GlassBridge Enterprises, Inc. - Annual Report: 2008 (Form 10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-14310
IMATION CORP.
(Exact name of registrant as specified in its charter)
| Delaware | 41-1838504 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 1 Imation Way | 55128 | |
| Oakdale, Minnesota | (Zip Code) | |
| (Address of principal executive offices) |
(651) 704-4000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, $.01 per share | New York Stock Exchange, Inc.; | |
| Chicago Stock Exchange, Incorporated | ||
| Preferred Stock Purchase Rights | New York Stock Exchange, Inc.; | |
| Chicago Stock Exchange, Incorporated |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):
Large accelerated filer þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ |
Aggregate market value of voting and non-voting stock of the registrant held by non-affiliates
of the registrant, based on the closing price of $22.92 as reported on the New York Stock Exchange
on June 30, 2008, was $855.4 million.
The number of shares outstanding of the registrant’s common stock on February 20, 2009 was
37,736,153.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of registrant’s Proxy Statement for registrant’s 2009 Annual Meeting are
incorporated by reference into Part III.
IMATION CORP.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
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PART I
Item 1. Business.
General
Imation Corp. is a Delaware corporation whose primary businesses are (1) the development,
manufacturing, sourcing, marketing and distribution of removable data storage media products and
accessories and (2) sourcing and distribution of a range of audio and video consumer electronic
products and accessories. As used herein, the terms “Imation,” “Company,” “ we,” “us,” or “our”
mean Imation Corp. and its subsidiaries unless the context indicates otherwise. We sell our
removable data storage media products across multiple technology platforms or “pillars” — magnetic
media, recordable optical media, solid state flash drives and removable and external hard drives.
We sell our products in approximately 100 countries around the world, primarily under the Imation,
Memorex and TDK Life on Record brand names. We also have distribution agreements under which we
distribute certain removable data storage media products under other brands as well, including
International Business Machines Corp. (IBM), Sun Microsystems Inc. (Sun), Hewlett Packard Co. (HP)
and Exabyte. Our consumer electronic products and accessories are sold primarily under the Memorex
and XtremeMac brand names, primarily in North America. Except for certain magnetic tape media
formats, we do not manufacture the products we sell and distribute. We seek to differentiate these
products through unique designs, product positioning, packaging, merchandising, and branding. We
source these products from a variety of third party manufacturers.
We have a long history in the data storage media industry, beginning with development of the
first commercialized data storage tape introduced in 1952 when we were part of 3M Company. In July
1996, Imation was established as a spin-off of the businesses which comprised substantially all of
the data storage and imaging systems groups of 3M Company. Subsequent to the spin-off, we divested
all of the non-data storage businesses acquired from 3M Company in connection with the spin-off.
The purpose and result of these divestitures was that we became focused on data storage media,
primarily as a manufacturer of magnetic tape products under the Imation brand, sold to commercial
end users through multiple distribution channels. We expanded our business into other removable
data storage media such as optical media, flash and solid state drives, removable and external hard
disk drives. We began transformation to a brand and product management company with the 2006
acquisition of Memorex and the 2007 acquisition of TDK recording media business. In 2007, we
acquired certain assets of Memcorp, Inc., a Florida corporation, and Memcorp Asia Limited, a
corporation organized under the laws of Hong Kong (together Memcorp), used in or relating to the
sourcing and sale of branded consumer electronic products, principally under the Memorex brand
name. This action established our foundation in audio and video consumer electronic products. In
2008, we expended our presence in consumer electronic products with the Xtreme Accessories, LLC
(XtremeMac) acquisition.
Recordable and rewritable magnetic and optical media, which currently constitute the majority
of our revenue, are categorized under the North American Industry Classification System (NAICS)
code as “334613: Magnetic and Optical Recording Media Manufacturing.” The majority of the other
products we source and distribute are also categorized under the NAICS code “334” as computer and
electronic products.
Industry Background
We rely on various industry analysts and our own estimates to gauge market size, growth rates
and market shares as discussed below. In 2008, we saw significant turmoil to certain of our markets
as a result of the global economic slowdown and credit crisis. As a result, it is likely that
certain market size, growth rates and market share estimates will change once global 2008 market
data is compiled. For further discussion of 2008 business conditions, refer to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and to Item 1A. Risk
Factors herein.
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Data Storage Media Industry
The global data storage market, including hardware and services, is estimated to be in excess
of $100 billion, of which the removable data storage media market is approximately $20 billion
including magnetic and optical media, flash and solid state drives, removable and external hard
disk drives. Our removable data storage media products are designed to help users capture, create,
protect, preserve and retrieve valuable digital assets. Our primary products include recordable and
rewritable optical discs, magnetic tape cartridges, USB flash drives, and external and removable
hard drives used by business and individual customers.
Demand for data storage capacity is expected to grow for the next several years, driven by the
rapid growth of information in digital form, the growth of complex databases as a result of new
hardware and software applications, increased ability to access data remotely and across multiple
locations, increased regulatory requirements for record retention and the pervasive use of the
Internet. This increased quantity of data has put data security and archiving at the forefront of
critical business processes. Further, the continued growth in the variety and functionality of
consumer electronic devices has increased demand for a range of convenient, low-cost removable data
storage media to capture, store, edit and manage data, photographs, video, images and music. Within
the data storage media industry, the magnetic tape market remains important to Imation with growing
demand for storage capacity across a substantial installed base of commercial information
technology users, a relatively small number of competitors and high barriers to entry. Imation
enjoys a leading market share, significant intellectual property portfolio, solid industry
reputation and relationships among key original equipment manufacturers (OEMs). Many of our legacy
tape formats, which are proprietary or semi-proprietary, have the highest gross profit margins
among all our products.
While the need for removable data storage capacity is expected to grow slightly, the removable
media market size is expected to decline in terms of revenue. The magnetic tape industry has
consistently addressed the growth in demand for storage capacity with new non-proprietary storage
formats with higher capacity cartridges resulting in lower cost per gigabyte and a decline in
actual number of units of media shipped. In addition, these non-proprietary “open” formats
experience greater price competition than proprietary formats. Non-proprietary open format tape
typically is more competitive with lower gross margins and continues to gain share against legacy
formats. These factors inhibit the overall revenue growth of the industry.
In the current economic environment, we have seen this trend accelerate, especially among some
of our enterprise class customers, most notably financial institutions which represent
approximately 40 percent of our magnetic tape revenues. In addition, lower cost disk and
optimization strategies such as virtual tape and de-duplication remain a factor in certain sectors
of the market. As a result, we expect our tape revenue and margins to continue to be under pressure
as these factors result in a decline in the size of the total tape media market over time and a
shift in the mix of total tape revenue toward lower margin open formats.
Our recordable optical media product sales are primarily composed of CDs and DVDs sold
throughout the world under various brands we own or control (Imation, Memorex and TDK Life on
Record) as well as under a distribution agreement for the HP brand. We also have a majority
interest in Global Data Media (GDM) a sales and marketing joint venture for optical media. While
our different brands have varying strengths in different regions of the world, in aggregate we have
the leading overall market share for recordable optical media globally. While the overall market
for CDs and DVDs is declining as hard disk and flash media replace optical media in some
applications such as music and video recording, we have increased both our optical revenue and
market share through our acquisitions. In addition, we sell Blu-ray™ recordable media as a new and
emerging higher capacity format targeted at the recording of high definition video content. Our
optical media products are sold through a variety of retail and commercial distribution channels
and sourced from manufacturers primarily in Taiwan and India.
Our flash media sales are primarily composed of USB flash drives sold through a variety of
retail and commercial distribution channels around the world under the Imation, Memorex and TDK
Life on Record brands and are sourced from manufacturers in Asia. The removable flash media market
is competitive with highly variable price swings driven by NAND chip manufacturing volumes and
capacity as well as market demand in the much larger embedded flash market. Focused and efficient
sourcing and distribution, as well as diligent management of inventories, channel placement and
promotional activity, are critical elements for success in this market. These are areas of focus as
we implement our strategy focused on our transformation to a brand and product management company
(as further described in Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations herein), in addition to USB flash drives, we sell a limited amount of flash
cards and solid state drives (SSD).
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Audio and Video Consumer Electronics Industry
We also participate in the audio and video marketplace of the much larger consumer electronics
market. The consumer electronics market is broadly defined as traditional analog-based audio and
video devices as well as digital-based audio and video hardware and accessories for recording and
replaying audio and video content. The accessories market includes cases, cleaning and labeling
products, cables and connectors sold through retail outlets and distribution channels. Both
consumer electronic products and accessories are sourced from manufacturers throughout Asia.
Consumer electronic products are sold based on a variety of factors, including brand and
reputation, product features and designs, distribution coverage, innovation and price.
The global consumer electronics market is a very large and highly diverse market in terms of
competitors, channels and products. Our current product offerings focus on a subset of this market
which we estimate to be approximately $30 billion (audio and video products and accessories).
Products we sell include CD and DVD players, LCD displays (flat panel televisions and digital
picture frames), iPod® accessories, MP3 players, karaoke machines, and alarm clocks and
clock-radios sold primarily under the Memorex brand name and certain character-based properties
under license. We compete primarily in mass merchant channels for second tier brand preference in
the United States and are expanding into Canada, Mexico and Europe with the Memorex brand,
targeting female consumers, and the XtremeMac brand, targeting the Apple enthusiast.
Business Segments
We operate in two broad market categories: (1) removable data storage media products and
accessories and (2) audio and video consumer electronic products and accessories (electronic
products).
Data Storage Media Products and Accessories
The Data Storage Media market is organized, managed and reported, internally and externally,
as three segments differentiated by the regional markets we serve: Americas, Europe and Asia
Pacific. Each of these segments has the responsibility for selling virtually all of our product
lines except for consumer electronic products which are sold primarily through our Electronic
Products segment.
The Americas segment, our largest segment by revenue, includes North America, South America
and the Caribbean. The United States represents the largest current market for our products. It has
a great variety and sophistication of distribution channels from value-added resellers, OEMs,
retail outlets, mass merchants and on-line resellers. The countries of South America and the
Caribbean represent potential growth markets with increasing penetration of Information Technology
in the commercial and consumer markets.
Europe is our second largest segment by revenue and also incorporates our business results in
most of the Middle East, Africa and most of the results of GDM. Western Europe exhibits traits
similar to North America in terms of overall breadth of products, high penetration of end user
markets and breadth and sophistication of distribution channels. Emerging markets in Eastern Europe
and the Middle East represent potential growth markets for our products as IT end user and consumer
markets grow.
Asia Pacific (APAC) is our smallest segment in terms of revenue and largest segment in terms
of geographic area covered and populations served. It also has the widest diversity of languages,
cultures and currencies of any of our segments. Japan is the single largest market in APAC and is
similar to North America and Western Europe in terms of overall penetration of IT into the market,
though distribution channels are less developed than those in other regions.
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Audio and Video Consumer Electronic Products and Accessories
We entered into the consumer electronics market with the Memcorp acquisition during the third
quarter of 2007 and created our Electronic Products (EP) segment. The EP segment sells consumer
electronics and is currently focused primarily in North America and primarily under the Memorex
brand name. This segment experiences some degree of seasonality with its focus on consumer channels
resulting in the second half of the year being relatively stronger than the first.
The chart below breaks out our 2008 revenue by segment:
See Note 16 to the Consolidated Financial Statements for further information regarding our
business segments and geographic information.
Description of Business
Products and Application Areas
The table below describes our revenue by product category. Optical products consist of
recordable CDs, DVDs and Blu-ray™. Magnetic products consist of data storage tape media, floppy
diskettes and audio and video tape products. Flash products consist of USB flash drives, flash
cards and SSD and are sold primarily under the Memorex brand. Electronic products consist of
consumer electronic products sold by the Memcorp business. Accessories and other include CD and DVD
labeling products, storage cases and cleaning products as well as products and services not
otherwise classified.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| (Dollars in millions) | Revenue | Total | Revenue | Total | Revenue | Total | ||||||||||||||||||
Optical |
$ | 1,025.2 | 47.6 | % | $ | 954.2 | 46.3 | % | $ | 680.3 | 42.9 | % | ||||||||||||
Magnetic |
644.4 | 29.9 | % | 703.9 | 34.1 | % | 660.8 | 41.7 | % | |||||||||||||||
Flash |
99.2 | 4.6 | % | 157.1 | 7.6 | % | 146.6 | 9.3 | % | |||||||||||||||
Electronic products,
accessories and
other |
385.8 | 17.9 | % | 246.8 | 12.0 | % | 97.0 | 6.1 | % | |||||||||||||||
Total |
$ | 2,154.6 | $ | 2,062.0 | $ | 1,584.7 | ||||||||||||||||||
Data storage products, whether for business or consumer applications, are addressed by our
broad range of media across magnetic, optical, solid state USB flash drives and hard disk
platforms. Storage capacities on more established products range from 650 megabyte CD-R
(recordable) and CD-RW (rewritable) optical discs to 9.4 gigabyte (GB) double-sided DVD optical
discs. Products include USB flash drives with capacities ranging from 1GB up to 32GB. The
capacities for USB flash drive and hard disk continue to increase as new products are introduced.
Our Blu-ray™ recordable media currently offers 25GB to 50GB of capacity. Capacity for removable
hard disk drive cartridges ranges from 40GB to 1terabyte (TB).
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Our tape products are used for back-up, business and operational continuity planning, disaster
recovery, near-line data storage and retrieval, cost-effective mass storage and archival storage
and are used across major application areas, including enterprise data centers, the network server
environment and small-medium businesses. Native capacity of our tape products ranges from less than
10GB up to 1TB per piece of media.
Our consumer electronics portfolio includes CD and DVD players, LCD displays (flat panel
televisions and digital picture frames), iPod® accessories, MP3 players, karaoke
machines, and alarm clocks and clock-radios sold primarily under the Memorex brand name and certain
character-based properties under license. The portfolio continues to evolve with consumer demand
and with development of our brands.
Customers, Marketing and Distribution
As described above, our removable data storage media products are used by business customers
and by individual consumers and our electronic products are sold primarily to individual consumers.
No one customer constituted 10 percent or more of our revenue in 2008, 2007 or 2006.
Our products are sold through a combination of distributors, wholesalers, value-added
resellers, OEMs and retail outlets. Worldwide, approximately 49 percent of our 2008 revenue came
from distributors, 43 percent came from the retail channel and 8 percent came from OEMs. We
maintain a company sales force of approximately 320 representatives to generate sales of our
products around the world. We have 47 sales offices worldwide, with 5 in the United States and 42
internationally.
We work with OEMs that develop or market tape drives, tape libraries, tape automation systems
and servers with storage subsystems for differing customer applications. OEMs include Sun
StorageTek, IBM, HP and Tandberg. We are the sole source of supply for certain tape cartridges for
use with Sun StorageTek, IBM and Tandberg drives used in the high-end data center. The development
of future tape formats with key OEMs is an important element in our ability to successfully compete
in the tape market and the loss of such a relationship could have a material adverse effect on our
business.
In 2007, we began to enhance and build our brand management capabilities as we expanded our
brand portfolio. We are building a brand and marketing management organization, comprised of
individuals from both within and outside of Imation as well as acquired businesses, combining
industry experience and consumer marketing expertise.
Competition
The global market for our products is highly competitive and characterized by continuing
changes in technology, frequent new product introductions and performance improvements, diverse
distribution channels, aggressive marketing and pricing practices and ongoing variable price
erosion. Competition is based on a multitude of factors, including brand strength, distribution
presence and capability, channel knowledge and expertise, geographic availability, breadth of
product line, product cost, media capacity, access speed and performance, durability, reliability,
scalability and compatibility.
Our primary competitors in magnetic tape include FUJIFILM Corporation; Sony Corporation and
Hitachi Maxell Ltd. Our primary competitors in optical include Sony Corporation; Hitachi Maxell
Ltd; Verbatim Corporation and SanDisk Corporation. Our primary competitors in flash include SanDisk
Corporation; Lexar Media, Inc.; PNY Electronics, Inc.; and Kingston Technology, Inc. Our primary
competitors in external and removable hard drives include WD, Seagate Technology, LaCie, Iomega
Corporation and Tandberg. While these companies compete in the removable data storage media market,
most of them generally do not report financial results for these business lines on a stand-alone
basis. Therefore, it is difficult for us to estimate our relative market share. However, we use a
variety of industry sources to estimate market size and share and we estimate that in 2008, the
latest period for which data is available, we held a leading market share in magnetic and optical
products with more than one-third of those markets. We estimated that we held a much smaller market
share in flash and removable and external hard disk products.
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Our competitors in the consumer electronics market are numerous manufacturers and brands,
including the iHome, Philips, RCA®, VIZIO® and Griffin brands, some of which
are much larger companies than Imation. Our total of the United States consumer electronics market
share is currently less than one percent.
Manufacturing
We conduct coating operations for the manufacture of magnetic data storage tape products at
our facility in Weatherford, Oklahoma, which is certified to ISO 9001:2000 quality standards and
has a state-of-the-art magnetic tape coating capability that began operation in 2004. In 2007, we
announced our intention to exit our Wahpeton, North Dakota facility and in 2008 we announced our
intention to exit our Camarillo, California facility. By the end of 2008 we ceased manufacturing
operations at both the Wahpeton, North Dakota facility and the Camarillo, California facility. As
part of those steps we consolidated all coating activity in Weatherford, Oklahoma and either ended
or outsourced other manufacturing activities occurring in those locations by the end of 2008. Those
outsourced include conversion of coated tape into finished cartridges and manufacture of plastic
components.
To manufacture magnetic tape media, a thin film material is precisely and uniformly coated
with a magnetic dispersion solution. The coating of high quality magnetic tape media requires
exacting manufacturing process steps with precise physical, electrical and chemical tolerances as
well as significant technical expertise in several areas including coating processes, servo-writing
and magnetic and material science. To meet the market requirements for future advanced tape media
products with higher data transfer rates, greater data density, and faster tape speeds, we must be
capable of coating thinner substrates with smaller particle sizes and increased uniformity, surface
smoothness and bit and track density.
We do not manufacture optical media, removable or external hard disk, USB flash drive products
or consumer electronic products or storage accessories. They are currently sourced from
manufacturing plants outside the United States.
Raw Materials and Other Purchased Products
The principal raw materials we use for the manufacture of removable data storage media
products include plastic resins, polyester films, magnetic pigments, specialty chemicals and
solvents. We make significant purchases of these and other materials and components for use in our
manufacturing operations from domestic and foreign sources. There are two sources of supply for the
base film, one of which supplies the newer, more advanced base film, and there are two sources for
the metal particulate pigments on which the industry relies for use in the manufacture of higher
capacity magnetic data storage cartridges. If supply was disrupted or prices significantly
increased for any of these key materials, our business and the business of our competitors could be
negatively impacted. We also rely on certain partners as sole suppliers for components and raw
materials used in our manufacturing processes. The loss of these certain suppliers could have a
material adverse impact on the business. Except as noted above, we are not overly dependent on any
single supplier of raw materials.
On July 31, 2007, we acquired substantially all of the assets relating to the marketing,
distribution, sales, customer service and support of removable recording media products, accessory
products and ancillary products being sold under the TDK Life on Record brand name (TDK Recording
Media), from TDK Corporation, a Japanese corporation (TDK), including the assets or capital stock
of TDK’s operating subsidiaries engaged in the TDK Recording Media business. In conjunction with
our acquisition of the TDK Recording Media business we also entered into a supply agreement, dated
July 31, 2007, with TDK (Supply Agreement), to purchase a limited number of LTO Tape media and
Blu-ray™ removable recording media products and accessory products for resale under the TDK Life on
Record brand name. TDK agreed to supply such products on competitive terms, and TDK agreed not to
sell any such products to third parties for resale under the TDK Life on Record brand name during
the term of the trademark license agreements. The trademark license agreements will continue unless
terminated by TDK no earlier than 2032. The Supply Agreement will continue for the greater of five
years or for so long as TDK manufactures any of the products.
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We also make significant purchases of finished and semi-finished products, including optical
media and USB flash drives, certain finished tape and tape cartridges and electronic products,
primarily from Asian suppliers. For our optical media, we procure our supply primarily from three
companies. If supply were disrupted from any of these companies, our business could be negatively
impacted. The loss of these certain suppliers could have a material adverse impact on the business.
We view the sourcing and distribution of finished goods as a critical success factor for those
products we do not manufacture. Therefore, we seek to establish and maintain strategic sourcing
relationships with several key suppliers.
Research and Development
Development and timely introduction of new removable data storage media products are important
to our future success. We maintain an advanced research facility and invest resources in
researching and developing potential new products and improving existing products. We invest in
research, development and capital equipment in order to remain competitive and successfully
develop, manufacture and source media that meets market requirements. We also invest, through third
party industrial designers, in design and feature enhancements for our removable and external hard
drive and consumer electronic products. We are also engaged in certain research programs that do
not yet have specific commercialized products in the market, related to future generations of
magnetic tape, both on our own and in collaboration with other organizations. Our research and
development (R&D) expense was $23.6 million, $38.2 million and $50.0 million for 2008, 2007 and
2006, respectively. In 2007, we announced a strategy focused on our transformation to a brand and
product management company. This transformation included a cost reduction program in our
manufacturing and research and development organization. The decrease in our 2008 R&D expense was
due to an alignment of our resources with our strategic direction.
Intellectual Property
We rely on a combination of patent, trademark and copyright laws, trade secret protection and
confidentiality and license agreements to protect the intellectual property rights related to our
products. We register our patents and trademarks in the United States and in a number of other
countries where we do business. United States patents are currently granted for a term of twenty
years from the date a patent application is filed. United States trademark registrations are for a
term of ten years and are renewable every ten years as long as the trademarks are used in the
regular course of trade. Pursuant to trademark license agreements between TDK and Imation and its
affiliates, TDK granted Imation and its affiliates a long-term exclusive license to use the TDK
Life on Record brand for current and future recordable magnetic, optical, flash media and accessory
products globally. That right is revocable by TDK in the year 2032, with a one year wind-down.
During 2008, we were awarded 28 United States patents and at the end of the year held over 345
patents in the United States.
Sourcing, Supply Chain and Distribution
As our revenue mix shifts increasingly to sales from products we do not manufacture, our
sourcing, supply chain and distribution capabilities worldwide are increasingly important. As a
result, in 2008 we centralized our corporate operations organization to coordinate sourcing for
purchased finished goods products across all our businesses. We also have consolidated distribution
centers in the United States, Europe and parts of Asia.
Employees
At December 31, 2008, we employed approximately 1,570 people worldwide, with approximately 810
employed in the United States and approximately 760 employed internationally.
Environmental Matters
Our operations are subject to a wide range of federal, state and local environmental laws.
Environmental remediation costs are accrued when a probable liability has been determined and the
amount of such liability has been reasonably estimated. These accruals are reviewed periodically as
remediation and investigatory activities proceed and are adjusted accordingly. Compliance with
environmental regulations has not had a material adverse effect on our financial results. As of
December 31, 2008, we had environmental-related accruals totaling $0.5 million and we had minor
remedial activities underway at one of our facilities. We believe that our accruals are adequate,
though there can be no assurance that the amount of expense relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts reflected in our
accruals.
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International Operations
Approximately 58 percent of our total 2008 revenue came from sales outside the United States,
primarily through subsidiaries, sales offices, distributors and relationships with OEMs throughout
Europe, Asia, Latin America and Canada. The removable data storage market is at different levels of
development and penetration in different geographic regions. As a result, growth rates will
typically vary in different application areas and product categories in different parts of the
world. Our EP segment does not have material operations internationally. We do not manufacture
outside the United States. See Note 16 to the Consolidated Financial Statements for further
information by geographic region.
As discussed under Risk Factors in Item 1A of this Form 10-K, our international operations are
subject to various risks and uncertainties that are not present in our domestic operations.
Executive Officers of the Registrant
Information regarding our executive officers as of February 27, 2009 is set forth below.
Frank P. Russomanno, age 61, is President, Chief Executive Officer and a member of our Board
of Directors. He became President and Chief Executive Officer in April 2007, was acting Chief
Executive Officer, Chief Operating Officer and President from November 2006 to April 2007 and was
Chief Operating Officer from November 2003 to November 2006. He joined Imation at spin-off in July
1996. Prior to assuming his current responsibilities, he held various leadership positions with
Imation, including Corporate Sales and Marketing Director, President of Data Storage and
Information Management and General Manager of Advanced Imaging Technologies. Prior to joining
Imation, he held multiple sales and marketing positions with 3M Company, including European
Business Director.
James C. Ellis, age 51, is Vice President, Strategy and M&A, a position he has held since
January 2008. He has been with Imation since spin-off in July 1996. Prior to assuming his current
responsibilities, he had various leadership positions within Imation, including Vice President
Strategic Growth Programs from April 2007 to January 2008, General Manager of Strategic Growth
Programs from January 2007 to April 2007, General Manager Global Product Strategy from January 2005
to December 2006, General Manager of New Business Ventures from June 2004 to December 2004, General
Manager Data Storage & Information Management from May 2004 to June 2004, Director of Strategic
Marketing from March 2001 to April 2004, Product Marketing Manager from May 2000 to February 2001,
and Enterprise Storage Manager from July 1996 to April 2000. Prior to joining Imation, he held
various business and technical positions with 3M Company.
Peter A. Koehn, age 48, is Vice President, Global Operations, a position he has held since
August 2007. Prior to assuming his current responsibilities, he was Vice President and Corporate
Controller. He joined Imation in 2000 as Division Controller for Data Storage and Information
Management and was named Corporate Controller in 2004 and Vice President in 2005.
Dr. Subodh Kulkarni, age 44, is Vice President, Global Commercial Business, R&D and
Manufacturing, a position he has held since August 2007. He has been with Imation since spin-off.
Prior to assuming his current responsibilities, he was appointed Vice President, R&D and
Manufacturing in October 2006. He was appointed Vice President of R&D in March 2006, Executive
Director of R&D in 2004 and has held various positions leading the R&D organization.
Mark E. Lucas, age 54, will join Imation as President and Chief Operating Officer (COO),
effective March 17, 2009. He has served as Chairman and Chief Executive Officer of Geneva Watch
Group, from November 2005 to August 2008. Prior to that role, Mr. Lucas served as President and
Chief Executive Officer of Altec Lansing Technologies, a manufacturer of consumer audio equipment,
from June 2001 to August 2005. Mr. Lucas had been a member of the Board of Directors of Imation
since April 2007 and served as a member of the Company’s Audit and Finance Committee and
Compensation Committee. Mr. Lucas resigned from the Board of Directors of Imation Corp. in
connection with this appointment. Mr. Lucas’s resignation from the Board of Directors was a
requirement of his employment.
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Scott J. Robinson, age 42, was appointed Corporate Controller and Chief Accounting Officer in
August 2007. He joined Imation in March 2004 and held the position of Chief Accountant until taking
his current position. Prior to joining Imation, he was at Deluxe Corporation, where he held the
position of Assistant Corporate Controller from August 2002 to March 2004 and held the position of
Director of Internal Audit from June 1999 to August 2002.
John L. Sullivan, age 54, is Senior Vice President, General Counsel and Corporate Secretary, a
position he has held since joining Imation in August 1998. He joined Imation from Silicon Graphics,
where he most recently was Vice President, General Counsel. Prior to joining Silicon Graphics, he
held several positions with Cray Research from 1989 to 1997, including the positions of General
Counsel and Corporate Secretary from 1995 to 1997. Cray Research became part of Silicon Graphics in
1996.
Paul R. Zeller, age 48, is Vice President and Chief Financial Officer, a position he has held
since August 2004. He has been with Imation since spin-off and held the position of Corporate
Controller from May 1998 until taking his current position. Prior to joining Imation, he held
several accounting management positions with 3M Company.
Availability of SEC Reports
Our website address is www.imation.com. We make available free of charge on or through our
website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (the Exchange Act) as soon as reasonably
practicable after we electronically file such material with or furnish it to the Securities and
Exchange Commission (SEC). Materials posted on our website are not incorporated by reference into
this Annual Report on Form 10-K.
Item 1A. Risk Factors.
Our business faces many risks. Any of the risks discussed below, or elsewhere in this Form
10-K or our other SEC filings, could have a material impact on our business, financial condition or
results of operations. Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also impair our business operations.
Our global business is subject to a number of risks related to the global credit crisis and
economic downturn. As widely reported, markets globally have been experiencing extreme disruption
in recent months, including, among other things, extreme volatility in securities prices, severely
diminished liquidity and credit availability, rating downgrades of certain investments and
declining valuations of others. Worldwide economic conditions have deteriorated, with many
countries, including the United States, formally announcing that their economies are in a
recession. This downturn is evidenced by declining revenues and profitability across many
industries, increased unemployment, reduced capital spending, increasing rates of consumer default
and corporate bankruptcies, and decreased consumer confidence and spending. Governments have taken
unprecedented actions intended to address extreme market conditions. There can be no assurance that
there will not be a further deterioration in global financial markets in major economies.
We cannot predict the duration or severity of this economic downturn or the extent of which
the global economic conditions could negatively effect our business, operating results and
financial condition. These economic developments affect businesses such as ours in a number of
ways. Unfavorable economic conditions may make it more difficult for us to improve our performance.
The current tightening of credit in financial markets adversely affects the ability of customers
and suppliers to obtain financing for significant purchases and operations and could result in a
decrease in or cancellation of orders or non-payment of amounts owed to Imation. The decline in
economic conditions may also diminish consumer demand for our products, which would have a material
adverse effect on our business. The significant and rapid downturn in the global economy has
negatively affected demand for both our commercial and consumer product lines, and is impacting
suppliers, distributors and channel partners. For example, as a result of the financial market
turmoil, data center customers in several large financial institutions scaled back, deferred or
stopped purchase activity altogether. We are unable to predict the likely duration and severity of
the current disruption in financial markets and adverse economic conditions in the United States
and other countries.
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Significant litigation matters could result in large costs and distraction to our business. We
are subject to various pending or threatened legal actions, including the Philips and SanDisk
disputes and in the ordinary course of our business. Litigation is always subject to many
uncertainties and outcomes that are not predictable. We cannot ascertain the ultimate aggregate
amount of any monetary liability or financial impact that may be incurred by us in litigation. See
Item 3. Legal Proceedings herein for a description of our disputes with Philips and SanDisk.
Continued disruption in United States and international credit markets may adversely affect
our ability to draw on our credits lines or obtain financing from alternative sources on reasonable
terms or at all, and may adversely affect our business, financial condition and results of
operation. Recent disruptions in national and international credit markets have lead to a scarcity
of credit, tighter lending standards and higher interest rates on business loans. Continued
disruption may materially limit our credit availability. We could incur significant expenses or
shortfalls in anticipated cash generated as a result of unanticipated events in our business or
competitive, regulatory, or other changes in the markets in which we compete. As a result, we may,
in the future, need to obtain financing. The availability of such financing is limited by the
tightening of the global credit markets. If our lenders are adversely affected by economic
conditions in domestic or international capital markets, they may become unwilling or unable to
fund borrowings under their credit facilities with us. In such a case, we might not be able to
locate replacement lenders or other sources of financing, on reasonable terms, or at all, which
could have a material and adverse impact on our ability to fund working capital, capital
expenditures, research and development and other corporate needs. Failure of lenders to provide
sufficient financing may constrain our ability to operate or grow the business and to make
complementary strategic business and/or brand acquisitions. This could have a material adverse
effect on our business, financial condition and results of operations.
Our ability to extend our current credit facilities or to enter into a new credit facility
could be impaired if current market conditions continue or worsen. Lenders may seek more
restrictive lending provisions and higher interest rates that may reduce our borrowing capacity and
increase our costs, which could have a material adverse effect on our business. If other financing
is not available on acceptable terms or at all, we may not be able to respond adequately to these
changes or maintain our business, which could adversely affect our operating results and the market
price of our common stock.
Our financial success depends in part on our ability to profitably grow our business in the
consumer electronics market. One element of our strategy is the sourcing of a portfolio of consumer
video, audio and electronic products. This is a strategic segment where we have had limited sales
and marketing experience. Our financial success is dependent on successfully increasing our brand
portfolio and product offerings to profitably grow market share in the United States and worldwide.
If we are not successful in profitably expanding our product portfolio, creating brand awareness
and developing new customers our financial results could be impacted. Additionally, in an economic
recession or under other adverse economic conditions described above, customers and vendors could
make fewer purchases of our products, and may be more likely to fail to meet contractual terms or
their payment obligations and product areas such as consumer electronics may be significantly
affected.
Our international operations subject us to economic risk as our results of operations may be
adversely affected by changes in political, economic and other conditions and foreign currency
fluctuations. We conduct our business on a global basis, with 58 percent of our 2008 revenue
derived from operations outside of the United States. Our international operations may be subject
to various risks which are not present in domestic operations, including political and economic
instability, terrorist activity, the possibility of expropriation, trade tariffs or embargoes,
unfavorable tax laws, restrictions on royalties, dividend and currency remittances, changes in
foreign laws and regulations, requirements for governmental approvals for new ventures and local
participation in operations such as local equity ownership and workers’ councils. In addition, our
business and financial results are affected by fluctuations in world financial markets. Changes in
local and regional economic conditions, including fluctuations in exchange rates, may affect
product demand in our non-U.S. operations and export markets. Foreign currency fluctuations can
also affect reported profits of our non-U.S. operations where transactions are generally
denominated in local currencies. In addition, currency fluctuations may affect the prices we pay
suppliers for materials used in our products. Our financial statements are denominated in U.S.
dollars.
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Accordingly, fluctuations in exchange rates may give rise to translation gains or losses when
financial statements of non-U.S. operating units are translated into U.S. dollars. Given that the
majority of our revenues are non-U.S. based, a strengthening of the U.S. dollar against other major
foreign currencies could adversely affect our results of operations. While these factors or the
impact of these factors are difficult to predict, any one or more of them could adversely affect
our business, financial condition or operating results.
If we do not successfully implement our global restructuring plans and realize the benefits
expected from the restructuring, our financial results will be affected. We have announced multiple
restructuring plans focused on transforming Imation into a brand and product management company.
This transformation has included cost reduction restructuring programs in our manufacturing and R&D
organizations along with programs intended to redesign and simplify our corporate structure
globally. These programs are focused on aligning our resources with our strategic direction. We may
not be able to realize the expected benefits and cost savings if we do not successfully consolidate
or outsource our magnetic tape cartridge converting operations. If these factors limit our ability
to restructure our operations successfully, or on a timely basis, our expectations of future
results of operations, including certain cost savings expected to result from the restructuring may
not be met. If such difficulties are encountered or such cost savings are not realized, it could
have a material adverse effect on our business, financial condition and results of operations.
If we do not successfully manage our multiple brands on a global basis, it could have a
material impact on our financial results. One element of our Company’s profitable growth strategy
is to acquire and successfully manage a balanced portfolio of strong commercial and consumer brands
focused on data storage media and consumer electronic products. Our financial success is dependent
on our ability to successfully manage the brands to maintain our strong recognition and presence in
existing markets worldwide, grow brand recognition and presence in other areas of the world, grow
our recognition and presence in areas of the world in which we do not currently operate and to grow
our retail channel penetration. Our success is dependent on a number of factors including our
ability to develop effective sales and marketing programs that enhance the strength of our brands
and ability to increase retail channel penetration with leading-edge product innovation and
increased product offerings. If one of our brands suffers a substantial impediment to its
reputation due to real or perceived quality issue, our market share declines significantly or our
sales and marketing programs are not effective, our results could be negatively impacted.
