GlassBridge Enterprises, Inc. - Annual Report: 2010 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form 10-K

 

 

 

Commission file number: 1-14310

 

 

 

 

IMATION CORP.

(Exact name of registrant as specified in its charter)

 

 

(651) 704-4000

(Registrant’s telephone number, including area code)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     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.  þ

 

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 Exchange Act (check one).

(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 Exchange 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 $9.19 as reported on the New York Stock Exchange on June 30, 2010, was $348.2 million.

 

The number of shares outstanding of the registrant’s common stock on February 24, 2011 was 38,819,639.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Selected portions of registrant’s Proxy Statement for registrant’s 2011 Annual Meeting are incorporated by reference into Part III.

 

 

IMATION CORP.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010

 

TABLE OF CONTENTS

 

 

 

General

 

Imation Corp., a Delaware corporation, is a leading global technology company dedicated to helping people and organizations store, protect and connect their digital world. Our portfolio of data storage and security products, electronics and accessories reaches customers in more than 100 countries through a powerful global distribution network. As used herein, the terms “Imation,” “Company,” ‘‘we,” “us,” or “our” mean Imation Corp. and its subsidiaries unless the context indicates otherwise.

 

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. We subsequently divested all of the non-data storage businesses acquired from 3M Company in connection with the spin-off. These divestitures allowed us to focus 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 then expanded our business into other removable data storage media such as optical media, flash and solid state drives, and removable and external hard disk drives. In 2006, we acquired substantially all of the assets of Memorex International Inc. (Memorex), followed by the acquisition of the TDK Recording Media business (TDK Life on Record) in 2007. In 2007, we also acquired certain assets of Memcorp, Inc. and Memcorp Asia Limited (together Memcorp) used in or relating to the sourcing and sale of consumer electronic products, principally under the Memorex brand name. This acquisition established our foundation in audio and video consumer electronic products. In 2008, we expanded our presence in consumer electronic products with the Xtreme Accessories, LLC (XtremeMac) acquisition, a maker of accessories for Apple consumer electronics products.

 

Our global brand portfolio includes the Imation brand, the Memorex brand, one of the most widely recognized names in the consumer electronics industry and famous for the slogan, “Is it live or is it Memorex?” and the XtremeMac brand. Imation is also the exclusive licensee of the TDK Life on Record brand, one of the world’s leading recording media brands.

 

Our Products

 

We have three major product categories: traditional storage, emerging storage, and electronics and accessories.

 

Traditional Storage

 

Traditional storage products include optical media products, magnetic tape media products and other traditional storage media products.

 

Our optical media products consist of CDs, DVDs and Blu-ray recordable media. We have the leading global market share for recordable optical media. While the overall market for CDs and DVDs is declining as streaming digital, hard disk and flash media replace optical media in some applications such as music and video recording, we have increased our market share through acquisitions and by execution of our optical brand consolidation strategy. We sell high capacity Blu-ray discs which are used primarily for recording high-definition video content. Our recordable optical media products are sold through a variety of retail and commercial distribution channels and sourced from manufacturers primarily in Taiwan and India. Optical storage capacities range from 650 megabyte CD-R (recordable) and CD-RW (rewritable) optical discs to 9.4 gigabyte (GB) double-sided DVD optical discs and Blu-ray discs with 25GB to 100GB of capacity. Our optical media is sold throughout the world under brands we own or control, including Imation, Memorex and TDK Life on Record, and under a distribution agreement for the Hewlett Packard brand.

 

Our magnetic tape media products are used for back-up, business and operational continuity planning, disaster recovery, near-line data storage and retrieval and for cost-effective mass and archival storage. Major application areas for magnetic tape products include enterprise data centers, network servers, and small to medium sized businesses. Native capacity of our tape products range from less than 10GB up to 1.6 terabytes (TB) per cartridge. We enjoy a leading market share, a significant intellectual property portfolio, a solid industry reputation, and strong relationships with key original equipment manufacturers (OEMs). Many of our legacy tape formats are proprietary or semi-proprietary and have higher gross profit margins than our other products. Our magnetic tape products are sold throughout the world under various brands. We also have agreements under which we distribute certain products under other brands, including IBM

and Oracle Storage Tek. We also sell data protection products, such as the DataGuard rf^tm Tape Tracking System and the Secure Scan system under the Imation brand. These products are designed to help large Fortune 1000 companies track and monitor the location and health of the data cartridges in their extensive libraries.

 

Other traditional storage products include primarily optical drives and audio and video tape media.

 

Emerging Storage

 

Emerging storage products include USB flash drives, removable hard disk drives and external hard disk drives. We source these products from manufacturers primarily in Asia and sell them through a variety of retail and commercial distribution channels around the world. USB flash drives have capacities ranging from 1GB up to 64GB and capacities continue to increase as new products are introduced. These products are sold throughout the world under our Imation, Memorex and TDK Life on Record brands. Our Defender^tm collection includes flash drives and external hard drives designed to meet the most stringent security standards to protect data at rest with Federal Information Processing Standard (FIPS) validation, password and biometric authentication. The Imation RDX^tm removable hard disk cartridge is a high-capacity, rugged and removable 2.5-inch hard disk drive cartridges with 160GB to 1TB capacities.

 

Electronics and Accessories

 

Our electronics and accessories consist of CD players, alarm clocks, portable boom boxes, MP3 players, Apple iPad^®, iPod^® and iPhone^® accessories, headphones, speakers and gaming accessories sold under the Memorex, TDK Life on Record and XtremeMac brands. The portfolio continues to evolve with consumer demand and with development of our brands. We design products to meet user needs and source these products from manufacturers throughout Asia.

