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RIMG > SEC Filings for RIMG > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for RIMAGE CORP

Form 10-Q for RIMAGE CORP


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following table sets forth, for the periods indicated, selected items from the Company's condensed consolidated statements of operations.

                           Percentage (%)        Percentage (%)           Percentage (%)       Percentage (%)
                            of Revenues            Inc/(Dec)               of Revenues            Inc/(Dec)
                         Three Months Ended         Between             Nine Months Ended          Between
                           September 30,            Periods               September 30,            Periods
                          2012         2011      2012 vs. 2011           2012         2011      2012 vs. 2011
Revenues                     100.0      100.0               (3.1 )         100.0       100.0              (5.3 )
Cost of revenues             (51.6 )    (48.7 )              9.1           (52.3 )     (49.8 )            (0.7 )
Gross profit                  48.4       51.3               (2.7 )          47.7        50.2              (9.9 )
Operating expenses:
Research and
development                  (14.1 )     (7.6 )             91.2           (15.3 )      (7.4 )            94.1
Selling, general and
administrative               (43.4 )    (33.2 )             34.9           (46.2 )     (32.2 )            34.5
Goodwill and
intangible assets
impairment charge           (141.0 )        -                  -           (50.3 )         -                 -
Amortization of
intangibles                   (1.4 )        -                  -            (1.4 )         -                 -
Operating income
(loss)                      (151.5 )     10.5           (1,584.1 )         (65.5 )      10.1            (711.6 )
Other income, net              0.3        0.4              (14.7 )             -         0.3            (100.0 )
Income (loss) before
income taxes                (151.2 )     10.9           (1,530.9 )         (65.5 )      10.4            (696.0 )
Income tax expense           (53.4 )     (3.8 )         (1,392.6 )         (15.4 )      (3.8 )          (612.0 )
Net income (loss)           (204.6 )      7.1           (1,605.2 )         (80.9 )       6.6            (745.1 )
Noncontrolling
interest                       0.4        0.2               88.4             0.4         0.2              84.6
Net income (loss)
attributable to
Rimage                      (204.2 )      7.3           (1,556.1 )         (80.5 )       6.8            (721.9 )

Overview
Rimage helps businesses deliver digital content directly and securely to their customers and employees. The Company organizes and manages its business in two reportable segments based on the nature of its products and markets, consisting of disc publishing and online publishing. Rimage's disc publishing business supplies customers in North America, Europe and Asia with industry-leading solutions that archive, distribute and protect content on CDs, DVDs and Blu-ray Discs™. The Company's online publishing business enables online distribution of content through two delivery systems, 1) live and on-demand streaming video through its enterprise video communications product line, acquired as part of the acquisition of Qumu, and 2) secure push-based content delivery to personal computers, tablets and smart phones through its Signal online publishing solution, introduced in the second quarter of 2012. The combination of disc publishing and online publishing enables businesses to securely deliver their videos, documents, audio files and images in today's multi-platform, multi-device world.

Rimage distributes its disc publishing systems from its operations in the United States, Germany, Japan and China. The Company also distributes related consumables for use with its disc publishing systems, consisting of media kits, ribbons, ink cartridges and Rimage-branded blank CD-R, DVD-R and Blu-ray media. These systems allow customers to distribute digital content in markets and applications such as medical imaging; video workflows, manufacturing, business services, including banking and finance; and government law enforcement, including surveillance and evidence management. As Rimage's sales within North America and Europe have averaged approximately 90% of total sales over the past three years, the strength of the economies in these regions plays an important role in determining the success of Rimage.

The Company introduced its Signal online publishing solution in the second quarter of 2012, and generated initial revenues in the third quarter of 2012. Signal is designed to help companies push content directly to the personal computers, tablets and smart phones of their employees, partners, suppliers and customers while applying security and usage policies that effectively manage its distribution, even when it is resident on subscribers' devices and disconnected from the internet. The initial sales focus will be on helping customers deliver pre-release content for media and entertainment and on securing business content to tablets for corporations.


Table of Contents

On October 10, 2011, the Company acquired 100% of the capital stock of Qumu pursuant to an Agreement and Plan of Merger (the "Merger Agreement"). Based in San Bruno, California, Qumu is a leading supplier of enterprise video communication solutions and social enterprise applications for business. Qumu's products are expected to complement Rimage's recently introduced Signal online publishing solution, and each company is expected to benefit from the other's existing customer base. As a result of the acquisition, Qumu is a wholly-owned subsidiary of the Company.