We must make strategic decisions from time to time as to the products and technologies in
which we invest and if we choose the wrong product or technology, our financial results could be
adversely impacted. Our operating results are dependent upon our ability to successfully develop,
manufacture, source and market innovative new products and services. New product and technology
innovations may require a substantial investment before we can determine their commercial viability
and a return on the investment may never be realized.
Because of the rapid technology changes in our industry, we may not be able to compete if we
cannot quickly develop, source and introduce differentiating and innovative products. We operate in
a highly competitive environment against competitors who are both larger and smaller than us in
terms of resources and market share. Our industry is characterized by rapid technological change
and new product introductions. In these highly competitive and changing markets, our success will
depend to a significant extent on our ability to continue to develop and introduce differentiated
and innovative products and services cost-effectively and on a timely basis. The success of our
offerings is dependent on several factors including our differentiation from competitive offerings,
timing of new product introductions, effectiveness of marketing programs and maintaining low
manufacturing, sourcing and supply chain costs. No assurance can be given with regard to our
ability to anticipate and react to changes in market requirements, react to the actions of
competitors or react to the pace and direction of technology changes.
We may be dependent on third parties for new product introductions or technologies in order to
introduce our own new products. We are dependent in some cases upon various third parties, such as
certain drive manufacturers, for the introduction and acceptance of new products, the timing of
which is out of our control. In addition, there can be no assurance that we will maintain existing
or create new OEM relationships. There can be also no assurance that we will continue to have
access to significant proprietary technologies through internal development and licensing
arrangements with third parties, or that we will continue to have access to new competitive
technologies that may be required to introduce new products. If we are not successful in
maintaining and developing new relationships with OEMs or obtaining rights to use competitive
technologies, we may become less competitive in certain markets.
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Operating losses in tax jurisdictions with deferred tax assets could hinder our ability to
continue to carry the deferred tax assets, which would result in a valuation allowance negatively
impacting our consolidated results and net worth. In a tax jurisdiction with a net deferred tax
asset, the considerations for determining whether the asset can continue to be carried on the
financial statements, include, amongst others, whether there has been cumulative profit (defined as
pre-tax income adjusted by permanent differences) over the preceding three year period. Our
analysis of the need for a valuation allowance recognizes that while we have reported a
consolidated cumulative loss over the three year period ended December 31, 2008, this loss includes
certain goodwill impairments which can be excluded from the calculation of cumulative profit.
Excluding these goodwill impairments, we have a consolidated cumulative profit over the most recent
three year period in all tax jurisdictions where a net deferred tax asset is recorded.
While we have a history of profits, our profitability has declined over the last three years
and we recorded a loss in the current year in the United States where the majority of our deferred
tax assets are recorded. Therefore achievement of profitability in the United States in 2009 will
be a significant factor in determining our continuing ability to carry these deferred tax assets.
Significant negative events could impact the ability to carry the deferred tax assets in future
periods
Impairment in the carrying value of goodwill or other assets could negatively affect our
consolidated results of operations and net worth. Goodwill represents the difference between the
purchase price of acquired companies and the related fair values of net assets acquired. Goodwill
is not subject to amortization and is tested for impairment annually and whenever events or changes
in circumstances indicate that impairment may have occurred. Impairment testing is performed for
each of our reporting units. We compare the carrying value of a reporting unit, including goodwill,
to the fair value of the unit. Carrying value is based on the assets and liabilities associated
with the operations of that reporting unit, which often requires allocation of shared or corporate
items among reporting units. If the carrying amount of a reporting unit exceeds its fair value, we
revalue all of the assets and liabilities of the reporting unit, including goodwill, to determine
if goodwill is impaired. If the fair value of goodwill is less than its carrying amount, impairment
has occurred. Our estimates of fair value are determined based on a discounted cash flow model and
then compared to the market capitalization of the Company. Growth rates for sales and profits are
determined using inputs from our annual long-range planning process. We also make estimates of
discount rates, perpetuity growth assumptions, market comparables and other factors.
We evaluate assets on our balance sheet, including intangible assets, whenever events or
changes in circumstances indicate that their carrying value may not be recoverable. Our estimate of
the fair value of the assets may be based on fair value appraisals or discounted cash flow models
using various inputs.
As of December 31, 2008, we had $357.0 million of definite-lived intangible assets subject to
amortization and $23.5 million of goodwill. While we believe that the current carrying value of
these assets is not impaired, materially different assumptions regarding future performance of our
businesses could result in significant impairment losses.
Our stock price may be subject to significant volatility due to our results or market trends.
If revenue, earnings or cash flows in any quarter fail to meet the investment community’s
expectations, there could be an immediate negative impact on our stock price. Our stock price may
also be affected by broader market trends and world events unrelated to our performance.
Our financial success depends upon our ability to manufacture, source and deliver products to
our customers at acceptable quality, volume and cost levels. Our success depends on our ability to
source, manufacture and deliver products to our customers at acceptable quality, volume and cost
levels. The manufacture of our magnetic tape products involves complex and precise processes
requiring production in highly controlled and clean environments. If we do not manage these
processes effectively, changes could significantly hurt our ability to meet our customers’ product
volume and quality needs at acceptable costs. Even within a clean room environment, minor equipment
malfunctions in any one of the many manufacturing process steps could halt production and lead to
additional costs. Further, existing manufacturing techniques may not achieve our volume and cost
targets. In these cases, there can be no assurance that we will be able to develop new
manufacturing processes and techniques to achieve these targets. For sourced products, we must be
able to obtain quality products at a price that will allow us to sell the products at an acceptable
gross margin. To the extent we cannot control costs or price erosion is greater than expected, our
financial results may be negatively impacted.
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If we do not achieve the expected benefits from strategic relationships, our financial results
may be negatively impacted. In 2003, we entered into a series of agreements with MBI that
established MBI as a significant, non-exclusive source for our optical media products and created
GDM as a joint venture sales and distribution company for optical media products. We hold a 51
percent interest in GDM and MBI holds a 49 percent interest. As the controlling shareholder of this
subsidiary, we consolidate the results of GDM in our financial statements. We have also entered
into other strategic relationships and distribution agreements over the past several years with
IBM, HP, Sun StorageTek, Tandberg and others, where we are the exclusive distributor on a global or
regional basis. If we do not perform at levels expected with these relationships, our volumes and
growth prospects may not be realized which could have a material adverse effect on our business,
financial condition and results of operations.
Significant changes in discount rates, rates of return on pension assets, mortality tables and
other factors could affect our future earnings, equity and pension funding requirements. Pension
obligations and the related costs are determined using actual investment results as well as
actuarial valuations that involve several assumptions. Our funding requirements are also based on
these assumptions in addition to the performance of the assets in the plans. The most critical
assumptions are the discount rate, the long-term expected return on assets and mortality. Other
assumptions include salary increases and retirement age. Some of these assumptions, such as the
discount rate, are largely outside of our control. Changes in these assumptions could affect our
future earnings, equity and funding requirements. In 2008, the declines in the United States equity
markets resulted in a significant decrease in our plan assets.
We use a variety of raw materials, supplier-provided parts, components, sub-systems and third
party contract manufacturing services in our businesses, and significant shortages, supplier
capacity constraints, supplier production disruptions or price increases could increase our
operating costs and adversely impact the competitive positions of our products. Our reliance on
suppliers, third party contract manufacturing and commodity markets to secure raw materials, parts
and components used in our products exposes us to volatility in the prices and availability of
these materials. In some instances, we depend upon a single source of supply, manufacturing or
assembly or participate in commodity markets that may be subject to allocations by suppliers. A
disruption in deliveries from our suppliers or third party contract manufacturers, supplier
capacity constraints, supplier and third party contract manufacturer production disruptions, price
increases or decreased availability of raw materials or commodities could have an adverse effect on
our ability to meet our commitments to customers or increase our operating costs. We believe that
our supply management and production practices are based on an appropriate balancing of the
foreseeable risks and the costs of alternative practices. No assurances can be given that
acceptable cost levels will continue in the future. In addition, some critical raw materials and
key components have a limited number of suppliers. If we cannot obtain those raw materials or
critical components from the suppliers, we will not be able to produce certain of our products. In
the global consumer electronics market, flat panel displays are in high demand and if our vendors
fail to supply us with products we may not meet the demands of our customers and revenue could
decline.
A material change in customer relationships or in customer demand for products could have a
significant impact on our business. We are transforming the Company into a brand and product
management organization and increasing our reliance on retail customers. Our success is dependent
on our ability to successfully offer trade terms that are acceptable to our customers and are
aligned with our pricing and profitability targets. Our business could suffer if we cannot reach
agreements with key customers based on our trade terms and principles. In addition, our business
would be negatively impacted if key customers were to significantly reduce the range or inventory
level of our products.
Our success depends in part on our ability to obtain and protect our intellectual property
rights, including the Imation, TDK Life on Record, Memorex and XtremeMac brands, and to defend
ourselves against intellectual property infringement claims of others, including the Philips patent
cross-license claim. Claims may arise from time to time alleging that we infringe on the
intellectual property rights of others. If we are not successful in defending ourselves against
those claims, we could incur substantial costs in implementing remediation actions, such as
redesigning our products or processes, paying for license rights or paying to settle disputes. The
related costs or the disruption to our operations could have a material adverse effect on us. See
Item 3. Legal Proceedings for a description of our dispute with Philips and SanDisk.
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In addition, we utilize valuable non-patented technical know-how and trade secrets in our
product development and manufacturing operations. There can be no assurance that confidentiality
agreements and other measures we utilize to protect such proprietary information will be effective,
that these agreements will not be breached or that our competitors will not acquire the information
as a result of or through independent development. We enforce our intellectual property rights
against others who infringe those rights.
If we are unable to attract and retain employees and key talent, we may incur a material
adverse impact on our business and financial results. We operate in a highly competitive market for
employees with specialized skill, experience and industry knowledge. No assurance can be given that
we will be able to attract and retain employees and key talent.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our worldwide headquarters is located in Oakdale, Minnesota, United States of America. Our
major facilities, and the functions at such facilities, are listed below for each reporting
segment. Our facilities are in good operating condition suitable for their respective uses and are
adequate for our current needs.
| Facility | Function | |
Electronic Products |
||
Kowloon, Hong Kong (leased) |
Administrative | |
Weston, Florida (leased) |
Sales/Administrative | |
Data Storage Media |
||
Americas |
||
Bogota, Columbia (leased) |
Sales/Administrative | |
Buenos Aires, Argentina (leased) |
Sales/Administrative | |
Lima, Peru (leased) |
Sales/Administrative | |
London, Ontario, Canada (owned) |
Sales/Administrative | |
Mexico City, Mexico (leased) |
Sales/Administrative | |
Panama City, Panama (leased) |
Sales/Administrative | |
Oakdale, Minnesota (owned) |
Sales/Administrative/Laboratory facility | |
Santiago, Chile (owned) |
Sales/Administrative | |
Sao Paulo, Brazil (leased) |
Sales/Administrative | |
Rochester, New York (leased) |
Sales/Administrative | |
Southaven, Mississippi (leased) |
Distribution Center | |
Weatherford, Oklahoma (owned) |
Magnetic tape manufacturing | |
Europe |
||
Bracknell, England (leased) |
Sales/Administrative | |
Cergy, France (leased) |
Sales/Administrative | |
Dubai, United Arab Emirates (leased) |
Sales/Administrative | |
Langendorf, Switzerland (leased) |
Sales/Administrative | |
Madrid, Spain (leased) |
Sales/Administrative | |
Neuss, Germany (leased) |
Sales/Administrative/Distribution Center | |
Hoofddorp, Netherlands (leased) |
Sales/Administrative/European regional headquarters | |
Warsaw, Poland (leased) |
Sales/Administrative | |
Segrate, Italy (leased) |
Sales/Administrative |
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| Facility | Function | |
Asia Pacific |
||
Auckland, New Zealand (leased) |
Distribution Center | |
Kings Park, Australia (leased) |
Sales/Administrative | |
Beijing, China (leased) |
Sales/Administrative | |
Guangzhou, China (leased) |
Sales/Administrative | |
New Delhi, India (leased) |
Sales/Administrative | |
North Point, Hong Kong (leased) |
Sales/Administrative/Asia-Pacific regional headquarters | |
Seoul, South Korea (leased) |
Sales/Administrative | |
Shanghai, China (leased) |
Sales/Administrative | |
Petaling Jaya, Malaysia (leased) |
Sales/Administrative | |
Bangkok, Thailand (leased) |
Sales/Administrative | |
Manila, Philippines (leased) |
Sales/Administrative | |
Singapore (leased) |
Sales/Administrative | |
Taipei, Taiwan (leased) |
Sales/Administrative | |
Tokyo, Japan (leased) |
Sales/Administrative | |
Nagoya, Japan (leased) |
Sales/Administrative | |
Sendai, Japan (leased) |
Sales/Administrative | |
Sapporo, Japan (leased) |
Sales/Administrative | |
Osaka, Japan (leased) |
Sales/Administrative | |
Fukuoka, Japan (leased) |
Sales/Administrative |
Item 3. Legal Proceedings.
In the normal course of business, we periodically enter into agreements that incorporate
general indemnification language. Performance under these indemnities would generally be triggered
by a breach of terms of the contract or by a third-party claim. There have historically been no
material losses related to such indemnifications. In accordance with Statement of Financial
Accounting Standard (SFAS) No. 5, Accounting for Contingencies, we record a liability in our
consolidated financial statements for these actions when a loss is known or considered probable and
the amount can be reasonably estimated.
We are the subject of various pending or threatened legal actions in the ordinary course of
our business. All such matters are subject to many uncertainties and outcomes that are not
predictable with assurance. Consequently, as of December 31, 2008, we are unable to ascertain the
ultimate aggregate amount of any monetary liability or financial impact that we may incur with
respect to these matters. While these matters could materially affect operating results depending
upon the final resolution in future periods, it is our opinion that after final disposition, except
for possibly the Philips dispute described below, any monetary liability beyond that provided in
the Consolidated Balance Sheet as of December 31, 2008 would not be material to our financial
position.
Philips
Imation filed a Declaratory Judgment Action on October 27, 2006, in Federal District Court in
St. Paul, Minnesota requesting that the court resolve an ongoing dispute with Philips Electronics
N.V., U.S. Philips Corporation and North American Philips Corporation (collectively, Philips).
Philips has asserted that (1) the patent cross-license between 3M Company and Philips was not
validly assigned to Imation in connection with the spin-off of Imation from 3M Company in 1996; (2)
Imation’s 51 percent owned subsidiary, Global Data Media (GDM), is not a “subsidiary” as defined in
the cross-license; (3) the coverage of the cross-license does not apply to Imation’s acquisition of
Memorex; (4) the cross-license does not apply to DVD discs; (5) certain Philips patents that are
not covered by the cross-license are infringed by Imation; and (6) as a result, Imation owes
Philips royalties for the prior and future sales of CD and DVD discs. We believe that these
allegations are without merit and filed a Declaratory Judgment Action to have a court reaffirm
Imation’s rights under the cross-license. On February 26, 2007, the parties signed a Standstill
Agreement and the litigation was voluntarily dismissed without prejudice. Imation and Philips
held settlement negotiations but were unable to come to an agreement. Imation re-filed its
Declaratory Judgment Action on August 10, 2007. Philips filed its Answer and Counterclaims against
Imation and MBI, Imation’s partner in GDM. Philips alleged that (1) the cross-license does not
apply to companies that Imation purchased or created after March 1, 2000; (2) GDM is not a
legitimate subsidiary of Imation; (3) Imation’s formation of GDM is a breach of the cross-license
resulting in termination of the cross-license at that time; (4) Imation (including Memorex and GDM)
infringes various patents that would otherwise be licensed under the cross-license; and (5) Imation
(including Memorex and GDM) infringes one or more patents that are not covered by the
cross-license. Philips originally claimed damages of $655 million plus interest and costs, as well
as a claim requesting a trebling of that amount. Imation was aware of these claims prior to filing
its Declaratory Judgment Action.
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On October 30, 2007, Imation filed its answers to Philips’ counterclaims and a Motion for
Partial Summary Judgment on the issue of whether the patent cross-license was validly assigned by
3M Company to Imation. Philips did not contest Imation’s Motion and on November 26, 2007, the
parties filed a stipulation affirming that the cross-license was validly assigned to Imation.
On April 7, 2008, Philips amended its counterclaims to (1) add claims that DVD discs sold by
Imation infringe its patents, and (2) withdraw its specific claim of $655 million in damages in
favor of the more general “damages in an amount to be proved at trial.”
On May 27, 2008, Philips filed a Motion for Judgment on the Pleadings that the cross-license
does not apply to subsidiaries acquired or formed by Imation after March 1, 2000. Under this
interpretation, the license would not apply to GDM or Memorex Products, Inc. Imation disagrees with
this interpretation.
The parties held court ordered settlement discussions from June through September 2008,
however, no agreement was reached.
On October 1, 2008, Imation filed a Motion for Leave to amend its Complaint. On November 18,
2008, the Magistrate Judge denied Imation’s Motion. Imation filed its Objection to the Magistrate
Judge’s Order and on February 2, 2009, the Court affirmed the Magistrate Judge’s decision.
On November 26, 2008, the Court issued a decision granting Philips’ Motion for Judgment on the
pleadings relating to subsidiaries formed after March 1, 2000. Following this ruling, Imation and
MBI filed a Motion for the Court to certify the ruling on this issue as final under FRCP 54(b)
allowing for an interlocutory appeal to the Court of Appeals for the Federal Circuit. The Court
granted this Motion on January 21, 2009 and on January 23, 2009, Imation filed its Notice of Appeal
with the Court of Appeals for the Federal Circuit.
On December 1, 2008, MBI filed two patent-related Summary Judgment Motions. A hearing on these
Motions was held on January 16, 2009. The Court has not yet ruled on these Motions.
Although all litigation carries risk, we continue to aggressively dispute
Philips’ claims.
Given the present status of the proceedings, there currently is no probable or estimable liability.
Discovery is ongoing and trial of the matter is currently scheduled for fall 2009. In the interim,
the parties may continue to conduct settlement discussions.
Although the Company is not a party to this lawsuit, On August 15, 2007, Philips initiated a
lawsuit against Moser Baer India Ltd. (MBI) in The Hague, Netherlands, based on MBI’s optical
license agreements with Philips. MBI has made a claim for indemnification of its legal expenses and
potential liabilities for damages that may be incurred with respect to this claim as well as the US
litigation described above. Imation has made payments to MBI and accrued liabilities in connection
with a portion of MBI’s legal fees incurred with respect to the Philips litigation. We continue to
review MBI’s claims for reimbursement to determine the extent of our obligations under the relevant
agreements with MBI.
SanDisk
On October 24, 2007, SanDisk Corporation filed a patent infringement action in U.S. District
Court, Western District of Wisconsin, against Imation and its subsidiaries, Imation Enterprises
Corp. and Memorex Products, Inc. The lawsuit also names over twenty other companies as defendants.
This action alleges that we have infringed five
patents held by SanDisk: US Patent 6,426,893; 6,763,424; 5,719,808; 6,947,332 and 7,137,011.
SanDisk alleges that our sale of various flash memory products, such as USB flash drives and
certain flash card formats, infringes these patents and is seeking damages for prior sales, and an
injunction and/or royalties on future sales. This action has been stayed pending resolution of the
related case described below.
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Also on October 24, 2007, SanDisk filed a complaint with the United States International Trade
Commission (ITC) against the same Imation entities listed above, as well as over twenty other
companies. This action involves the same patents and the same products as described above and
SanDisk is seeking an order from the ITC blocking the defendants’ importation of these products
into the United States.
The ITC hearing was held October 27, 2008 through November 4, 2008. Prior to the hearing,
SanDisk affirmatively withdrew three of the five patents (US Nos. 6,426,893; 5,719,808; and
6,947,332) from the case. On November 25, 2008, the ITC Investigative Staff Counsel released its
Post Hearing Brief recommending that U.S. Patent No. 7,137,011 be found invalid and that U.S.
Patent No. 6,763,424 be found valid and infringed. The ITC judge will consider the ITC Staff
Counsel’s recommendation, and the briefs of the other parties, and will issue an Initial
Determination by April 10, 2009. The Final Determination of the ITC should follow four months
later, in August 2009, and an Exclusion Order, if any, would likely take effect two months later,
in October 2009.
Some of our suppliers are already licensed by SanDisk. We are also generally indemnified by
our suppliers against claims for patent infringement. Additionally, our suppliers have indicated
that they will be providing us with USB flash drives with different controllers, which SanDisk has
stipulated are not covered by U.S. Patent No. 6,763,424, well prior to any action by the ITC.
Therefore, at this time we do not believe that either of the SanDisk actions will have a material
adverse impact on our financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
(a) – (b)
As of February 20, 2009, there were 37,736,153 shares of our common stock, $0.01 par value
(common stock), outstanding held by approximately 23,475 shareholders of record. Our common stock
is listed on the New York Stock Exchange and the Chicago Stock Exchange under the symbol “IMN”. The
Board of Directors declared a dividend of $0.16 per share of common stock in February, May and July
2008 and $0.08 per share of common stock in November 2008, as well as a dividend of $0.14 per share
of common stock in February 2007 and dividends of $0.16 per share of common stock in May, August
and November 2007. We paid a total of $20.9 million and $23.2 million in dividends to shareholders
in 2008 and 2007, respectively. The payment of dividends is discretionary and will be subject to
determination by our Board of Directors each quarter following its review of our financial
performance and other factors. Effective January 30, 2009 our Board of Directors suspended the
Company’s quarterly cash dividend.
The following table sets forth, for the periods indicated, the high and low sales prices of
common stock as reported on the New York Stock Exchange.
| 2008 Sales Prices | 2007 Sales Prices | |||||||||||||||
| High | Low | High | Low | |||||||||||||
First quarter |
$ | 27.63 | $ | 17.64 | $ | 49.20 | $ | 38.96 | ||||||||
Second quarter |
$ | 27.41 | $ | 22.85 | $ | 41.95 | $ | 35.69 | ||||||||
Third quarter |
$ | 25.48 | $ | 18.37 | $ | 37.89 | $ | 23.71 | ||||||||
Fourth quarter |
$ | 22.78 | $ | 10.11 | $ | 27.95 | $ | 18.96 | ||||||||
| (c) | Issuer Purchases of Equity Securities |
No shares were repurchased by the Company during the fourth quarter of 2008.
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Item 6. Selected Financial Data.*
| (Dollars in millions, except per share data) | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Net revenue |
$ | 2,154.6 | $ | 2,062.0 | $ | 1,584.7 | $ | 1,258.1 | $ | 1,173.7 | ||||||||||
Gross profit |
350.0 | 355.9 | 344.1 | 302.1 | 287.8 | |||||||||||||||
Selling, general and administrative |
290.6 | 223.3 | 174.0 | 146.3 | 161.5 | |||||||||||||||
Research and development |
23.6 | 38.2 | 50.0 | 51.3 | 56.5 | |||||||||||||||
Goodwill impairment |
34.7 | 94.1 | — | — | — | |||||||||||||||
Restructuring and other |
28.9 | 33.3 | 11.9 | 1.2 | 25.2 | |||||||||||||||
Operating (loss) income |
(27.8 | ) | (33.0 | ) | 108.2 | 103.3 | 44.6 | |||||||||||||
(Loss) income from continuing operations |
(33.3 | ) | (34.6 | ) | 75.2 | 81.8 | 36.5 | |||||||||||||
Net (loss) income |
(33.3 | ) | (50.4 | ) | 76.4 | 87.9 | 29.9 | |||||||||||||
(Loss) earnings per common share from
continuing operations: |
||||||||||||||||||||
Basic |
(0.89 | ) | (1.36 | ) | 2.17 | 2.41 | 1.04 | |||||||||||||
Diluted |
(0.89 | ) | (1.36 | ) | 2.14 | 2.36 | 1.03 | |||||||||||||
Net (loss) earnings per common share: |
||||||||||||||||||||
Basic |
(0.89 | ) | (1.36 | ) | 2.21 | 2.59 | 0.85 | |||||||||||||
Diluted |
(0.89 | ) | (1.36 | ) | 2.17 | 2.54 | 0.84 | |||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 472.6 | $ | 487.7 | $ | 485.3 | $ | 643.1 | $ | 510.8 | ||||||||||
Cash and cash equivalents (1) |
96.6 | 135.5 | 252.5 | 483.0 | 397.1 | |||||||||||||||
Inventories, net |
363.2 | 366.1 | 258.0 | 134.9 | 131.3 | |||||||||||||||
Property, plant and equipment, net |
122.4 | 171.5 | 178.0 | 195.0 | 214.4 | |||||||||||||||
Total assets |
1,522.3 | 1,751.0 | 1,382.9 | 1,146.2 | 1,110.6 | |||||||||||||||
Long-term debt |
— | 21.3 | — | — | — | |||||||||||||||
Total liabilities |
577.7 | 697.2 | 436.6 | 290.9 | 323.8 | |||||||||||||||
Total shareholders’ equity |
944.6 | 1,053.8 | 946.3 | 855.3 | 786.8 | |||||||||||||||
Other Information: |
||||||||||||||||||||
Current ratio |
1.9 | 1.8 | 2.2 | 3.6 | 2.9 | |||||||||||||||
Days sales outstanding (2) |
63 | 64 | 56 | 46 | 45 | |||||||||||||||
Days of inventory supply (2) |
82 | 65 | 72 | 56 | 53 | |||||||||||||||
Return on average assets (3) |
(2.0 | )% | (3.2 | )% | 5.9 | % | 7.2 | % | 3.2 | % | ||||||||||
Return on average equity (3) |
(3.3 | )% | (5.0 | )% | 8.3 | % | 10.0 | % | 4.5 | % | ||||||||||
Dividends per common share |
$ | 0.56 | $ | 0.62 | $ | 0.54 | $ | 0.46 | $ | 0.38 | ||||||||||
Capital expenditures |
$ | 13.6 | $ | 14.5 | $ | 16.0 | $ | 21.6 | $ | 35.8 | ||||||||||
Number of employees |
1,570 | 2,250 | 2,070 | 2,100 | 2,550 | |||||||||||||||
| * | See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information regarding the financial information presented in this table. | |
| N/M — Not meaningful | ||
| (1) | We invested certain funds in active cash management and classified those investments in other current assets or other assets depending on remaining maturity. These amounts represented $24.6 million and $42.5 million as of December 31, 2005 and 2004, respectively, in addition to cash and equivalents. These investments have since matured, which resulted in no cash management investment balance for the years ended December 31, 2008, 2007 and 2006. | |
| (2) | These operational measures, which we regularly use, are provided to assist in the investor’s further understanding of our operations. Days sales outstanding is calculated using the count-back method, which calculates the number of days of most recent revenue that are reflected in the net accounts receivable balance. Days of inventory supply is calculated using the current period inventory balance divided by the average of the inventoriable portion of cost of goods sold for the previous 12 months, expressed in days. | |
| (3) | Return percentages are calculated using income from continuing operations. | |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is intended to be read in conjunction with Item 1. Business, the
Consolidated Financial Statements and related notes that appear elsewhere in this Annual Report on
Form 10-K.
Overview
We are a leading global marketer and developer of products in digital storage, audio and video
electronics and accessories that enable people to capture, save and enjoy digital information. The
primary brand names under which our products are sold are Imation, Memorex, TDK Life on Record and
XtremeMac. We sell removable data storage media products in approximately 100 countries around the
world and under several different brand names across multiple technology platforms or “pillars” —
magnetic media, recordable optical media, USB flash drives and external and removable hard drives.
We also sell a range of audio and video consumer electronic products and accessories primarily in
North America and primarily under the Memorex brand name. Except for certain magnetic tape media
formats, we do not manufacture the products we sell and distribute. We seek to differentiate these
products through unique designs, product positioning, packaging, merchandising and branding. We
source these products from a variety of third party manufacturers.
In addition to overall industry trends described under Business in Item 1. of this form 10-K,
we have seen unexpected softness in the markets we participated in during 2008. We expect these
negative trends to continue in 2009. The significant and rapid downturn in the global economy has
negatively affected demand for both our commercial and consumer product lines, and is impacting
suppliers, distributors and channel partners. These impacts, in many cases, have been of greater
magnitude than we had expected and are of longer duration. For example, as a result of the
financial market turmoil data center customers in several large banks and financial services firms
scaled back, deferred or stopped purchase activity altogether. This impacted tape sales for some of
our highest margin products. In addition, consumer spending has slowed globally in 2008, which
impacted sales of our consumer electronic products.
Strategy
Our long term strategy is built upon three key elements which we describe as optimize, grow
and extend.
| • | Optimize our magnetic tape business. The magnetic tape market remains an attractive market for Imation because of our significant market share, brand and product portfolio, intellectual property, solid industry reputation and relationships among key original equipment manufacturers (OEMs), global distribution, and manufacturing capability. There is growing demand for data storage capacity across a substantial installed base of commercial information technology users, a relatively small number of competitors, and high barriers to entry. At the same time, it is highly competitive, and the overall market size, in terms of revenue, is declining. In May of 2007 we started a major restructuring of our manufacturing operations to optimize our magnetic tape business and stabilize or reduce our manufacturing costs. As a result we are concentrating our direct manufacturing investments on coating operations and outsourcing other parts of manufacturing operations for magnetic tape. See Note 8 to the Consolidated Financial Statements for further information. We continue to invest broadly in tape technology and seek to maintain and extend value-added technology capabilities in key areas, including precision thin film tape coating and servo-writing. | ||
| • | Grow the data storage media business across the four “pillars” of storage offering products under multiple brands. Over the years, we have brought to market recordable media products beyond magnetic tape, including recordable optical media, removable USB flash drives and flash cards, solid state drives, and external and removable hard disk products. We have also acquired additional brands, beyond the Imation brand, and established distribution agreements for other brands, as described above. The strength of our brands has allowed us to gain market share in the world wide optical media markets. In addition, with over half of our revenue coming from outside the United States, we seek to leverage our global marketing and distribution capability in bringing products to market across multiple geographies. |
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| • | Extend certain brands selectively across multiple product categories. We sell accessories and certain consumer electronic products, selectively, under multiple brands in various regions of the world. With the acquisition of Memcorp we entered into the consumer electronics market to sell certain products which we did not offer previously. Our product portfolio includes TVs and digital displays, including flat-panel liquid crystal displays (LCD) and digital picture frames, iPod® accessories, clock-radios and MP3 players. The portfolio also includes home theater video, portable and fashion DVD players, karaoke systems and office products such as voice recorders. The XtremeMac acquisition provided a broader product set and greater distribution presence targeting Apple iPod®, iPhone™ and Apple TV® users. |
While retaining our tape media business as a cornerstone of the Company, we are transforming
the Company into a brand and product management company, with the majority of our products sold to
individual consumers, primarily through retail distribution channels.
We have taken several actions which have significantly increased our industry presence and
relevance in both commercial and consumer retail channels and markets globally, to broaden the
scope of our business and to address the large and growing consumer market for data storage media
and audio/video consumer electronics and accessories.
The more important actions driving this change over the past five years include the following:
| • | We entered into a series of agreements with Moser Baer India Ltd. (MBI) in 2003 that established MBI as a significant, non-exclusive source for our optical media products and created a joint venture sales and distribution company, Global Data Media (GDM). We hold a 51 percent interest in GDM. As the controlling shareholder of the subsidiary, GDM’s results are consolidated into our financial statements. | ||
| • | An agreement with IBM in 2004 established us as the exclusive global distributor for IBM branded tape media products, whether manufactured by Imation or others. | ||
| • | On April 28, 2006, we acquired substantially all of the assets of Memorex International Inc. (Memorex), including the Memorex brand name and the capital stock of its operating subsidiaries engaged in the business of the design, development, sourcing, marketing, distribution and sale of hardware, media and accessories used for the storage of electronic data under the Memorex brand name. This action strengthened our position in optical products and accessories, especially in the United States retail channel. See Note 3 to the Consolidated Financial Statements for further information. | ||
| • | On July 9, 2007, we acquired Memcorp. This action established our foundation in the consumer electronic products in the mass merchant channel and enabled us to better manage the Memorex brand name across all retail channels in the United States. See Note 3 to the Consolidated Financial Statements for further information. | ||
| • | On July 31, 2007, we acquired TDK Recording Media. This action further strengthened our optical market position, especially in the important consumer markets of Europe and Japan. See Note 3 to the Consolidated Financial Statements for further information. | ||
| • | An agreement with Sun Microsystems, Inc. in 2007 established us as the exclusive global distributor for Sun StorageTek branded tape media products, whether manufactured by Imation or others. | ||
| • | An agreement with Hewlett-Packard Company (HP) in 2007 established us as the exclusive global distributor for HP branded recordable optical media products. | ||
| • | Other agreements have given us exclusive and non-exclusive distribution rights for certain brands of recordable media in various regions or product categories. Examples of other distribution agreements include those with ProStor Systems Inc. and Tandberg Data ASA (Tandberg). |
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| • | On June 30, 2008 we acquired substantially all of the assets of XtremeMac, a Florida-based product development and design firm focused on consumer electronic products and accessories for the iPod®, iPhone™ and Apple TV® markets. This action expanded our product portfolio, enhanced our distribution reach and strengthened product design capabilities, with particular focus on Apple users. | ||
| • | An agreement in 2008 with Mtron, a Korean company, established Imation as a global distributor (except in Korea and Japan) for certain solid state drive (SSD) products developed by Mtron for mobile computers and enterprise servers. |
Factors Affecting Comparability of our Financial Results
Acquisitions
| • | On July 31, 2007, we acquired the TDK Recording Media business. | ||
| • | On July 9, 2007, we acquired the Memcorp business. | ||
| • | On April 28, 2006, we acquired the Memorex business. |
Operating results of the TDK Recording Media, Memcorp and Memorex businesses are included in
our consolidated results of operations from their respective dates of acquisition. See Note 3 to
the Consolidated Financial Statements for further information. In addition, we acquired XtremeMac
on June 30, 2008. The effects of the acquisition did not materially impact our 2008 results of
operations.