 

The table below describes our revenue by product category:

 

 

Our Brands

 

The Imation brand has been at the forefront of data storage and digital technology since inception. Imation brand products include recordable CDs, DVDs and Blu-ray discs, magnetic tape media, flash products and hard disk drives. Imation brand products are sold throughout the world and target the commercial user and individual consumer.

 

The Memorex brand was acquired by Imation in 2006. Memorex brand products include recordable CDs, DVDs and Blu-ray discs, CD players, alarm clocks, portable boom boxes, iPod and iPhone accessories, headphones, speakers and gaming accessories. Memorex brand products are sold primarily in North America.

 

The rights to the TDK Life on Record brand were acquired by Imation in 2007 under an exclusive long-term license from TDK Corporation (TDK). TDK Life on Record brand products include recordable CDs, DVDs and Blu-ray discs, flash drives, tape cartridges, headphones and computer speakers which are sold to commercial customers and individual consumers. TDK Life on Record brand products are sold throughout the world.

The XtremeMac brand was acquired by Imation in 2008. XtremeMac brand products include cases, chargers and audio solutions to protect, power and play Apple iPad, iPod, iPhone and other devices. XtremeMac products are developed for Apple enthusiasts and are available worldwide.

 

Business Segments

 

Our business is organized, managed and internally and externally reported as segments differentiated by the regional markets we serve: Americas, Europe, North Asia and South Asia. Each of these geographic segments has responsibility for selling all of our product lines.

 

The Americas segment, our largest segment by revenue, includes North America, Central America and South America. The United States represents the largest current market for our products. It has a great variety and sophistication of distribution channels including value-added resellers, OEMs, retail outlets, mass merchants and on-line resellers. The countries in South America and the Caribbean represent potential growth markets with increasing penetration of Information Technology (IT) in the commercial and consumer markets.

 

The Europe segment includes Europe and parts of Africa. Western Europe exhibits traits similar to North America in terms of overall breadth of product offerings, high penetration of end user markets and breadth and sophistication of distribution channels. Emerging markets in Eastern Europe represent potential growth markets for our products as IT end user and consumer markets grow.

 

North Asia is our second largest segment by revenue, and includes Japan, China, Hong Kong, Korea and Taiwan. It has the widest diversity of languages, cultures and currencies of any of our segments. Japan is the single largest market in the segment and is similar to North America and Western Europe in terms of overall penetration of IT into the market, though its distribution channels are less developed than those of other regions.

 

The South Asia segment includes Australia, Singapore, India, the Middle East and parts of Africa. It also has a wide diversity of languages, cultures and currencies and is similar to North America and Western Europe in terms of overall penetration of IT into the market, though its distribution channels are less developed.

 

The chart below breaks out our 2010 revenue by segment:

 

 

See Note 14 to the Consolidated Financial Statements for further information regarding our business segments and geographic information.

 

Customers, Marketing and Distribution

 

Our products are sold to businesses and individual consumers. No one customer constituted 10 percent or more of our revenue in 2010, 2009 or 2008.

Our products are sold through a combination of distributors, wholesalers, value-added resellers, OEMs and retail outlets. Worldwide, approximately 52 percent of our 2010 revenue came from distributors, 45 percent came from the retail channel and 3 percent came from OEMs. We maintain a company sales force to generate sales of our products around the world.

 

Market and 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 product design, 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 recordable optical media include Sony, Maxell and Verbatim brands. Our primary competitors in flash media include SanDisk, Lexar, PNY and Kingston brands. Our primary competitors in magnetic tape media include Fuji, Sony and Maxell brands. Our primary competitors in external and removable hard drives are Western Digital and Seagate. While the parent companies that own these brands compete in the removable data storage media market, most 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 we held a leading market share in optical and magnetic products with more than one-third of those markets. We estimate that we held a market share in flash and removable and external hard disk products of less than two percent.

 

While demand for data storage capacity is expected to grow, 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 a lower cost per gigabyte and a decline in actual number of units of media shipped. In addition, these non-proprietary formats experience greater price competition than proprietary formats. The market for non-proprietary format tape continues to gain share against proprietary formats and is typically more competitive with lower gross margins than proprietary formats. These factors inhibit the overall revenue growth of the industry. In addition, lower cost disk and storage 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 contribute over time to a decline in the size of the total tape media market and a shift in the mix of total tape revenue toward lower margin open formats.

 

The removable flash media market is competitive with highly variable price swings driven by NAND chip manufacturing volume 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.

 

Consumer electronic products are sold based on a variety of factors, including brand and reputation, product features and designs, distribution coverage, innovation and price. Our competitors in the consumer electronic products market consist of numerous manufacturers and brands. Our portion of the United States consumer electronics market share is currently less than one percent. 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.

 

Manufacturing

 

We currently manufacture certain magnetic tape media formats. We contract for the manufacturing of all other products we sell and distribute from a variety of third-party providers that manufacture predominately outside the United States. We seek to differentiate our products through unique designs, product positioning, packaging, merchandising and branding.

 

On January 13, 2011, our Board of Directors approved a restructuring plan to discontinue tape coating operations at our Weatherford, Oklahoma facility by April 2011 and subsequently close the facility. We signed a strategic agreement with TDK, a related party, to jointly develop and manufacture magnetic tape technologies. Under the agreement, we will

collaborate on the research and development of future tape formats in both companies’ research centers in the U.S. and Japan, while consolidating tape coating operations to the TDK Group Yamanashi manufacturing facility.

 

In 2008, we ceased manufacturing operations at both the Wahpeton, North Dakota facility and the Camarillo, California facility and either ended or outsourced manufacturing activities occurring in those locations by the end of that year.