Through the acquisition of Qumu, the Company's enterprise video communications solutions, included in the online publishing business, are deployed primarily through the sale of software licenses and software on a server appliance. Software maintenance contracts and professional services are also sold with these solutions. The recently introduced Signal solution, also included in the online publishing business, generated its first revenues in the third quarter of 2012. Signal is deployed through a cloud-based SaaS platform as well as the sale of software licenses and software on a server appliance, depending on customer preference. The Company's disc publishing business earns revenues through the sale of equipment, consumables and parts as well as maintenance contracts, repair and installation services. Product revenues on the accompanying consolidated statements of operations include the Company's sale of equipment and appliances, consumables, parts and software licenses. Service revenues on the consolidated statements of operations include revenues from maintenance contracts, repair, installation, software and maintenance subscription arrangements and professional services. Rimage has no long-term debt and does not require significant capital investment as all fabrication of its products is outsourced to vendors.

Results of Operations

Revenues.

The table below describes Rimage's revenues by segment and product category (in
thousands):


                            Three Months Ended                Inc (Dec)                  Nine Months Ended                 Inc (Dec)
                              September 30,                    Between                     September 30,                    Between
                     2012                2011                  Periods            2012                2011                  Periods
                      $         %         $         %         $         %          $         %         $         %         $         %
Disc publishing
Disc publishing
equipment:
Producer           $  4,529      22 %  $  4,603      23 %  $    (74 )    -2 %   $  9,692      17 %  $ 11,603      19 %  $ (1,911 )   -16 %
Professional          1,815       9 %     2,713      13 %      (898 )   -33 %      7,542      13 %     9,038      15 %    (1,496 )   -17 %
Desktop                 507       2 %       727       4 %      (220 )   -30 %      1,499       3 %     2,061       3 %      (562 )   -27 %
Total disc
publishing
equipment             6,851      33 %     8,043      40 %    (1,192 )   -15 %     18,733      32 %    22,702      37 %    (3,969 )   -17 %
Recurring:
Consumables and
parts                 8,509      41 %     9,261      46 %      (752 )    -8 %     25,597      44 %    30,618      49 %    (5,021 )   -16 %
Service               2,829      14 %     3,017      15 %      (188 )    -6 %      8,846      15 %     8,651      14 %       195       2 %
Total recurring      11,338      54 %    12,278      60 %      (940 )    -8 %     34,443      59 %    39,269      63 %    (4,826 )   -12 %
Total disc
publishing           18,189      87 %    20,321     100 %    (2,132 )   -10 %     53,176      91 %    61,971     100 %    (8,795 )   -14 %
Online
publishing
Software
licenses and
appliances            1,287       6 %         -       -       1,287       -        1,897       3 %         -       -       1,897       -
Service               1,473       7 %         -       -       1,473       -        3,621       6 %         -       -       3,621       -
Total online
publishing            2,760      13 %         -       -       2,760       -        5,518       9 %         -       -       5,518       -
Total              $ 20,949     100 %  $ 20,321     100 %  $    628       3 %   $ 58,694     100 %  $ 61,971     100 %  $ (3,277 )    -5 %

Total revenues increased 3% and decreased 5% for the three and nine months ended September 30, 2012, respectively, to $20.9 million and $58.7 million, respectively, from $20.3 million and $62.0 million in the same prior-year periods. The increase in total revenues in the third quarter of 2012 occurred as a result of $2.8 million in revenues generated by the enterprise video communications product line, included in the online publishing business, partially offset by a $2.1 million reduction in disc publishing revenue. The revenue decline in the year-to-date periods reflects an $8.8 million reduction in disc publishing revenues, partially offset by $5.5 million in revenues generated by the enterprise video communications product line. Consolidated product revenues decreased $0.7 million and $7.1 million for the three and nine months ended September 30, 2012 respectively, compared to the prior year comparative periods, while consolidated service revenues increased $1.3 million and $3.8 million for the same respective periods. International sales, inclusive of the impact of currency changes, decreased 4% and 10% during the three and nine months ended September 30, 2012, and comprised 32% and 35% of total revenues for the three and nine months ended September 30, 2012, respectively, compared to 34% and 37% of total revenues for the three and nine months ended September 30, 2011, respectively. In the aggregate, currency fluctuations decreased consolidated revenues for the three and nine months ended September 30, 2012 by $0.7 million, or 3%, and $1.4 million, or 2%, for each respective period.