Executive Summary
2008 Consolidated Results of Operations
| • | Revenue of $2,154.6 million in 2008 was up 4.5 percent compared with revenue of $2,062.0 million in 2007, due primarily to the acquisitions of the TDK Recording Media and Memcorp businesses which closed in the third quarter of 2007. | ||
| • | Gross margin of 16.2 percent in 2008 was down from 17.3 percent in 2007, due mainly to continued changes in product mix and reduced profitability in our Electronic Products segment. | ||
| • | Selling, general and administrative expense was 13.5 percent of revenue in 2008, compared with 10.8 percent in 2007 due to incremental TDK Recording Media and Memcorp SG&A expense, brand investments and additional legal expenses related to the Philips and SanDisk litigation. | ||
| • | Operating loss was $27.8 million in 2008, compared with $33.0 million in 2007. Operating loss in 2008 included a goodwill impairment charge of $34.7 million and restructuring and other charges of $28.9 million. Operating loss in 2007 included a goodwill impairment charge of $94.1 million and restructuring and other charges of $33.3 million. |
2008 Cash Flow/Financial Condition
| • | Cash totaled $96.6 million at year-end. | ||
| • | Cash flow provided by operating activities was $84.7 million for 2008. | ||
| • | We repurchased approximately 1.1 million shares of common stock in 2008 for $26.4 million. | ||
| • | Our Board of Directors declared dividends of $0.16 per share in February, May and August 2008, and $0.08 per share in November 2008, totaling $20.9 million for the year. Effective January 30, 2009 our Board of Directors suspended the Company’s quarterly cash dividend. |
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Results of Operations
Net Revenue
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Net revenue |
$ | 2,154.6 | $ | 2,062.0 | $ | 1,584.7 | 4.5 | % | 30.1 | % | ||||||||||
Our worldwide 2008 revenue growth, compared with 2007, was driven by volume increases of 10.1
percent, a foreign currency benefit of 2.6 percent, partially offset by price declines of 8.2
percent. The volume increases for 2008, compared with 2007, were driven by optical and consumer
electronics sales, primarily due to the addition of TDK Recording Media and Memcorp incremental
revenue which totaled $394.4 million. Excluding acquisitions, revenue for 2008 from our magnetic
products was down due to declines in demand for entry level and mature data center tape formats;
revenue from our optical products was down due to a decline in DVD and CD sales due to a decrease
in the size of DVD and CD market. Revenue from our flash products was down due to our planned
rationalization of our exposure in the retail channel.
Our worldwide 2007 revenue growth, compared with 2006, was driven by volume increases of 38.4
percent and foreign currency benefit of 2.4 percent, partially offset by price declines of 10.7
percent. The revenue increase in 2007, compared with 2006, was driven by the acquisitions of the
TDK Recording Media and Memcorp businesses, both of which closed in the third quarter of 2007 and
incremental revenue from the Memorex acquisition which closed in the second quarter of 2006.
Revenue from the TDK Recording Media and Memcorp acquisitions in 2007 was $275.1 million and $118.1
million, respectively. Incremental revenue in 2007 from the Memorex acquisition was $130.1 million.
Gross Profit
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Gross profit |
$ | 350.0 | $ | 355.9 | $ | 344.1 | -1.7 | % | 3.4 | % | ||||||||||
Gross margin |
16.2 | % | 17.3 | % | 21.7 | % | ||||||||||||||
Our gross margin decreased in 2008, compared with 2007, driven by continued changes in product
mix which can be attributed to softness in data center tape demand and reduced profitability in our
Electronic Products segment. Our
consumer electronic product margins were impacted by economic factors in the United States, which
led to higher than expected levels of price erosion in the industry as supply exceeded demand as
well as weaker margins on all products.
Our gross margin decreased in 2007, compared with 2006, driven by changes in our product mix,
negative impacts of USB flash products and declining revenue and gross margins of legacy magnetic
tape products. The product mix changes were primarily due to the acquisitions of the TDK Recording
Media and Memcorp businesses in the third quarter of 2007 and the acquisition of Memorex in the
second quarter of 2006. These operations, which are almost entirely focused on consumer channels,
have business models which involve selling products with lower gross margin percentages than our
base magnetic tape business.
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Selling, General and Administrative (SG&A)
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Selling, general and
administrative |
$ | 290.6 | $ | 223.3 | $ | 174.0 | 30.1 | % | 28.3 | % | ||||||||||
As a percent of revenue |
13.5 | % | 10.8 | % | 11.0 | % | ||||||||||||||
Our 2008 increase in SG&A expense, compared with 2007, was due to incremental TDK Recording
Media and Memcorp SG&A expense, brand investments and legal expenses related to the Philips and
SanDisk litigation. We experienced additional intangible asset amortization due to the TDK
Recording Media and Memcorp acquisitions of approximately $6 million in 2008.
Our 2007 increase in SG&A expense, compared with 2006, was due to the addition of the TDK
Recording Media and Memcorp business SG&A expenses and incremental Memorex SG&A expense. Additional
intangible amortization associated with the TDK Recording Media and Memcorp businesses totaled
approximately $5 million and incremental Memorex intangible amortization totaled approximately $4
million. The decrease in SG&A as a percentage of revenue in 2007 was due to our overall revenue
growth and the benefit of restructuring actions.
Research and Development (R&D)
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Research and development |
$ | 23.6 | $ | 38.2 | $ | 50.0 | -38.2 | % | -23.6 | % | ||||||||||
As a percent of revenue |
1.1 | % | 1.9 | % | 3.2 | % | ||||||||||||||
The decrease in our 2008 and 2007 R&D expense was due to cost saving from restructuring
activities initiated in the second quarter of 2007. This is consistent with our strategy of
transforming the Company into a brand and product management company, as we focused our activities
primarily on development of new magnetic tape formats.
Goodwill Impairment
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Goodwill impairment |
$ | 34.7 | $ | 94.1 | $ | — | N/M | N/M | ||||||||||||
| N/M — Not meaningful | ||
In the fourth quarter of 2008, in connection with our annual goodwill impairment test,
impairments were identified and recorded in an aggregate amount of $34.7 million related to the
Americas-Commercial, Asia Pacific and Electronic Products reporting units. During the fourth
quarter, the continuing and accelerating deterioration of general economic conditions including
shortfalls against our anticipated fourth quarter operating profitability resulted in lower
expectations for growth and profitability in future periods. In addition, we experienced a decline
in our stock price reflecting a further reduction in a market participant’s view of fair value of
our underlying reporting units.
During the fourth quarter of 2007, in conjunction with our annual goodwill impairment test, we
recorded a goodwill impairment charge of $94.1 million consisting of a full impairment of the
goodwill associated with our Americas-Consumer and Europe reporting units. The goodwill impairments
in 2007 resulted from a general decline in the outlook for profitability for the products sold by
our Americas-Consumer and Europe reporting units combined with the fact that a market participant’s
view of our fair value was substantially reduced as reflected by the decline in our stock price.
See Notes 2 and 6 to the Consolidated Financial Statements as well as Critical Accounting
Policies and Estimates for further background and information on goodwill impairment.
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Table of Contents
Restructuring and Other
The components of our restructuring and other expense included in the Consolidated Statements
of Operations were as follows:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Restructuring |
||||||||||||
Severance and severance related expense |
$ | 15.7 | $ | 23.6 | $ | 8.6 | ||||||
Lease termination costs |
4.8 | 0.6 | 1.4 | |||||||||
Reversal of severance and severance related
expense from prior
restructuring programs |
— | — | (0.9 | ) | ||||||||
Total restructuring |
20.5 | 24.2 | 9.1 | |||||||||
Other |
||||||||||||
Pension settlement/curtailment (Note 10) |
5.7 | 1.4 | — | |||||||||
Asset impairments |
5.0 | 8.4 | 2.8 | |||||||||
TDK post-closing purchase price adjustment |
(2.3 | ) | — | — | ||||||||
Terminated employment agreement |
— | (0.7 | ) | — | ||||||||
Total |
$ | 28.9 | $ | 33.3 | $ | 11.9 | ||||||
During 2008, we recorded $4.9 million and $0.5 million of severance and severance related
expenses and lease termination costs, respectively, related to our 2008 corporate redesign
restructuring program initiated during the fourth quarter of 2008. This program further accelerates
the alignment of our cost structure with our strategic direction by reducing selling, general and
administrative expenses (SG&A). We plan to reduce costs by rationalizing key accounts and products
and through simplifying our corporate structure globally. We anticipate incurring up to $40 million
in restructuring and other charges globally, mainly through cash payments for severance and
severance related costs. The majority of the program is expected to be completed by the end of
2009. As of December 31, 2008, we estimate 290 positions will be eliminated throughout the world
and annualized SG&A costs savings will exceed $40 million once the program is fully implemented.
During 2008, we recorded $5.2 million and $0.2 million of severance and severance related
expenses and lease termination costs, respectively, related to our 2008 cost reduction
restructuring program. This program began in the third quarter of 2008 when our Board of Directors
approved the Camarillo, California restructuring plan as further implementation of our
manufacturing strategy. We ended manufacturing at our Camarillo plant and have exited the facility
as of December 31, 2008. We will focus our manufacturing efforts on magnetic tape coating
operations at our existing plant in Weatherford, Oklahoma. The plant closing resulted in the
elimination of approximately 140 positions, 31 of which were included under previously announced
programs. We expect exit of the Camarillo plant to result in approximately $15 million to $20
million in annualized cost eliminations intended to partially mitigate projected declines in tape
gross profits in future years. As of December 31, 2008, charges related to the Camarillo plan are
substantially complete.
The 2008 cost reduction restructuring program also includes our decision to consolidate the
Cerritos, California business operations into Oakdale, Minnesota and close the Cerritos office by
March 2009. As of December 31, 2008, we expect the elimination of 49 positions in Cerritos, some of
which we expect to be replaced in Oakdale, Minnesota. Consolidation of Cerritos activities at a
single headquarters location is intended to achieve better focus, gain efficiencies across brands
and channels, and reduce cost. Consolidation of the Cerritos operations is expected to result in
approximately $1.0 million in annualized sales, general and administrative cost eliminations.
During 2008, we recorded $5.3 million for severance and severance related expenses under our
TDK recording media and 2007 cost reduction restructuring programs, respectively, which began in
2007. We also recorded $1.8 million of lease termination costs related to these programs in 2008.
The 2007 cost reduction restructuring program is expected to result in $25 million to $30 million
in annualized cost savings, which is intended to counteract the impact of declining gross margins
on tape products. As of December 31, 2008, charges related to both programs are
substantially complete.
During 2008, we recorded $0.3 million and $2.3 million of severance and severance related
expenses and lease termination costs, respectively, related to our 2006 Imation and Memorex
restructuring program, which began in the second quarter of 2006.
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The TDK post-closing purchase price adjustment of $2.3 million recorded in 2008 is associated
with the finalization of certain acquisition-related working capital amounts as negotiated with
TDK. See Note 3 to the Consolidated Financial Statements for further information.
We recorded pension settlement and curtailment losses of $5.7 and $1.4 million in 2008 and
2007, respectively, within restructuring and other expense in the Consolidated Statements of
Operations, mainly as a result of the reorganizations associated with our restructuring activities.
See Note 10 to the Consolidated Financial Statements for further information regarding pension
settlements and curtailments.
During 2008 and 2007, we incurred net asset impairment charges of $5.0 and $8.4 million,
respectively, related to the abandonment of certain manufacturing and R&D assets as a result of the
reorganizations associated with our restructuring activities.
During 2007, we recorded severance and severance related expenses of $21.5 million and $2.3
million under our 2007 cost reduction and TDK Recording Media restructuring programs, respectively,
within restructuring and other expense in the Consolidated Statements of Operations. During 2007,
we recorded $0.4 million and $0.2 million of lease termination costs related to our 2007 cost
reduction and 2006 Imation and Memorex restructuring programs, respectively.
During 2006, we recorded net restructuring charges of $9.1 million mainly related to the
restructuring program which began in the second quarter of 2006, as well as charges related to
employee reductions in our Wahpeton, North Dakota and Camarillo, California production facilities.
During 2006, we incurred asset impairment charges of $2.8 million related to the abandonment of
certain manufacturing assets and purchased intellectual property.
See Note 8 to the Consolidated Financial Statements for further information regarding our
various restructuring programs and other expenses.
Operating (Loss) Income
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Operating (loss) income |
$ | (27.8 | ) | $ | (33.0 | ) | $ | 108.2 | -15.8 | % | -130.5 | % | ||||||||
As a percent of
revenue |
-1.3 | % | -1.6 | % | 6.8 | % | ||||||||||||||
Our 2008 and 2007 operating losses were significantly impacted by non-cash goodwill impairment
charges of $34.7 million and $94.1 million, respectively and restructuring and other charges of
$28.9 million and $33.3 million, respectively, noted above.
Other (Income) and Expense
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Interest expense |
$ | 1.5 | $ | 2.6 | $ | 1.0 | ||||||
Interest income |
(3.8 | ) | (7.6 | ) | (12.6 | ) | ||||||
Other expense, net |
9.8 | 6.6 | 8.0 | |||||||||
Other (income) and expense |
$ | 7.5 | $ | 1.6 | $ | (3.6 | ) | |||||
As a percent of revenue |
0.3 | % | 0.1 | % | -0.2 | % | ||||||
Our 2008 decrease in interest income was primarily attributable to declines in cash balances
due to the repurchase of common stock of $26.4 million and $108.2 million in 2008 and 2007,
respectively, the acquisitions of TDK Recording Media and Memcorp businesses in 2007, the repayment
of debt of $31.3 million in 2008, and the acquisitions of XtremeMac and the minority interest in
Imation Corporation Japan in 2008.
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Our 2008 increase in other expense, net compared to 2007, was primarily attributable to an
increase in foreign currency transaction losses.
Our 2007 decrease in interest income was primarily attributable to declines in cash balances
due to the acquisition of Memorex in 2006, the repurchase of common stock of $108.2 million and
$35.6 million in 2007 and 2006, respectively, and the acquisitions of TDK Recording Media and
Memcorp businesses in 2007.
Our 2007 decrease in other expense, net, compared to 2006, was primarily attributable to
decreases in investment and minority interest losses, offset by an increase in foreign currency
transaction losses.
Income Tax (Benefit) Provision
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Income taxes |
$ | (2.0 | ) | $ | 15.8 | $ | 36.6 | |||||
Effective tax rate |
N/M | N/M | 32.7 | % | ||||||||
| N/M — Not meaningful | ||
Our 2008 income tax benefit includes an incremental tax benefit of $8.4 million associated
with the non-cash goodwill impairment charge of $34.7 million, as well as the establishment of
valuation allowances, net of $2.1 million. See Note 9 to the Consolidated Financial Statements for
further information.
Our 2007 income tax provision is comprised of a $4.0 million tax benefit associated with
non-cash goodwill impairment and restructuring and other charges noted above as well as a $19.8
million tax charge on all other operations. See Note 9 to the Consolidated Financial Statements for
further information.
Our 2006 tax rate benefited from favorable resolutions of various tax matters, the largest of
which related to a net benefit of $10.4 million for the settlement of a long-standing tax dispute
in the Netherlands, offset by a charge of $8.2 million associated with the reorganization of our
international tax structure.
Segment Results
We operate in two broad market categories: (1) removable data storage media products and
accessories and (2) audio and video consumer electronic products and accessories (electronic
products).
Our data storage media business is organized, managed and internally and externally reported
as segments differentiated by the regional markets we serve: Americas, Europe and Asia Pacific.
Each of these segments has responsibility for selling virtually all Imation product lines except
for consumer electronic products. Consumer electronic products are sold primarily through our
Electronic Products (EP) segment. The EP segment is currently focused primarily in North America
and primarily under the Memorex brand name.
We evaluate segment performance based on revenue and operating income. Revenue for each
segment is generally based on customer location where the product is shipped. The operating income
reported in our segments excludes corporate and other unallocated amounts. Although such amounts
are excluded from the business segment results, they
are included in reported consolidated earnings. Corporate and unallocated amounts include
research and development costs, corporate expense, stock-based compensation expense and
restructuring and other costs which are not allocated to the segments.
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Information related to our segments is as follows:
Data Storage Media
Americas
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Net revenue |
$ | 789.4 | $ | 959.3 | $ | 838.9 | -17.7 | % | 14.4 | % | ||||||||||
Operating income |
73.0 | 82.1 | 128.9 | -11.1 | % | -36.3 | % | |||||||||||||
As a percent of
revenue |
9.2 | % | 8.6 | % | 15.4 | % | ||||||||||||||
The Americas segment was our largest segment comprising approximately 37 percent, 46 percent
and 53 percent of our total consolidated revenue in 2008, 2007 and 2006, respectively. The Americas
revenue decreased in 2008 driven by lower revenue from our magnetic, flash and to a lesser degree
optical product sales, partially offset by incremental revenue of $58.5 million associated with the
TDK Recording Media acquisition.
The 2007 revenue increase of 14.4 percent was driven mainly by incremental revenue of $87.2
million from the Memorex acquisition which closed in the second quarter of 2006 and revenue of
$57.0 million from the TDK Recording Media acquisition which closed in the third quarter of 2007.
Memorex brand revenue was $275.1 million in 2006.
The increase in our Americas segment 2008 operating income as a percentage of revenue was
driven by increased gross profits in both optical and flash products and lower SG&A expense,
partially offset by lower gross profits in magnetic products. The decline in our Americas segment
2007 operating income as a percentage of revenue was driven by changes in our product mix, negative
impacts of USB flash products and declining gross margins of legacy tape products.
Europe
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Net revenue |
$ | 685.2 | $ | 655.7 | $ | 524.3 | 4.5 | % | 25.1 | % | ||||||||||
Operating income |
22.3 | 45.2 | 48.1 | -50.7 | % | -6.0 | % | |||||||||||||
As a percent of
revenue |
3.3 | % | 6.9 | % | 9.2 | % | ||||||||||||||
The Europe segment revenue comprised approximately 32 percent, 32 percent and 33 percent of
our total consolidated revenue in 2008, 2007 and 2006, respectively. The Europe revenue growth of
4.5 percent in 2008 was driven by incremental revenue of $130.3 million from the TDK Recording
Media acquisition, mostly in optical products, as well as an increase in revenue from our GDM joint
venture, offset partially by declines in magnetic and flash products revenue.
The Europe segment revenue growth of 25.1 percent in 2007 was driven mainly by additional
revenue from the TDK Recording Media acquisition of $125.8 million and growth in flash media
products offset partially by declines in magnetic products.
The decrease in our Europe segment 2008 and 2007 operating income as a percentage of revenue
was driven by higher SG&A expense as well as lower gross profits in our magnetic products.
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Asia Pacific
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Net revenue |
$ | 434.4 | $ | 328.9 | $ | 221.5 | 32.1 | % | 48.5 | % | ||||||||||
Operating income |
28.7 | 23.5 | 17.1 | 22.1 | % | 37.4 | % | |||||||||||||
As a percent of
revenue |
6.6 | % | 7.1 | % | 7.7 | % | ||||||||||||||
The Asia Pacific revenue growth of 32.1 percent and 48.5 percent in 2008 and 2007 was driven
by incremental revenue of $119.9 million and $92.3 million from the TDK Recording Media acquisition in
2008 and 2007,
respectively, as well as increased sales of our other
business products.
The decrease in 2008 operating income as a percentage of revenue in our Asia Pacific segment
was driven by higher SG&A expense. The decrease in 2007 operating income as a percentage of revenue
for our Asia Pacific segment was driven by slightly lower gross margins associated with products
from the TDK Recording Media acquisition.
Electronic Products
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Net revenue |
$ | 245.6 | $ | 118.1 | $ | — | N/M | N/M | ||||||||||||
Operating (loss) income |
(13.4 | ) | 5.5 | — | N/M | N/M | ||||||||||||||
As a percent of
revenue |
-5.5 | % | 4.7 | % | ||||||||||||||||
| N/M — Not meaningful | ||
The Electronic Products segment comprised approximately 11 percent of our total revenue for
2008. This operating segment is the result of the Memcorp business acquisition in July 2007. Our
operating results for 2008 were negatively impacted by economic factors in the United States. We
experienced weakened demand throughout the year as orders were pulled back or deferred. This led to
higher than expected price erosion in the industry as supply exceeded demand, especially in flat
panel screens.
Our results for 2007 are based on six months of operations and are not necessarily indicative
of full year results as this segment has some degree of seasonality with its focus on consumer
channels. The majority of the revenue and operating income for this segment occurs in the second
half of the fiscal year with a greater degree of concentration in the fourth quarter.
Corporate and Unallocated
| Years Ended December 31, | Percent Change | |||||||||||||||||||
| 2008 vs. | 2007 vs. | |||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2007 | 2006 | |||||||||||||||
Operating loss |
$ | (138.4 | ) | $ | (189.3 | ) | $ | (85.9 | ) | -26.9 | % | 120.4 | % | |||||||
The corporate and unallocated operating loss include costs which are not allocated to the
business units in management’s evaluation of segment performance such as research and development
expense, corporate expense, stock-based compensation expense, restructuring and other expense and
non-cash goodwill impairment charges. The operating loss in 2008 and 2007 included non-cash charges
of $34.7 million and $94.1 million, respectively, related to goodwill impairment as well as $28.9
million and $33.3 million, respectively, of restructuring and other charges associated mainly
with our restructuring programs and asset impairment charges of $5.0 million and $8.4 million
in 2008 and 2007, respectively. The operating loss in 2006 included costs of $11.9 million
associated with our 2006 restructuring programs.
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Financial Position
As of December 31, 2008, our cash and cash equivalents balance was $96.6 million, a decrease
of $38.9 million compared with December 31, 2007. The decrease was primarily due to the repayment
of the Memcorp promissory notes of $31.3 million, repurchase of common stock of $26.4 million,
dividend payments of $20.9 million, cash paid for capital expenditures of $13.6 million, cash paid
for minority interest acquisition of $8.0 million, cash paid for the XtremeMac acquisition of $7.3
million and cash paid for the TDK working capital settlement of $6.5 million offset by cash
generated from operations of $84.7 million.
Accounts receivable days sales outstanding was 63 days as of December 31, 2008, down one day
from December 31, 2007. Days sales outstanding is calculated using the count-back method, which
calculates the number of days of most recent revenue that is reflected in the net accounts
receivable balance.
Days of inventory supply was 82 days as of December 31, 2008, up 17 days compared with 65 days
as of December 31, 2007. Days of inventory supply is calculated using the current period inventory
balance divided by the average of the inventoriable portion of cost of goods sold for the previous
12 months, expressed in days. The increase in days of inventory supply was due to much softer than
expected demand relative to increasing inventory for anticipated seasonal demand late in the year,
particularly within Electronic Products, as well as increasing end-of-life inventories associated
with the Camarillo and Wahpeton shut-down.
Our other current assets balance as of December 31, 2008 was $138.1 million, an increase of
$28.2 million from $109.9 million as of December 31, 2007. The increase was primarily due to a
$22.5 million reclassification of assets held for sale from property, plant and equipment to other
current assets relating to the exit of our Anaheim and Camarillo facilities.
Our accounts payable balance as of December 31, 2008 was $296.1 million, a decrease of $54.0
million from $350.1 million as of December 31, 2007. The decrease was due to lower purchasing
levels as well as timing of payments made during the fourth quarter of 2008.
Our other current liabilities balance as of December 31, 2008 was $195.0 million, a decrease
of $62.3 million from $257.3 million as of December 31, 2007. The decrease was mainly due to lower
accrued rebate liabilities, payments made under our restructuring plans, and a decrease in
acquisition related liabilities as we settled certain liabilities with TDK. See Note 3 to the
Consolidated Financial Statements for further information.
Our other liabilities balance as of December 31, 2008 was $74.1 million, an increase of $29.1
million from $45.0 million as of December 31, 2007. The increase was mainly due to the
remeasurement of our United States pension unfunded status. During 2008, the United States equity
markets have seen a significant decline in value and, consequently, our plan assets have decreased
from December 31, 2007. In accordance with SFAS No. 158, Employers; Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and
132(R), we recognized the difference between the plan assets at their fair value and the benefit
obligation as a pension liability, and as an unrecognized loss included in other comprehensive
income. We ended 2008 with an aggregate noncurrent pension liability of $49.0 million related to
our United Stated plan and some of our international plans and aggregated international noncurrent
pension assets of $4.9 million related to five international locations.
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Liquidity and Capital Resources
Cash Flows provided by Operating Activities:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Net (loss) income |
$ | (33.3 | ) | $ | (50.4 | ) | $ | 76.4 | ||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||||||
Depreciation |
25.9 | 28.6 | 29.1 | |||||||||
Amortization |
23.4 | 18.3 | 9.3 | |||||||||
Deferred income taxes |
0.2 | (10.7 | ) | 9.7 | ||||||||
Goodwill impairment |
34.7 | 94.1 | — | |||||||||
Asset impairments |
5.0 | 8.4 | 7.2 | |||||||||
Stock-based compensation |
9.5 | 10.2 | 11.0 | |||||||||
Pension settlement / curtailment |
5.7 | 2.4 | 1.7 | |||||||||
Gain on sale of Specialty Papers |
— | — | (2.1 | ) | ||||||||
Excess tax benefit from exercise of stock options |
— | — | (3.3 | ) | ||||||||
Other |
4.9 | 3.5 | 0.6 | |||||||||
Changes in operating assets and liabilities, net of effects from acquisitions |
8.7 | (16.9 | ) | (42.1 | ) | |||||||
Net cash provided by operating activities |
$ | 84.7 | $ | 87.5 | $ | 97.5 | ||||||
Cash flows from operating activities can fluctuate significantly from period to period as many
items can significantly impact cash flows. In 2008, 2007 and 2006 we contributed $7.6 million, $5.6
million and $13.2 million to our pensions worldwide, respectively. Operating cash outflows in 2008,
2007 and 2006 included net income tax payments of $19.5 million, $9.6 million and $22.0,
respectively, as well as restructuring payments of $32.0 million, $13.1 million and $13.2 million,
respectively.
Cash Flows used in Investing Activities:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Capital expenditures |
$ | (13.6 | ) | $ | (14.5 | ) | $ | (16.0 | ) | |||
Acquisitions, net of cash acquired |
(15.3 | ) | (68.3 | ) | (332.2 | ) | ||||||
Acquisition of minority interest |
(8.0 | ) | — | — | ||||||||
Purchase of investments |
(0.1 | ) | — | (0.3 | ) | |||||||
Proceeds from sale of investments |
— | — | 28.9 | |||||||||
Proceeds from sale of businesses |
— | — | 2.3 | |||||||||
Other investing activities |
0.9 | 0.3 | 3.2 | |||||||||
Net cash used in
investing
activities |
$ | (36.1 | ) | $ | (82.5 | ) | $ | (314.1 | ) | |||
Consistent with our strategy noted above, we are transforming into a brand and product
management company and have significantly increased our industry presence and relevance in both
commercial and consumer retail channels and markets globally through acquisitions. In 2008,
acquisition related activities included payment for the acquisition of the minority interest in
Imation Corporation Japan of $8.0 million, payment for the acquisition of XtremeMac of $7.3
million, payment for the TDK working capital settlement of $6.5 million, and payment for the
Memorex minimum earn-out of $2.5 million. In 2007 acquisition related activities included payments
of $41.1 million for the TDK Recording Media acquisition and payments of $32.7 million for the
Memcorp acquisition partially offset by Memorex net cash proceeds of $5.5 million. In 2006
acquisitions related activities included payments for the Memorex acquisition of $332.2 million.
See Note 3 to the Consolidated Financial Statements for further information.
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Cash Flows used in Financing Activities:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Purchase of treasury stock |
$ | (26.4 | ) | $ | (108.2 | ) | $ | (35.6 | ) | |||
Exercise of stock options |
0.6 | 7.7 | 31.7 | |||||||||
Dividend payments |
(20.9 | ) | (23.2 | ) | (18.8 | ) | ||||||
Debt repayment |
(31.3 | ) | (6.3 | ) | — | |||||||
Excess tax benefit from exercise of stock options |
— | 3.3 | ||||||||||
Net cash used in financing activities |
$ | (78.0 | ) | $ | (130.0 | ) | $ | (19.4 | ) | |||
On January 28, 2008, the Board of Directors authorized a share repurchase program increasing
the total outstanding authorization to 3.0 million shares of common stock. The Company’s previous
authorization was cancelled with the new authorization. During the three months ended March 30,
2008, we repurchased 0.8 million shares completing the 10b5-1 plan announced in May 2007. As of
December 31, 2008, we had repurchased 0.7 million shares under the latest authorization and held,
in total, 5.2 million shares of treasury stock acquired at an average price of $25.07 per share.
Authorization for repurchases of an additional 2.3 million shares remained outstanding as of
December 31, 2008.
We paid cash dividends of $0.56 per share or $20.9 million during 2008, $0.62 per share or
$23.2 million during 2007 and $0.54 per share or $18.8 million during 2006. On January 30, 2009 our
Board of Directors suspended the quarterly cash dividend. Any future dividends are at the
discretion of and subject to the approval of our Board of Directors
In connection with the Memcorp acquisition which closed on July 9, 2007, we issued promissory
notes totaling $37.5 million payable to Hopper Radio of Florida, Inc., a Florida corporation,
Memcorp, Inc., a Florida corporation, and Memcorp Asia Limited, a corporation organized under the
laws of Hong Kong (together, the Sellers). Promissory note payments totaling $30 million were due
in quarterly installments over three years from the closing date, with an interest rate of 6
percent per annum, and not subject to offset. Payment of the $30 million obligation was further
provided for by an irrevocable letter of credit issued pursuant to the Credit Agreement. The
remaining $7.5 million obligation was payable to the Sellers in a lump sum payment 18 months from
the closing date, with an interest rate of 6 percent per annum, which was unsecured and subject to
offset to satisfy any claims to indemnification; provided that if an existing obligation of the
Sellers was satisfied prior to the 18-month maturity date, $3.75 million of such note was to be
paid in advance of the maturity date, and provided further that if the existing obligation was not
satisfied prior to the 18-month maturity date, $3.75 million of such note was to be withheld until
such obligation was satisfied or the third anniversary of the closing date, whichever occurs first.
As a result of an existing obligation of the Sellers being satisfied prior to the 18-month maturity
date, we paid $3.75 million of such note during the third quarter of 2007. We also paid a quarterly
installment in the amount of $2.5 million in the fourth quarter of 2007, in accordance with the
note agreements. In the first quarter of 2008, we repaid in full the promissory notes outstanding
at December 31, 2007 of $31.35 million.
On March 30, 2006, we entered into a credit agreement (the Credit Agreement) with a group of
banks that were party to a prior credit agreement, extending the expiration date from December 15,
2006 to March 29, 2011. The Credit Agreement was further amended on July 24, 2007, as follows: (i)
increased the credit facility from $300 million to $325 million and added an option to increase the
facility to $400 million at a future date; (ii) extended the term for an additional year to March
29, 2012; (iii) permitted the Company’s acquisition of the TDK Recording Media business; (iv)
increased the guarantee of foreign obligations limit and letter of credit sub-limit; (v) modified
the fixed charge coverage ratio definition and (vi) reduced the applicable interest rates. The
amended Credit Agreement provides for revolving credit, including letters of credit. A further
amendment on April 25, 2008 formally expanded the types of letters of credit available under the
Credit Agreement. Borrowings under the amended Credit Agreement bear interest, at our option, at
either: (a) the higher of the federal funds rate plus 0.50 percent or the rate of interest
published by Bank of America as its “prime rate” plus, in each case, up to an additional 0.50
percent depending on the applicable leverage ratio, as described below, or (b) the British Bankers’
Association LIBOR, adjusted by the reserve percentage in effect from time to time, as determined by
the Federal Reserve Board, plus up to 0.95 percent depending on the applicable leverage ratio.
Leverage ratio is defined as the ratio of total debt to EBITDA. A facility fee ranging from 0.125
to 0.250 percent per annum based on our consolidated leverage ratio is payable on the revolving
line of credit. The amended Credit Agreement contains
covenants, which are customary for similar credit arrangements, and contains financial
covenants that require us to have a leverage ratio not exceeding 2.5 to 1.0 and a fixed charge
coverage ratio (defined as the ratio of EBITDA less capital expenditures to interest expenses and
income taxes actually paid) not less than 2.5 to 1.0. As of December 31, 2008, these covenants
currently restrict the total amount available under the credit facility to $132 million and based
on our future profitability expectations will likely restrict the amount further in the future. No
borrowings were outstanding and we complied with all covenants under the amended Credit Agreement
as of December 31, 2008.
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In addition, certain international subsidiaries have borrowing arrangements locally outside of
the Credit Agreement discussed above. As of December 31, 2008 and 2007, there were no borrowings
outstanding under such arrangements.
Our liquidity needs for 2009 include the following: capital expenditures in the range of $15
million, restructuring payments of approximately $25 million, pension funding of approximately $5
million to $10 million, operating lease payments of
approximately $10 million (see Note 14 to the
Consolidated Financial Statements for further information), any amounts associated with TDK
post-closing purchase price adjustment for previously unfiled European value added tax returns
which could be in an amount of approximately $20 million to $25 million and any amounts associated
with litigation or the repurchase of common stock under the authorization discussed above. We
expect that cash and cash equivalents, together with cash flow from operations and availability of
borrowings under our current and future sources of financing, will provide liquidity sufficient to
meet these needs and for our operations.
Off-Balance Sheet Arrangements
Other than the operating lease commitments discussed in Note 14 to the Consolidated Financial
Statements, we are not using off-balance sheet arrangements, including special purpose entities.
Summary of Contractual Obligations
| Payments Due by Period | ||||||||||||||||||||
| Less Than | More Than | |||||||||||||||||||
| (In millions) | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Operating lease
obligations |
$ | 31.2 | $ | 10.3 | $ | 15.3 | $ | 4.8 | $ | 0.8 | ||||||||||
Purchase obligations (1) |
202.9 | 202.9 | — | — | — | |||||||||||||||
Other liabilities (2) |
25.1 | — | — | — | 25.1 | |||||||||||||||
Total |
$ | 259.2 | $ | 213.2 | $ | 15.3 | $ | 4.8 | $ | 25.9 | ||||||||||
| (1) | The majority of the purchase obligations consist of 90-day rolling estimates. Each month, we provide various suppliers with rolling forecasts of our demand for products for the next three months. The forecasted amounts are generally binding on us as follows: 100 percent for the first month, 75 percent for the second month and 50 percent for the third month. | |
| (2) | Timing of payments for the vast majority of other liabilities cannot be reasonably determined and, as such, have been included in the “More Than 5 Years” category. |
The table above does not include payments for non-contributory defined benefit pension plans.
It is our general practice, at a minimum, to fund amounts sufficient to meet the requirements set
forth in applicable benefits laws and local tax laws. From time to time, we contribute additional
amounts, as we deem appropriate. We expect to contribute approximately $5 million to $10 million to
our pension plans in 2009 and have $49 million recorded in other liabilities related to pension
plans as of December 31, 2008.
The table above does not include possible payments for uncertain tax positions. Our reserve
for uncertain tax positions, including accrued interest and penalties, was $10.5 million as of
December 31, 2008. Due to the nature of the underlying liabilities and the extended time often
needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or
timing of cash payments that may be required to settle these liabilities.
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We
may be required to pay additional cash consideration of up to
$70 million, $40 million,
$20 million and
$10 million related to the TDK Recording Media, Memorex, Memcorp and XtremeMac business
acquisitions, respectively, contingent on future financial performance of the acquired businesses.
We have not recorded a liability for these contingent payments at December 31, 2008 as payment is
not probable based on current financial performance.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon
our Consolidated Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates to ensure they are consistent with historical experience
and the various assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions and could materially impact our results of operations.
We believe the following critical accounting policies are affected by significant judgments
and estimates used in the preparation of our Consolidated Financial Statements:
Income Tax Accruals and Valuation Allowances. We record income taxes under the asset and
liability method, whereby deferred tax assets and liabilities are recognized based on the future
tax consequences attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and attributable to
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply in the years in which the temporary differences are expected to
be recovered or paid.