 

Raw Materials and Other Purchased Products

 

Until the assumption of manufacturing by TDK on April 1, 2011, 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 increase 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 our 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, 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), which allows us 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 (2017 in the case of headphones and speakers) or earlier in the event of a material breach of the Trademark License Agreement, specific change of control events or default by Imation. The Supply Agreement will continue until the later of 2012 or for so long as TDK manufactures any of the products.

 

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 consumer 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, Development and Engineering

 

Development and timely introduction of new 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 and source products that meet market requirements. We are also engaged both on our own and in collaboration with other organizations in certain research programs related to future generations of magnetic tape that do not yet have specific commercialized products in the market. Our research and development expense was $16.4 million, $20.4 million and $23.6 million for 2010, 2009 and 2008, respectively. In 2011, we expect additional research and development costs related to our strategic focus on data protection, storage hardware, removable hard drive systems and related software. As noted above, we signed a strategic agreement with TDK to jointly develop and manufacture magnetic tape technologies. Under the agreement, we will collaborate on the research and development of future tape formats in both companies’ research centers in the U.S. and Japan, while consolidating tape coating operations to the TDK Group Yamanashi manufacturing facility.

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. The trademark license agreements will continue unless terminated by TDK no earlier than 2032 (2017 in the case of headphones and speakers) or earlier in the event of a material breach of the Trademark License Agreement, specific change of control events or default by Imation.

 

During 2010, we were awarded 12 United States patents and at the end of the year held over 275 patents in the United States.

 

Employees

 

At December 31, 2010, we employed approximately 1,115 people worldwide, with approximately 515 employed in the United States and approximately 600 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, 2010, 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.

 

International Operations

 

Approximately 57 percent of our total 2010 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 by application and product category in different parts of the world. We do not own manufacturing facilities outside of the United States. See Note 14 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 25, 2011 is set forth below:

 

Greg J. Bosler, age 49, is Senior Vice President of Global Business Management, a position he has held since October 2010. From May 2010 to October 2010 he was Vice President, Americas, and from January 2009 to April 2010 he was Vice President, Americas Consumer. Prior to joining Imation in January 2009, he was with TTE Corporation (a global consumer electronics manufacturer) where he held the position of Executive Vice President, North America Business Center from August 2004 until February 2008. Prior to that, Mr. Bosler held a series of senior sales and general management positions at Thomson Inc., Pioneer Electronics (USA) and Duracell Inc.

 

James C. Ellis, age 53, 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 and General Manager Global Product Strategy from January 2005 to December 2006. Prior to joining Imation, he held various business and technical positions with 3M Company.

 

Dr. Subodh Kulkarni, age 46, is Senior Vice President, OEM and Emerging Business, and Chief Technology Officer, a position he has held since August 2009. He has been with Imation since spin-off in July 1996. Prior to assuming his current responsibilities, he served as Vice President, Global Commercial Business, R&D and Manufacturing, from August 2007 to August 2009. He was appointed Vice President, R&D and Manufacturing in October 2006, 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 56, is President, Chief Executive Officer and a member of our Board of Directors, positions he has held since May 2010. He was President and Chief Operating Officer from March 2009 through May 2010. Prior to joining Imation, he served as Chairman and Chief Executive Officer of Geneva Watch Group, a privately held company that is a leading designer, manufacturer and distributor of watches, pens and clocks under both its own brand and licensed brands, 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 was a member of the Board of Directors of Imation from April 2007 to February 2009 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 in connection with his appointment as President and Chief Operating Officer. Mr. Lucas’ resignation from the Board of Directors was a requirement of his employment.

 

Scott J. Robinson, age 44, is Vice President, Corporate Controller and Chief Accounting Officer. He was appointed Vice President in February 2010 and 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 August 2007. 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 56, 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 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. In January 2011, we announced that Mr. Sullivan will be leaving the Company on May 31, 2011.

 

Paul R. Zeller, age 50, is Senior Vice President and Chief Financial Officer, a position he has held since May 2009. He was Vice President and Chief Financial Officer from August 2004 to May 2009. He has been with Imation since spin-off and held the position of Corporate Controller from May 1998 until August 2004. Prior to joining Imation, he held several accounting management positions with 3M Company.

 

Availability of SEC Reports

 

The Securities and Exchange Commission (SEC) maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including Imation Corp., that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov. We file annual reports, quarterly reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

We also make available free of charge through our website (www.imation.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

 

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.

 

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.  On February 1, 2011, we announced our strategic direction as a technology company focused on growth opportunities in data storage, protection and connectivity. Growth opportunities will be achieved through corporate strategies, product strategies and investment strategies. These strategies require significant investment. If we are not successful in implementing these strategies or if we choose the wrong focus for our strategies, our financial results could be negatively impacted.

 

The future revenue growth of our business depends in part on the development and performance of our new products.  Historically, magnetic and optical products have provided the majority of our revenues. Demand for optical media products is decreasing due to a shift in demand to the use of other media for storing data. While demand for data capacity is expected to increase, removable magnetic media market size is expected to decrease in terms of revenue. We expect new product revenue growth to eventually offset the product revenue declines of our products in mature markets so that our total company revenue will grow. If we are not successful in growing new product revenues, our financial results could be negatively impacted.