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The $2.1 million and $8.8 million reduction in disc publishing revenues for the respective three and nine months ended September 30, 2012 compared to the same periods in 2011 was driven by declines in equipment sales in Europe and the U.S. combined with a decline in consumable sales primarily in the Company's U.S. market. The decline in equipment sales was primarily due to lower sales to European channel partners as sales in the Company's European markets were negatively impacted by continued economic challenges, increased competition and the negative impact of foreign currency fluctuations. Additionally, equipment sales in the U.S. were negatively impacted by a significant sale to the government sector in last year's third quarter that did not reoccur in the current period, as well as reduced sales in the Company's U.S. retail market, where sales can fluctuate significantly between periods. The decline in U.S. consumable sales in the current-year periods was primarily due to decreased usage of consumable products by the Company's retail customers and other segments of the Company's customer base.

Online publishing revenues totaled $2.8 million and $5.5 million for the three and nine months ended September 30, 2012, respectively. Sales of software licenses and appliances increased in this year's third quarter to 47% of online publishing sales, compared to 34% for the year-to-date period. Remaining revenues for each period were generated from services, including software maintenance contracts, subscription licenses and professional services. The Company introduced its Signal online publishing solution in the second quarter of 2012 and generated initial revenues during the third quarter of 2012. During the second quarter of 2012, the Company announced that Qumu had partnered with one of its key managed service providers to close a multi-year, multi-million dollar contract with a Fortune 50 corporation. The Company will recognize revenue related to this transaction over the term of the agreement and began recognizing revenue in the third quarter of 2012. The Company's contracted commitment backlog for Qumu's enterprise video communications solution aggregated $8.4 million as of September 30, 2012. The Company defines contracted commitments as the dollar value of signed customer purchase commitments.

Future consolidated revenues will be dependent upon many factors, including the rate of growth of Qumu's enterprise video communications product line, whether Qumu structures its license arrangements with customers as term or perpetual licenses, which impacts the timing of revenue recognition, the Company's ability to successfully commercialize its Signal online publishing solution, introduced in the second quarter of 2012, the success of the Company's deployment of a complete disc publishing solution for medical imaging in hospitals in China and the rate of adoption of other new solutions-based products introduced by the Company. Other factors that will influence future consolidated revenues include the timing of new product introductions, the rate of adoption of other new applications for the Company's products in its targeted markets, the performance of the Company's channel partners, the timing of customer orders and related product deliveries, the Company's ability to maintain continuous supply of its products and components, the impact of changes in economic conditions and the impact of foreign currency exchange rate fluctuations.

Gross profit. Gross profit as a percentage of total revenues was 48.4% and 47.7% for the three and nine months ended September 30, 2012, respectively, compared to 51.3% and 50.2% for the respective periods in 2011, which was comprised only of disc publishing revenues. The disc publishing business generated aggregate gross margins of 48.4% and 48.3% for the three and nine months ended September 30, 2012, respectively, and the online publishing product line generated margins of 48.0% and 42.2% for each respective period. The online publishing margins are inclusive of the impact of amortization expense associated with intangible assets acquired as a result of the Qumu acquisition. Amortization expense related to the developed technology intangible asset of $0.2 million and $0.4 million had an 8% unfavorable impact on online publishing gross margins for both the three and nine month periods ended September 30, 2012. An impairment charge of $1.8 million related to developed technology is included within operating expenses in a separate line item, "Goodwill and intangible asset impairment charge." Gross profit will be favorably impacted over the remaining life of the technology intangible asset by approximately $0.1 million per quarter due to reduced amortization related to this impairment.

The three and nine month period declines in consolidated gross profit as a percentage of total revenues were primarily impacted by a lower volume of equipment sales in the disc publishing business, which typically generate higher margins than other disc publishing products. Further, a reduced volume of Producer equipment sales in the second quarter led to lower production levels in that quarter and a resulting underabsorption of fixed manufacturing costs, negatively impacting gross profit as a percentage of revenues for the nine months ended September 30, 2012. Also contributing to the decline in consolidated gross margin for the nine months ended September 30, 2012 were lower gross margins generated by the enterprise video communications product line. Inclusive of the impact of amortization expense, the online publishing business contributed 0.6 percentage points to the decline in gross profit as a percentage of total revenues for the current year-to-date period. In addition to the impact of amortization expense, online publishing margins for the current year-to-date period were unfavorably impacted by a low volume and concentration of higher margin software license revenues. Partially offsetting the unfavorable impact in the current year-to-date period of a reduced volume of equipment sales in the disc publishing product line was the impact of the Company incurring higher media prices and air freight costs in the first half of 2011 to secure alternative supply sources and to expedite shipments stemming from supply disruptions caused by the March 2011 earthquake and tsunami in Japan.


