. CSA gross margin was 30.2 percent and included the levy accrual reversal compared to 20.1 percent 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. Research and development (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 (See Tables Five and Six for non-GAAP measures). 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 (See Table Five for non-GAAP measures). 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. Webcast and Replay Information A teleconference is scheduled for 9:00 AM Central Time today, July 31, 2013, and will be available on the Internet on a listen-only basis at www.ir.Imation.com or www.streetevents.com. The Company's quarterly financial results will be discussed. A taped replay of the teleconference will be available beginning at 12:30 PM Central Time on July 31, 2013, until 11:00 PM Central Time on August 10, 2013, by dialing 855-859-2056 (conference ID 26507556). 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.