SFAS No. 109, Accounting for Income Taxes, (SFAS 109) requires a reduction of the carrying
amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is
more likely than not that such assets will not be realized. Accordingly, the need to establish a
valuation allowance against deferred tax assets is assessed periodically based on the SFAS 109 more
likely than not realization threshold criterion. In the assessment of the need for a valuation
allowance, appropriate consideration is given to all positive and negative evidence related to the
realization of the deferred tax assets. This assessment considers, among other matters, the nature,
frequency and severity of current and cumulative losses, forecasts of future profitability, the
duration of statutory carryforward periods, our experience with operating loss and tax credit
carryforwards not expiring unused, and tax planning alternatives.
At December 31, 2008, our net deferred tax asset was $78.7 million of which $62.0 relates to
deferred tax assets in the United States. These net deferred tax assets are net of valuation
allowances of $18.6 million. The valuation allowance relates to various worldwide operating loss
carryforwards which we do not expect to realize. Based on our assessment, it appears more likely
than not that the recorded net deferred tax asset at December 31, 2008 will be realized through
future taxable earnings. We will continue to assess the required valuation allowance in the future.
In a tax jurisdiction with a net deferred tax asset, the considerations for determining
whether the more likely than not criterion is met, include, whether there has been cumulative
profit (defined as pre-tax income adjusted by permanent differences) over the preceding three year
period. Our analysis of the need for a valuation allowance recognizes that while we have reported a
consolidated cumulative loss over the three year period ended December 31, 2008. This loss includes
goodwill impairments which are nondeductible permanent differences. Excluding these nondeductible
permanent differences, we have a consolidated cumulative profit over the most recent three year
period and cumulative three year profit, excluding nondeductible permanent differences, in all tax
jurisdictions where a net deferred tax asset is recorded.
While we have a history of profits, our profitability has declined over the last three years
and we recorded a loss in the current year in the United States where the majority of our deferred
tax assets are recorded. Therefore achievement of the expected profitability in the United States
in 2009 will be a significant factor in determining our
continuing ability to carry these deferred tax assets. Significant negative events could
impact the ability to carry the deferred tax assets in future periods.
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We believe that the accounting estimate for the valuation of deferred tax assets is a critical
accounting estimate because judgment is required in assessing the likely future tax consequences of
events that have been recognized in our financial statements or tax returns. We base our estimate
of deferred tax assets and liabilities on current tax laws and rates and, in certain cases,
business plans and other expectations about future outcomes. Changes in existing tax laws or rates
could affect actual tax results and future business results, including further market
deterioration, may affect the amount of deferred tax liabilities or the valuation of deferred tax
assets over time. Our accounting for deferred tax consequences represents our best estimate of
future events. If future results from our operations are less than projected particularly in our
primary markets, a valuation allowance may be required to reduce deferred tax assets, which could
have a material impact on our results of operations in the period in which it is recorded.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48). This standard defines the threshold for recognizing the
benefits of tax return positions in the financial statements as “more likely than not” to be
sustained by the taxing authorities based solely on the technical merits of the position. If the
recognition threshold is met, the tax benefit is measured and recognized as the largest amount of
tax benefit that, in our judgment, is greater than 50 percent likely to be realized. The total
amount of unrecognized tax benefits as of December 31, 2008 was $10.5 million, excluding accrued
interest and penalties. These tax benefits would affect our effective tax rate if recognized.
Interest and penalties recorded for uncertain tax positions are included in our income tax
provision. As of December 31, 2008, $1.7 million of interest and penalties was accrued, excluding
the tax benefits of deductible interest. Fiscal years 2006 and 2007 remain subject to examination
by the Internal Revenue Service. The years 2002 through 2006 remain subject to examination by
foreign tax jurisdictions and state and city tax jurisdictions. In the event that we have
determined not to file tax returns with a particular state or city, all years remain subject to
examination by the tax jurisdictions. The ultimate outcome of tax matters may differ from our
estimates and assumptions. Unfavorable settlement of any particular issue would require the use of
cash and could result in increased income tax expense. Favorable resolution could result in reduced
income tax expense. Within the next 12 months, we do not expect that our unrecognized tax benefits
will change significantly.
Litigation. In accordance with SFAS No. 5, Accounting for Contingencies, we record a liability
when a loss from litigation is known or considered probable and the amount can be reasonably
estimated. Management’s current estimated range of liability related to pending litigation is based
on claims for which we can estimate the amount or range of loss. Based upon information presently
available, management believes that accruals for these claims are adequate. Due to uncertainties
related to both the amount and range of loss on the remaining pending litigation, we are unable to
make a reasonable estimate of the liability that could result from an unfavorable outcome. While
these matters could materially affect operating results in future periods depending on the final
resolution, it is our opinion that after final disposition, any monetary liability to us beyond
that provided in the Consolidated Balance Sheet as of December 31, 2008, would not be material to
our financial position except for the Philips dispute. Imation believes that Philips’ claims are
without merit and consequently there is no probable or estimable liability. See Item 3. Legal
Proceedings for a description of our dispute with Philips. As additional information becomes
available, the potential liability related to pending litigation will be assessed and estimates
will be revised as necessary.
Goodwill and Other Intangibles. We record all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair value as required by SFAS No. 141,
Business Combinations. The initial recognition of goodwill and other intangible assets, the
determination of useful lives of intangible assets and subsequent impairment analyses require
management to make subjective judgments concerning estimates of how the acquired assets will
perform in the future using valuation methods including discounted cash flow analysis.
Goodwill represents the excess of the purchase price paid over the fair value of the net
assets acquired in business combinations. Goodwill is not amortized but is subject, at a minimum,
to annual tests for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. Under certain situations, interim impairment tests may be required if events occur or
circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. Other intangible assets are subject to impairment if events or
circumstances indicate a possible inability to realize the carrying amount.
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Intangible assets are amortized using methods that approximate the benefit provided by
utilization of the assets. In determining the useful life of a trade name, we consider the
following: (1) the overall strength of the trade name in the market in terms of market awareness
and market share, (2) the length of time that the trade name has been in existence, (3) the period
of time over which the trade name is expected to remain in use and (4) the strength of the trade
name and its perseverance through changes in the data storage industry. In determining the useful
lives of other intangible assets, we consider the period over which a majority of the economic
benefits provided by the asset will be realized by the Company. We periodically review the carrying
value of our long lived assets including intangible assets to test whether current events or
circumstances indicate that such carrying value may not be recoverable. If the tests indicate that
the carrying value of the asset is greater than the expected undiscounted cash flows to be
generated by the asset, an impairment loss would be recognized which is determined as the amount by
which carrying value exceeds fair value.
Evaluating goodwill for impairment involves the determination of the fair value of our
reporting units in which we have recorded goodwill. A reporting unit is a component of an operating
segment for which discrete financial information is available and reviewed by management on a
regular basis.
We have determined that our reporting units are our segments with the exception of the
Americas Data Storage Media segment which is further divided between the Americas-Consumer and
Americas-Commercial reporting units. Inherent in the determination of fair value of our reporting
units are certain estimates and judgments, including the interpretation of current economic
indicators and market valuations as well as our strategic plans with regard to our operations.
In the fourth quarter of 2008, in connection with the annual test of goodwill impairment,
impairments were identified and recorded in an aggregate amount of $34.7 million related to the
Americas-Commercial, Asia Pacific and Electronic Products reporting units. We had previously
performed an interim test for impairment at September 30, 2008 and determined that no impairments
were present. During the fourth quarter, the continuing and accelerating deterioration of general
economic conditions including shortfalls against our anticipated fourth quarter operating
profitability resulted in lower expectations for growth and profitability in future periods. In
addition, we experienced a decline in our stock price reflecting a further reduction in a market
participant’s view of fair value of our underlying reporting units.
During the fourth quarter of 2007, in conjunction with our annual test of goodwill impairment,
we recorded a goodwill impairment charge of $94.1 million consisting of a full impairment of the
goodwill associated with our Americas-Consumer and Europe reporting units. The goodwill impairments
in 2007 resulted from a general decline in the outlook for profitability for the products sold by
our Americas-Consumer and Europe reporting units combined with the fact that a market participant’s
view of our fair value was substantially reduced reflected by a decline in our stock price.
In evaluating whether goodwill was impaired, we compared the fair value of the reporting units
to which goodwill is assigned to their carrying value (Step 1 of the impairment test). In
calculating fair value, we used a weighting of the valuations calculated using market multiples and
the income approach. The income approach is a valuation technique under which we estimate future
cash flows using the reporting units’ financial forecasts. Future estimated cash flows are
discounted to their present value to calculate fair value. The market approach establishes fair
value by comparing our company to other publicly traded guideline companies or by analysis of
actual transactions of similar businesses or assets sold. In determining the fair value of
reporting units, we weighted values under the income approach 75 percent and values determined from
market comparables 25 percent. The summation of our reporting units’ fair values is compared and
reconciled to our market capitalization as of the date of our impairment test. In the situation
where a reporting unit’s carrying amount exceeds its fair value, the amount of the impairment loss
must be measured. The measurement of the impairment (Step 2 of the impairment test) is calculated
by determining the implied fair value of a reporting unit’s goodwill. In calculating the implied
fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and
liabilities of that unit based on their fair values. The excess of the fair value of a reporting
unit over the amount assigned to its other assets and liabilities is the implied fair value of
goodwill. The goodwill impairment is measured as the excess of the carrying amount of goodwill over
its implied fair value.
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In determining the fair value of our reporting units under the income approach, our expected
cash flows are affected by various assumptions. Fair value on a discounted cash flow basis uses
forecasts over a 10 year period with an estimation of residual growth rates thereafter. We use
management business plans and projections as the basis for expected future cash flows. The
significant assumptions incorporated in these forecasts for the most recent goodwill impairment
tests included annual revenue changes in future period from
(18) percent to 1 percent for
Americas-Commercial, from (13) percent to 6 percent for Asia
Pacific and from 4 percent to 30
percent for Electronic Products. Terminal growth rates of zero to
four percent were used for all reporting
units. Discount rates of 18 percent were used for all reporting units other than Electronic
Products which used a market participant rate of 20 percent to reflect the relevant risks of the
higher growth assumed for this reporting unit. The selection of discount rates has a significant
impact on the determination of fair value. An increase or decrease of one percent in the discount
rate would have had no impact on the impairments recorded for Americas-Commercial and Asia Pacific;
however, an increase in the discount rate of one percent would have increased the impairment in the
Electronic Products by $6.6 million while a decrease in the discount rate by one percent would have
decreased the impairment charge in this reporting unit by $5.4 million.
There are also various assumptions used under the market approach that affect the valuation of
our reporting units. The most significant assumptions are market multiples and control premium. In
estimating the fair value of our company under the market approach, we considered the relative
merits of commonly applied market capitalization multiples based on the availability of data. Based
on our analysis, we determined the market value of invested capital to earnings before interest,
taxes, depreciation, and amortization multiple to be the most appropriate valuation multiple to be
applied in the application of the market approach.
As a result of our analysis of fair value from the combination of our discounted cash flow
modeling and market comparisons, we utilized an implied stock price
of $12.36 per share at November
30, 2008 in determining and allocating fair value to our reporting units as compared to a market
price of $20.07 per share on the November 30, 2007 testing date for goodwill impairment. A control
premium of 25 percent was used in our determination of fair value which represents the value an
investor would pay above minority interest transaction prices in order to obtain a controlling
interest in the company. The control premium was determined by a review of premiums paid for
similar companies over the past five years. An increase in the
assumed control premium by 5
percent to 30 percent would have decreased the impairment charge in 2008 by approximately $5.4
million while a decrease in the assumed control premium by 5 percent to 20 percent would have
increased the impairment by $6.6 million.
After considering the goodwill impairments recorded in fiscal years 2008 and 2007, remaining
goodwill in the amount of $23.5 million relates to our Electronic Products reporting unit. While
management’s most recent analyses indicates that this goodwill is not impaired, to the extent that
assumptions about future economic conditions or potential for our growth and profitability in this
business changes, it is possible that our conclusion regarding the remaining goodwill could change,
which could have a material effect on our financial position and results of operations.
Allowance for Doubtful Accounts Receivable. We extend credit to our customers in the normal
course of business. We perform ongoing credit evaluations and generally do not require collateral.
We maintain reserves for potential credit losses based upon our loss history and our aging
analysis. The allowance for doubtful accounts is our best estimate of the amount of probable credit
losses in our existing accounts receivable. We review the allowance for doubtful accounts each
reporting period based on a detailed analysis of our accounts receivable. In the analysis, we
primarily consider the age of the customer’s receivable and also consider the creditworthiness of
the customer, the economic conditions of the customer’s industry, and general economic conditions,
among other factors. If any of these factors change, we may also change our original estimates,
which could impact the level of our future allowance for doubtful accounts. If payment is not made
timely, we will contact the customer to try to obtain payment. Once all collection efforts are
exhausted, the receivable is written off against the allowance for doubtful accounts.
Excess Inventory and Obsolescence Accruals. We write down our inventory for estimated excess
and obsolescence to the estimated net realizable value based upon assumptions about future demand
and market conditions. If actual market conditions are less favorable than those we project,
adjustments to these reserves may be required. As of December 31, 2008, the excess inventory and
obsolescence accrual was $30.2 million.
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Rebates. We maintain an accrual for customer rebates that totaled $75.6 million as of December
31, 2008 included in other current liabilities. This accrual requires a program-by-program
estimation of outcomes based on a variety of factors including customer unit sell-through volumes
and end user redemption rates. In the event that actual volumes and redemption rates differ from
the estimates used in the accrual calculation, adjustments to the accrual, upward or downward, may
be necessary.
Other Accrued Liabilities. We also have other accrued liabilities, including uninsured claims
and pensions. These accruals are based on a variety of factors including past experience and
various actuarial assumptions and, in many cases, require estimates of events not yet reported to
us. If future experience differs from these estimates, operating results in future periods would be
impacted.
We sponsor defined benefit pension plans in both U.S. and foreign entities. Expenses and
liabilities for the pension plans are actuarially calculated. These calculations are based on our
assumptions related to the discount rate, expected return on plan assets and projected salary
increases. The annual measurement date for these assumptions is December 31. See Note 10 to the
Consolidated Financial Statements includes disclosures of these assumptions for both the U.S. and
international plans.
The discount rate assumptions are tied to portfolios of long-term high quality bonds and are,
therefore, subject to annual fluctuations. A lower discount rate increases the present value of the
pension obligations, which results in higher pension expense. The discount rate used in calculating
the benefit obligation in the United States was 5.75 percent at December 31, 2008, as compared to
6.0 percent at December 31, 2007. A discount rate reduction of 0.25 percent decreases U.S. pension
plan expense (pre-tax) by approximately $0.4 million.
The expected return on assets assumptions on the investment portfolios for the pension plans
are based on the long-term expected returns for the investment mix of assets currently in the
respective portfolio. Because the rate of return is a long-term assumption, it generally does not
change each year. We use historic return trends of the asset portfolio combined with recent market
conditions to estimate the future rate of return.
The rate of return used in calculating the pension expense for 2008, 2007 and 2006 was 8.0
percent. A change of 0.25 percent for the expected return on plan assets assumption will impact
United States net pension plan expense (pre-tax) by $0.2 million. Expected returns on asset
assumptions for non-U.S. plans are determined in a manner consistent with the United States plan.
The projected salary increase assumption is based on historic trends and comparisons to the
external market. Higher rates of increase result in higher pension expenses. In the United States,
we have used the rate of 4.75 percent for the past three years. Mortality assumptions were obtained
from the IRS 2009 Static Mortality Table.
Recently Issued Accounting Standards
In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) Financial Accounting Standard (FAS) 132(R)-1, Employers’ Disclosures about Postretirement
Benefit Plan Assets. This FSP amends SFAS 132(R), Employers’ Disclosures about Pensions and Other
Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan. The disclosures about plan assets required by
this FSP shall be provided for fiscal years ending after December 15, 2009.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets, which amends the list of factors an entity should consider in developing renewal or
extension assumptions used in determining the useful life of recognized intangible assets under
SFAS No. 142, Goodwill and Other Intangible Assets. The new guidance applies to (1) intangible
assets that are acquired individually or with a group of other assets and (2) intangible assets
acquired in both business combinations and asset acquisitions. We are required to adopt the FSP at
the beginning of 2009 and for interim periods within that year. While the guidance on determining
the useful life of a recognized intangible asset must be applied prospectively only to intangible
assets acquired after the FSP’s effective date, the disclosure requirements of the FSP must be
applied prospectively to all intangible assets recognized as of, and after, the FSP’s effective
date. Early adoption of the FSP is prohibited.
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In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities — an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of, and gains and losses on, derivative instruments, and
disclosures about credit-risk-related contingent features in derivative agreements. We are required
to adopt SFAS 161 effective at the beginning of 2009.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which
is a revision of SFAS No. 141, Business Combinations. SFAS 141(R) retains the fundamental
requirements in SFAS No. 141 that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination. This statement
includes changes in the measurement of fair value of the assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree as of the acquisition date, with limited
exceptions. This statement requires in general that transaction costs and costs to restructure the
acquired company be expensed and contractual contingencies be recorded at their acquisition-date
fair values. We are required to adopt the new standard prospectively effective at the beginning of
2009. Early adoption of SFAS 141(R) is prohibited.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51 (SFAS 160). This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. This statement also changes
the way the consolidated income statement is presented. It requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the noncontrolling
interest, with disclosure on the face of the consolidated statement of income of the amounts of
consolidated net income attributable to the parent and the noncontrolling interest. We are required
to adopt the new standard effective at the beginning of 2009. We have determined that the adoption
of SFAS 160 will not have a material impact on our consolidated financial position, results of
operations or cash flows.
A variety of proposed or otherwise potential accounting standards are currently under study by
standard setting organizations and various regulatory agencies. Due to the tentative and
preliminary nature of those proposed standards, management has not determined whether
implementation of such proposed standards would be material to our Consolidated Financial
Statements.
Forward-Looking Statements
We may from time to time make written or oral forward-looking statements with respect to our
future goals, including statements contained in this Form 10-K, in our other filings with the SEC
and in our reports to shareholders.
Certain information which does not relate to historical financial information may be deemed to
constitute forward-looking statements. The words or phrases “is targeting,” “will likely result,”
“are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar
expressions identify “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that
could cause our actual results in the future to differ materially from our historical results and
those presently anticipated or projected. We wish to caution investors not to place undue reliance
on any such forward-looking statements. Any forward-looking statements speak only as of the date on
which such statements are made, and we undertake no obligation to update such statements to reflect
events or circumstances arising after such date. Risk factors include our ability to successfully
integrate the acquisitions of the TDK Recording Media business and the Electronic Products business
and achieve the anticipated benefits, including synergies, in a timely manner; our ability to
successfully manage the Memorex brand; our ability to successfully manage multiple brands globally;
our ability to successfully defend our intellectual property rights, including the Memorex and TDK
Life on Record brands and the Philips patent cross-license; continuing uncertainty in global
economic conditions and particularly United States conditions that make it difficult to predict
product demand; the volatility of the markets in which we operate; our ability to implement our
global restructuring plan and realize the benefits expected; our ability to meet our cost reduction
and revenue growth targets; our ability to successfully implement our global manufacturing strategy
for magnetic data storage products and realize the benefits expected
from the related restructuring; our ability to introduce new offerings in a timely manner
either independently or in association with OEMs or other third parties; our ability to achieve the
expected benefits from the strategic relationships and distribution agreements such as the GDM
joint venture and Tandberg relationships; the competitive pricing environment and its possible
impact on profitability and inventory valuations; foreign currency fluctuations; the outcome of any
pending or future litigation including the Philips litigation; our ability to secure adequate
supply of certain high demand products at acceptable prices; the ready availability and price of
energy and key raw materials or critical components; the market acceptance of newly introduced
product and service offerings; the rate of decline for certain existing products; the possibility
that our goodwill or other assets may become impaired, as well as various factors set forth in Item
1A. Risk Factors, of this Form 10-K and from time to time in our filings with the SEC.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various market risks including volatility in foreign currency exchange rates
and credit risk. International operations, which comprised approximately 58 percent of our revenue
in 2008, may be subject to various risks that are not present in domestic operations. The
additional risks include political and economic instability, terrorist activity, the possibility of
expropriation, trade tariffs or embargoes, unfavorable tax laws, restrictions on royalties,
dividends and currency remittances, requirements for governmental approvals for new ventures and
local participation in operations such as local equity ownership and workers’ councils.
Our foreign currency hedging policy attempts to manage some of the foreign currency risks over
near term periods; however, we cannot ensure that these risk management activities will offset more
than a portion of the adverse financial impact resulting from unfavorable movements in foreign
exchange rates or that medium and longer term effects of exchange rates will not be significant.
Although we attempt to utilize hedging to manage the impact of changes in currency exchange rates,
when the U.S. dollar sustains a strengthening position against currencies in which we sell products
or a weakening exchange rate against currencies in which we incur costs, our revenue or costs are
adversely impacted.
In accordance with established policies and procedures, we may utilize derivative financial
instruments, including forward exchange contracts, options, combination option strategies and swap
agreements to manage certain of these exposures. Factors that could impact the effectiveness of our
hedging include the accuracy of our forecasts, the volatility of the currency markets and the
availability of hedging instruments. We do not hold or issue derivative financial instruments for
trading or speculative purposes and we are not a party to leveraged derivative transactions. The
utilization of derivatives and hedging activities is described more fully in Note 13 to the
Consolidated Financial Statements.
As of December 31, 2008, we had $595.4 million notional amount of foreign currency forward and
option contracts of which $99.0 million hedged recorded balance sheet exposures. This compares to
$321.4 million notional amount of foreign currency forward and option contracts as of December 31,
2007, of which $102.3 million hedged recorded balance sheet exposures. An immediate adverse change
of 10 percent in year-end foreign currency exchange rates with all other variables (including
interest rates) held constant would reduce the fair value of foreign currency contracts outstanding
as of December 31, 2008 by $27.5 million.
We are exposed to credit risk associated with cash investments and foreign currency
derivatives. We do not believe that our cash investments and foreign currency derivatives present
significant credit risks because the counterparties to the instruments consist of major financial
institutions and we monitor and manage the notional amount of contracts entered into with each
counterparty.
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Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Imation Corp.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, shareholders’ equity and comprehensive income (loss) and of cash flows
present fairly, in all material respects, the financial position of Imation Corp. and its
subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Report on Internal Control over
Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these
financial statements and on the Company’s internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in
which it accounts for uncertain tax positions in 2007. As discussed in Note 10 to the consolidated
financial statements, the Company changed the manner in which it accounts for defined benefit
pension plans in 2006.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP |
||
PricewaterhouseCoopers LLP |
||
Minneapolis, MN |
February 27, 2009
42
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IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| (In millions, except per share amounts) | 2008 | 2007 | 2006 | |||||||||
Net revenue |
$ | 2,154.6 | $ | 2,062.0 | $ | 1,584.7 | ||||||
Cost of goods sold |
1,804.6 | 1,706.1 | 1,240.6 | |||||||||
Gross profit |
350.0 | 355.9 | 344.1 | |||||||||
Operating expense: |
||||||||||||
Selling, general and administrative |
290.6 | 223.3 | 174.0 | |||||||||
Research and development |
23.6 | 38.2 | 50.0 | |||||||||
Goodwill impairment |
34.7 | 94.1 | — | |||||||||
Restructuring and other |
28.9 | 33.3 | 11.9 | |||||||||
Total |
377.8 | 388.9 | 235.9 | |||||||||
Operating (loss) income |
(27.8 | ) | (33.0 | ) | 108.2 | |||||||
Other (income) and expense: |
||||||||||||
Interest expense |
1.5 | 2.6 | 1.0 | |||||||||
Interest income |
(3.8 | ) | (7.6 | ) | (12.6 | ) | ||||||
Other expense, net |
9.8 | 6.6 | 8.0 | |||||||||
Total |
7.5 | 1.6 | (3.6 | ) | ||||||||
(Loss) income from continuing operations before income taxes |
(35.3 | ) | (34.6 | ) | 111.8 | |||||||
Income tax (benefit) provision |
(2.0 | ) | 15.8 | 36.6 | ||||||||
(Loss) income from continuing operations |
(33.3 | ) | (50.4 | ) | 75.2 | |||||||
Gain on disposal of discontinued businesses, net of income
taxes |
— | — | 1.2 | |||||||||
Net (loss) income |
$ | (33.3 | ) | $ | (50.4 | ) | $ | 76.4 | ||||
(Loss) earnings per common share — basic: |
||||||||||||
Continuing operations |
$ | (0.89 | ) | $ | (1.36 | ) | $ | 2.17 | ||||
Discontinued operations |
$ | — | $ | — | $ | 0.03 | ||||||
Net (loss) income |
$ | (0.89 | ) | $ | (1.36 | ) | $ | 2.21 | ||||
(Loss) earnings per common share — diluted: |
||||||||||||
Continuing operations |
$ | (0.89 | ) | $ | (1.36 | ) | $ | 2.14 | ||||
Discontinued operations |
$ | — | $ | — | $ | 0.03 | ||||||
Net (loss) income |
$ | (0.89 | ) | $ | (1.36 | ) | $ | 2.17 | ||||
Weighted average basic shares outstanding |
37.5 | 37.0 | 34.6 | |||||||||
Weighted average diluted shares outstanding |
37.5 | 37.0 | 35.2 | |||||||||
Cash dividends paid per common share |
$ | 0.56 | $ | 0.62 | $ | 0.54 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
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IMATION CORP.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
| As of December 31, | ||||||||
| (In millions, except per share amounts) | 2008 | 2007 | ||||||
Assets |
||||||||
Current assets
Cash and cash equivalents |
$ | 96.6 | $ | 135.5 | ||||
Accounts receivable, net |
378.3 | 507.1 | ||||||
Inventories, net |
363.2 | 366.1 | ||||||
Other current assets |
138.1 | 109.9 | ||||||
Total current assets |
976.2 | 1,118.6 | ||||||
Property, plant and equipment, net |
122.4 | 171.5 | ||||||
Intangible assets, net |
357.0 | 371.0 | ||||||
Goodwill |
23.5 | 55.5 | ||||||
Other assets |
43.2 | 34.4 | ||||||
Total assets |
$ | 1,522.3 | $ | 1,751.0 | ||||
Liabilities and Shareholders’ Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 296.1 | $ | 350.1 | ||||
Accrued payroll |
12.5 | 13.5 | ||||||
Other current liabilities |
195.0 | 257.3 | ||||||
Current maturities of long-term debt |
— | 10.0 | ||||||
Total current liabilities |
503.6 | 630.9 | ||||||
Other liabilities |
74.1 | 45.0 | ||||||
Long-term debt, less current maturities |
— | 21.3 | ||||||
Commitments and contingencies |
||||||||
Shareholders’ equity |
||||||||
Preferred stock, $.01 par value, authorized 25 million shares, none issued and outstanding |
— | — | ||||||
Common stock, $.01 par value, authorized 100 million shares, 42.9 million issued |
0.4 | 0.4 | ||||||
Additional paid-in capital |
1,113.1 | 1,109.0 | ||||||
Retained earnings |
47.3 | 101.5 | ||||||
Accumulated other comprehensive loss |
(85.0 | ) | (44.1 | ) | ||||
Treasury stock, at cost, 5.2 million and 4.5 million shares as of December 31, 2008
and 2007, respectively |
(131.2 | ) | (113.0 | ) | ||||
Total shareholders’ equity |
944.6 | 1,053.8 | ||||||
Total liabilities and shareholders’ equity |
$ | 1,522.3 | $ | 1,751.0 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
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Table of Contents
IMATION CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
| Unearned ESOP | ||||||||||||||||||||||||||||
| Common | Additional Paid- | Accumulated Other | Shares and Other | Treasury | Total Shareholders’ | |||||||||||||||||||||||
| (In millions, except per share amounts) | Stock | in Capital | Retained Earnings | Comprehensive Loss | Compensation | Stock | Equity | |||||||||||||||||||||
Balance as of December 31, 2005 |
0.4 | 1,046.7 | 120.5 | (106.6 | ) | (4.4 | ) | (201.3 | ) | 855.3 | ||||||||||||||||||
Purchase of treasury stock (865,400 shares) |
(35.6 | ) | (35.6 | ) | ||||||||||||||||||||||||
Exercise of stock options (1,204,781 shares) |
(8.8 | ) | (5.5 | ) | 46.0 | 31.7 | ||||||||||||||||||||||
Restricted stock grants (96,960 shares) and other |
(6.1 | ) | 4.4 | 3.5 | 1.8 | |||||||||||||||||||||||
401(k) matching contribution (80,501 shares) |
0.2 | 3.2 | 3.4 | |||||||||||||||||||||||||
Stock-based compensation related to options |
8.8 | 8.8 | ||||||||||||||||||||||||||
Tax benefit from shareholder transactions |
8.1 | 8.1 | ||||||||||||||||||||||||||
Dividend payments |
(18.8 | ) | (18.8 | ) | ||||||||||||||||||||||||
Initial FAS 158 adjustment (net of income tax provision of $1.7) |
(3.2 | ) | (3.2 | ) | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
76.4 | 76.4 | ||||||||||||||||||||||||||
Net change in cumulative translation adjustment |
13.4 | 13.4 | ||||||||||||||||||||||||||
Minimum pension liability adjustments (net of
income tax benefit of $2.6) |
4.6 | 4.6 | ||||||||||||||||||||||||||
Cash flow hedging (net of income tax provision of $0.3) |
0.4 | 0.4 | ||||||||||||||||||||||||||
Comprehensive income |
94.8 | |||||||||||||||||||||||||||
Balance as of December 31, 2006 |
0.4 | 1,048.9 | 172.6 | (91.4 | ) | 0.0 | (184.2 | ) | 946.3 | |||||||||||||||||||
Purchase of treasury stock (3,816,401 shares) |
(108.2 | ) | (108.2 | ) | ||||||||||||||||||||||||
Exercise of stock options (293,954 shares) |
(2.3 | ) | 10.0 | 7.7 | ||||||||||||||||||||||||
Restricted stock grants (46,202 shares) and other |
(0.1 | ) | 2.8 | 2.7 | ||||||||||||||||||||||||
401(k) matching contribution (104,155 shares) |
0.3 | 3.1 | 3.4 | |||||||||||||||||||||||||
Stock-based compensation related to options |
7.9 | 7.9 | ||||||||||||||||||||||||||
Terminated employment agreement |
0.6 | (1.5 | ) | (0.9 | ) | |||||||||||||||||||||||
TDK Recording Media acquisition (6,825,764 shares) |
51.7 | 165.0 | 216.7 | |||||||||||||||||||||||||
FIN 48 adjustment |
2.5 | 2.5 | ||||||||||||||||||||||||||
Tax benefit from shareholder transactions |
2.0 | 2.0 | ||||||||||||||||||||||||||
Dividend payments |
(23.2 | ) | (23.2 | ) | ||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||
Net loss |
(50.4 | ) | (50.4 | ) | ||||||||||||||||||||||||
Net change in cumulative translation adjustment |
37.5 | 37.5 | ||||||||||||||||||||||||||
Pension adjustments (net of income tax
benefit of $5.0) |
9.2 | 9.2 | ||||||||||||||||||||||||||
Cash flow hedging (net of income tax provision of $0.2) |
0.6 | 0.6 | ||||||||||||||||||||||||||
Comprehensive loss |
(3.1 | ) | ||||||||||||||||||||||||||
Balance as of December 31, 2007 |
$ | 0.4 | $ | 1,109.0 | $ | 101.5 | $ | (44.1 | ) | $ | 0.0 | $ | (113.0 | ) | $ | 1,053.8 | ||||||||||||
Purchase of treasury stock (1,102,800 shares) |
(26.4 | ) | (26.4 | ) | ||||||||||||||||||||||||
Exercise of stock options (46,330 shares) |
(0.5 | ) | 1.1 | 0.6 | ||||||||||||||||||||||||
Restricted stock grants (164,559 shares) and other |
(1.2 | ) | 3.8 | 2.6 | ||||||||||||||||||||||||
401(k) matching contribution (130,227 shares) |
(0.7 | ) | 3.3 | 2.6 | ||||||||||||||||||||||||
Stock-based compensation related to options |
6.4 | 6.4 | ||||||||||||||||||||||||||
Tax benefit from shareholder transactions |
0.1 | 0.1 | ||||||||||||||||||||||||||
Dividend payments |
(20.9 | ) | (20.9 | ) | ||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||
Net loss |
(33.3 | ) | (33.3 | ) | ||||||||||||||||||||||||
Net change in cumulative translation adjustment |
(14.9 | ) | (14.9 | ) | ||||||||||||||||||||||||
Pension adjustments (net of income tax
benefit of $14.8) |
(24.2 | ) | (24.2 | ) | ||||||||||||||||||||||||
Cash flow hedging (net of income tax provision of $0.6) |
(1.8 | ) | (1.8 | ) | ||||||||||||||||||||||||
Comprehensive loss |
(74.2 | ) | ||||||||||||||||||||||||||
Balance as of December 31, 2008 |
$ | 0.4 | $ | 1,113.1 | $ | 47.3 | $ | (85.0 | ) | $ | 0.0 | $ | (131.2 | ) | $ | 944.6 | ||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
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IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net (loss) income |
$ | (33.3 | ) | $ | (50.4 | ) | $ | 76.4 | ||||
Adjustments to reconcile net (loss) income to net cash provided by operating
activities: |
||||||||||||
Depreciation and leasehold amortization |
25.9 | 28.6 | 29.1 | |||||||||
Intangible amortization |
23.4 | 18.3 | 9.3 | |||||||||
Deferred income taxes |
0.2 | (10.7 | ) | 9.7 | ||||||||
Goodwill impairment |
34.7 | 94.1 | — | |||||||||
Asset impairments |
5.0 | 8.4 | 7.2 | |||||||||
Stock-based compensation |
9.5 | 10.2 | 11.0 | |||||||||
Pension settlement / curtailment |
5.7 | 2.4 | 1.7 | |||||||||
Gain on sale of Specialty Papers |
— | — | (2.1 | ) | ||||||||
Excess tax benefit from exercise of stock
options |
— | — | (3.3 | ) | ||||||||
Other |
4.9 | 3.5 | 0.6 | |||||||||
Changes in operating assets and liabilities, net of effects from
acquisitions: |
||||||||||||
Accounts receivable |
129.0 | (33.7 | ) | (37.6 | ) | |||||||
Inventories |
0.2 | 7.8 | (49.3 | ) | ||||||||
Other assets |
(2.9 | ) | (9.1 | ) | 1.5 | |||||||
Accounts payable |
(61.5 | ) | (8.7 | ) | 30.5 | |||||||
Accrued payroll and other liabilities |
(56.1 | ) | 26.8 | 12.8 | ||||||||
Net cash provided
by operating
activities |
84.7 | 87.5 | 97.5 | |||||||||
Cash Flows from Investing Activities: |
||||||||||||
Capital expenditures |
(13.6 | ) | (14.5 | ) | (16.0 | ) | ||||||
Acquisitions, net of cash acquired |
(15.3 | ) | (68.3 | ) | (332.2 | ) | ||||||
Acquisition of minority interest |
(8.0 | ) | — | — | ||||||||
Purchase of investments |
(0.1 | ) | — | (0.3 | ) | |||||||
Proceeds from sale of investments |
— | — | 28.9 | |||||||||
Proceeds from sale of businesses |
— | — | 2.3 | |||||||||
Other investing activities |
0.9 | 0.3 | 3.2 | |||||||||
Net cash used in
investing
activities |
(36.1 | ) | (82.5 | ) | (314.1 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Purchase of treasury stock |
(26.4 | ) | (108.2 | ) | (35.6 | ) | ||||||
Exercise of stock options |
0.6 | 7.7 | 31.7 | |||||||||
Dividend payments |
(20.9 | ) | (23.2 | ) | (18.8 | ) | ||||||
Debt repayment |
(31.3 | ) | (6.3 | ) | — | |||||||
Excess tax benefit from exercise of stock options |
— | 3.3 | ||||||||||
Net cash used in
financing
activities |
(78.0 | ) | (130.0 | ) | (19.4 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(9.5 | ) | 8.0 | 5.5 | ||||||||
Change in cash and equivalents |
(38.9 | ) | (117.0 | ) | (230.5 | ) | ||||||
Cash and cash equivalents — beginning of year |
135.5 | 252.5 | 483.0 | |||||||||
Cash and cash equivalents — end of year |
$ | 96.6 | $ | 135.5 | $ | 252.5 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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Table of Contents
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Background and Basis of Presentation
Background
Imation Corp., a Delaware corporation, was formed in 1996 as a result of the spin-off of
substantially all of the businesses which comprised the data storage and imaging systems groups of
3M Company. As used herein, the terms “Imation,” “Company,” “ we,” “us,” or “our” mean Imation
Corp. and its subsidiaries unless the context indicates otherwise. We develop, manufacture, source,
market and distribute removable data storage media products and certain consumer electronic
products. Through divestitures, we have exited all of the non-data storage businesses existing at
the spin-off.