Table of Contents

Future gross profit margins will continue to be affected by many factors, including product mix, the timing of new product introductions, the timing of customer orders and related product deliveries, changes in material costs and supply sources, manufacturing volume, the growth rate of service-related revenues relative to associated service support costs and foreign currency exchange rate fluctuations. Future gross margins will also be impacted by the integration and growth of Qumu's enterprise video communications online publishing product line, which has historically generated higher gross margins than the Company's disc publishing business. This benefit will be partially offset in future years from the inclusion of amortization expense associated with intangibles acquired as a result of the Qumu acquisition, expected to approximate $0.8 million in 2012.

Operating expenses. Total operating expenses amounted to $41.9 million and $66.4 million for the three and nine months ended September 30, 2012, respectively, compared to $8.3 million and $24.8 million in the respective prior-year periods. The $33.6 million and $41.6 million rise in total operating expenses between the third quarter and year-to-date periods, respectively, occurred primarily as a result of $29.5 million of non-cash charges incurred for the impairment of goodwill and intangible assets associated with the online publishing business and operating expenses incurred to support the Company's online publishing business, including $4.4 million and $12.4 million of expenses to support Qumu's enterprise video communications product line in each respective period.

Research and development expenses totaled $3.0 million and $9.0 million for the three and nine months ended September 30, 2012, respectively, representing 14% and 15% of revenues, respectively. Research and development expenses totaled $1.5 million and $4.6 million for the comparative three and nine months ended September 30, 2011, representing 8% and 7% of revenues, respectively. The $1.5 million third quarter and $4.4 million year-to-date increases from 2011 reflect the inclusion of $1.3 million and $3.8 million, respectively, of research and development expenses generated by Qumu to support the enterprise video communications product line, included in the Company's online publishing business. The remaining increases over prior-year periods are primarily driven by costs to support the development of the Signal online publishing solution. The Company also continues to incur development expenses to enhance its disc publishing products. Rimage anticipates expenditures in research and development in the fourth quarter 2012 will be comparable to that of the third quarter.

Selling, general and administrative expenses for the three and nine months ended September 30, 2012 totaled $9.1 million and $27.1 million, or 43% and 46% of revenues, respectively, compared to expenses in the same prior-year periods of $6.7 million and $20.2 million, or 33% of revenues for each respective period. The $2.4 million and $6.9 million increase in expenses in the respective current-year periods primarily reflects the impact of $2.9 million and $7.8 million of expenses incurred in each respective period to support the enterprise video communications product line, included in the Company's online publishing business. The Company also incurred a higher level of expenses in the current-year periods to support the introduction in the second quarter of its internally developed Signal online publishing solution. Additionally, the Company incurred a charge of approximately $0.4 million in the third quarter for the settlement of a pending patent infringement lawsuit associated with its disc publishing products. Partially offsetting this charge and the expense growth driven by the online publishing business was the impact of currency fluctuations primarily in the Company's European operations, which reduced selling, general and administrative expenses in the disc publishing business in the current year's third quarter and year-to-date periods by $0.2 million and $0.5 million, respectively. Rimage anticipates expenditures for selling, general and administrative activities in the fourth quarter will be comparable to that of the third quarter 2012, primarily due to increased sales and marketing expenses, partially offset by lower legal related expenses.

During the three and nine months ended September 30, 2012, the Company recorded a $22.2 million goodwill and $7.3 million intangible asset impairment charge associated with its online publishing segment. The Company concluded that certain indicators of impairment were present, as evidenced by a sustained decrease in the Company's stock price during the third quarter resulting in a market capitalization significantly below the carrying value of its net equity and a lower than planned rate of revenue growth to-date for its online publishing segment. As a result, the Company performed an interim impairment test of goodwill and long-lived assets. These charges, totaling $29.5 million, are included as a separate operating expense line item, "Goodwill and intangible asset impairment charge," in the Company's condensed consolidated statements of operations. The Company used the income approach, specifically the discounted cash flow method, in concluding the fair value of the online publishing reporting unit and associated amount of impairment charges. The application of the income approach for both goodwill and intangibles requires management judgment for many of the inputs.