 

Our results of operations include our determinations of the amount of taxes owed in the various tax jurisdictions in which we operate and are subject to changes in tax laws and regulations, and to inspection by various tax authorities.  Changes in related interpretations and other tax guidance as well as inspections by tax authorities could materially impact our tax receivables and liabilities and our deferred tax assets and deferred tax liabilities. Additionally, in the ordinary course of business we are subject to examinations by tax authorities in multiple jurisdictions. In addition to ongoing investigations, there could be additional investigations launched in the future by governmental authorities in various jurisdictions and existing investigations could be expanded. While we believe we have adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of our operations means that these risks will continue to exist and additional issues will arise from time to time. Our results may be affected by the outcome of such proceedings and other contingencies that cannot be predicted with certainty.

 

Because of the rapid technology changes in our industry, we may not be able to compete if we cannot quickly develop, source, introduce and deliver 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, actions of competitors or 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 relationships or forge new OEM relationships. There can also be 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.

 

Negative or uncertain global economic conditions could result in a decrease in our sales and revenue and an increase in our operating costs, which could adversely affect our business and operating results.  Negative or uncertain global economic conditions could cause many of our direct and indirect customers to delay or reduce their purchases of our products. Further, many of our customers in OEM, distribution and retail channels rely on credit financing in order to purchase our products. Additionally, some of our suppliers pay us quarterly or annual rebates based on the

amount of purchases we make from them. If negative conditions in the global credit markets prevent our customers’ access to credit, product orders in these channels may decrease, which could result in lower revenue. Likewise, our suppliers may face challenges in obtaining credit, in selling their products or otherwise in operating their businesses. These actions could result in reductions in our revenue, increased price competition and increased operating costs, which could adversely affect our business, results of operations and financial condition.

 

Negative or uncertain global economic conditions increase the risk that we could suffer unrecoverable losses on our customers’ accounts receivable, which would adversely affect our financial results.  We extend credit and payment terms to most of our customers. In addition to ongoing credit evaluations of our customers’ financial condition, we traditionally seek to mitigate our credit risk outside the U.S. by purchasing credit insurance on certain of our accounts receivable balances; however, as a result of the recent uncertainty and volatility in global economic conditions, we may find it increasingly difficult to be able to insure these accounts receivable. We could suffer significant losses if a customer whose accounts receivable we have not insured, or have underinsured, fails and is unable to pay us.

 

We may engage in business combinations that are dilutive to existing stockholders, result in unanticipated accounting charges or otherwise harm our results of operations, and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses.  We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale of assets. Acquisitions made entirely or partially for cash would reduce our cash reserves. We use financial assumptions and forecasts to determine the negotiated price we are willing to pay for an acquisition. If those financial assumptions and/or forecasts are not accurate, the price we pay may be too high, resulting in an inefficient use of cash and future goodwill impairment.

 

No assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Even when an acquired company has already developed and marketed products, there can be no assurance that such products will be successful after the closing and will not cannibalize sales of our existing products, that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such company. Failed business combinations, or the efforts to create a business combination, can also result in litigation.

 

Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies. We may experience delays in the timing and successful integration of acquired technologies and product development, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also result in our entering into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation, subject us to an increased risk of intellectual property and other litigation and increase our expenses. These challenges are magnified as the size of the acquisition increases, and we cannot assure that we will realize the intended benefits of any acquisition. Acquisitions may require large one-time charges and can result in contingent liabilities, adverse tax consequences, substantial depreciation or deferred compensation charges, amortization of identifiable purchased intangible assets or impairment of goodwill, any of which could have a material adverse effect on our business, financial condition or results of operations. If we acquire a business while our market value remains lower than our book value, which was the case as of December 31, 2010 and 2009, accounting rules may require us to expense any goodwill associated with a new acquisition.

 

Volatility of demand and seasonality may result in our inability to accurately forecast our product purchase requirements.  Sales of some of our products are subject to seasonality. For example, sales have typically increased in the fourth quarter of each fiscal year, sometimes followed by significant declines in the first quarter of the following fiscal year. This seasonality makes it more difficult for us to forecast our business, especially in the volatile current global economic environment and its corresponding change in consumer confidence, which may impact typical seasonal trends. If our forecasts are inaccurate, we may lose market share due to product shortages or procure excess inventory or inappropriately increase or decrease our operating expenses, any of which could harm our business, financial condition

and results of operations. This seasonality also may lead to the need for significant working capital investments in receivables and inventory and our need to build inventory levels in advance of our most active selling seasons.

 

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 57 percent of our 2010 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. 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.

 

Our financial success depends upon our ability to source and deliver products to our customers at acceptable quality, volume and cost levels.  We source the manufacture of our products, including magnetic tape products. The manufacture of our magnetic tape products involves complex and precise processes requiring production in highly controlled and clean room environments. If we do not manage these processes effectively, we may significantly hurt our ability to meet our customers’ product volume and quality needs at acceptable 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. 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.

 

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 related costs are determined using actual investment results as well as actuarial valuations that involve several assumptions. Our funding requirements are based on these assumptions in addition to the performance of assets in the pension 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.

 

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 products.

Sudden disruptions to the availability of freight lanes could have an impact on our operations.  We generally ship our products to our customers, and receive shipments from our suppliers, via air or ocean freight. The sudden unavailability or disruption of cargo operations or freight lanes, such as due to labor difficulties or disputes, severe weather patterns or other natural disasters, or political instability, terrorism or civil unrest, could impact our operating results by impairing our ability to timely and efficiently deliver our products.

 

A material change in customer relationships or in customer demand for products could have a significant impact on our business.  Our success is dependent on our ability to successfully offer trade terms that are acceptable to our customers and that 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.  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 our results.

 

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.

 

Additionally, our electronic products segment is subject to allegations of patent infringement by our competitors as well as by non-practicing entities (NPEs), sometimes referred to as “patent trolls,” who may seek monetary settlements from the U.S. consumer electronics industry.