Basis of Presentation
The consolidated financial statements include our accounts and our wholly- or majority-owned
subsidiaries, and have been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP). All significant inter-company transactions have been
eliminated. We have a 51 percent ownership interest in our Global Data Media subsidiary that was
formed in 2003. Minority interest in the income and net assets of these subsidiaries is not
material for the periods presented.
On June 30, 2005, we closed on the sale of our Specialty Papers business to Nekoosa Coated
Products, LLC located in Nekoosa, Wisconsin. This operation is presented in our Consolidated
Statements of Operations as discontinued operations for all periods presented.
Note 2 — Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported asset and liability amounts,
and the contingent asset and liability disclosures at the date of the financial statements, as well
as the revenue and expense amounts reported during the period. Actual results could differ from
those estimates.
Foreign Currency. For operations in local currency environments, assets and liabilities are
translated at year-end exchange rates with cumulative translation adjustments included as a
component of shareholders’ equity and income and expense items are translated at average foreign
exchange rates prevailing during the year. For operations in which
the U.S. dollar is not considered
the functional currency, certain financial statements amounts are re-measured at historical
exchange rates, with all other asset and liability amounts translated at year-end exchange rates.
These re-measured adjustments are reflected in the results of operations. Foreign currency
transactions gains and losses are included in the results of operations.
Cash Equivalents. Cash equivalents consisted of highly liquid investments purchased with
original maturities of three months or less. The carrying amounts reported in the Consolidated
Balance Sheets for cash equivalents approximate fair value.
Trade Accounts Receivable and Allowances. Trade accounts receivable are initially recorded at
the invoiced amount upon the sale of goods or services to customers and do not bear interest. They
are stated net of allowances, which primarily represent estimated amounts for expected customer
returns, allowances and deductions for a variety of claims such as terms discounts or the inability
of certain customers to make the required payments. When determining the allowances, we take
several factors into consideration, including prior history of accounts receivable credit activity
and write-offs, the overall composition of accounts receivable aging, the types of customers, and
our day-to-day knowledge of specific customers. Changes in the allowances are recorded as
reductions of net revenue or as bad debt expense (included in selling, general and administrative
expense), as appropriate, in the Consolidated Statements of Operations.
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Inventories. Inventories are valued at the lower of cost or market, with cost generally
determined on a first-in, first-out basis. We provide estimated inventory allowances for excess,
slow-moving and obsolete inventory as well as inventory with a carrying value in excess of net
realizable value.
Derivative Financial Instruments. We follow Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires that all
derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at
fair value. Derivatives that are not hedges must be recorded at fair value through operations. If a
derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of the underlying assets or
liabilities through operations or recognized in accumulated other comprehensive loss in
shareholders’ equity until the underlying hedged item is recognized in operations. These gains and
losses are generally recognized as an adjustment to cost of goods sold for inventory-related hedge
transactions, or as adjustments to foreign currency transaction gains/losses included in
non-operating expenses for foreign denominated payables and receivables-related hedge transactions.
Cash flows attributable to these financial instruments are included with cash flows of the
associated hedged items. The ineffective portion of a derivative’s change in fair value is
immediately recognized in operations.
Other Financial Instruments. Our other financial instruments consist principally of cash and
cash equivalents and short-term receivables and payables for which their current carrying amounts
approximate fair market value.
Property, Plant and Equipment. Property, plant and equipment, including leasehold and other
improvements that extend an asset’s useful life or productive capabilities, are recorded at cost.
Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed are removed from the related accounts and the gains or losses are
reflected in the results of operations.
Property, plant and equipment are generally depreciated on a straight-line basis over their
estimated useful lives. The estimated depreciable lives range from 20 to 40 years for buildings and
5 to 12 years for machinery and equipment. Leasehold and other improvements are amortized over the
lesser of the remaining life of the lease or the estimated useful life of the improvement.
Intangible Assets. Intangible assets include trade names, customer relationships and other
intangible assets acquired in business combinations. Intangible assets are amortized using methods
that approximate the benefit provided by utilization of the assets.
We capitalize costs of software developed or obtained for internal use, once the preliminary
project stage has been completed, management commits to funding the project and it is probable that
the project will be completed and the software will be used to perform the function intended.
Capitalized costs include only (1) external direct costs of materials and services consumed in
developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees
who are directly associated with and who devote time to the internal-use software project and (3)
interest costs incurred, when material, while developing internal-use software. Capitalization of
costs ceases when the project is substantially complete and ready for its intended use.
Goodwill. Goodwill is the excess of the cost of an acquired entity over the amounts assigned
to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), we evaluate the
carrying value of goodwill during the fourth quarter of each year and between annual evaluations if
events occur or circumstances change that would indicate a possible impairment.
In evaluating whether goodwill is impaired, we compare the fair value of the reporting units
to which goodwill is assigned to their carrying value (Step 1 of the impairment test). In
calculating fair value, we used a weighting of the valuations calculated using market multiples and
the income approach. The income approach is a valuation technique under which we estimate future
cash flows using the reporting units’ financial forecasts. Future estimated cash flows are
discounted to their present value to calculate fair value. The market approach establishes fair
value by comparing our company to other publicly traded guideline companies or by analysis of
actual transactions of similar businesses or assets sold. The summation of our reporting units’
fair values is compared and reconciled to our market capitalization as of the date of our
impairment test. In the situation where a reporting unit’s carrying amount exceeds its fair value,
the amount of the impairment loss must be measured. The measurement of the impairment (Step 2 of
the impairment test) is calculated by determining the implied fair value of a reporting unit’s
goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit
is allocated to all other assets and liabilities of that unit based on their fair values. The
excess of the fair value of a reporting unit over the amount assigned to its other assets and
liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the
excess of the carrying amount of goodwill over its implied fair value.
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Table of Contents
Impairment of Long-Lived Assets. In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), we periodically review the carrying value
of our property and equipment and our intangible assets to test whether current events or
circumstances indicate that such carrying value may not be recoverable. If the tests indicate that
the carrying value of the asset is greater than the expected undiscounted cash flows to be
generated by such asset, an impairment loss would be recognized. The impairment loss is determined
by the amount by which the carrying value of such asset exceeds its fair value. We generally
measure fair value by considering sale prices for similar assets or by discounting estimated future
cash flows from such assets using an appropriate discount rate. Assets to be disposed of are
carried at the lower of their carrying value or fair value less costs to sell. Considerable
management judgment is necessary to estimate the fair value of assets, and accordingly, actual
results could vary significantly from such estimates.
Revenue Recognition. We sell a wide range of removable data storage media products as well as
certain consumer electronic products. Net revenue consists primarily of magnetic, optical, flash
media, consumer electronics and accessories sales. We recognize revenue in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition, which requires that persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, fees are fixed or
determinable and collectibility is reasonably assured. For product sales, delivery is considered to
have occurred when the risks and rewards of ownership transfer to the customer. For inventory
maintained at the customer site, revenue is recognized at the time these products are sold by the
customer. We base our estimates for returns on historical experience and have not experienced
significant fluctuations between estimated and actual return activity. Provisions for returns are
recorded against sales based on quarterly historical experience. Taxes collected from customers and
remitted to governmental authorities that were included in revenue in 2008, 2007 and 2006 were
$75.9 million, $69.8 million and $52.0 million, respectively.
Concentrations of Credit Risk. We sell a wide range of products and services to a diversified
base of customers around the world and perform ongoing credit evaluations of our customers’
financial condition. Therefore, we believe there is no material concentration of credit risk. No
single customer represented more than 10 percent of total net
revenue in 2008, 2007 or 2006.
Shipping and Handling Costs. Costs related to shipping and handling are included in cost of
goods sold.
Research and Development Costs. Research and development costs are charged to expense as
incurred. Research and development costs include salaries, payroll taxes, employee benefit costs,
supplies, depreciation and maintenance of research equipment as well as the allocable portion of
facility costs such as rent, utilities, insurance, repairs, maintenance and general support
services.
Advertising Costs. Advertising and other promotional costs are expensed as incurred and were
approximately $22 million, $15 million and $11 million in 2008, 2007 and 2006, respectively.
Prepaid advertising costs were not significant at December 31, 2008 and 2007.
Rebates. We provide rebates to our customers. Customer rebates are accounted for as a
reduction of revenue at the time of sale based on an estimate of the cost to honor the related
rebate programs.
Income Taxes. We account for income taxes under the provisions of SFAS No. 109, Accounting for
Income Taxes (SFAS 109). Under the asset and liability method prescribed in SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. A valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred
tax assets depends on the generation of future taxable income during the period in which related
temporary differences become deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in this assessment.
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date of such change.
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On January 1, 2007, we adopted FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48). This new standard defines the
threshold for recognizing the benefits of tax return positions in the financial statements as “more
likely than not” to be sustained by the taxing authorities based solely on the technical merits of
the position. If the recognition threshold is met, the tax benefit is measured and recognized as
the largest amount of tax benefit that in our judgment is greater than 50% likely to be realized.
Prior to the adoption of FIN 48 on January 1, 2007, we established reserves for income tax
contingencies when, despite our belief that the tax return positions were fully supportable,
certain positions were likely to be challenged. We adjusted these reserves in light of changing
facts and circumstances, such as the closing of a tax audit.
Treasury Stock. Our repurchases of shares of common stock are recorded as treasury stock and
are presented as a reduction of shareholders’ equity. When treasury shares are reissued, we use a
last-in, first-out method and the difference between repurchase cost and reissuance price is
treated as an adjustment to equity.
Stock-Based Compensation. Effective January 1, 2006, we adopted the fair value recognition
provisions of SFAS No. 123 (Revised 2004) (SFAS 123(R)), Share-Based Payment, using the
modified-prospective transition method. Compensation expense includes the estimated expense for
stock options granted on, and subsequent to, January 1, 2006. Estimated expense recognized for the
options granted prior to, but not vested as of January 1, 2006, was calculated based on the grant
date fair value estimated in accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123).
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option valuation model. Expected volatilities are based on historical volatility of our stock. The
risk-free rate for the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. We use historical data to estimate option exercise and employee
termination activity within the valuation model. The expected term of stock options granted is
based on historical data and represents the period of time that stock options granted are expected
to be
outstanding. The dividend yield is based on the latest dividend payments made on or announced
by the date of the grant. Forfeitures are estimated based on historical experience and current
demographics. See Note 12 herein for further information regarding stock-based compensation.
Comprehensive Income. Comprehensive income (loss) includes net (loss) income, the effects of
currency translation, unrealized gains and losses on cash flow hedges and pension adjustments.
Comprehensive income (loss) for all years presented is included in the Consolidated Statements of
Shareholders’ Equity and Comprehensive Income (Loss).
Weighted Average Basic and Diluted Shares Outstanding. Basic earnings per share is calculated
using the weighted average number of shares outstanding during the year. Diluted earnings per share
is computed on the basis of the weighted average basic shares outstanding plus the dilutive effect
of our stock-based compensation plans using the “treasury stock” method. The following table sets
forth the computation of the weighted average basic and diluted shares outstanding:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Weighted average number of basic shares outstanding during the year |
37.5 | 37.0 | 34.6 | |||||||||
Dilutive effect of stock-based compensation plans |
— | — | 0.6 | |||||||||
Weighted average number of dilutive shares outstanding during the year |
37.5 | 37.0 | 35.2 | |||||||||
Options to purchase approximately 4.1 million, 3.1 million and 0.1 million shares of our
common stock were outstanding as of December 31, 2008, 2007 and 2006, respectively, and were not
considered in the computation of potential common shares because the effect of the options would be
antidilutive.
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Recent Accounting Pronouncements
In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) Financial Accounting Standard (FAS) 132(R)-1, Employers’ Disclosures about Postretirement
Benefit Plan Assets. This FSP amends SFAS 132(R), Employers’ Disclosures about Pensions and Other
Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan. The disclosures about plan assets required by
this FSP shall be provided for fiscal years ending after December 15, 2009.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets, which amends the list of factors an entity should consider in developing renewal or
extension assumptions used in determining the useful life of recognized intangible assets under
SFAS No. 142, Goodwill and Other Intangible Assets. The new guidance applies to (1) intangible
assets that are acquired individually or with a group of other assets and (2) intangible assets
acquired in both business combinations and asset acquisitions. We are required to adopt the FSP at
the beginning of 2009 and for interim periods within that year. While the guidance on determining
the useful life of a recognized intangible asset must be applied prospectively only to intangible
assets acquired after the FSP’s effective date, the disclosure requirements of the FSP must be
applied prospectively to all intangible assets recognized as of, and after, the FSP’s effective
date. Early adoption of the FSP is prohibited.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities – an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of, and gains and losses on, derivative instruments, and
disclosures about credit-risk-related contingent features in derivative agreements. We are required
to adopt SFAS 161 effective at the beginning of 2009.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which
is a revision of SFAS No. 141, Business Combinations. SFAS 141(R) retains the fundamental
requirements in SFAS No. 141 that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination. This statement
includes changes in the measurement of fair value of the assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree as of the acquisition date, with limited
exceptions. This statement requires in general that transaction costs and costs to restructure the
acquired company be expensed and contractual contingencies be recorded at their acquisition-date
fair values. We are required to adopt the new standard prospectively effective at the beginning of
2009. Early adoption of SFAS 141(R) is prohibited.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51 (SFAS 160). This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. This statement also changes
the way the consolidated income statement is presented. It requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the noncontrolling
interest, with disclosure on the face of the consolidated statement of income of the amounts of
consolidated net income attributable to the parent and the noncontrolling interest. We are required
to adopt the new standard effective at the beginning of 2009. We have determined that the adoption
of SFAS 160 will not have a material impact on our consolidated financial position, results of
operations or cash flows.
A variety of proposed or otherwise potential accounting standards are currently under study by
standard setting organizations and various regulatory agencies. Due to the tentative and
preliminary nature of those proposed standards, management has not determined whether
implementation of such proposed standards would be material to our Consolidated Financial
Statements.
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Note 3 — Business Combinations
2008 Acquisitions
Xtreme Accessories, LLC
On June 30, 2008, we acquired substantially all of the assets of Xtreme Accessories, LLC
(XtremeMac), a Florida-based product design and marketing firm focused on consumer electronic
products and accessories. The purchase price was $7.3 million, consisting of a cash payment of $7.0
million and $0.3 million of direct acquisition costs. We may pay additional cash consideration of
up to $10 million payable over a three-year period, contingent on future financial performance of
the acquired business. Additional cash consideration, if paid, will be recorded as additional
goodwill.
The purchase price allocation resulted in goodwill of $5.0 million. The following table
illustrates our allocation of the purchase price to the assets acquired and liabilities assumed:
| (In millions) | Amount | |||
Inventory |
$ | 1.4 | ||
Accounts receivable |
0.1 | |||
Fixed assets |
0.2 | |||
Intangibles |
4.6 | |||
Goodwill |
5.0 | |||
Accounts payable |
(4.0 | ) | ||
| $ | 7.3 | |||
Our allocation of the purchase price to the assets acquired and liabilities assumed resulted
in the recognition of the following intangible assets:
| Weighted | ||||||||
| Average | ||||||||
| (In millions) | Amount | Life | ||||||
Trade names |
$ | 2.1 | 10 years | |||||
Intellectual property |
1.3 | 6 years | ||||||
Customer relationships |
0.9 | 7 years | ||||||
Non-compete |
0.3 | 3 years | ||||||
| $ | 4.6 | |||||||
The effects of the acquisition did not materially impact our 2008 results of
operations. Therefore, pro forma disclosures are not included.
Imation Corporation Japan
On March 16, 2008, we completed the acquisition of the 40 percent minority interest in Imation
Corporation Japan (ICJ). The purchase price for the acquisition was $8.0 million, which was paid in
cash. The transaction was accounted for using the step acquisition method prescribed by Accounting
Research Bulletin No. 51, Consolidated Financial Statements. The step acquisition method requires
the allocation of the excess purchase price to the fair value of net assets acquired. The excess
purchase price is determined as the difference between the cash paid and the historical book value
of the interest in net assets acquired.
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The following table presents the excess purchase price over historical book value:
| (In millions) | Amount | |||
Cash consideration |
$ | 8.0 | ||
Interest acquired in historical book value of ICJ |
(7.1 | ) | ||
Excess purchase price over historical book value |
$ | 0.9 | ||
The following table summarizes the allocation of the excess purchase price over historical
book value arising from the acquisition:
| (In millions) | Amount | |||
Customer relationships |
$ | 0.8 | ||
Inventory |
0.1 | |||
Goodwill |
0.4 | |||
Deferred tax liability |
(0.4 | ) | ||
Excess purchase price over historical book value |
$ | 0.9 | ||
The weighted average life of the customer relationships intangible asset is six years. The
effects of the acquisition did not materially impact our 2008 results of operations. Therefore, pro
forma disclosures are not included.
2007 Acquisitions
TDK Recording Media
On July 31, 2007, we completed the acquisition of substantially all of the assets relating to
the marketing, distribution, sales, customer service and support of removable recording media
products, accessory products and ancillary products under the TDK Life on Record brand name (TDK
Recording Media), from TDK Corporation, a Japanese corporation (TDK), pursuant to an acquisition
agreement dated April 19, 2007, between Imation and TDK (the TDK Acquisition Agreement).
As provided in the TDK Acquisition Agreement, we acquired substantially all of the assets of
the TDK Recording Media operations, including the assets or capital stock of certain of TDK’s
operating subsidiaries engaged in the TDK Recording Media operations, and use of the TDK Life on
Record brand name for current and future recording media products including magnetic tape, optical
media, flash media and accessories.
In conjunction with the acquisition, we issued to TDK approximately 6.8 million shares of
Imation common stock, representing 16.6 percent of Imation’s shares then outstanding after the
issuance of the shares to TDK, valued at $216.7 million and paid $54.9 million in cash to TDK for a
total of $271.6 million. The shares were valued at $31.75 based on an average market value of
Imation’s shares for the two day period prior to the date on which the number of shares to be
exchanged was determined. This purchase price included approximately $8.2 million for customary
closing costs, accounting and advisory fees and a payment of $3.9 million made to a third party to
acquire their minority interest in a TDK international subsidiary. This purchase price excludes the
cost of integration, as well as other indirect costs related to the transaction. We may pay
additional cash consideration of up to $70 million to TDK, contingent on future financial
performance of the acquired business. Additional cash consideration, if paid, will be recorded as
additional goodwill.
The TDK Acquisition Agreement provided for a future purchase price adjustment related to the
target working capital amount at the date of acquisition. During the first quarter of 2008 we
reached an agreement with TDK on the closing date working capital amount resulting in a required
additional payment to TDK of $6.5 million which was paid during the second quarter of 2008. The
required additional payment to TDK was $3.7 million less than the previous estimate of the
additional liability. The favorable adjustment to the estimated purchase price was allocated to our
reporting units in a manner consistent with the initial allocation of the purchase price. As a
result of the finalization of the purchase price and additional direct acquisition costs, goodwill
decreased by $1.2 million. For those reporting units where we previously incurred a goodwill
impairment charge, income of $2.3 million was recorded in restructuring and other
expense during the first quarter of 2008 due to the adjustment to the purchase consideration
originally allocated to these reporting units.
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The TDK Acquisition Agreement assumed that no cash or debt would be transferred to or assumed
by Imation in the transaction. TDK operating subsidiaries purchased in the transaction did not
reduce their cash positions prior to acquisition, and as such, we acquired cash in the transaction.
Consequently, we paid cash of approximately $25 million to TDK in November of 2007.
As a result of the transaction, TDK became our largest shareholder, and has the right to
nominate a representative to serve on the Imation Board of Directors. Raymond Leung, TDK’s nominee,
was elected to serve as a Class III member of the Board of Directors on November 7, 2007 and was
reelected by shareholders in May 2008. Pursuant to an Investor Rights Agreement, dated July 30,
2007, TDK’s ownership stake will be permitted to increase up to 21 percent of Imation common stock
on a fully diluted basis through open market purchases. TDK received certain preemptive rights and
registration rights, and TDK agreed to a standstill on further acquisitions of Imation common stock
above the 21 percent threshold (except as a result of stock repurchases initiated by Imation, in
which event TDK’s ownership will not be permitted to exceed 22 percent of the then outstanding
shares). TDK also agreed to a voting agreement with respect to certain matters presented to Imation
shareholders and a three-year lock-up on sales of the Imation shares acquired in the transaction.
TDK and Imation also entered into two long-term Trademark License Agreements, dated July 31,
2007, with respect to the TDK Life on Record brand, which will continue unless terminated by TDK no
earlier than 2032 (2017 years in the case of headphones, speakers or wholly new products) or
earlier in the event of a material breach of the Trademark License Agreement, specific change of
control events or default by Imation. One of the agreements licenses the trademark to Imation for
the U.S. territory, while the other licenses the trademark to an Imation affiliate outside the
United States. The trademark licenses provide us exclusive use of the TDK Life on Record logo for
marketing and sales of current and successor magnetic tape, optical media and flash memory
products, certain accessories, headphones and speakers, and certain future removable recording
media products. We anticipate that TDK will continue its research and development (R&D) and
manufacturing operations for recording media products including audio, video and data storage tape,
and Blu-ray™ optical discs, which TDK will supply us as well as its other OEM customers.
We also entered into a Supply Agreement, dated July 31, 2007, with TDK to purchase Imation’s
requirements of removable recording media products and accessory products for resale under the TDK
Life on Record brand to the extent TDK can supply such products on competitive terms, and TDK
agreed not to sell any such products to third parties for resale under the TDK Life on Record brand
during the term of the Trademark License Agreement. The Supply Agreement will continue for the
greater of five years or for so long as TDK manufactures any of the products.
The following table summarizes our purchase price analysis as of December 31, 2007:
| (In millions) | Amount | |||
Cash consideration |
$ | 54.9 | ||
Cash consideration to minority interest holders |
3.9 | |||
Common stock issued |
216.7 | |||
Direct acquisition costs |
8.2 | |||
Restructuring and other |
31.2 | |||
Total purchase price |
$ | 314.9 | ||
The purchase price allocation resulted in goodwill of $55.9 million. The portion of goodwill
deductible for tax purposes was $11.7 million.
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The following illustrates our allocation of the purchase price to the assets acquired and
liabilities assumed as of December 31, 2007:
| (In millions) | Amount | |||
Cash and cash equivalents |
$ | 25.8 | ||
Accounts receivable |
147.9 | |||
Inventories |
91.5 | |||
Other current assets |
18.8 | |||
Property, plant and equipment |
16.3 | |||
Goodwill |
55.9 | |||
Intangibles |
132.1 | |||
Other assets |
2.8 | |||
Accounts payable |
(121.6 | ) | ||
Accrued payroll |
(2.2 | ) | ||
Other current liabilities |
(39.1 | ) | ||
Deferred tax liability arising on acquisition |
(3.8 | ) | ||
Other liabilities |
(9.5 | ) | ||
| $ | 314.9 | |||
Our allocation of the purchase price to the assets acquired and liabilities assumed resulted
in the recognition of the following intangible assets:
| Weighted | ||||||||
| Average | ||||||||
| (In millions) | Amount | Life | ||||||
Trade name |
$ | 115.0 | 30 years | |||||
Customer relationships |
16.0 | 6 years | ||||||
Other |
1.1 | 18 months | ||||||
Intangible assets acquired |
$ | 132.1 | ||||||
In determining the useful life of the TDK Life on Record trade name, we considered the
following: (1) the overall strength of the TDK Life on Record trade name in the market in terms of
market awareness and market share, (2) the length of time that the TDK Life on Record trade name
has been in existence, (3) the period of time over which the TDK Life on Record trade name is
expected to remain in use and (4) that the TDK Life on Record trade name has remained strong
through technological innovation in the data storage industry. Based on this analysis, we
determined that the useful life for the TDK Life on Record trade name was estimated to be 30 years.
TDK Recording Media operating results are included in our Consolidated Statements of
Operations from the date of acquisition. Our Consolidated Balance Sheet as of December 31, 2007,
reflects the allocation of the purchase price to the assets acquired and liabilities assumed based
on their estimated fair values at the date of acquisition.
Memcorp
On July 9, 2007, we completed the acquisition of certain assets of Memcorp, Inc., a Florida
corporation, and Memcorp Asia Limited, a corporation organized under the laws of Hong Kong
(together Memcorp, subsidiaries of Hopper Radio of Florida, Inc., a Florida corporation), pursuant
to an asset purchase agreement dated as of May 7, 2007 (the Memcorp Purchase Agreement). As
provided in the Memcorp Purchase Agreement, we acquired the assets of Memcorp used in or relating
to the sourcing and sale of consumer electronic products, principally sold under the Memorex brand
name, including inventories, equipment and other tangible personal property and intellectual
property. The acquisition also included existing brand licensing agreements, including Memcorp’s
agreement with MTV Networks, a division of Viacom International, to design and distribute consumer
electronics under certain Nickelodeon
character-based properties and the NPower brand. We paid $31.8 million in cash, and we issued
three-year promissory notes in the aggregated amount of $37.5 million. An earn-out payment may be
paid three years after closing of up to $20 million, dependent on financial performance of the
purchased business. Additional cash consideration, if paid, will be recorded as additional
goodwill.
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The following table summarizes our purchase price analysis as of December 31, 2007:
| (In millions) | Amount | |||
Cash consideration |
$ | 31.8 | ||
Promissory notes |
37.5 | |||
Direct acquisition costs |
1.0 | |||
Total preliminary purchase price |
$ | 70.3 | ||
The purchase price allocation as of December 31, 2007 resulted in goodwill of $33.6 million.
The goodwill is deductible for tax purposes. The following illustrates the allocation of the
purchase price to the assets acquired and liabilities assumed:
| (In millions) | Amount | |||
Inventories |
$ | 13.9 | ||
Other current liabilities |
(2.3 | ) | ||
Goodwill |
33.6 | |||
Intangibles |
25.1 | |||
| $ | 70.3 | |||
Our allocation of the purchase price to the assets acquired and liabilities assumed resulted
in the recognition of the following intangible assets:
| Weighted | ||||||||
| Average | ||||||||
| (In millions) | Amount | Life | ||||||
Trade name |
13.7 | 12 years | ||||||
Customer relationships |
10.0 | 6 years | ||||||
Other |
1.4 | 3 years | ||||||
Intangible assets acquired |
$ | 25.1 | ||||||
Promissory note payments totaling $30 million were due in quarterly installments over three
years from the closing date, with an interest rate of 6 percent per annum, and not subject to
offset. Payment of the $30 million obligation was further provided for by an irrevocable letter of
credit issued pursuant to the Credit Agreement. The remaining $7.5 million obligation was payable
to the Sellers in a lump sum payment 18 months from the closing date, with an interest rate of 6
percent per annum, which was unsecured and subject to offset to satisfy any claims to
indemnification; provided that if an existing obligation of the Sellers was satisfied prior to the
18 month maturity date, $3.75 million of such note was to be paid in advance of the maturity date,
and provided further that if the existing obligation was not satisfied prior to the 18-month
maturity date, $3.75 million of such note was to be withheld until such obligation was satisfied,
or until the third anniversary of the closing date, whichever occurred first. As a result of an
existing obligation of the Sellers being satisfied prior to the 18-month maturity date, we paid
$3.75 million of such note during the third quarter of 2007. We also paid a quarterly installment
in the amount of $2.5 million in the fourth quarter of 2007, in accordance with the note
agreements. In the first quarter of 2008, we repaid in full the promissory notes outstanding at
December 31, 2007 of $31.35 million.
Memcorp operating results are included in our Consolidated Statements of Operations from the
date of acquisition.
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2006 Acquisition
Memorex International Inc.
On April 28, 2006, we closed on the acquisition of substantially all of the assets of Memorex
International Inc. (Memorex), including the Memorex brand name and the capital stock of its
operating subsidiaries engaged in the business of the design, development, sourcing, marketing,
distribution and sale of hardware, media and accessories used for the storage of electronic data
under the Memorex brand name. Memorex’s product portfolio includes recordable CDs and DVDs, branded
accessories, USB flash drives and magnetic and optical drives.
The estimated cash purchase price for the acquisition was $329.3 million, after estimated net
asset adjustments were made to the original purchase price of $330.0 million. This amount excludes
the cost of integration, as well as other indirect costs related to the transaction. Certain price
adjustments were finalized post-closing. Additional cash consideration of a minimum of $5.0 million
will be paid and may range up to a maximum of $45.0 million over a period of up to three years
after close, contingent on financial performance of the purchased business. During the second
quarter of 2007 and 2008 we paid $2.5 million related to the minimum additional cash consideration.
We placed $33.0 million of the purchase price paid at closing in escrow to address potential
indemnification claims. From this escrowed amount $31.6 million was released to the seller during
2007. We submitted a claim against the remaining amount of $1.4 million and settled the claim for
$1.0 million in the first quarter of 2008. In addition, we placed $8.0 million of the purchase
price paid at closing in escrow until the determination of any required post-closing purchase price
adjustments under the acquisition agreement were finalized. On March 30, 2007, we received
$7.9 million of this escrow amount in a settlement of post-closing adjustments relating to working
capital. The remaining escrow balance of $0.1 million was released to the seller. As set forth in
Note 6, the finalization of working capital adjustments resulted in a decrease to the goodwill
balance during 2007.
The following table summarizes our purchase price analysis as of December 31, 2006:
| (In millions) | Amount | |||
Cash and cash equivalents |
$ | 329.3 | ||
Direct acquisition costs |
6.4 | |||
Memorex restructuring costs |
7.6 | |||
Present value of minimum additional |
||||
purchase price consideration |
4.6 | |||
| $ | 347.9 | |||
The following illustrates the allocation of the purchase price to the assets acquired and
liabilities assumed:
| (In millions) | Amount | |||
Cash and cash equivalents |
$ | 3.5 | ||
Accounts receivable |
68.3 | |||
Inventories |
69.1 | |||
Other current assets |
20.1 | |||
Property, plant and equipment |
1.7 | |||
Goodwill |
55.3 | |||
Intangibles |
231.0 | |||
Other assets |
0.7 | |||
Accounts payable |
(61.8 | ) | ||
Other current liabilities |
(29.1 | ) | ||
Other liabilities |
(10.9 | ) | ||
| $ | 347.9 | |||
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The purchase price allocation as of December 31, 2006 resulted in goodwill of $55.3 million.
The goodwill is not deductible for tax purposes. Memorex operating results are included in our
Consolidated Statements of Operations from the date of acquisition.
Our allocation of the purchase price to the assets acquired and liabilities assumed resulted
in the recognition of the following intangible assets:
| Weighted | ||||||||
| Average | ||||||||
| (In millions) | Amount | Life | ||||||
Trade name |
$ | 200.0 | 35 years | |||||
Customer relationships (1) |
28.9 | 7 years | ||||||
Other |
2.1 | 17 months | ||||||
Intangible assets acquired |
$ | 231.0 | ||||||
| (1) | Customer relationships represent an asset without United States tax basis. A deferred tax liability was recorded in the purchase price allocation to reflect this basis difference. |
In determining the useful life of the Memorex trade name, we considered the following: (1) the
overall strength of the Memorex trade name in the market in terms of market awareness and market
share, (2) the length of time that the Memorex trade name has been in existence, (3) the period of
time over which the Memorex trade name is expected to remain in use and (4) that the Memorex trade
name has remained strong through technological innovation in the data storage industry. Based on
this analysis, we determined that the useful life for the Memorex trade name was estimated to be 35
years.
Pro Forma Disclosure
The following unaudited pro forma financial information illustrates our estimated results of
operations as if the TDK Recording Media, Memcorp and Memorex acquisitions had occurred at the
beginning of each period presented:
| Years Ended December 31, | ||||||||
| (In millions, except per share amounts) | 2007 | 2006 | ||||||
Net revenue |
$ | 2,492.5 | $ | 2,523.5 | ||||
(Loss) income from continuing operations |
(60.7 | ) | 98.1 | |||||
Net (loss) income |
(60.7 | ) | 99.3 | |||||
(Loss) earnings per common share – basic: |
||||||||
Continuing operations |
$ | (1.50 | ) | $ | 2.37 | |||
Net income |
$ | (1.50 | ) | $ | 2.40 | |||
(Loss) earnings per common share – diluted: |
||||||||
Continuing operations |
$ | (1.50 | ) | $ | 2.34 | |||
Net income |
$ | (1.50 | ) | $ | 2.36 | |||
The pro forma operating results are presented for comparative purposes only. They do not
represent the results that would have been reported had the acquisitions occurred on the dates
assumed, and they are not necessarily indicative of future operating results.
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Note 4 — Divestiture
Divestiture Presented as Discontinued Operations
On June 30, 2005, we closed on the sale of our Specialty Papers business to Nekoosa Coated
Products, LLC located in Nekoosa, Wisconsin. The business provided carbonless cut-sheet and digital
carbonless paper for businesses and institutions such as printers, banks, and hospitals. The sale
was for $17.0 million, with the potential of up to an additional $4.0 million consideration over
the next three years, contingent on performance of the business. Upon closing, we received a cash
payment of $16.0 million and a note receivable of $1.0 million due in four years subject to certain
post-closing adjustments. A gain of $4.6 million, net of taxes of $2.7 million, was recognized on
the sale. We sold virtually all of the assets of our Specialty Papers business, including the
Nekoosa manufacturing plant. Approximately 90 employees were also transferred as a part of the
sale. These operations are presented in our Consolidated Statements of Operations as discontinued
operations for all years presented.