Amortization of Purchased Intangibles. Operating expenses for the three and nine months ended September 30, 2012 include $0.3 million and $0.8 million, respectively, for the amortization of intangible assets acquired as part of the Company's acquisition of Qumu in October 2011. Operating expenses in 2012 are expected to include approximately $1.0 million of amortization expense associated with the Qumu acquisition, exclusive of the portion classified in cost of revenues. Operating expenses will be favorably impacted over the remaining life of the intangible assets by approximately $0.1 million per quarter due to reduced amortization related to the impairment described above.


Table of Contents

Other income, net. The Company recognized net interest income on cash, marketable securities and notes receivable, of $27,000 and $48,000 for the three and nine month periods ended September 30, 2012, respectively, compared to $50,000 and $169,000 for the comparative prior-year periods. The reduction in interest income in the current-year periods was primarily the result of the Company's use of approximately $39 million in cash to acquire Qumu and a slight reduction in average effective yields on the Company's cash equivalents and marketable securities. Other income for the three and nine months ended September 30, 2012 also included net income on foreign currency transactions of $23,000 and a net loss of $62,000, respectively, compared to net income of $26,000 and net loss of $4,000 for the three months and nine months ended September 30, 2011, respectively.

Income taxes. The provision or benefit for income taxes represents federal, state and foreign income taxes on income. Income tax expense for the three and nine months ended September 30, 2012 amounted to $11.2 million and $9.0 million, respectively, or (35.3%) and (23.4%) of loss before income taxes, respectively. The effective tax rate in the current-year periods includes the impact of a discrete charge for the establishment in the third quarter of a valuation allowance against the Company's U.S. deferred tax assets. The Company established a valuation allowance as a result of the generation of accumulated pre-tax losses over a three-year period, inclusive of impairment charges in the current period, and a determination that it was not "more likely than not" that the Company would realize all deductible temporary differences and loss and credit carryforwards in the near-term future. Income tax expense for the three and nine months ended September 30, 2011 amounted to $0.8 million and $2.3 million, respectively, or 35.0% and 36.9% of income before taxes for each respective period.

Net income (loss) / net income (loss) per share. Resulting net loss attributable to Rimage for the three and nine months ended September 30, 2012 was $42.8 million and $47.2 million, respectively, compared to net income attributable to Rimage of $1.5 million and $4.2 million, for the respective prior-year periods. Related net income (loss) per diluted share was $(4.23) and $(4.64) for the three and nine months ended September 30, 2012, respectively, compared to $0.16 and $0.44 per diluted share for the respective prior-year periods.

Liquidity and Capital Resources

The Company expects it will be able to maintain current operations and anticipated capital expenditure requirements for the foreseeable future through its internally generated funds and cash reserves. At September 30, 2012, the Company had working capital of $65.3 million, down $13.0 million from working capital reported at December 31, 2011. The decrease was primarily the result of generation of a net loss adjusted for non-cash items during the nine months ended September 30, 2012 of $5.7 million, payment of $5.2 million in dividends, purchases of property and equipment of $2.2 million, repurchases of common stock of $1.4 million and issuance of a $0.5 million note receivable, partially offset by $2.1 million of favorable changes in operating assets and liabilities. Exclusive of a small amount of capital lease obligations, Rimage has no long-term debt and does not require significant capital investment for its ongoing operations as all fabrication of tooling-intensive parts is outsourced to vendors.

Effective October 2010, the Company's Board of Directors approved the continuation of common stock repurchases under original Board authorizations providing for the repurchase of up to 1,000,000 shares of the Company's common stock. Shares may be purchased at prevailing market prices in private transactions or in open market transactions including block trades, subject to market conditions, share price, trading volume and other factors. The repurchase program may be discontinued at any time. Under the program, the Company repurchased 65,176 and 164,792 shares of its common stock during the three and nine months ended September 30, 2012, respectively. The repurchase program has been funded to date using cash on hand. As of September 30, 2012, the Company had 182,217 shares available for repurchase under the authorizations.

On October 26, 2012, the Company's Board of Directors approved the repurchase of . . .

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