 

If our long-lived assets or any goodwill that we acquire become impaired, it may adversely affect our operating results.  Negative or uncertain global economic conditions could result in circumstances, such as a sustained decline in our stock price and market capitalization or a decrease in our forecasted cash flows such that they are insufficient, indicating that the carrying value of our long-lived assets or any acquired goodwill may be impaired. If we are required to record a significant charge to earnings in our Consolidated Financial Statements because an impairment of our long-lived assets or any acquired goodwill is determined, our results of operations will be adversely affected.

 

Significant litigation matters could result in large costs.  We are subject to various pending or threatened legal actions in the ordinary course of our business, especially regarding patents related to our consumer electronics products. We are generally indemnified by our suppliers; litigation, however, 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.

 

We may be affected by legal, regulatory, or market responses to actual or perceived global climate change.  Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For example, proposals that would impose mandatory requirements on GHG emissions continue to be considered by policy makers in the territories that we operate. Laws enacted that directly or indirectly affect our production, distribution, packaging, cost of raw materials, fuel, ingredients, and water could impact our business and financial results.

 

The market price of our common stock is volatile.  The market price of our common stock has been, and may continue to be, volatile. Factors such as the following may significantly affect the market price of our common stock:

 

 

 

In addition, general economic conditions may cause the stock market to experience extreme price and volume fluctuations from time to time that particularly affect the stock prices of many high technology companies. These fluctuations often appear to be unrelated to the operating performance of the companies.

 

If we are unable to attract and retain employees and key talent our business and financial results may be materially impacted.  We operate in a highly competitive market for employees with specialized skill, experience and industry knowledge. We plan to add employees as part of our strategy to invest in technology, expand sales and marketing, improve decision making tools in IT and international expansion focused on China. No assurance can be given that we will be able to attract and retain employees and key talent.

 

 

None.

 

 

Our worldwide headquarters is located in Oakdale, Minnesota, in the United States of America. Our principal 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.

 

 

 

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 has historically been no material losses related to such indemnifications. In accordance with accounting principles generally accepted in the United States of America, 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. Additionally, our electronics and accessories business is subject to allegations of patent infringement by our competitors as well as by non-practicing entities (NPEs), sometimes referred to as “patent trolls,” who may seek monetary settlements from us, our competitors, suppliers and resellers. Consequently, as of December 31, 2010, 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, any monetary liability beyond that provided in the Consolidated Balance Sheet as of December 31, 2010 would not be material to our Consolidated Financial Statements.

 

In 2007 SanDisk Corporation (SanDisk) filed a patent infringement action in U.S. District Court, Western District of Wisconsin, against Imation and its subsidiaries and 20 other defendants, relating to flash drives and other solid state memory products, seeking damages for prior sales and an injunction and/or royalties on future sales. SanDisk also filed a complaint with the U.S. International Trade Commission (ITC) against the same defendants, relating to the same patents and products, seeking to block the defendants’ importation of these products into the United States. The U.S. District Court stayed the court proceeding until resolution of the ITC claim. The ITC claim was resolved in the fall of 2009, with SanDisk withdrawing its claims with respect to certain patents and the ITC ruling that the remaining patents were invalid and or not infringed. The U.S. District Court lifted the stay of its proceedings in the fall of 2009 and one of the patents in the case was withdrawn without prejudice by SanDisk. On May 4, 2010, SanDisk filed an additional patent infringement lawsuit in the U.S. District Court, Western District of Wisconsin, based on seven new patents against Imation and its subsidiaries and one other company named as defendants seeking an injunction and damages.

 

On January 11, 2011, we signed a patent cross-license agreement with SanDisk to settle the two patent cases filed by SanDisk in Federal District Court against our flash memory products, including USB drives and solid state disk (SSD) drives. Under the terms of the cross-license, we will pay SanDisk royalties on certain flash memory products that were previously not licensed. The specific terms of the cross-license are confidential. The cross-license agreement requires us to make a one time payment of $2.6 million. The one time payment was recognized in the fourth quarter of 2010 and recorded as litigation settlement expense in the Consolidated Statements of Operations.

 

On June 19, 2009, Advanced Research Corp. (ARC) sued Imation for breach of contract relating to a supply agreement under which we purchase our requirements for magnetic heads to write servo patterns on magnetic tape prior to sale of the finished cartridges, requesting the court to order that Imation pay damages and return the purchased heads to ARC. ARC is alleging that we misrepresented the volumes of heads that we would require, and that ARC invested in a new facility in reliance on our forecasts. ARC has claimed damages in excess of $27.2 million and we have filed counterclaims against ARC for its failure to comply with the supply agreement and other agreements, claiming damages in excess of $8.5 million. In March, 2010, both Imation and ARC filed motions for partial summary judgment, which motions were denied by the court on July 6, 2010. On July 27, 2010, the court granted ARC’s motion to amend its complaint to add a claim for trade secret misappropriation. On December 20, 2010, the court provided Imation ten weeks to conduct additional discovery relating to ARC’s new claim. A trial date has been set for October 2011. Imation believes ARC’s claims are without merit.

 

See Note 15 to the Consolidated Financial Statements for further information.

 

 

 

(a) — (b)

 

As of February 24, 2011, there were 38,819,639 shares of our common stock, $0.01 par value (common stock), outstanding and held by 21,785 shareholders of record. Our common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange under the symbol “IMN.” No dividends were declared or paid during 2010 or 2009.

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.

 

 

(c) Issuer Purchases of Equity Securities

 

No shares were repurchased by the Company during the fourth quarter of 2010.