During the second quarter of 2006, we renegotiated the contingent consideration due from
Nekoosa Coated Products, LLC noted above. As a result, on June 16, 2006, we received a cash payment
of $2.3 million in full satisfaction of all future potential payments from Nekoosa Coated Products,
LLC, including the outstanding note receivable. This resulted in an after-tax gain of $1.2 million
from discontinued operations.
Note 5 — Supplemental Balance Sheet Information
| As of December 31, | ||||||||
| (In millions) | 2008 | 2007 | ||||||
Inventories, net |
||||||||
Finished goods |
$ | 337.1 | $ | 308.7 | ||||
Work in process |
17.1 | 34.7 | ||||||
Raw materials and supplies |
9.0 | 22.7 | ||||||
Total inventories, net |
$ | 363.2 | $ | 366.1 | ||||
Other Current Assets |
||||||||
Deferred income taxes |
$ | 51.5 | $ | 53.1 | ||||
Assets held for sale (1) |
22.5 | — | ||||||
Other |
64.1 | 56.8 | ||||||
Total other current assets |
$ | 138.1 | $ | 109.9 | ||||
Property, Plant and Equipment |
||||||||
Land |
$ | 1.4 | $ | 10.4 | ||||
Buildings and leasehold improvements |
119.0 | 160.8 | ||||||
Machinery and equipment |
305.3 | 370.3 | ||||||
Construction in progress |
1.7 | 1.1 | ||||||
Total |
$ | 427.4 | $ | 542.6 | ||||
Less accumulated depreciation and leasehold amortization |
(305.0 | ) | (371.1 | ) | ||||
Property, plant and equipment, net |
$ | 122.4 | $ | 171.5 | ||||
Other Assets |
||||||||
Deferred income taxes |
$ | 31.4 | $ | 14.9 | ||||
Other |
11.8 | 19.5 | ||||||
Total other assets |
$ | 43.2 | $ | 34.4 | ||||
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Note 5 — Supplemental Balance Sheet Information
| As of December 31, | ||||||||
| (In millions) | 2008 | 2007 | ||||||
Other Current Liabilities |
||||||||
Rebates |
$ | 75.6 | $ | 104.0 | ||||
Employee separation costs |
14.5 | 23.9 | ||||||
Income taxes |
5.5 | 18.2 | ||||||
Other |
99.4 | 111.2 | ||||||
Total other current liabilities |
$ | 195.0 | $ | 257.3 | ||||
Other Liabilities |
||||||||
Pension |
$ | 49.0 | $ | 7.7 | ||||
Deferred income taxes |
4.2 | 2.5 | ||||||
Other |
20.9 | 34.8 | ||||||
Total other liabilities |
$ | 74.1 | $ | 45.0 | ||||
Accumulated Other Comprehensive Loss |
||||||||
Cumulative translation adjustment |
$ | (54.9 | ) | $ | (40.0 | ) | ||
Pension liability adjustments, net of income tax |
(28.6 | ) | (4.4 | ) | ||||
Cash flow hedging and other, net of income tax |
(1.5 | ) | 0.3 | |||||
Total accumulated other
comprehensive loss |
$ | (85.0 | ) | $ | (44.1 | ) | ||
| Accounts | ||||||||
| Inventory | Receivable* | |||||||
Reserves and Allowances |
||||||||
Balance, as of December 31, 2005 |
$ | 10.3 | $ | 10.2 | ||||
Additions |
3.8 | 33.3 | ||||||
Write-offs, net of
recoveries |
(3.8 | ) | (30.7 | ) | ||||
Balance, as of December 31, 2006 |
10.3 | 12.8 | ||||||
Additions |
14.5 | 57.4 | ||||||
Write-offs, net of
recoveries |
(4.6 | ) | (41.9 | ) | ||||
Balance, as of December 31, 2007 |
$ | 20.2 | $ | 28.3 | ||||
Additions |
16.8 | 53.9 | ||||||
Write-offs, net of
recoveries |
(6.8 | ) | (45.6 | ) | ||||
Balance, as of December 31, 2008 |
$ | 30.2 | $ | 36.6 | ||||
| (1) | As part of our restructuring programs, we ended operations and exited our Anaheim, California distribution center as well as our Camarillo, California plant, which are being actively marketed for sale. We met the plan of sale criteria in SFAS 144. Accordingly, the book value of the building and property, which is less than the estimated net realizable value, was transferred into other current assets, and is no longer being depreciated. | |
| * | Accounts receivable reserves and allowances include estimated amounts for customer returns, terms discounts and the inability of certain customers to make the required payment. |
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Note 6 — Intangible Assets and Goodwill
Intangible Assets
The breakdown of intangible assets as of December 31, 2008 and 2007 was as follows:
| Trade | Customer | |||||||||||||||||||
| (In millions) | Names | Software | Relationships | Other | Total | |||||||||||||||
December 31, 2008 |
||||||||||||||||||||
Cost |
$ | 333.1 | $ | 56.9 | $ | 62.9 | $ | 8.1 | $ | 461.0 | ||||||||||
Accumulated amortization |
(23.2 | ) | (51.9 | ) | (22.7 | ) | (6.2 | ) | (104.0 | ) | ||||||||||
Net |
$ | 309.9 | $ | 5.0 | $ | 40.2 | $ | 1.9 | $ | 357.0 | ||||||||||
December 31, 2007 |
||||||||||||||||||||
Cost |
$ | 330.0 | $ | 54.6 | $ | 60.9 | $ | 8.8 | $ | 454.3 | ||||||||||
Accumulated amortization |
(12.2 | ) | (52.7 | ) | (12.8 | ) | (5.6 | ) | (83.3 | ) | ||||||||||
Net |
$ | 317.8 | $ | 1.9 | $ | 48.1 | $ | 3.2 | $ | 371.0 | ||||||||||
Based on the intangible assets in service as of December 31, 2008, estimated amortization
expense for each of the next five years ending December 31 is as follows:
| (In millions) | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||
Amortization expense |
$ | 22.8 | $ | 21.4 | $ | 21.1 | $ | 20.8 | $ | 15.8 | ||||||||||
Goodwill
The following table presents the changes in goodwill allocated to our reportable segments
during 2008 and 2007:
| Asia | Electronic | |||||||||||||||||||
| (In millions) | Americas | Europe | Pacific | Products | Total | |||||||||||||||
Balance as of December 31, 2006 |
63.3 | 2.5 | 1.8 | 67.6 | ||||||||||||||||
Memorex post-closing purchase price
adjustments |
(7.9 | ) | — | — | — | (7.9 | ) | |||||||||||||
Memcorp acquisition |
— | — | — | 33.6 | 33.6 | |||||||||||||||
TDK Recording Media acquisition |
11.7 | 34.1 | 10.1 | — | 55.9 | |||||||||||||||
Adjustments of acquisition tax liabilities |
(2.7 | ) | — | — | — | (2.7 | ) | |||||||||||||
Foreign currency translation adjustment |
— | 2.6 | 0.5 | — | 3.1 | |||||||||||||||
Goodwill impairment |
(54.9 | ) | (39.2 | ) | — | — | (94.1 | ) | ||||||||||||
Balance as of December 31, 2007 |
$ | 9.5 | $ | — | $ | 12.4 | $ | 33.6 | $ | 55.5 | ||||||||||
TDK
post-closing purchase
price adjustment |
(0.1 | ) | — | (1.1 | ) | — | (1.2 | ) | ||||||||||||
ICJ minority interest acquistion |
— | — | 0.4 | — | 0.4 | |||||||||||||||
XtremeMac acquistion |
— | — | 5.0 | 5.0 | ||||||||||||||||
Foreign currency translation adjustment |
— | — | (1.5 | ) | — | (1.5 | ) | |||||||||||||
Goodwill impairment |
(9.4 | ) | — | (10.2 | ) | (15.1 | ) | (34.7 | ) | |||||||||||
Balance as of December 31, 2008 |
$ | — | $ | — | $ | — | $ | 23.5 | $ | 23.5 | ||||||||||
Evaluating goodwill for impairment involves the determination of the fair value of our
reporting units in which we have recorded goodwill. A reporting unit is a component of an operating
segment for which discrete financial information is available and reviewed by management on a
regular basis. We have determined that our reporting units are our segments with the exception of
the Americas data storage media segment which is further divided between the Americas-Consumer and
Americas-Commercial reporting units. Inherent in the determination of fair value of our reporting
units are certain estimates and judgments, including the interpretation of current economic
indicators and market valuations as well as our strategic plans with regard to our operations. To
the extent additional information arises or our strategies change, it is possible that our
conclusion regarding goodwill impairment could change, which could have a material effect on our
financial position and results of operations.
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In the fourth quarter of 2008, in connection with the annual test of goodwill impairment,
impairments were identified and recorded in an aggregate amount of $34.7 million related to the
Americas-Commercial, Asia Pacific and Electronic Products reporting units. We previously performed
an interim test for impairment at September 30, 2008 and determined that no impairments were
present. During the fourth quarter, the continuing and accelerating deterioration of general
economic conditions including shortfalls against our anticipated fourth quarter operating
profitability resulted in lower expectations for growth and profitability in future periods. In
addition, we experienced a decline in our stock price reflecting a further reduction in a market
participant’s view of fair value of our underlying reporting units.
During the fourth quarter of 2007, in conjunction with our annual test of goodwill impairment,
we recorded a goodwill impairment charge of $94.1 million consisting of a full impairment of the
goodwill associated with our Americas-Consumer and Europe reporting units. The goodwill impairments
in 2007 resulted from a general decline in the outlook for profitability for the products sold by
our Americas-Consumer and Europe reporting units combined with the fact that a market participant’s
view of our fair value was substantially reduced reflected by a decline in our stock price.
In evaluating whether goodwill was impaired, we compared the fair value of the reporting units
to which goodwill is assigned to their carrying value (Step 1 of the impairment test). In
calculating fair value, we used a weighting of the valuations calculated using market multiples and
the income approach. The income approach is a valuation technique under which we estimate future
cash flows using the reporting units’ financial forecasts. Future estimated cash flows are
discounted to their present value to calculate fair value. The market approach establishes fair
value by comparing our company to other publicly traded guideline companies or by analysis of
actual transactions of similar businesses or assets sold. The summation of our reporting units’
fair values must be compared to our market capitalization as of the date of our impairment test. In
the situation where a reporting unit’s carrying amount exceeds its fair value, the amount of the
impairment loss must be measured. The measurement of the impairment (Step 2 of the impairment test)
is calculated by determining the implied fair value of a reporting unit’s goodwill. In calculating
the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the
other assets and liabilities of that unit based on their fair values. The excess of the fair value
of a reporting unit over the amount assigned to its other assets and liabilities is the implied
fair value of goodwill. The goodwill impairment is measured as the excess of the carrying amount of
goodwill over its implied fair value.
In determining the fair value of our reporting units under the income approach, our expected
cash flows are affected by various assumptions. Fair value on a discounted cash flow basis uses
forecasts over a 10 year period with a residual growth rate of
approximately zero to four percent thereafter.
We use management business plans and projections as the basis for expected future cash flows.
There are also various assumptions used under the market approach that affect the valuation of
our reporting units. The most significant assumptions are the market multiples and control premium.
In estimating the fair value of our company under the market approach, we considered the relative
merits of commonly applied market capitalization multiples and the comparability of data between
our Company and the guideline public companies. Based on our analysis, we determined the market
value of invested capital to earnings before interest, taxes, depreciation, and amortization
multiple to be the most appropriate valuation multiple to be applied in the application of the
market approach. A control premium of 25 percent was used in our determination of fair value which
represents the value an investor would pay above minority interest transaction prices in order to
obtain a controlling interest in the company. The control premium was determined by a review of
premiums paid for similar companies over the past five years.
After considering the goodwill impairments recorded in fiscal years 2008 and 2007, remaining
goodwill in the amount of $23.5 million relates to our Electronic Products reporting unit. While
management’s most recent analyses indicates that this goodwill is not impaired, to the extent that
assumptions about future economic conditions or potential for our growth and profitability in this
business changes, it is possible that our conclusion regarding the remaining goodwill could change,
which could have a material effect on our financial position and results of operations.
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Note 7 — Debt
On March 30, 2006, we entered into a credit agreement (the Credit Agreement) with a group of
banks that were party to a prior credit agreement, extending the expiration date from December 15,
2006 to March 29, 2011. The Credit Agreement was further amended on July 24, 2007, as follows: (i)
increased the credit facility from $300 million to $325 million and added an option to increase the
facility to $400 million at a future date; (ii) extended the term for an additional year to March
29, 2012; (iii) permitted the Company’s acquisition of the TDK Recording Media business; (iv)
increased the guarantee of foreign obligations limit and letter of credit sub-limit; (v) modified
the fixed charge coverage ratio definition and (vi) reduced the applicable interest rates. The
amended Credit Agreement provides for revolving credit, including letters of credit. A further
amendment on April 25, 2008 formally expanded the types of letters of credit available under the
Credit Agreement. Borrowings under the amended Credit Agreement bear interest, at our option, at
either: (a) the higher of the federal funds rate plus 0.50 percent or the rate of interest
published by Bank of America as its “prime rate” plus, in each case, up to an additional 0.50
percent depending on the applicable leverage ratio, as described below, or (b) the British Bankers’
Association LIBOR, adjusted by the reserve percentage in effect from time to time, as determined by
the Federal Reserve Board, plus up to 0.95 percent depending on the applicable leverage ratio.
Leverage ratio is defined as the ratio of total debt to EBITDA. A facility fee ranging from 0.125
to 0.250 percent per annum based on our consolidated leverage ratio is payable on the revolving
line of credit. The amended Credit Agreement contains covenants, which are customary for similar
credit arrangements, and contains financial covenants that require us to have a leverage ratio not
exceeding 2.5 to 1.0 and a fixed charge coverage ratio (defined as the ratio of EBITDA less capital
expenditures to interest expenses and income taxes actually paid) not less than 2.5 to 1.0. As of
December 31, 2008, these covenants currently restrict the total amount available under the credit
facility to $132 million and based on our future profitability expectations will likely restrict
the amount further in the future. No borrowings were outstanding and we complied with all covenants
under the amended Credit Agreement as of December 31, 2008.
As of December 31, 2008 and 2007, we had outstanding standby and import letters of credit of
$9.4 million and $33.1 million, respectively. As of December 31, 2008, we had $10.2 million
available under credit facilities of various subsidiaries outside the United States.
Our interest expense, which includes letter of credit fees, facility fees and commitment fees
under the Credit Agreement, for 2008, 2007 and 2006, was $1.5 million, $2.6 million and $1.0
million, respectively. Cash paid for interest in these periods, relating to both continuing and
discontinued operations, was $1.9 million, $2.0 million and $0.8 million, respectively.
Note 8 — Restructuring and Other Expense
The components of our restructuring and other expense included in the Consolidated Statements
of Operations for the years ended December 31, 2008, 2007 and 2006 were as follows:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Restructuring |
||||||||||||
Severance and severance related expense |
$ | 15.7 | $ | 23.6 | $ | 8.6 | ||||||
Lease termination costs |
4.8 | 0.6 | 1.4 | |||||||||
Reversal of severance and severance related
expense from prior restructuring programs |
— | — | (0.9 | ) | ||||||||
Total restructuring |
20.5 | 24.2 | 9.1 | |||||||||
Pension settlement/ curtailment (Note 11) |
5.7 | 1.4 | — | |||||||||
Asset impairments |
5.0 | 8.4 | 2.8 | |||||||||
TDK post-closing purchase price adjustment |
(2.3 | ) | — | — | ||||||||
Terminated employment agreement |
— | (0.7 | ) | — | ||||||||
Total |
$ | 28.9 | $ | 33.3 | $ | 11.9 | ||||||
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2008 Activity
Restructuring Programs
2008 Corporate Redesign Restructuring Program
During 2008, we recorded $4.9 million and $0.5 million of severance and severance related
charges and lease termination costs, respectively, related to our 2008 corporate redesign
restructuring program, initiated during the fourth quarter of 2008. This program further
accelerates the alignment of our cost structure with our strategic direction by reducing selling,
general and administrative expenses (SG&A). We plan to reduce costs by rationalizing key accounts
and products and through simplifying our corporate structure globally.
The Company anticipates incurring up to $40 million in restructuring and other charges
globally, mainly through cash payments for severance and severance related costs. The majority of
the program is expected to be completed by the end of 2009. As of December 31, 2008, we estimate
290 positions will be eliminated throughout the world.
The following tables summarize 2008 activity related to our 2008 corporate redesign
restructuring program as of December 31, 2008:
| Initial | Liability | |||||||||||||||
| Period | as of | |||||||||||||||
| Program | Additional | Cumulative | December 31, | |||||||||||||
| (In millions) | Amounts | Charges | Usage | 2008 | ||||||||||||
Severance and severance related |
$ | 4.9 | $ | — | $ | (1.0 | ) | $ | 3.9 | |||||||
Lease termination costs |
0.5 | — | — | 0.5 | ||||||||||||
| Initial | ||||||||||||||||
| Period | Balance as of | |||||||||||||||
| Headcount | Cumulative | December 31, | ||||||||||||||
| Amounts | Additions | Reductions | 2008 | |||||||||||||
Total employees affected |
203 | — | (64 | ) | 139 | |||||||||||
2008 Cost Reduction Restructuring Program
During 2008, we recorded $5.2 million and $0.2 million of severance and severance related
expense and lease termination costs, respectively, related to our 2008 cost reduction restructuring
program. This program began in the third quarter of 2008 when our Board of Directors approved the
Camarillo, California restructuring plan as further implementation of our manufacturing strategy.
We ended manufacturing at our Camarillo plant and have exited the facility as of December 31, 2008.
We will focus our manufacturing efforts on magnetic tape coating operations at our existing plant
in Weatherford, Oklahoma. We expect the plant closing will result in the elimination of
approximately 140 positions, 31 of which were included under previously announced programs.
The 2008 cost reduction restructuring program also includes our decision to consolidate the
Cerritos, California business operations into Oakdale, Minnesota and close the Cerritos office by
March 2009. As of December 31, 2008, this plan has resulted in the elimination of 49 positions in
Cerritos, 32 of which we expect to be replaced in Oakdale, Minnesota. Consolidation of Cerritos
activities at a single headquarters location is intended to achieve better focus, gain efficiencies
across brands and channels, and reduce cost. The 2008 cost reduction restructuring program was
substantially completed as of December 31, 2008.
The 2008 cost reduction restructuring program also includes other various restructuring
activities which have resulted in the elimination of 11 positions during 2008.
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The following tables summarize 2008 activity related to our 2008 cost reduction restructuring
program as of December 31, 2008:
| Initial | Liability | |||||||||||||||
| Period | as of | |||||||||||||||
| Program | Additional | Cumulative | December 31, | |||||||||||||
| (In millions) | Amounts | Charges | Usage | 2008 | ||||||||||||
Severance and severance related |
$ | 5.2 | $ | — | $ | (1.7 | ) | $ | 3.5 | |||||||
Lease termination costs |
— | 0.2 | — | 0.2 | ||||||||||||
| Initial | Balance | |||||||||||||||
| Period | as of | |||||||||||||||
| Headcount | Cumulative | December 31, | ||||||||||||||
| Amounts | Additions | Reductions | 2008 | |||||||||||||
Total employees affected |
169 | 0 | (99 | ) | 70 | |||||||||||
TDK Recording Media Restructuring Costs Program
During 2008 we recorded $4.2 million for severance and severance related expenses under our
TDK Recording media restructuring costs program, which began in the third quarter of 2007 in
conjunction with the TDK Recording Media acquisition and integration. We also recorded $1.4 million
of lease termination costs related to this program during the first quarter of 2008. The TDK
recording media restructuring program was substantially completed as of December 31, 2008.
The following table summarizes 2008 activity related to our 2008 TDK recording media
restructuring program:
| Balance | Liability | |||||||||||||||||||
| as of | as of | |||||||||||||||||||
| December 31, | Additional | Currency | Cumulative | December 31, | ||||||||||||||||
| (In millions) | 2007 | Charges | Impacts | Usage | 2008 | |||||||||||||||
Severance and
severance related |
$ | 9.4 | $ | 4.2 | $ | 1.1 | $ | (9.6 | ) | $ | 5.1 | |||||||||
Lease termination costs |
— | 1.4 | (0.1 | ) | (0.2 | ) | 1.1 | |||||||||||||
The following tables summarize cumulative activity related to our TDK recording media
restructuring program:
| Initial | Liability | |||||||||||||||||||
| Period | as of | |||||||||||||||||||
| Program | Additional | Currency | Cumulative | December 31, | ||||||||||||||||
| (In millions) | Amounts | Charges | Impacts | Usage | 2008 | |||||||||||||||
Severance and severance related |
$ | 11.7 | $ | 4.2 | $ | 1.1 | $ | (11.9 | ) | $ | 5.1 | |||||||||
Lease termination costs |
— | 1.4 | (0.1 | ) | (0.2 | ) | 1.1 | |||||||||||||
| Initial | Balance | |||||||||||||||
| Period | as of | |||||||||||||||
| Headcount | Cumulative | December 31, | ||||||||||||||
| Amounts | Additions | Reductions | 2008 | |||||||||||||
Total employees affected |
172 | 50 | (186 | ) | 36 | |||||||||||
2007 Cost Reduction Restructuring Program
During the fourth quarter of 2008 we recorded $0.4 million in lease termination costs related
to our 2007 cost reduction restructuring program. We also recorded $1.1 million of severance and
severance related expenses related to this program during the first quarter of 2008.
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This program is focused on transforming Imation to a brand and product Management Company with
a balanced portfolio of strong commercial and consumer brands. Consequently, in the second quarter
of 2007 we started a cost reduction restructuring program in our manufacturing, research and
development (R&D), administrative and sales organizations to align our resources with our strategic
direction. This program included a reorganization of our magnetic data storage tape manufacturing
operations and changes to our R&D organization to support an increasing focus on engineering and
qualification of new products. Through this program, we have focused our manufacturing on magnetic
tape coating operations and have consolidated and outsourced converting operations for magnetic
tape cartridges. Furthermore, this program focused the R&D organization on key programs in support
of future advanced magnetic tape formats and our increased growth and concentration on consumer
digital storage products and accessories. The 2007 cost reduction restructuring program was
substantially completed as of December 31, 2008.
The following table summarizes 2008 activity related to our 2007 cost reduction restructuring
program:
| Liability | Liability | |||||||||||||||||||
| as of | as of | |||||||||||||||||||
| December 31, | Additional | Currency | Cumulative | December 31, | ||||||||||||||||
| (In millions) | 2007 | Charges | Impacts | Usage | 2008 | |||||||||||||||
Severance and severance related |
$ | 13.6 | $ | 1.1 | $ | 0.1 | $ | (12.8 | ) | $ | 2.0 | |||||||||
Lease termination costs |
— | 0.4 | — | — | 0.4 | |||||||||||||||
The following tables summarize cumulative activity related to our 2007 cost reduction
restructuring program:
| Initial | Liability | |||||||||||||||||||
| Period | as of | |||||||||||||||||||
| Program | Additional | Currency | Cumulative | December 31, | ||||||||||||||||
| (In millions) | Amounts | Charges | Impacts | Usage | 2008 | |||||||||||||||
Severance and severance related |
$ | 15.1 | $ | 7.3 | $ | 0.1 | $ | (20.5 | ) | $ | 2.0 | |||||||||
Lease termination costs |
— | 0.4 | — | — | 0.4 | |||||||||||||||
| Initial | Balance | |||||||||||||||
| Period | as of | |||||||||||||||
| Headcount | Cumulative | December 31, | ||||||||||||||
| Amounts | Additions | Reductions | 2008 | |||||||||||||
Total employees affected |
675 | 160 | (795 | ) | 40 | |||||||||||
2006 Imation and Memorex Restructuring Program
During 2008, we recorded $2.3 million of lease termination costs related to our 2006 Imation
and Memorex restructuring program, which began in the second quarter of 2006. We recorded $0.7
million during the second quarter of 2008 related to unutilized space in California and $1.6
million in the first quarter of 2008 related to the full settlement of a leased space no longer
utilized in the United Kingdom.
During 2008, we recorded $0.3 million of severance and severance related expenses related to
the 2006 Imation and Memorex restructuring program.
Other
Pension Settlement / Curtailment
We incurred pension settlement and curtailment losses of $3.2 million and $2.5 million in the
second and third quarters of 2008, respectively, mainly as a result of the reorganizations
discussed above. See Note 10 to the Consolidated Financial Statements for further information
regarding pension settlements and curtailments.
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Asset Impairments
In 2008, we incurred net asset impairment charges of $5.0 million related to the abandonment
of certain manufacturing and R&D assets as a result of the reorganizations discussed above.
TDK Post-Closing Purchase Price Adjustment
The TDK post-closing purchase price adjustment is associated with the finalization of certain
acquisition-related working capital amounts as negotiated with TDK as set forth in Note 3 herein.
2007 Activity
Restructuring Programs
2007 Cost Reduction Restructuring Program
During the fourth quarter of 2007, we recorded restructuring charges of $3.3 million for
severance and related costs related to reorganization of certain administrative and sales
organizations.
During the third quarter of 2007, we recorded additional restructuring charges of $3.1 million
related to reorganization of certain administrative and sales organizations. The charges in the
third quarter of 2007 consisted of estimated severance and severance related expenses of $2.9
million and lease termination costs of $0.2 million.
During the second quarter of 2007, we recorded estimated severance and severance related
expenses of $15.1 million related to our 2007 cost reduction restructuring program for our
manufacturing and R&D organizations.
TDK Recording Media Restructuring Costs
During the third and fourth quarter of 2007, we recorded severance and other charges of $11.7
million as we reorganized in conjunction with the TDK Recording Media acquisition and integration.
We recorded $9.4 million of these amounts as adjustments to goodwill in accordance with EITF 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination (EITF 95-3). The
remaining $2.3 million of restructuring costs related to Imation operations and were reflected in
our Consolidated Statements of Operations as restructuring and other expense.
2006 Imation and Memorex Restructuring Program
During the first quarter of 2007 we recorded lease termination costs of $0.4 million related
to our 2006 Imation and Memorex restructuring program, which began in the second quarter of 2006.
Other
Asset Impairments
In 2007, we incurred asset impairment charges of $8.4 million related to the abandonment of
certain manufacturing and R&D assets as a result of the reorganizations discussed above.
Pension Curtailment
In 2007, we incurred a pension curtailment loss of $1.4 million, mainly as a result of the
reorganizations discussed above. See Note 10 to the Consolidated Financial Statements for further
information regarding pension settlements and curtailments.
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Terminated Employment Agreement
On April 2, 2007, the Board of Directors and Mr. Henderson (our former Chairman and CEO)
mutually determined that Mr. Henderson would resign as Chairman of the Board and CEO of the Company
effective as of the close of business on April 2, 2007 due to his continuing health issues. The
Employment Agreement between Imation and Mr. Henderson also terminated effective as of that date.
We entered into an Employment Closure agreement dated April 2, 2007 with Mr. Henderson which
provided that Mr. Henderson would continue as an inactive employee, receiving his 2007 salary,
benefits and 2007 bonus eligibility under the annual bonus plan through the period he was on
short-term disability. It also provided for Mr. Henderson to apply for long-term disability
benefits. The Employment Closure Agreement also provided that, for so long as Mr. Henderson was
entitled to receive benefits under our long-term disability plan, he would receive benefits paid by
our disability insurance carrier in accordance with its ordinary policies and practices, which for
Mr. Henderson included a disability payment of $7,500 per month. Mr. Henderson was to also receive
other benefits as provided to all other similarly situated employees who were receiving benefits
under our long-term disability plan. These benefits included: (i) coverage under our medical
insurance plans (with Mr. Henderson continuing to pay the required employee premium for such
benefits); (ii) continued vesting of his stock options (other than his performance-based stock
option, which was forfeited) and restricted stock in accordance with their regular schedules; and
(iii) continued accrual of pension benefits. Once Mr. Henderson failed or ceased to be entitled to
receive benefits under the Company’s long-term disability plan, his employment would terminate. Mr.
Henderson continued to receive benefits under our long-term disability program until he passed away
on November 5, 2007.
Costs recorded in the second quarter of 2007 associated with the terminated employment
agreement totaled $3.1 million and were comprised of $3.2 million of stock compensation costs for
unvested awards expected to vest over the remaining term of the stock awards, $0.9 million of
separation pay and other benefits and a reversal of $1.0 million of costs previously recorded under
performance-based stock options due to the forfeiture of these awards under the agreements with Mr.
Henderson. Costs for unvested stock awards were fully accrued in the second quarter as no future
service was expected due to Mr. Henderson’s status as a disabled employee. Mr. Henderson’s passing
resulted in the accounting recognition of a change in estimate resulting in the reversal of $3.8
million of expense in the third quarter of 2007 for unvested stock awards previously awarded and
other costs recorded during the second quarter which will not be incurred.
2006 Activity
Restructuring Programs
2006 Imation and Memorex Restructuring Program
During the fourth quarter of 2006, we re-evaluated the needs of our 2006 restructuring program
and reduced the severance and severance related liability estimate by $0.5 million. We also
recorded an additional $0.2 million accrual for the termination of facility leases related to the
acquired Memorex operations as an adjustment to goodwill in accordance with EITF 95-3. This program
was substantially completed as of June 30, 2006.
In the third quarter of 2006, we recorded an additional accrual of $2.5 million for the
termination of facility leases related to the acquired Memorex operations. We also recorded a
reduction in the estimate of our severance and severance related obligations in the amount of $0.2
million. As these amounts were associated with the existing Memorex business, they were not
reflected in our Consolidated Statements of Operations, but were recorded as adjustments to
goodwill in accordance with EITF 95-3.
During the second quarter of 2006, we recorded $6.8 million of severance and severance related
expense. These charges, as well as $1.4 million related to lease termination costs, were associated
with historical Imation operations and were reflected in our Consolidated Statements of Operations
for the year ended December 31, 2006. We also recorded restructuring accruals totaling $4.9 million
as we reorganized in conjunction with the Memorex acquisition and integration, as well as continued
our efforts to simplify structure. These accruals included $4.1 million of severance and other
liabilities and $0.8 million for lease termination costs. Because these amounts were associated
with the existing Memorex business, they were not reflected in our Consolidated Statements of
Operations, but were recorded as adjustments to goodwill in accordance with EITF 95-3.
During the first quarter of 2006, we recorded severance and severance related charges of $1.8
million. The charges related to employee reductions in our Wahpeton, North Dakota and Camarillo,
California production facilities and consisted of estimated severance payments and related benefits
associated with the elimination of approximately 100 positions.
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Prior Restructuring Programs
The 2004 restructuring programs were substantially completed as of June 30, 2006. Actual
payments for employee termination benefits were slightly lower than estimated. As a result,
approximately $0.4 million of excess accrual was reversed in the second quarter of 2006.
Other
Asset Impairments
In 2006, we incurred asset impairment charges of $1.7 million in the fourth quarter and $1.1
million in the second quarter, related to the abandonment of certain manufacturing assets and
purchased intellectual property.
Note 9 — Income Taxes
We file income tax returns in the United States federal jurisdiction, and various states and
foreign jurisdictions. The Internal Revenue Service (IRS) commenced an examination on May 2008, of
one of our U.S. subsidiary’s (Memorex Products Inc.) federal income tax returns for the years ended
March 31, 2005, March 31, 2006 and a stub period ended April 28, 2006. The IRS audit of 2006 and
2007 of Imation Corp. and subsidiaries U.S. consolidated tax returns began in the last quarter of
2008. Some state and foreign jurisdiction tax years remain open to examination for years before
2006.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of
FIN 48, we recognized a cumulative effect benefit of approximately $2.5 million which is comprised
of previously unrecognized tax benefits in the amount of $1.5 million and a reduction of
international tax reserves in the amount of $1.0 million. This cumulative effect was accounted for
as an increase to the January 1, 2007 balance of retained earnings.
Unrecognized tax benefits are the differences between a tax position taken, or expected to be
taken in a tax return, and the benefit recognized for accounting purposes pursuant to FIN 48. A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (In millions) | Amount | |||
Balance at January 1, 2007 |
7.3 | |||
Additions for tax positions of prior years |
7.0 | |||
Reductions for tax positions of prior years |
(0.2 | ) | ||
Settlements with taxing authorities |
(3.6 | ) | ||
Lapse of the statue of limitations |
(1.0 | ) | ||
Balance at December 31, 2007 |
$ | 9.5 | ||
Additions for tax positions of prior years |
1.1 | |||
Lapse of the statue of limitations |
(0.1 | ) | ||
Balance at December 31, 2008 |
$ | 10.5 | ||
The total amount of unrecognized tax benefits that would affect the Company’s effective tax
rate, if recognized is $10.5 million as of December 31, 2008. This amount excludes penalties and
interest.
Our policy for recording interest and penalties associated with uncertain tax positions is to
record such items as a component of income tax (benefit) expense in the Consolidated Statements of
Operations. During the years ended December 31, 2008, 2007, and 2006, we recognized approximately
$0.7 million, $0.6 million, and $0.5 million, respectively, in interest and penalties. We had
approximately $1.7 million and $1.0 million accrued for the payment of interest at December 31,
2008, and 2007, respectively
We do not anticipate any significant increases or decreased in unrecognized tax benefits
within the next twelve months. Insignificant amounts of interest expense will continue to accrue.
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The components of (loss) income from continuing operations before income taxes were as
follows:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
U.S. |
$ | (51.6 | ) | $ | (25.9 | ) | $ | 98.0 | ||||
International |
16.3 | (8.7 | ) | 13.8 | ||||||||
Total |
$ | (35.3 | ) | $ | (34.6 | ) | $ | 111.8 | ||||
The income tax provision from continuing operations was as follows:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Current |
||||||||||||
Federal |
$ | (9.4 | ) | $ | 14.4 | $ | 20.9 | |||||
State |
(1.8 | ) | 1.8 | 3.3 | ||||||||
International |
9.0 | 10.3 | 2.7 | |||||||||
Deferred |
||||||||||||
Federal |
(5.7 | ) | (10.1 | ) | 16.5 | |||||||
State |
(0.5 | ) | (1.5 | ) | 1.2 | |||||||
International |
6.4 | 0.9 | (8.0 | ) | ||||||||
Total |
$ | (2.0 | ) | $ | 15.8 | $ | 36.6 | |||||
Upon repatriation of our international earnings to the United States in the form of dividends
or otherwise, we may be subject to United States income taxes and foreign withholding taxes. The
actual United States tax cost would depend on income tax law and circumstances at the time of
distribution. Determination of the related tax liability is not practicable because of the
complexities associated with the hypothetical calculation.
