Imation Corp. (IMN)

Q2 2010 Earnings Call

July 27, 2010 10:00 am ET


Tim Gallaher - IR

Mark Lucas - CEO

Paul Zeller - CFO


Blaine Marder - Loeb Capital Management

Mark Miller - Noble Financial

Chuck Murphy - Sidoti & Company

Jeff Hershey - Columbia Management



Good day, ladies and gentlemen, and welcome to your Imation announces Q2 earnings conference call. (Operator Instructions)

I would now like to introduce your host for today’s conference call, Mr. Tim Gallaher.

Tim Gallaher

Thank you, Kevin. Good morning, everyone, and welcome to our quarter 2, 2010 earnings conference call. On today’s call, you will be hearing from our CEO, Mark Lucas and our CFO, Paul Zeller.

Before I turn the call over to them for their comments followed by your questions, I want to remind everyone that certain information discussed on this call that does not relate to historical information may be deemed to constitute forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from any projected results.

Risk factors that could cause results to differ are outlined in both the press release as well as our filings with the SEC.

With that, I’d like to turn the call over to Mark. Mark?

Mark Lucas

Thank you, Tim, and good morning everyone. First let me comment on the quarter. While we continue to make progress in the evolution of our business model, we clearly need to drive for improved revenue and earnings. While getting better, our results are simply not strong enough.

And having said that, we have been able to continue our return to solid cash flow, and we have improved gross margins and costs across our businesses. I believe these improvements are sustainable over the longer term, and I think Imation has strong, fundamental business practices in place.

As we leverage our data storage technology legacy into our strategy of storing, protecting, and connecting the digital world, I have every confidence we will demonstrate improved financial performance.

I was able to meet several of you during May when Paul Zeller and I were out on the road, and I want to thank you for the time you spent with us. I appreciate the dialogue we had, and I look forward to continuing that with you. I'm excited to be leading Imation, and we have great confidence we can leverage our core capabilities.

Now let me turn the call over to our CFO, Paul Zeller, who will review the financial details of the quarter. Following his summary, I will rejoin the call with Paul to answer any questions you have.

Paul Zeller

Thanks Mark, and good morning everyone. Our Q2 results were much like our first quarter as we continue to build momentum in several important parts of the business. We continue to grow significantly in our emerging storage category. That was up 31% in the quarter, and 37% so far this year.

Our gross margins were still below the wall with some continuing improvement in our growth categories, both in emerging storage as well as electronics and accessories. Operating expenses were well controlled. Working capital indices continued to improve, and cash flows were again very strong in the quarter with our cash balances now over $250 million, and that's up over $160 million from the year-ago quarter.

That said, we need further improvements before our overall results start coming in line with our long term financial goals. While the decline rates in our core optical and tape markets were consistent with the first quarter, we need further growth elsewhere to offset these double digit declines and to deliver total company growth.

And the level of operating earnings, while encouraging relative to last year, is clearly not sufficient yet to provide a fair return to our shareholders. We remain very focused on strategies and actions to bring our current results in line with our long term financial goals.

Now before I get into the details on our Q2 results, I'd like to cover some reporting changes we implemented in the quarter. Based on how we're now managing the business around the world, we realigned our corporate segments and our reporting structure. Essentially we've combined the electronic product segment with our Americas segment. In addition, we've separated the Asia-Pacific segment into North Asia and South Asia regions. Each of these segments has responsibility for selling all of our product lines.

Along with this realignment, we have also changed our product revenue disclosures, which are now first, traditional storage products which includes magnetic and optical and other traditional storage media; second, emerging storage products which includes Flash and hard disk related storage products, and then finally electronics and accessories.

In addition to the change in our product reporting structure, we have also added product gross margin disclosures. These disclosures are aligned with how we're managing the business today, and the addition of gross margins by product category will help investors better understand the underlying trends in the business.

We have provided the financial history of these new disclosures in Table Six attached to our earnings release we issued this morning.

Now let me get into the Q2 results. Our revenues were at $354.4 million. That was down 11.4% versus the same quarter last year. This rate of decline was moderated from the decline rates we experienced last year, which were as high as 20%. We did however see a modest increase from the 8% decline rate we saw in Q1 this year.

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