 

Stock Performance Graph

 

The graph and table below compare the cumulative total shareholder return on our common stock for the last five fiscal years with the cumulative total return of the S&P MidCap 400 Index and ArcaEx Tech 100 Index, formerly known as the Pacific Stock Exchange High Technology Index, over the same period. The graph and table assume the investment of $100 on December 31, 2005 in each of our common stock, the S&P MidCap 400 Index and the ArcaEx Tech 100 Index and reinvestment of all dividends.

 

 

 

The stock performance graph shall not be deemed soliciting material or to be filed with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, nor shall it be incorporated by reference into any past or future filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically request that it be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act of 1933 or the Exchange Act.

 

 

 

 

 

 

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 technology company dedicated to helping people and organizations store, protect and connect their digital world. Our portfolio of data storage and security products, electronics and accessories reaches customers in more than 100 countries through a powerful global distribution network. We seek to differentiate our products through unique designs, product positioning, packaging, merchandising and branding.

 

Strategy

 

Our vision, as a technology company focusing on targeted applications, will leverage our deep data storage core while addressing opportunities for growth in emerging storage, electronics and accessories.

 

 

Factors Affecting Comparability of our Financial Results

 

Discontinued Operations

 

As a result of the wind down of our Global Data Media (GDM) business joint venture during 2009 it was determined that the GDM operations and cash flows would be eliminated from our ongoing operations and that we would not have any significant continuing involvement in the operations of GDM after the exit from the joint venture. As a result, these operations are presented in our Consolidated Financial Statements as discontinued operations for all periods presented. GDM was a joint venture created to market optical media products with Moser Baer India Ltd. (MBI). Since the inception of the joint venture in 2003, we held a 51 percent ownership in the business. As the controlling shareholder, we have historically consolidated the results of the joint venture in our financial statements. GDM was included partially in the Americas and Europe segments. Operating results of the GDM business joint venture are included as discontinued operations for the current period and all prior periods presented in the Consolidated Statements of Operations. See Note 4 to the Consolidated Financial Statements for further information.

 

Executive Summary

 

2010 Consolidated Results of Operations

 

 

2010 Cash Flow/Financial Condition

 

 

Results of Operations

 

Net Revenue

 

 

Our worldwide 2010 revenue decline, compared with 2009, was driven by price erosion of ten percent and volume declines of three percent, offset partially by a favorable foreign currency impact of one percent. From a product perspective, the revenue decrease was due to declines in traditional storage products of $191.8 million, including $118.7 million from optical products and $58.2 million from magnetic products, as well as $38.9 million from electronics and accessories driven in part by planned rationalization of our video products, offset partially by increases in emerging storage products of $42.1 million.

 

Our worldwide 2009 revenue decline, compared with 2008, was driven by price erosion of ten percent, volume declines of five percent and an unfavorable foreign currency translation of two percent. From a product perspective, the revenue decrease was due to declines in traditional storage products of $284.9 million, including $113.7 million from optical products and $142.7 million from magnetic products, as well as $60.7 million from electronics and accessories, offset partially by increases in emerging storage products of $14.1 million.

 

Gross Profit

 

 

Our gross profit declined in 2010, compared with 2009, due primarily to lower revenues for traditional storage products and inventory write-offs of $14.2 million which were part of our 2011 manufacturing redesign restructuring plan, offset partially by gross profit increases in emerging storage products of $9.5 million and electronics and accessories of $4.2 million.

 

Our gross margin decreased in 2009, compared with 2008, primarily driven by lower revenues and lower margins in traditional storage products.

 

Selling, General and Administrative (SG&A)

 

 

Our 2010 decrease in SG&A expense, compared with 2009, was due to lower legal expenses of $10.5 million related to the Philips litigation settled in July 2009 and cost control actions. As a percentage of revenue, our SG&A remained flat compared with 2009. During 2011 we plan to invest in IT decision making tools, expand sales and marketing coverage for the value added reseller and OEM channels and expand our international operations particularly in China. These investments will increase our SG&A expense annually.

 

Our 2009 decrease in SG&A expense, compared with 2008, was due primarily to ongoing restructuring and cost control actions along with reduced litigation expense due to the Philips litigation settlement.

Research and Development (R&D)

 

 

The decrease in our 2010 and 2009 R&D expense was due to continued cost savings from restructuring activities and cost control actions. R&D expense as a percent of revenue remained relatively flat compared with 2009 and 2008. During 2011 we plan to invest in additional R&D activities in four core product technology areas: secure storage, scalable storage, wireless/connectivity and magnetic tape. These investments will result in an increase of more than 30 percent in R&D annually.

 

Litigation Settlement

 

 

A charge of $2.6 million was recognized in the fourth quarter of 2010 and is included in litigation settlement expense. On January 11, 2011, we signed a patent cross-license agreement with SanDisk to settle the two patent cases filed by SanDisk in Federal District Court against our flash memory products, including USB drives and solid state disk (SSD) drives. Under the terms of the cross-license, we will pay SanDisk royalties on certain flash memory products that were previously not licensed. The specific terms of the cross-license are confidential. The cross-license agreement requires us to make a one time payment of $2.6 million. The one time payment was recognized in the fourth quarter of 2010 and recorded as litigation settlement expense in the Consolidated Statements of Operations. See Note 15 in the Consolidated Financial Statements for further information about this litigation settlement.