The components of net deferred tax assets and liabilities were as follows:
| As of December 31, | ||||||||
| (In millions) | 2008 | 2007 | ||||||
Accounts receivable allowances |
$ | 12.6 | $ | 12.2 | ||||
Inventories |
14.7 | 13.9 | ||||||
Payroll, pension and severance (short-term) |
10.9 | 13.7 | ||||||
State tax credit carryforwards |
5.6 | 8.2 | ||||||
Net operating loss carryforwards |
23.4 | 25.4 | ||||||
Accrued liabilities and other reserves |
21.7 | 19.6 | ||||||
Pension (long-term) |
15.9 | — | ||||||
Research and Development |
6.0 | 9.7 | ||||||
Other, net |
— | 2.5 | ||||||
Gross deferred tax assets |
110.8 | 105.2 | ||||||
Valuation allowance |
(18.6 | ) | (16.5 | ) | ||||
Deferred tax assets |
92.2 | 88.7 | ||||||
Property, plant and equipment |
(8.4 | ) | (14.6 | ) | ||||
Intangible assets |
(5.1 | ) | (7.2 | ) | ||||
Other |
— | (1.4 | ) | |||||
Deferred tax liabilities |
(13.5 | ) | (23.2 | ) | ||||
Net deferred tax assets |
$ | 78.7 | $ | 65.5 | ||||
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The valuation allowance was provided to account for uncertainties regarding the recoverability
of certain foreign net operating loss carryforwards and state tax credit carryforwards. The
valuation allowance was $18.6 million, $16.5 million, and $9.4 million as of December 31, 2008,
2007, and 2006, respectively. The increase in 2008 compared with 2007 is due to the establishment
of additional valuation allowances related to anticipated expirations of operating loss
carryforwards of $4.6 million, offset by $2.5 million for lapsing of statues and other items. The
increase in 2007 is primarily due to the acquisition of a foreign subsidiary. Of the aggregate net
operating loss carryforwards totaling $79.9 million, $36.6 million will expire at various dates up
to 2023 and $43.3 million may be carried forward indefinitely. State tax credit carryforwards of
$3.9 million will expire between 2008 and 2021.
Significant judgment is required in determining the realizability of our deferred tax assets.
The assessment of whether valuation allowances are required considers, among other matters, the
nature, frequency and severity of current and cumulative losses, forecasts of future profitability,
the duration of statutory carryforwards periods, the Company’s experience with loss carryforwards
not expiring unused and tax planning alternatives.
Our analysis of the need for valuation allowances considered that, after excluding the impact
of those goodwill impairments which are non-deductible permanent differences, we have a
consolidated cumulative profit over the most recent three year period and cumulative three year
profit, excluding nondeductible permanent differences, in all tax jurisdictions where a net
deferred tax asset is recorded. We also considered the forecasts of future profitability, the
duration of statutory carryforward periods and tax planning alternatives.
While we have a history of profits, our profitability has declined over the last three years
and we recorded a loss in the current year in the United States where the majority of our deferred
tax assets are recorded. Therefore achievement of profitability in the United States in 2009 will
be a significant factor in determining our continuing ability to carry these deferred tax assets.
Significant negative events, could also impact our ability to carry the deferred tax assets in
future periods.
If future results from our operations are less than projected particularly in the Company’s
primary markets, a valuation allowance may be required to reduce the deferred tax assets, which
could have a material impact on our results of operations in the period in which it is recorded.
The income tax provision from continuing operations differs from the amount computed by
applying the statutory United States income tax rate (35 percent) because of the following items:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Tax at statutory U.S. tax rate |
$ | (12.3 | ) | $ | (12.1 | ) | $ | 39.1 | ||||
State income taxes, net of federal benefit |
(1.0 | ) | 1.2 | 3.1 | ||||||||
Net effect of international operations |
(2.6 | ) | (0.6 | ) | 1.4 | |||||||
Valuation allowances |
2.1 | (2.5 | ) | (0.7 | ) | |||||||
International audit settlements |
— | — | (10.4 | ) | ||||||||
Tax on foreign earnings |
6.9 | 2.4 | 8.2 | |||||||||
Goodwill impairment |
3.7 | 28.9 | — | |||||||||
Other |
1.2 | (1.5 | ) | (4.1 | ) | |||||||
Income tax provision |
$ | (2.0 | ) | $ | 15.8 | $ | 36.6 | |||||
Our income tax provision was reduced by $8.4 million and $4.0 million as a result of the
non-cash goodwill impairment charges that occurred in the fourth quarter of 2008 and 2007,
respectively.
Significant tax loss carryforwards had been generated in the Netherlands for the years 1998
through 2000. The filing of the related tax returns resulted in a “nil” assessment from the Dutch
tax authorities on carryforwards representing a possible tax benefit of up to approximately $14.0
million. This matter was favorably resolved in 2006 and resulted in a net benefit to the tax rate
of $10.4 million.
In conjunction with the reorganization of our international tax structure, a charge of $8.2
million was recorded in 2006 on foreign earnings no longer considered permanently invested. In 2008
and 2007, we recorded $6.9 million and $2.4 million respectively, for distribution of foreign
dividends.
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In 2008, 2007 and 2006, cash paid for income taxes, relating to both continuing and
discontinued operations, was $20.4 million, $9.6 million, and $22.0 million, respectively.
As of December 31, 2008, approximately $104.5 million of earnings attributable to
international subsidiaries were considered to be permanently invested. No provision has been made
for taxes that might be payable if these earnings were remitted to the United States as the
earnings are considered indefinitely reinvested.
Note 10 — Retirement Plans
We have various non-contributory defined benefit pension plans covering substantially all
United States employees and certain employees outside the United States. Total pension expense was
$10.2 million, $7.3 million and $8.3 million in 2008, 2007 and 2006, respectively. The measurement
date of our pension plans is December 31. We expect to
contribute approximately $5 million to $10 million to our pension
plans in 2009. It is our general practice, at a minimum, to fund amounts sufficient to meet the
requirements set forth in applicable benefits laws and local tax laws. From time to time, we
contribute additional amounts, as we deem appropriate.
We adopted SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158) on
December 31, 2006. The initial recognition of the funded status of our defined benefit pension
plans resulted in a decrease in shareholders’ equity of $3.2 million, net of a $1.7 million tax
benefit.
In connection with actions taken under our 2008 and 2007 cost reduction restructuring program,
the number of employees accumulating benefits under our pension plan in the United States was
reduced significantly, which resulted in the recognition of a curtailment loss of $1.2 million and
$1.4 million in 2008 and 2007, respectively, included as a component of restructuring and other in
the Consolidated Statements of Operations. Further, as required by SFAS 158, we remeasured the
funded status of our United States plan as of the date of the curtailments.
Participants in the pension plan have the option of receiving cash lump sum payments when
exiting the plan, which a number of participants that exited the pension plan elected to receive.
In accordance with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, once lump sum payments in 2008 exceeded our
2007 service and interest costs, a partial settlement event occurred and we recognized a pro rata
portion of the previously unrecognized net actuarial loss. As a result, we incurred partial
settlement losses of $4.5 million and $1.0 million in 2008 and 2007 respectively, which are
recorded in restructuring and other expense on our Condensed Consolidated Statements of Operations.
Further, as required by SFAS 158, we remeasured the funded status of our United States plan as of
the date of the settlements.
The plan assets of our pension plans are valued at fair value using quoted market prices.
Investments, in general, are subject to various risks, including credit, interest and overall
market volatility risks. During 2008, the United States equity markets have seen a significant
decline in value and, consequently, our plan assets have decreased from December 31, 2007.
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Obligations and funded status for the years ended December 31, 2008 and 2007 were as follows:
| United States | International | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| (In millions) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation, beginning of year |
$ | 117.5 | $ | 131.9 | $ | 70.0 | $ | 73.1 | ||||||||
Acquisition |
— | — | — | 0.7 | ||||||||||||
Service cost |
5.6 | 6.6 | 0.6 | 0.5 | ||||||||||||
Interest cost |
6.5 | 7.4 | 3.6 | 3.6 | ||||||||||||
Actuarial (gain) loss |
0.5 | 0.9 | (5.5 | ) | (10.2 | ) | ||||||||||
Benefits paid |
(20.9 | ) | (30.7 | ) | (2.4 | ) | (2.5 | ) | ||||||||
Foreign exchange rate changes |
— | — | (9.3 | ) | 4.8 | |||||||||||
Curtailments |
1.0 | 1.4 | — | — | ||||||||||||
Projected benefit obligation, end of year |
$ | 110.2 | $ | 117.5 | $ | 57.0 | $ | 70.0 | ||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets, beginning of year |
$ | 111.6 | $ | 128.2 | $ | 76.0 | $ | 68.0 | ||||||||
Actual return on plan assets |
(31.6 | ) | 13.1 | (6.0 | ) | 3.2 | ||||||||||
Foreign exchange rate changes |
— | — | (11.2 | ) | 2.7 | |||||||||||
Company contributions |
5.0 | 1.0 | 2.6 | 4.6 | ||||||||||||
Benefits paid |
(20.9 | ) | (30.7 | ) | (2.4 | ) | (2.5 | ) | ||||||||
Fair value of plan assets, end of year |
$ | 64.1 | $ | 111.6 | $ | 59.0 | $ | 76.0 | ||||||||
Funded status of the plan, end of year |
$ | (46.1 | ) | $ | (5.9 | ) | $ | 2.0 | $ | 6.0 | ||||||
Accumulated benefit obligation |
$ | 108.8 | $ | 116.2 | $ | 54.4 | $ | 67.7 | ||||||||
Amounts recognized in the Consolidated Balance Sheets for the years ended December 31, 2008
and 2007 consisted of the following:
| United States | International | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| (In millions) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Noncurrent assets |
$ | — | $ | — | $ | 4.9 | $ | 7.8 | ||||||||
Noncurrent liabilities |
(46.1 | ) | (5.9 | ) | (2.9 | ) | (1.8 | ) | ||||||||
Accumulated other
comprehensive loss
(gain) — pre-tax |
43.2 | 8.1 | 4.6 | (0.6 | ) | |||||||||||
Amounts
recognized in accumulated other comprehensive loss consisted of the following:
| United States | International | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| (In millions) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Net actuarial loss |
$ | 42.7 | $ | 7.3 | $ | 6.5 | $ | 0.7 | ||||||||
Prior service cost (credit) |
0.5 | 0.8 | (4.0 | ) | (3.6 | ) | ||||||||||
Transition asset obligation |
— | — | 2.1 | 2.3 | ||||||||||||
Total |
$ | 43.2 | $ | 8.1 | $ | 4.6 | $ | (0.6 | ) | |||||||
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Information for pension plans with an accumulated benefit obligation in excess of plan assets
included the following:
| United States | International | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| (In millions) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Projected benefit obligation, end of year |
$ | 110.2 | $ | 117.5 | $ | 9.7 | $ | — | ||||||||
Accumulated benefit obligation, end of year |
108.8 | 116.2 | 7.6 | — | ||||||||||||
Plan assets at fair value, end of year |
64.1 | 111.6 | 6.7 | — | ||||||||||||
Components of net periodic benefit costs included the following:
| United States | International | |||||||||||||||||||||||
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
| (In millions) | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||
Service cost |
$ | 5.6 | $ | 6.6 | $ | 8.3 | $ | 0.8 | $ | 0.7 | $ | 0.5 | ||||||||||||
Interest cost |
6.5 | 7.4 | 7.0 | 3.6 | 3.6 | 3.3 | ||||||||||||||||||
Expected return on plan assets |
(7.9 | ) | (9.7 | ) | (9.8 | ) | (4.5 | ) | (4.1 | ) | (3.6 | ) | ||||||||||||
Amortization of net actuarial loss |
— | — | 0.4 | 0.3 | 0.2 | 0.3 | ||||||||||||||||||
Amortization of prior service cost |
0.1 | 0.2 | 0.2 | (0.3 | ) | — | — | |||||||||||||||||
Amortization of transition obligation |
— | — | — | 0.3 | — | — | ||||||||||||||||||
Net periodic benefit cost |
$ | 4.3 | $ | 4.5 | $ | 6.1 | $ | 0.2 | $ | 0.4 | $ | 0.5 | ||||||||||||
Settlements and curtailments |
5.7 | 2.4 | 1.2 | — | — | 0.5 | ||||||||||||||||||
Total pension cost |
$ | 10.0 | $ | 6.9 | $ | 7.3 | $ | 0.2 | $ | 0.4 | $ | 1.0 | ||||||||||||
The estimated prior service cost, net loss and net obligations at transition for the defined
benefit pension plans that will be amortized from accumulated other comprehensive loss into net
periodic benefit costs over the next fiscal year are $0.1 million, $0.7 million and $0.3 million,
respectively.
Weighted-average assumptions used to determine benefit obligations as of December 31, 2008 and
2007 were as follows:
| United States | International | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Discount rate |
5.75 | % | 6.00 | % | 5.70 | % | 5.40 | % | ||||||||
Rate of compensation increase |
4.75 | % | 4.75 | % | 3.70 | % | 3.70 | % | ||||||||
Weighted-average assumptions used to determine net periodic benefit costs for the years ended
December 31, 2008, 2007 and 2006, were as follows:
| United States | International | |||||||||||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
Discount rate |
6.00 | % | 5.90 | % | 5.50 | % | 5.13 | % | 4.75 | % | 4.45 | % | ||||||||||||
Expected return on plan assets |
8.00 | % | 8.00 | % | 8.00 | % | 5.73 | % | 5.75 | % | 5.70 | % | ||||||||||||
Rate of compensation increase |
4.75 | % | 4.75 | % | 4.75 | % | 3.77 | % | 3.75 | % | 3.40 | % | ||||||||||||
The discount rate is determined through a modeling process utilizing a customized portfolio of
high-quality bonds whose annual cash flows cover the expected benefit payments of the plan, as well
as comparing the results of our modeling to other corporate bond and pension liability indices. The
expected long-term rate of return on plan assets is chosen from the range of likely results of
compounded average annual returns over a 10-year time horizon based on the plans’ current
investment policy. The expected return and volatility for each asset class is based on historical
equity, bond and cash market returns. While this approach considers recent fund performance and
historical returns, the assumption is primarily a long-term, prospective rate.
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The plans’ weighted average asset allocations as of December 31, 2008 and 2007, by asset
category were as follows:
| United States | International | |||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Equity securities |
59 | % | 59 | % | 30 | % | 38 | % | ||||||||
Debt securities |
22 | % | 19 | % | 38 | % | 36 | % | ||||||||
Other |
19 | % | 22 | % | 32 | % | 26 | % | ||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
In the United States, we maintain target allocation percentages among various asset classes
based on an investment policy established for the plan, which is designed to achieve long-term
objectives of return, while mitigating against downside risk, and considering expected cash flows.
The current target asset allocation includes equity securities at 50 to 80 percent, debt securities
at 15 to 25 percent and other investments at 10 to 25 percent. Other investments include cash and
absolute return strategies investments. Management reviews our United States investment policy for
the plan at least annually. Outside the United States, the investment objectives are similar to the
United States, subject to local regulations. In some countries, a higher percentage allocation to
fixed income securities is required.
The following benefit payments as of December 31, 2008, reflect expected future services and
are expected to be paid in each of the next five fiscal years and in the aggregate for the five
fiscal years thereafter:
| (In millions) | United States | International | ||||||
2009 |
$ | 38.8 | $ | 2.2 | ||||
2010 |
$ | 4.2 | $ | 2.5 | ||||
2011 |
$ | 4.7 | $ | 2.9 | ||||
2012 |
$ | 5.9 | $ | 2.8 | ||||
2013 |
$ | 6.4 | $ | 3.0 | ||||
2014-2017 |
$ | 37.7 | $ | 16.6 | ||||
Note 11 — Employee Savings and Stock Ownership Plans
We sponsor a 401(k) retirement savings plan under which eligible United States employees may
choose to save up to 20 percent of eligible compensation on a pre-tax basis, subject to certain IRS
limitations. We match 100 percent of employee contributions on the first three percent of eligible
compensation and 25 percent on the next three percent of eligible compensation in our stock. We
also sponsor a variable compensation program in which we may, at our discretion, contribute up to
three percent of eligible employee compensation to employees’ 401(k) retirement accounts, depending
upon our performance.
We used shares of treasury stock to match employee 401(k) contributions for 2008, 2007 and
2006. Total expense related to the use of shares of treasury stock to match employee 401(k)
contributions was $2.6 million in 2008 and $3.4 million in both 2007 and 2006.
Due to global economic conditions, in February 2009, we determined it was appropriate to
reduce our 401(k) Plan matching contribution as a cost saving measure to 50% of employee
contributions up to 3% of compensation plus 25% of employee contributions that are between 3% and
5% of compensation. This change is targeted to be effective in April 2009.
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Note 12 — Stock-Based Compensation
We have stock-based compensation awards outstanding under five plans (collectively, the Stock
Plans). We have stock options outstanding under our 1996 Employee Stock Incentive Program (Employee
Plan) and our 1996 Directors Stock Compensation Program. We have stock options and restricted stock
outstanding under our 2000 Stock Incentive Plan (2000 Incentive Plan), our 2005 Stock Incentive
Plan (2005 Incentive Plan) and our 2008 Stock Incentive Plan (2008 Incentive Plan). We also have
restricted stock units outstanding under our 2005 Incentive Plan and our 2008 Incentive Plan. No
further shares are available for grant under the Employee Plan, Directors Plan, 2000 Incentive Plan
or the 2005 Incentive Plan.
The Employee Plan was approved and adopted by 3M Company on June 18, 1996, as our sole
shareholder, and became effective on July 1, 1996. The total number of shares of common stock that
could have been issued or awarded under the Employee Plan was not to exceed 6.0 million. The
outstanding options are non-qualified, normally have a term of ten years, and generally become
exercisable from one to five years after grant date. Exercise prices are equal to the fair market
value of our common stock on the date of grant. As a result of the approval and adoption of the
2000 Incentive Plan in May 2000, no further shares are available for grant under the Employee Plan.
The Directors Plan was also approved and adopted by 3M Company, as our sole shareholder, and
became effective on July 1, 1996. The total number of shares of common stock that could have been
issued or awarded under the Directors Plan was not to exceed 800,000. The outstanding options are
non-qualified, normally have a term of ten years and generally become exercisable one year after
grant date. Exercise prices are equal to the fair market value of our common stock on the date of
grant. As a result of the approval and adoption of the 2005 Incentive Plan in May 2005, no further
shares are available for grant under the Directors Plan.
The 2000 Incentive Plan was approved and adopted by our shareholders on May 16, 2000, and
became effective immediately. The total number of shares of common stock that could have been
issued or awarded under the 2000 Incentive Plan was not to exceed 4.0 million. The outstanding
options are non-qualified, normally have a term of seven to ten years, and generally become
exercisable 25 percent per year beginning on the first anniversary of the grant date. Exercise
prices are equal to the fair market value of our common stock on the date of grant. As a result of
the approval and adoption of the 2005 Incentive Plan in May 2005, no further shares are available
for grant under the 2000 Incentive Plan.
The 2005 Incentive Plan was approved and adopted by our shareholders on May 4, 2005, and
became effective immediately. The 2005 Incentive Plan permits the granting of incentive and
non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units,
dividend equivalents, performance awards and other stock and stock-based awards. The total number
of shares of common stock that may be issued or awarded under the 2005 Incentive Plan may not
exceed 2.5 million, of which the maximum number of shares that may be awarded pursuant to grants of
restricted stock, restricted stock units and stock awards is 1.5 million. The outstanding options
are non-qualified and normally have a term of ten years. For employees, the options generally
become exercisable 25 percent per year beginning on the first anniversary of the grant date. For
directors, the options generally become exercisable in full on the first anniversary of the grant
date. Exercise prices are equal to the fair market value of our common stock on the date of grant.
As a result of the approval and adoption of the 2008 Incentive Plan in May 2008, no further shares
are available for grant under the 2005 Incentive Plan.
The 2008 Incentive Plan was approved and adopted by our shareholders on May 7, 2008 and became
effective immediately. The 2008 Incentive Plan permits grants of stock options, stock appreciation
rights, restricted stock,
restricted stock units, dividend equivalents, performance awards, stock awards and other
stock-based awards (collectively, Awards). The Company’s Board of Directors and Compensation
Committee have the authority to determine the type of Awards as well as the amount, terms and
conditions of each Award under the 2008 Incentive Plan, subject to the limitations and other
provisions of the 2008 Incentive Plan. The total number of shares of common stock that may be
issued or granted under the 2008 Incentive Plan may not exceed 4.0 million, of which the maximum
number of shares that may be provided pursuant to grants of Awards other than options and stock
appreciation rights is 2.0 million. The number of shares available for Awards, as well as the terms
of outstanding Awards, are subject to adjustments as provided in the 2008 Incentive Plan for stock
splits, stock dividends, recapitalization and other similar events. The outstanding options are
non-qualified and normally have a term of ten years. For employees, the options generally become
exercisable and restricted stock vests 25 percent per year beginning on the first anniversary of
the grant date. For directors, the options generally become exercisable and restricted stock vests
in full on the first anniversary of the grant date. Exercise prices are equal to the fair market
value of our common stock on the date of grant. Awards may be granted under the 2008 Incentive Plan
until May 6, 2018 or until all shares available for Awards under the 2008 Incentive Plan have been
purchased or acquired; provided, however, that incentive stock options may not be granted after
March 11, 2018. As of December 31, 2008, there were 3,680,346 shares available for grant under our
2008 Incentive Plan.
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Stock Options
The following table summarizes our weighted average assumptions used in the valuation of
options for the years ended December 31, 2008, 2007 and 2006:
| 2008 | 2007 | 2006 | ||||||||||
Volatility |
31 | % | 29 | % | 33 | % | ||||||
Risk-free interest rate |
3.04 | % | 4.60 | % | 4.99 | % | ||||||
Expected life (months) |
61 | 63 | 58 | |||||||||
Dividend yield |
2.6 | % | 1.7 | % | 1.3 | % | ||||||
The following table summarizes stock option activity for the years ended December 31, 2008 and
2007:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Stock | Exercise | Contractual | Intrinsic | |||||||||||||
| Options | Price | Life (Years) | Value | |||||||||||||
Outstanding December 31, 2006 |
3,378,979 | $ | 34.48 | |||||||||||||
Granted |
606,312 | 37.54 | ||||||||||||||
Exercised |
(293,954 | ) | 26.24 | |||||||||||||
Canceled |
(80,385 | ) | 33.08 | |||||||||||||
Forfeited |
(461,191 | ) | 39.34 | |||||||||||||
Outstanding December 31, 2007 * |
3,149,761 | 35.16 | 6.0 | $ | — | |||||||||||
Granted |
1,237,513 | 24.39 | ||||||||||||||
Exercised |
(46,330 | ) | 18.33 | |||||||||||||
Canceled |
(89,315 | ) | 35.98 | |||||||||||||
Forfeited |
(147,873 | ) | 35.32 | |||||||||||||
Outstanding December 31, 2008 * |
4,103,756 | $ | 32.09 | 6.2 | $ | — | ||||||||||
Exercisable as of December 31,
2008 * |
2,270,854 | $ | 34.48 | 4.2 | $ | — | ||||||||||
| * | There was no aggregate intrinsic value at December 31, 2008 and 2007 as our stock price of $13.57 on December 31, 2008 and $21.00 on December 31, 2007 was below the majority of the outstanding stock options’ exercise price. |
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The following table summarizes outstanding and exercisable options as of December 31, 2008:
| Outstanding Options | Exercisable Options | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of Exercise | Stock | Contractual | Exercise | Stock | Exercise | |||||||||||||||
| Prices | Options | Life (Years) | Price | Options | Price | |||||||||||||||
$14.16 to $19.20 |
66,084 | 0.6 | $ | 17.45 | 65,084 | $ | 17.43 | |||||||||||||
$19.21 to $23.95 |
217,482 | 3.1 | 23.04 | 194,482 | 23.23 | |||||||||||||||
$23.96 to $28.70 |
1,185,013 | 9.2 | 24.47 | 750 | 25.42 | |||||||||||||||
$28.71 to $39.38 |
1,754,727 | 5.4 | 34.44 | 1,321,313 | 33.72 | |||||||||||||||
$39.39 to $41.75 |
838,550 | 4.9 | 40.81 | 667,200 | 40.61 | |||||||||||||||
$41.76 to $46.97 |
41,900 | 7.5 | 44.38 | 22,025 | 44.28 | |||||||||||||||
$14.16 to $46.97 |
4,103,756 | 6.2 | $ | 32.09 | 2,270,854 | $ | 34.48 | |||||||||||||
The total intrinsic value of options exercised during the years ended December 31, 2008 and
2007 was $0.3 million and $3.5 million, respectively. Total related stock-based compensation
expense recognized in the Consolidated Statements of Operations for the years ended December 31,
2008, 2007 and 2006 was $6.4 million, $7.0 million and $8.8 million before income taxes,
respectively. The related tax benefit was $2.0 million, $2.2 million and $2.9 million for the years
ended December 31, 2008, 2007 and 2006, respectively. The total fair value of shares vested during
the years ended December 31, 2008 and 2007 was $6.2 million and $8.8 million, respectively. As of
December 31, 2008, there was $10.8 million of total unrecognized compensation expense related to
non-vested stock options granted under our Stock Plans. That expense is expected to be recognized
over a weighted average period of 2.60 years.
Restricted Stock
The following table summarizes restricted stock activity for the years ended December 31, 2008
and 2007:
| Weighted | ||||||||
| Average | ||||||||
| Grant | ||||||||
| Date Fair | ||||||||
| Restricted | Value Per | |||||||
| Stock | Share | |||||||
Outstanding December 31, 2006 |
214,163 | $ | 38.71 | |||||
Granted |
118,143 | 38.08 | ||||||
Vested |
(69,834 | ) | 38.57 | |||||
Forfeited |
(55,243 | ) | 38.33 | |||||
Outstanding December 31, 2007 |
207,229 | 38.52 | ||||||
Granted |
206,261 | 24.05 | ||||||
Vested |
(80,219 | ) | 37.85 | |||||
Forfeited |
(28,760 | ) | 37.61 | |||||
Outstanding December 31, 2008 |
304,511 | $ | 28.98 | |||||
The total intrinsic value of restricted stock vested during the years ended December 31, 2008
and 2007 was $3.0 million and $2.5 million, respectively. Total related stock-based compensation
expense recognized in the Consolidated Statements of Operations for the years ended December 31,
2008 and 2007 was $3.1 million and $3.2 million before income taxes, respectively. The related tax
benefit was $1.2 million for each of the years ended December 31, 2008 and 2007. As of December 31, 2008, there was $6.3 million of total unrecognized compensation
expense related to restricted stock granted under our Stock Plans. That expense is expected to be
recognized over a weighted average period of 2.64 years.
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Note 13 — Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which is
effective for fiscal years beginning after November 15, 2007 and for interim periods within those
years. This statement defines fair value, establishes a framework for measuring fair value and
expands the related disclosure requirements. This statement applies under other accounting
pronouncements that require or permit fair value measurements. SFAS 157 establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers
include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions. SFAS 157 defines fair value based
upon an exit price model.
In February 2008, the FASB issued FSP FAS 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13 (FSP FAS 157-1) and 157-2,
Effective Date of FASB Statement No. 157 (FSP FAS 157-2). FSP FAS 157-1 amends SFAS 157 to exclude
SFAS No. 13, Accounting for Leases, and its related interpretive accounting pronouncements that
address leasing transactions, while FSP FAS 157-2 delays the effective date of the application of
SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. The aspects that have been deferred by FSP FAS 157-2 will be effective for the
Company beginning January 1, 2009.
Effective January 1, 2008, we adopted SFAS 157 for all financial instruments and nonfinancial
instruments accounted for at fair value on a recurring basis as required, which had no impact on
our Consolidated Financial Statements.
Fair value of financial instruments
At December 31, 2008 and 2007, our financial instruments included cash and cash equivalents,
accounts receivable, accounts payable, and derivative contracts. The fair values of cash and cash
equivalents, accounts receivable, and accounts payable approximated carrying values due to the
short-term nature of these instruments. In addition certain derivative instruments, are recorded at
fair values as discussed below.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
As discussed above FSP FAS 157-2 delays the effective date of the application of SFAS 157 for
all nonfinancial assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis to fiscal 2009. During 2008, measurements of fair
value impacted by the deferral under FSP FAS 157-2 related primarily to the nonfinancial assets and
liabilities with respect to the business combinations in 2008 as discussed in Note 3 herein,
goodwill discussed in Note 6 herein and the portion of 2008 restructuring and other expense related
to asset impairments discussed in Note 8 herein.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
Our retirement plans are measured at fair value on a recurring basis (at least annually). See
Note 10 herein for additional discussion concerning pension and postretirement benefit plans.
We maintain a foreign currency exposure management policy that allows the use of derivative
instruments, principally foreign currency forward, option contracts and option combination
strategies to manage risks associated with foreign exchange rate volatility. Generally, these
contracts are entered into to fix the U.S. dollar amount of the eventual cash flows. The derivative
instruments range in duration at inception from less than one to 14 months. We do not hold or issue
derivative financial instruments for speculative or trading purposes, and we are not a party to
leveraged derivatives.
We are exposed to the risk of nonperformance by our counter-parties in foreign currency
forward and option contracts, but we do not anticipate nonperformance by any of these
counter-parties. We actively monitor our exposure to credit risk through the use of credit
approvals and credit limits, and by using major international banks and financial institutions as
counter-parties.
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Cash Flow Hedges
We attempt to mitigate the risk that forecasted cash flows denominated in foreign currencies
may be adversely affected by changes in currency exchange rates through the use of option, forward
and combination option contracts. We formally document all relationships between hedging
instruments and hedged items, as well as our risk management objective and strategy for undertaking
the hedge items. This process includes linking all derivatives to forecasted transactions.
We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the
derivatives used in hedging transactions are highly effective in offsetting changes in the cash
flows of hedged items. Gains and losses related to cash flow hedges are deferred in accumulated
other comprehensive income (loss) with a corresponding asset or liability. When the hedged
transaction occurs, the gains and losses in accumulated other comprehensive income (loss) are
reclassified into the Consolidated Statement of Operations in the same line as the item being
hedged. If at any time it is determined that a derivative is not highly effective as a hedge, we
discontinue hedge accounting prospectively, with deferred gains and losses being recognized in
current period operations.
Other Hedges
We enter into foreign currency forward contracts, generally with durations of less than two
months, to manage the foreign currency exposure related to our monetary assets and liabilities
denominated in foreign currencies. We record the estimated fair value of these forwards within
other current assets or other current liabilities in the Consolidated Balance Sheets, and all
changes in their fair value are immediately recognized in the Consolidated Statement of Operations.
As of December 31, 2008, we held derivative instruments that are required to be measured at
fair value on a recurring basis. Our derivative instruments consist of foreign currency forwards,
option contracts and option combination strategies. The fair value of our derivative instruments is
determined based on inputs that are readily available in the public market or can be derived from
information available in publicly quoted markets (Level 1).
Our financial assets and liabilities that are measured at fair value on a recurring basis at
December 31, 2008 were as follows:
| Quoted prices in | Significant | |||||||||||||||
| active markets | other | |||||||||||||||
| for identical | observable | Unobservable | ||||||||||||||
| December | assets | inputs | inputs | |||||||||||||
| (In millions) | 31, 2008 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Derivative assets |
$ | 1.9 | $ | 1.9 | $ | — | $ | — | ||||||||
Derivative liabilities |
(4.7 | ) | (4.7 | ) | — | — | ||||||||||
Total |
$ | (2.8 | ) | $ | (2.8 | ) | $ | — | $ | — | ||||||
As of December 31, 2008 and 2007, cash flow hedges ranged in duration from one to 12 months
and had a total notional amount of $495.6 million and $219.1 million, respectively. Hedge costs,
representing the premiums paid on expired options net of hedge gains and losses, of $0.4 million,
$2.1 million and $1.2 million were reclassified into the Consolidated Statement of Operations in
2008, 2007 and 2006, respectively. The amount of net deferred losses on foreign currency cash flow
hedges included in accumulated other comprehensive income (loss) in shareholders’ equity as of
December 31, 2008 was $2.2 million, pre-tax, which depending on market factors is expected to
reverse in the Consolidated Balance Sheet or be reclassified into operations in 2009.
As of December 31, 2008 and 2007, we had a notional amount of forward contracts of $99.0
million and $102.3 million, respectively, to hedge our recorded balance sheet exposures.
Note 14 — Leases
Rent expense under operating leases, which primarily relate to equipment and office space,
amounted to $15.6 million, $13.1 million and $18.2 million in 2008, 2007 and 2006, respectively.
The following table sets forth the minimum rental payments under operating leases with
non-cancelable terms in excess of one year as of December 31, 2008:
| (In millions) | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | |||||||||||||||||||||
Minimum lease
payments |
$ | 10.3 | $ | 8.6 | $ | 6.7 | $ | 3.3 | $ | 1.5 | $ | 0.8 | $ | 31.2 | ||||||||||||||
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Note 15 — Shareholders’ Equity
In 2006, we adopted a shareholder rights plan under which we have issued one preferred share
purchase right (Right) for each share of our common stock. If it becomes exercisable, each Right
will entitle its holder to purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock at an exercise price of $160, subject to adjustment. The Rights are exercisable
only if a person or group acquires beneficial ownership of 15 percent or more of our outstanding
common stock, or after the first public announcement relating to a tender offer or exchange offer
that would result in a person or group beneficially owning 15 percent or more of our outstanding
shares of common stock subject to certain exceptions. The Rights expire on July 1, 2016 and may be
redeemed earlier by the Board of Directors for $0.01 per Right.
The shareholder rights plan was amended effective July 30, 2007 to change the definition of
acquiring person to exclude TDK Corporation and its affiliates at any time during the period (TDK
Standstill Period) beginning at the time, if any, that TDK and its affiliates own 15 percent or
more of the outstanding shares of common stock and ending at the time, if any, that TDK and its
affiliates cease to own at least 75 percent of the shares issued related to the acquisition of the
TDK Recording Media business or cease to be holders of record of at least 10 percent of the common
stock as a result of Imation issuing additional shares.
TDK can not become the beneficial owner of more than 21 percent of the common stock
outstanding at any time during the TDK Standstill Period other than as a result of a reduction in
the number of shares outstanding due to Imation repurchasing shares of common stock and is limited
to 22 percent in this event. TDK shall dispose of a sufficient number of shares of common stock
within 10 days after becoming aware that the percentage has been surpassed such that TDK shall be
the beneficial owner of no more than 21 percent of the common stock then outstanding.
In 1997, our Board of Directors authorized the repurchase of up to six million shares of our
common stock and in 1999 increased the authorization to a total of 10 million shares. On August 4,
2004, our Board of Directors increased the authorization for repurchase of common stock, expanding
the then remaining share repurchase authorization of 1.8 million shares as of June 30, 2004, to a
total of six million shares. On April 17, 2007, our Board of Directors authorized the repurchase of
5.0 million shares of common stock. The previous share repurchase program, which had a remaining
share repurchase authorization of 2.4 million shares, was cancelled and replaced with the new
authorization. During 2007 and 2006, we repurchased 3.8 million shares and 0.9 million shares,
respectively.