 

A litigation settlement charge of $49.0 million was recorded in 2009. We entered into a confidential settlement agreement ending all legal disputes with Philips Electronics N.V., U.S. Philips Corporation and North American Philips Corporation (collectively, Philips). We had been involved in a complex series of disputes in multiple jurisdictions regarding cross-licensing and patent infringement related to recordable optical media. The settlement provided resolution of all claims and counterclaims filed by the parties without any finding or admission of liability or wrongdoing by any party. As a term of the settlement, we agreed to pay Philips $53.0 million over a period of three years. Based on the present value of these settlement payments, we recorded a charge of $49.0 million in the second quarter of 2009. We made payments of $8.2 million and $20.0 million in 2010 and 2009, respectively. Interest accretion of $1.5 million and $0.8 million was recorded in 2010 and 2009, respectively. The interest accretion is included in the interest expense on our Consolidated Statements of Operations.

 

Goodwill Impairment

 

 

We made certain changes to our business segments effective in the second quarter of 2010. Our reporting units for goodwill are our operating segments with the exception of the Americas segment which is further divided between the Americas-Consumer and Americas-Commercial reporting units as determined by sales channel. As a result of the segment change in the second quarter of 2010, the $23.5 million of goodwill which was previously allocated to the Electronics Products segment was merged into the Americas-Consumer reporting unit. See Note 14 to the Consolidated Financial Statements for further information about the changes of our segments. The Americas-Consumer reporting unit had a fair value that was significantly less than its carrying amount prior to the combination, which is a triggering event for an interim goodwill impairment test. Goodwill is considered impaired when its carrying amount exceeds its implied fair value. A two-step impairment test was performed to identify a potential impairment and measure an impairment loss to be recognized.

Based on the goodwill test performed in the second quarter of 2010, we determined that the carrying amount of the reporting unit significantly exceeded its fair value and that the $23.5 million of goodwill was fully impaired. See Note 6 to the Consolidated Financial Statements for further information about the goodwill impairment.

 

During the fourth quarter of 2008, in connection with our annual goodwill impairment test, impairments were identified and recorded in an aggregate amount of $32.4 million related to the Americas-Commercial, Asia Pacific and Electronic Products reporting units. We also recorded $2.3 million of goodwill impairments during the fourth quarter of 2008 related to the Americas-Commercial reporting unit included in discontinued operations in our Consolidated Statements of Operations. During the fourth quarter of 2008, the continuing and accelerating deterioration of general economic conditions contributed to shortfalls in our anticipated fourth quarter 2008 operating profitability and 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.

 

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.

 

Restructuring and Other

 

The components of our restructuring and other expense included in the Consolidated Statements of Operations were as follows:

 

 

2011 Manufacturing Redesign Restructuring Program

 

On January 13, 2011, the Board of Directors approved a 2011 manufacturing redesign restructuring program of up to $55 million to rationalize certain product lines and discontinue tape coating operations at our Weatherford, Oklahoma facility by April 2011 and subsequently close the facility. We signed a strategic agreement with TDK to jointly develop and manufacture magnetic tape technologies. Under the agreement, we will collaborate on the research and development of future tape formats in both companies’ research centers in the U.S. and Japan, while consolidating tape coating operations to the TDK Group Yamanashi manufacturing facility.

 

During 2010 we recorded severance and related expenses of $3.2 million and non-cash asset impairment charges of $31.2 million, primarily related to the Weatherford facility. We also recorded non-cash inventory write-offs of $14.2 million related to this program, which is included in cost of goods sold on our Consolidated Statements of Operations. Approximately $2 million of other costs will be recorded in 2011 as incurred.

 

2011 Corporate Strategy Restructuring Program

 

On January 31, 2011, the Board of Directors approved the 2011 corporate strategy restructuring program to rationalize certain product lines and increase efficiency and gain greater focus in support of our go-forward strategy. Major components of the program include charges associated with certain benefit plans, improvements to our global sourcing and distribution network and costs associated with both further rationalization of our product lines as well as evolving skill sets to align with our new strategy.

During 2010 we recorded severance and related expenses of $3.4 million and pension curtailment charge of $0.3 million related to this program. In the future, we expect to incur severance and related expenses of approximately $11 million, charges associated with certain benefit plans of approximately $11 million, lease termination expenses of approximately $5 million, and other charges of approximately $5 million related to this program. The restructuring related to this program is expected to be substantially complete during 2012.

 

2008 Corporate Redesign Restructuring Program

 

During 2010, we recorded $6.4 million of severance and related expenses and $1.7 million of lease termination costs related to our 2008 corporate redesign restructuring program. This program was initiated during the fourth quarter of 2008 and aligned our cost structure by reducing SG&A expenses. We reduced costs by rationalizing key accounts and products and by simplifying our corporate structure globally. The program was substantially complete as of December 31, 2010.

 

During 2009, we recorded $11.2 million of severance and related expenses and $0.1 million of lease termination costs related to this program.

 

During 2008, we recorded $4.9 million of severance and related expenses and $0.5 million of lease termination costs related to this program.

 

Prior Programs Substantially Complete

 

During 2009, we recorded $0.9 million of lease termination costs 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. In order to partially mitigate projected declines in tape gross profits in future years, we ended manufacturing at our Camarillo plant and exited the facility during 2008. The 2008 cost reduction restructuring program also included our decision to consolidate the Cerritos, California business operations into Oakdale, Minnesota. During 2009, we consolidated the previous Cerritos activities into a single headquarters location in order to achieve better focus, gain efficiencies across brands and channels and reduce cost. We recorded $0.3 million of income through the reversal of lease termination accruals related to previously announced programs.

 

During 2008, we recorded $5.2 million of severance and related expenses and lease termination costs of $0.2 million, related to our 2008 cost reduction restructuring program. We recorded $5.3 million for severance and related expenses under our TDK Recording Media and 2007 cost reduction restructuring programs, which began in 2007. We also recorded $1.8 million of lease termination costs related to these programs. During 2008 we recorded $0.3 million of severance and related expenses and $2.3 million of lease termination costs related to other programs which are substantially complete.