On January 28, 2008, the Board of Directors authorized a share repurchase program increasing
the total outstanding authorization to 3.0 million shares of common stock. The Company’s previous
authorization was cancelled with the new authorization. During the three months ended March 30,
2008, we repurchased 0.8 million shares completing the 10b5-1 plan announced in May 2007. As of
December 31, 2008, we had repurchased 0.7 million shares under the latest authorization and held,
in total, 5.2 million shares of treasury stock acquired at an average price of $25.07 per share.
Authorization for repurchases of an additional 2.3 million shares remained outstanding as of
December 31, 2008. Effective January 30, 2009 our Board of Directors suspended the Company’s
quarterly cash dividend.
Note 16 — Business Segment Information and Geographic Data
We operate in two broad market categories: (1) Removable data storage media products and
accessories and (2) audio and video consumer electronic products and accessories (electronic
products).
Our Data Storage Media business is organized, managed and internally and externally reported
as segments differentiated by the regional markets we serve: Americas, Europe and Asia Pacific.
Each of these segments has responsibility for selling virtually all Imation product lines except
for consumer electronic products. Consumer electronics are sold primarily through our Electronic
Products (EP) segment. The EP segment is currently focused primarily in North America and primarily
under the Memorex brand name.
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We evaluate segment performance based on revenue and operating income. Revenue for each
segment is generally based on customer location where the product is shipped. The operating income
reported in our segments excludes corporate and other unallocated amounts. Although such amounts
are excluded from the business segment results, they are included in reported consolidated
earnings. Corporate and unallocated amounts include research and development expense, corporate
expense, stock-based compensation expense, non-cash goodwill impairment charges and restructuring
and other expenses which are not allocated to the segments.
Net revenue and operating income were as follows:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Net Revenue |
||||||||||||
Americas |
$ | 789.4 | $ | 959.3 | $ | 838.9 | ||||||
Europe |
685.2 | 655.7 | 524.3 | |||||||||
Asia Pacific |
434.4 | 328.9 | 221.5 | |||||||||
Electronic Products |
245.6 | 118.1 | — | |||||||||
Total |
$ | 2,154.6 | $ | 2,062.0 | $ | 1,584.7 | ||||||
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Operating Income |
||||||||||||
Americas |
$ | 73.0 | $ | 82.1 | $ | 128.9 | ||||||
Europe |
22.3 | 45.2 | 48.1 | |||||||||
Asia Pacific |
28.7 | 23.5 | 17.1 | |||||||||
Electronic Products |
(13.4 | ) | 5.5 | — | ||||||||
Corporate and unallocated |
(138.4 | ) | (189.3 | ) | (85.9 | ) | ||||||
Total |
$ | (27.8 | ) | $ | (33.0 | ) | $ | 108.2 | ||||
We have not provided specific asset information by segment, as it is not regularly provided to
our chief operating decision maker for review. Corporate and unallocated amounts above include
non-cash goodwill impairment charges of $34.7 million and $94.1 million for the years ended
December 31, 2008 and 2007, respectively, as well as restructuring and other costs of $28.9
million, $33.3 million and $11.9 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
We have four major product categories: optical, magnetic, flash media, electronic products,
accessories and other. Net revenue by product category was as follows:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Optical products |
$ | 1,025.2 | $ | 954.2 | $ | 680.3 | ||||||
Magnetic products |
644.4 | 703.9 | 660.8 | |||||||||
Flash media products |
99.2 | 157.1 | 146.6 | |||||||||
Electronic products, accessories and other |
385.8 | 246.8 | 97.0 | |||||||||
Total |
$ | 2,154.6 | $ | 2,062.0 | $ | 1,584.7 | ||||||
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The following tables present net revenue and long-lived assets by geographical region:
| Years Ended December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Net Revenue |
||||||||||||
United States |
$ | 905.0 | $ | 958.2 | $ | 722.7 | ||||||
International |
1,249.6 | 1,103.8 | 862.0 | |||||||||
Total |
$ | 2,154.6 | $ | 2,062.0 | $ | 1,584.7 | ||||||
| As of December 31, | ||||||||||||
| (In millions) | 2008 | 2007 | 2006 | |||||||||
Long-Lived Assets |
||||||||||||
United States |
$ | 116.9 | $ | 167.0 | $ | 174.6 | ||||||
International |
5.5 | 4.5 | 3.4 | |||||||||
Total |
$ | 122.4 | $ | 171.5 | $ | 178.0 | ||||||
Note 17 — Commitments and Contingencies
In the normal course of business, we periodically enter into agreements that incorporate
general indemnification language. Performance under these indemnities would generally be triggered
by a breach of terms of the contract or by a third-party claim. There have historically been no
material losses related to such indemnifications. In accordance with SFAS No. 5, Accounting for
Contingencies, we record a liability in our consolidated financial statements for these actions
when a loss is known or considered probable and the amount can be reasonably estimated.
We are the subject of various pending or threatened legal actions in the ordinary course of
our business. All such matters are subject to many uncertainties and outcomes that are not
predictable with assurance. Consequently, as of December 31, 2008, we are unable to ascertain the
ultimate aggregate amount of any monetary liability or financial impact that we may incur with
respect to these matters. While these matters could materially affect operating results depending
upon the final resolution in future periods, it is our opinion that after final disposition, except
for possibly the Philips dispute described below, any monetary liability beyond that provided in
the Consolidated Balance Sheet as of December 31, 2008 would not be material to our financial
position.
Philips
Imation filed a Declaratory Judgment Action on October 27, 2006, in Federal District Court in
St. Paul, Minnesota requesting that the court resolve an ongoing dispute with Philips Electronics
N.V., U.S. Philips Corporation and North American Philips Corporation (collectively, Philips).
Philips has asserted that (1) the patent cross-license between 3M Company and Philips was not
validly assigned to Imation in connection with the spin-off of Imation from 3M Company in 1996; (2)
Imation’s 51 percent owned subsidiary, Global Data Media (GDM), is not a “subsidiary” as defined in
the cross-license; (3) the coverage of the cross-license does not apply to Imation’s acquisition of
Memorex; (4) the cross-license does not apply to DVD discs; (5) certain Philips patents that are
not covered by the cross-license are infringed by Imation; and (6) as a result, Imation owes
Philips royalties for the prior and future sales of CD and DVD discs. We believe that these
allegations are without merit and filed a Declaratory Judgment Action to have a court reaffirm
Imation’s rights under the cross-license. On February 26, 2007, the parties signed a Standstill
Agreement and the litigation was voluntarily dismissed without prejudice. Imation and Philips held
settlement negotiations but were unable to come to an agreement. Imation re-filed its Declaratory
Judgment Action on August 10, 2007. Philips filed its Answer and Counterclaims against Imation and
MBI, Imation’s partner in GDM. Philips alleged that (1) the cross-license does not apply to
companies that Imation purchased or created after March 1, 2000; (2) GDM is not a legitimate
subsidiary of Imation; (3) Imation’s formation of GDM is a breach of the cross-license resulting in
termination of the cross-license at that time; (4) Imation (including Memorex and GDM) infringes
various patents that would otherwise be licensed
under the cross-license; and (5) Imation (including Memorex and GDM) infringes one or more
patents that are not covered by the cross-license. Philips originally claimed damages of $655
million plus interest and costs, as well as a claim requesting a trebling of that amount. Imation
was aware of these claims prior to filing its Declaratory Judgment Action. Although all litigation
carries risk, we continue to believe that Philips’ claims are without merit.
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On October 30, 2007, Imation filed its answers to Philips’ counterclaims and a Motion for
Partial Summary Judgment on the issue of whether the patent cross-license was validly assigned by
3M Company to Imation. Philips did not contest Imation’s Motion and on November 26, 2007, the
parties filed a stipulation affirming that the cross-license was validly assigned to Imation.
On April 7, 2008, Philips amended its counterclaims to (1) add claims that DVD discs sold by
Imation infringe its patents, and (2) withdraw its specific claim of $655 million in damages in
favor of the more general “damages in an amount to be proved at trial.”
On May 27, 2008, Philips filed a Motion for Judgment on the Pleadings that the cross-license
does not apply to subsidiaries acquired or formed by Imation after March 1, 2000. Under this
interpretation, the license would not apply to GDM or Memorex Products, Inc. Imation disagrees with
this interpretation.
The parties held court ordered settlement discussions from June through September 2008,
however, no agreement was reached.
On October 1, 2008, Imation filed a Motion for Leave to amend its Complaint. On November 18,
2008, the Magistrate Judge denied Imation’s Motion. Imation filed its Objection to the Magistrate
Judge’s Order and on February 2, 2009, the Court affirmed the Magistrate Judge’s decision.
On November 26, 2008, the Court issued a decision granting Philips’ Motion for Judgment on the
pleadings relating to subsidiaries formed after March 1, 2000. Following this ruling, Imation and
MBI filed a Motion for the Court to certify the ruling on this issue as final under FRCP 54(b)
allowing for an interlocutory appeal to the Court of Appeals for the Federal Circuit. The Court
granted this Motion on January 21, 2009 and on January 23, 2009, Imation filed its Notice of Appeal
with the Court of Appeals for the Federal Circuit.
On December 1, 2008, MBI filed two patent-related Summary Judgment Motions. A hearing on these
Motions was held on January 16, 2009. The Court has not yet ruled on these Motions.
Although
all litigation carries risk, we continue to aggressively dispute Philips’ claims.
Given the present status of the proceedings, there currently is no probable or estimable liability.
Discovery is ongoing and trial of the matter is currently scheduled for fall 2009. In the interim,
the parties may continue to conduct settlement discussions.
Although the Company is not a party to this lawsuit, On August 15, 2007, Philips initiated a
lawsuit against Moser Baer India Ltd. (MBI) in The Hague, Netherlands, based on MBI’s optical
license agreements with Philips. MBI has made a claim for indemnification of its legal expenses and
potential liabilities for damages that may be incurred with respect to this claim as well as the US
litigation described above. Imation has made payments to MBI and accrued liabilities in connection
with a portion of MBI’s legal fees incurred with respect to the Philips litigation. We continue to
review MBI’s claims for reimbursement to determine the extent of our obligations under the relevant
agreements with MBI.
SanDisk
On October 24, 2007, SanDisk Corporation filed a patent infringement action in U.S. District
Court, Western District of Wisconsin, against Imation and its subsidiaries, Imation Enterprises
Corp. and Memorex Products, Inc. The lawsuit also names over twenty other companies as defendants.
This action alleges that we have infringed five patents held by SanDisk: US Patent 6,426,893;
6,763,424; 5,719,808; 6,947,332 and 7,137,011. SanDisk alleges that our sale of various flash
memory products, such as USB flash drives and certain flash card formats, infringes these patents
and is seeking damages for prior sales, and an injunction and/or royalties on future sales. This
action has been stayed pending resolution of the related case described below.
Also on October 24, 2007, SanDisk filed a complaint with the United States International Trade
Commission (ITC) against the same Imation entities listed above, as well as over twenty other
companies. This action involves the same
patents and the same products as described above and SanDisk is seeking an order from the ITC
blocking the defendants’ importation of these products into the United States.
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The ITC hearing was held October 27, 2008 through November 4, 2008. Prior to the hearing,
SanDisk affirmatively withdrew three of the five patents (US Nos. 6,426,893; 5,719,808; and
6,947,332) from the case. On November 25, 2008, the ITC Investigative Staff Counsel released its
Post Hearing Brief recommending that U.S. Patent No. 7,137,011 be found invalid and that U.S.
Patent No. 6,763,424 be found valid and infringed. The ITC judge will consider the ITC Staff
Counsel’s recommendation, and the briefs of the other parties, and will issue an Initial
Determination by April 10, 2009. The Final Determination of the ITC should follow four months
later, in August 2009, and an Exclusion Order, if any, would likely take effect two months later,
in October 2009.
Some of our suppliers are already licensed by SanDisk. We are also generally indemnified by
our suppliers against claims for patent infringement. Additionally, our suppliers have indicated
that they will be providing us with USB flash drives with different controllers, which SanDisk has
stipulated are not covered by U.S. Patent No. 6,763,424, well prior to any action by the ITC.
Therefore, at this time we do not believe that either of the SanDisk actions will have a material
adverse impact on our financial statements.
Environmental Matters
Our operations are subject to a wide range of federal, state and local environmental laws.
Environmental remediation costs are accrued when a probable liability has been determined and the
amount of such liability has been reasonably estimated. These accruals are reviewed periodically as
remediation and investigatory activities proceed and are adjusted accordingly. Compliance with
environmental regulations has not had a material adverse effect on our financial results. As of
December 31, 2008, we had environmental-related accruals totaling $0.5 million recorded in other
liabilities and we have minor remedial activities underway at one of our facilities. We believe
that our accruals are adequate, though there can be no assurance that the amount of expense
relating to remedial actions and compliance with applicable environmental laws will not exceed the
amounts reflected in our accruals.
Note 18 — Related Party Transactions
As a result of the TDK Recording Media business acquisition, TDK became our largest
shareholder and owned approximately 20 percent of our shares as of December 31, 2008 and 2007. In
connection with the acquisition we entered into a Supply Agreement and a Transition Services
Agreement with TDK. For details on the Supply Agreement see Note 3 herein for further information.
Under the Transition Services Agreement, TDK provided certain services to assist in the transfer of
the TDK Recording Media business to Imation.
In 2008 we did not sell products nor provide services to TDK or its affiliates. In 2007 and
2006, Imation sold products and services in the aggregate amounts of approximately $25 million and
$75 million, respectively, to TDK or its affiliates. In 2008, 2007 and 2006 we purchased products
and services in the aggregate amounts of approximately $80 million, $31 million and $6 million,
respectively, from TDK or its affiliates. Fees under the Transition Services Agreement were
approximately $10 million and $11 million in 2008 and 2007, respectively. Trade payables to TDK or
its affiliates were $14.2 million and $7.5 million at December 31, 2008 and 2007, respectively. We
had no trade receivables from TDK or its affiliates at December 31, 2008. Trade receivables from
TDK or its affiliates were $0.1 million at December 31, 2007.
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Note 19 — Quarterly Data (Unaudited)
| (In millions, except per share amounts) | First | Second | Third | Fourth | Total(1) | |||||||||||||||
2008 |
||||||||||||||||||||
Net revenue |
$ | 530.9 | $ | 547.0 | $ | 527.5 | $ | 549.2 | $ | 2,154.6 | ||||||||||
Gross profit |
98.7 | 94.9 | 81.6 | 74.8 | 350.0 | |||||||||||||||
Goodwill impairment |
— | — | — | 34.7 | 34.7 | |||||||||||||||
Operating (loss) income |
19.5 | 12.2 | (8.7 | ) | (50.8 | ) | (27.8 | ) | ||||||||||||
Net income (loss) |
11.0 | 7.2 | (5.9 | ) | (45.6 | ) | (33.3 | ) | ||||||||||||
Earnings (loss) per common share: |
||||||||||||||||||||
Basic |
$ | 0.29 | $ | 0.19 | $ | (0.16 | ) | $ | (1.22 | ) | $ | (0.89 | ) | |||||||
Diluted |
0.29 | 0.19 | (0.16 | ) | (1.22 | ) | (0.89 | ) | ||||||||||||
2007 |
||||||||||||||||||||
Net revenue |
$ | 421.9 | $ | 412.8 | $ | 525.5 | $ | 701.8 | $ | 2,062.0 | ||||||||||
Gross profit |
81.8 | 72.5 | 85.7 | 115.9 | 355.9 | |||||||||||||||
Goodwill impairment |
— | — | — | 94.1 | 94.1 | |||||||||||||||
Operating (loss) income |
23.6 | (2.6 | ) | 16.3 | (70.3 | ) | (33.0 | ) | ||||||||||||
Net income (loss) |
15.7 | (1.4 | ) | 9.4 | (74.1 | ) | (50.4 | ) | ||||||||||||
Earnings (loss) per common share: |
||||||||||||||||||||
Basic |
$ | 0.45 | $ | (0.04 | ) | $ | 0.24 | $ | (1.91 | ) | $ | (1.36 | ) | |||||||
Diluted |
0.44 | (0.04 | ) | 0.24 | (1.91 | ) | (1.36 | ) | ||||||||||||
| (1) | The sum of the quarterly earnings per share may not equal the annual earnings per share due to changes in average shares outstanding. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Based on an evaluation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31,
2008, the end of the period covered by this report, the President and Chief Executive Officer,
Frank P. Russomanno, and the Vice President and Chief Financial Officer, Paul R. Zeller, have
concluded that the disclosure controls and procedures were effective.
Changes in Internal Controls. During the quarter ended December 31, 2008, there was no change
in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act) that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Management’s Report on Internal Control over Financial Reporting. Management of Imation is
responsible for establishing and maintaining adequate internal control over financial reporting.
Imation’s internal control system is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
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Imation management assessed the effectiveness of Imation’s internal control over financial
reporting as of December 31, 2008. In making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework. Based on our assessment, we concluded that, as of December 31, 2008,
Imation’s internal control over financial reporting was effective, based on those criteria. Our
independent registered public accounting firm, PricewaterhouseCoopers, has audited the
effectiveness of our internal control over financial reporting, as stated in their report which
appears herein.
Attestation Report of Independent Registered Public Accounting Firm. The attestation report of
PricewaterhouseCoopers LLP, our independent registered public accounting firm, regarding our
internal control over financial reporting is provided on page 42.
Item 9B. Other Information.
None.
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PART III
Except where otherwise noted, the information required by Items 10 through 14 is incorporated
by reference from our definitive Proxy Statement pursuant to general instruction G(3) to Form 10-K,
with the exception of the executive officers section of Item 10, which is included in Item 1 of
this Form 10-K. We will file our definitive Proxy Statement pursuant to Regulation 14A by April 30,
2009.
Item 10. Directors, Executive Officers and Corporate Governance.
Board of Directors
Information regarding our Board of Directors as of February 27, 2009 is set forth below:
Michael S. Fields, Chairman and Chief Executive Officer of KANA Software, Inc. (a customer
relationship management software and services company) and Chairman, The Fields Group (a management
consulting firm).
Charles A. Haggerty, Chief Executive Officer, Le Conte Associates, LLC (a consulting and
investment company) and former Chairman and Chief Executive Officer, Western Digital Corporation (a
hard disk maker).
Linda W. Hart, Vice Chairman and Chief Executive Officer, Hart Group, Inc. (a diversified
group of companies primarily involved in residential and commercial building materials) and
Non-Executive Chairman of our Board.
Ronald T. LeMay, Industrial Partner of Ripplewood Holdings (a private equity fund), Chairman
of AirCell Inc. (a designer, manufacturer and marketer of airborne telecommunication systems) and
Chairman, October Capital (a private investment company).
Raymond Leung, Chairman and Chief Executive Officer of TDK China Co., LTD (TDK Corporation’s
Asian subsidiary in China), Senior Vice President of TDK Corporation Japan and Chairman of SAE
Magnetics (HK) Ltd. (a wholly owned subsidiary of TDK engaged in the development, manufacture and
sale of HDD heads).
L. White Matthews, III, retired Executive Vice President and Chief Financial Officer, Ecolab
Inc. (a developer and marketer of cleaning and sanitizing products and services) and former Chief
Financial Officer and Executive Vice President, Union Pacific Corporation (a company involved in
rail/truck transportation and oil/gas exploration and production).
Charles Reich, retired Executive Vice President of 3M Health Care, a major business segment of
3M Company (a diversified technology company).
Frank P. Russomanno, President and Chief Executive Officer, Imation. See Executive Officers of
the Registrant in Item 1. Business herein for further information.
Glen A. Taylor, Chairman, Taylor Corporation (a holding company in the specialty printing and
marketing areas). Owner, Minnesota Timberwolves (NBA) and Minnesota Lynx (WNBA).
Daryl J. White, retired President and Chief Financial Officer, Legerity, Inc. (a supplier of
data and voice communications integrated circuitry), and former Senior Vice President of Finance
and Chief Financial Officer, Compaq Computer Corporation (a computer equipment manufacturer).
See Part I of this Form 10-K, “Executive Officers of the Registrant.” The Sections of the
Proxy Statement entitled “Board of Directors-Director Independence and Determination of Audit
Committee Financial Expert,” “Board of Directors-Meetings of the Board and Board Committees,”
“Information Concerning Solicitation and Voting — Section 16(a) Beneficial Ownership Reporting
Compliance” and “Item No. 1-Election of Directors — Information Concerning Directors” are
incorporated by reference into this Form 10-K.
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We adopted a code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer/controller, or persons performing similar functions
and all our other employees. This code of ethics is part of our broader Business Conduct Policy,
posted on our website. The Internet address for our website is http://www.imation.com, and the
Business Conduct Policy may be found on the “Corporate Governance” web page, which can be accessed
from the “Investor Relations” page, which can be accessed from the main web page. We intend to
satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver
from, a provision of the required code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer/controller or persons performing similar
functions by posting such information on our website, at the address and location specified above.
Materials posted on our website are not incorporated by reference into this Form 10-K.
Item 11. Executive Compensation.
The Sections of the Proxy Statement entitled “Compensation Discussion and Analysis,”
“Compensation Committee Report,” “Compensation of Executive Officers” and “ Board of Directors -
Compensation of Directors” are incorporated by reference into this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The Sections of the Proxy Statement entitled “Information Concerning Solicitation and Voting -
Security Ownership of Certain Beneficial Owners” and “Information Concerning Solicitation and
Voting — Security Ownership of Management” are incorporated by reference into this Form 10-K.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued under all of
our existing equity compensation plans as of December 31, 2008, including the 2008 Stock Incentive
Plan, the 2005 Stock Incentive Plan, the 2000 Stock Incentive Plan, the 1996 Employee Stock
Incentive Program and the 1996 Directors Stock Compensation Program. As of December 31, 2008,
options were the only form of award that had been granted under the 1996 Employee Stock Incentive
Program, options and restricted stock had been granted under the 2000 Stock Incentive Plan, 2005
Stock Incentive Plan and 2008 Stock Incentive Plan, and options, restricted stock and restricted
stock units had been granted to directors under the 1996 Directors Stock Compensation Program. Our
shareholders have approved all of the compensation plans listed below.
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| Number of | ||||||||||||
| securities | ||||||||||||
| remaining | ||||||||||||
| available for | ||||||||||||
| future issuance | ||||||||||||
| under equity | ||||||||||||
| Number of securities | Weighted-average | compensation | ||||||||||
| to be issued upon | exercise price of | plans (excluding | ||||||||||
| exercise of | outstanding | securities | ||||||||||
| Equity compensation plans approved by | outstanding options, | options, | reflected in the | |||||||||
| shareholders | warrants and rights | warrants and rights | first column) | |||||||||
2008 Stock Incentive Plan |
150,555 | (1) | $ | 23.90 | 3,680,346 | |||||||
2005 Stock Incentive Plan |
2,134,705 | (1) | $ | 31.95 | — | (2) | ||||||
2000 Stock Incentive Plan |
1,444,194 | (1) | $ | 33.97 | — | (2) | ||||||
1996 Employee Stock Incentive Program |
127,709 | $ | 23.48 | — | (2) | |||||||
1996 Directors Stock Compensation Program |
246,593 | $ | 31.65 | — | (2) | |||||||
Total |
4,103,756 | $ | 32.09 | 3,680,346 | ||||||||
| (1) | This number does not include restricted stock of 163,661 shares under our 2008 Stock Incentive Plan, 129,650 shares under our 2005 Stock Incentive Plan and 11,200 shares under our 2000 Stock Incentive Plan. | |
| (2) | No additional awards may be granted under our 2005 Stock Incentive Plan, 2000 Stock Incentive Plan, 1996 Employee Stock Incentive Plan or 1996 Directors Stock Compensation Program. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Sections of the Proxy Statement entitled “Information Concerning Solicitation and Voting -
Related Person Transactions and Related Person Transaction Policy”, and “Board of Directors -
Director Independence and Determination of Audit Committee Financial Expert” as well as the
biographical material pertaining to Mr. Raymond Leung, located in the Proxy Statement under the
heading “Item No. 1 Election of Directors — Information Concerning Directors” are incorporated by
reference into this Form 10-K.
Item 14. Principal Accountant Fees and Services.
The Section of the Proxy Statement entitled “Audit and Other Fees and Audit and Finance
Committee Pre-Approval Policies” is incorporated by reference into this Form 10-K.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
List of Documents Filed as Part of this Report
1. Financial Statements
| Page | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
| 47 | ||||
2. Financial Statement Schedules
All financial statement schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in the Consolidated
Financial Statements or the notes thereto.
3. Exhibits
The following Exhibits are filed as part of, or incorporated by reference into, this report:
| Number | Description of Exhibit | |
2.1
|
Asset Purchase Agreement, dated May 7, 2007, among Hopper Radio of Florida, Inc., Memcorp, Inc., Memcorp Asia Limited and Imation Corp. (incorporated by reference to Exhibit 2.1 of Imation’s Form 10-Q for the quarter ended March 31, 2007) | |
2.2
|
Acquisition Agreement, dated April 19, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 2.1 to Imation’s Form 8-K Current Report filed on April 25, 2007) | |
2.3
|
Acquisition Agreement, dated January 19, 2006, by and between Imation Corp. and Memorex International Inc. (incorporated by reference to Exhibit 2.1 to Imation’s Form 8-K Current Report filed on January 25, 2006) | |
2.4
|
Inducement Agreement, dated January 19, 2006, among Hanny Holding Limited, Hanny Magnetics (B.V.I.) Limited, Investor Capital Management Asia Limited, Investor Capital Partners — Asia Fund L.P, Global Media Limited, Memorex Holdings Limited and Imation Corp. (incorporated by reference to Exhibit 2.2 to Imation’s Form 8-K Current Report filed on January 25, 2006) | |
3.1
|
Restated Certificate of Incorporation of Imation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form 10, No. 1-14310) | |
3.2
|
Amended and Restated Bylaws of Imation (incorporated by reference to Exhibit 3.1 of Imation’s Form 10-Q for the quarter ended March 31, 2007) | |
4.1
|
Rights Agreement between Imation and The Bank of New York, as Rights Agent, dated as of June 21, 2006 (incorporated by reference to Exhibit 4.1 to Imation’s Registration Statement on Form 8-A filed on June 23, 2006) | |
4.2
|
First Amendment to Rights Agreement, dated as of July 30, 2007 (incorporated by reference to Exhibit 4.3 to Imation’s Registration Statement on Form 8-A/A filed on August 1, 2007) | |
4.3
|
Amended and Restated Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 4.2 to Imation’s Registration Statement on Form 8-A filed on June 23, 2006) | |
10.1
|
Shareholders Agreement in relation to Global Data Media FZ-LLC (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 2003) |
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| Number | Description of Exhibit | |
10.2
|
Amendment Agreement to Shareholders Agreement in relation to Global Data Media FZ-LLC (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on January 26, 2006) | |
10.3
|
Trademark License Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on August 3, 2007) | |
10.4
|
IMN Trademark License Agreement, dated July 31, 2007, by and between IMN Data Storage Holdings C.V. and TDK Corporation (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on August 3, 2007) | |
10.5
|
Supply Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on August 3, 2007) | |
10.6
|
Investor Rights Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on August 3, 2007) | |
10.7
|
Credit Agreement between Imation and a Consortium of Lenders dated as of March 29, 2006 (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on April 5, 2006) | |
10.8
|
Amendment to the Credit Agreement between Imation Corp. and Consortium of Lenders dated as of July 24, 2007 (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on July 30, 2007) | |
10.9
|
Second amendment to Credit Agreement between Imation Corp. and a consortium of lenders dated as of April 25, 2008 (incorporated by reference to Exhibit 10.1 to Imation’s Form 10-Q for the quarter ended March 31, 2008) | |
10.10*
|
Form of Indemnity Agreement between Imation and each of its directors (incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the year ended December 31, 1996) | |
10.11*
|
Employment Closure Agreement between Imation Corp. and Mr. Henderson (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on April 2, 2007) | |
10.12*
|
Amendment to Mr. Henderson’s Performance Option Agreement (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.13*
|
Amendment to Employment Agreement between Imation and Bruce Henderson (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on March 3, 2006) | |
10.14*
|
Imation 1996 Employee Stock Incentive Program (incorporated by reference to Exhibit 10.8 to Registration Statement on Form 10, No. 1-14310) | |
10.15*
|
1996 Directors Stock Compensation Program, as amended May 8, 2002 (incorporated by reference to Exhibit 10.1 of Imation’s Form 10-Q for the quarter ended June 30, 2002) | |
10.16*
|
Imation 2000 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 2003) | |
10.17*
|
Form of Restricted Stock Award Agreement between Imation and Frank Russomanno (incorporated by reference to Exhibit 10.12 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.18*
|
Description of Compensatory arrangement between Imation and Frank Russomanno (incorporated by reference to Imation’s Form 8-K Current Report filed on November 14, 2006) | |
10.19*
|
Form of 2000 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.9 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.20*
|
Amendment to 2000 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.8 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.21*
|
Form of Amendment to 2000 Employee Stock Incentive Plan Restricted Stock Award Agreements — Executive Officer (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.22*
|
Form of 2000 Stock Incentive Plan Stock Option Agreement — Executive Officers (incorporated by reference to Exhibit 10.11 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.23*
|
Form of 2000 Stock Incentive Plan Stock Option Agreement — Employees (incorporated by reference to Exhibit 10.10 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.24*
|
Form of Restricted Stock Award Agreement — Employees 2004 (incorporated by reference to Exhibit 10.1 of Imation’s Form 10-Q for the quarter ended September 30, 2004) | |
10.25*
|
Form of Restricted Stock Award Agreement — Executive Officers 2004 (incorporated by reference to Exhibit 10.2 of Imation’s Form 10-Q for the quarter ended September 30, 2004) | |
10.26*
|
Form of Stock Option Agreement — Employees 2004 (incorporated by reference to Exhibit 10.3 of Imation’s Form 10-Q for the quarter ended September 30, 2004) | |
10.27*
|
Form of Stock Option Agreement — Executive Officers 2004 (incorporated by reference to Exhibit 10.4 of Imation’s Form 10-Q for the quarter ended September 30, 2004) | |
10.28*
|
Imation 2005 Stock Incentive Plan, as amended November 9, 2005 (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on November 16, 2005) | |
10.29*
|
Imation 2005 Stock Incentive Plan Stock Option Agreement — Employees (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.30*
|
Imation 2005 Stock Incentive Plan Stock Option Agreement — Executive Officers (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.31*
|
Form of Amendment to 2005 Stock Incentive Plan Option Agreements — Executive Officer (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
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| Number | Description of Exhibit | |
10.32*
|
Imation 2005 Stock Incentive Plan Stock Option Agreement — Directors (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.33*
|
Amendment to 2005 Stock Incentive Plan Stock Option Agreement — Directors (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on November 16, 2005) | |
10.34*
|
Imation 2005 Stock Incentive Plan Restricted Stock Award Agreement — Employees (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.35*
|
Imation 2005 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.36*
|
Form of Amendment to 2005 Stock Incentive Plan Restricted Stock Award Agreements — Executive Officer (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.37*
|
Imation 2005 Stock Incentive Plan Restricted Stock Award Agreement — Directors (incorporated by reference to Exhibit 10.7 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.38*
|
Amendment to 2005 Stock Incentive Plan Restricted Stock Award Agreement — Directors (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on November 16, 2005) | |
10.39*
|
Form of Amendment to 2004 and 2005 Executive Officer Option Agreements under the 2000 Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.40*
|
Form of Amendment to 2005 Stock Option Agreements — Non-Employee Directors (incorporated by reference to Exhibit 10.7 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.41*
|
Form of Non-Employee Director Option Agreement (incorporated by reference to Exhibit 10.12 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.42*
|
Form of Amendment to 2005 Restricted Stock Award Agreements — Non-Employee Directors (incorporated by reference to Exhibit 10.8 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.43*
|
Form of Non-Qualified Stock Option Agreement for Executive Officers under the Imation Corp. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.44*
|
Form of Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.13 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.45*
|
Form of Executive Officer Option Agreement (incorporated by reference to Exhibit 10.10 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.46*
|
Form of Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.11 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.47*
|
Form of Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.13 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.48*
|
Form of Executive Officer Option Agreement (incorporated by reference to Exhibit 10.10 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.49*
|
Form of Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.11 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.50*
|
Imation Corp. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.51*
|
Form of Non-Qualified Stock Option Agreement for Executive Officers under the Imation Corp. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.52*
|
Form of Non-Qualified Stock Option Agreement for Directors under the Imation Corp. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.53*
|
Form of Restricted Stock Agreement for Executive Officers under the Imation Corp. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.54*
|
Form of Restricted Stock Agreement for Directors under the Imation Corp. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.55*
|
Description of 2008 Annual Bonus Plan Target Approval (incorporated by reference to Imation’s Form 8-K Current Report filed on January 25, 2008) | |
10.56*
|
Description of 2009 Annual Bonus Plan Target Approval (incorporated by reference to Imation’s Form 8-K Current Report filed on February 17, 2008) | |
10.57*
|
Form of Amended and Restated Severance Agreement with Executive Officers (incorporated by reference to Imation’s Form 10-K for the year ended December 31, 2007) | |
10.58*
|
Directors Compensation Program, as amended (incorporated by reference to Imation’s Form 10-K for the year ended December 31, 2007) | |
10.59*
|
Imation Excess Benefit Plan (incorporated by reference to Exhibit 10.10 to Registration Statement on Form 10, No. 1-14310) | |
10.60*
|
Employment Offer Letter from Imation Corp. to Mark E. Lucas (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on February 17, 2008) |
93
Table of Contents
| Number | Description of Exhibit | |
21.1
|
Subsidiaries of Imation Corp. | |
23.1
|
Consent of Independent Registered Public Accounting Firm | |
24.1
|
Power of Attorney | |
31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| * | Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| IMATION CORP. |
||||
| By: | /s/ FRANK P. RUSSOMANNO | |||
| Frank P. Russomanno | ||||
| President and Chief Executive Officer | ||||
Date: February 27, 2009
94
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
/s/ FRANK P. RUSSOMANNO
|
President and Chief Executive Officer | February 27, 2009 | ||
| (Principal Executive Officer) | ||||
/s/ PAUL R. ZELLER
|
Vice President and Chief Financial Officer | February 27, 2009 | ||
| (Principal Financial Officer) | ||||
/s/ SCOTT J. ROBINSON
|
Corporate Controller and Chief Accounting Officer | February 27, 2009 | ||
| (Principal Accounting Officer) | ||||
*
|
Director | February 27, 2009 | ||
*
|
Director | February 27, 2009 | ||
*
|
Director | February 27, 2009 | ||
*
|
Director | February 27, 2009 | ||
*
|
Director | February 27, 2009 | ||
*
|
Director | February 27, 2009 | ||
*
|
Director | February 27, 2009 | ||
*
|
Director | February 27, 2009 | ||
*
|
Director | February 27, 2009 | ||
*By:
|
/s/ JOHN L. SULLIVAN | |||
| Attorney-in-fact |
95
Table of Contents
EXHIBIT INDEX
| Exhibit | ||
| Number | Description of Exhibit | |
21.1
|
Subsidiaries of Imation Corp. | |
23.1
|
Consent of Independent Registered Public Accounting Firm | |
24.1
|
Power of Attorney | |
31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
96