 

Other

 

We recorded pension settlement and curtailment losses of $2.8 million, $11.7 million and $5.7 million in 2010, 2009 and 2008, respectively, within restructuring and other expense in the Consolidated Statements of Operations, mainly as a result of the downsizing associated with our restructuring activities. See Note 9 to the Consolidated Financial Statements for further information regarding pension settlements and curtailments.

 

We incurred net asset impairment charges of $31.2 million (as noted above), $2.7 million and $5.0 million in 2010, 2009 and 2008, respectively, related mainly to the abandonment of certain manufacturing and R&D assets as a result of our restructuring activities.

 

During 2010, other expenses of $2.4 million included costs associated with the announced retirement of our former Vice Chairman and Chief Executive Officer, Mr. Frank Russomanno, including a severance related charge of $1.4 million and a charge of $0.8 million related to the accelerated vesting of his unvested options and restricted stock.

 

We recorded a $2.3 million TDK post-closing purchase price adjustment in 2008 associated with the finalization of certain acquisition-related working capital amounts as negotiated with TDK. See Note 4 to the Consolidated Financial Statements for further information.

 

See Note 7 to the Consolidated Financial Statements for further information regarding our various restructuring programs and other expenses.

Operating Loss

 

 

Our operating loss increased in 2010, compared with 2009, due to lower revenues resulting in lower gross profit of $37.6 million offset by lower operating expenses of $27.2 million and litigation settlement expenses of $46.4 million. The 2010 operating loss was significantly impacted by restructuring and other expenses of $51.1 million, a charge for goodwill impairment of $23.5 million, asset impairment of $31.2 million and inventory write-offs of $14.2 million as well as a litigation settlement charge of $2.6 million.

 

Our 2009 operating loss was significantly impacted by the Philips litigation settlement charge of $49.0 million and restructuring and other charges of $26.6 million.

 

Our 2008 operating loss was significantly impacted by goodwill impairment charges of $32.4 million and restructuring and other charges of $28.9 million.

 

Other Expense

 

 

Our interest income remained relatively constant in 2010, compared with 2009, primarily due to higher average cash balances during the year, offset by reduced interest rates year-over-year. Our interest expense increased in 2010, compared with 2009, due to increased amortization of capitalized fees related to securing our credit facility of $1.1 million and increased imputed interest related to our liability for the Philips litigation settlement of $0.7 million, offset partially by reduced interest on borrowings of $0.5 million. Our other expense net decreased in 2010, compared with 2009, due to declines in foreign currency losses of $4.5 million and a $3.0 million reserve for a note receivable from one of our commercial partners recorded in 2009, offset partially by a recovery of $2.0 million in 2010.

 

Our interest income decreased in 2009, compared with 2008, primarily due to lower average cash balances for the first three quarters of the year and lower interest rates year-over-year. Our interest expense increased in 2009, compared with 2008, primarily due to accretion of expense related to the Philips litigation settlement obligation and amortization of capitalized fees related to securing our credit facility. Our other expense, net consisting predominately of gains and losses on foreign currency transactions, increased in 2009 compared with 2008 primarily due to a $3.0 million reserve for a note receivable offset partially by a $1.5 million decrease in foreign currency losses.

 

Income Tax Provision (Benefit)

 

 

 

NM - Not meaningful

 

The change in our effective rate for 2010, as compared to 2009, was primarily due to the establishment of a valuation allowance on our U.S. deferred tax assets. During the fourth quarter of 2010, we recognized significant restructuring charges related to our U.S. operations. Due to these charges and cumulative losses incurred in recent years, we were no longer able to conclude that it was more-likely-than-not that our U.S. deferred tax assets would be fully realized. Therefore, during 2010, we recorded a charge to establish a valuation allowance of $105.6 million related to our U.S. deferred tax assets. The valuation allowance charge is included in income tax provision on our Consolidated Statement of Operations.

 

Other items that had an impact on the 2010 effective tax rate included a change in the state tax effective rate, reserves for uncertain tax positions, foreign earnings subject to U.S. taxation, and changes in the mix of income by jurisdiction. See Note 10 to the Consolidated Financial Statements for further information.

 

The uncharacteristically low effective tax rate in 2008 was due to permanent differences for tax purposes including a non-cash goodwill impairment charge and the payment of dividends treated as a return of capital. There was no such activity in 2009 and, as a result, the effective tax rate is much closer to the statutory rate. Other items that have an impact on the 2009 effective tax rate include an increase in the state tax effective rate, additional reserves for uncertain tax positions and the change in proportion of income by jurisdiction.

 

As of December 31, 2010 and 2009 we had valuation allowances of $127.4 million and $22.9 million, respectively, to account for deferred tax assets we have concluded are not considered to be more-likely-than-not to be realized in the future due to our cumulative losses in recent years. The deferred tax assets subject to valuation allowance include certain U.S. and foreign operating loss carryforwards, certain U.S. deferred tax deductions, and certain tax credit carryforwards.

 

Segment Results

 

During the second quarter of 2010, we realigned our corporate segments and reporting structure with how the business is managed. As part of this reorganization, we combined our Electronic Products segment with our Americas segment, and we separated our Asia Pacific segment into North Asia and South Asia regions. Each of these segments has responsibility for selling all of our product lines.

 

 

We revised the segment information for the prior year within this Form 10-K to conform to the new presentation. 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 litigation settlement expense, goodwill impairment expense, research and development expense, corporate expense, stock-based compensation expense and restructuring and other expenses which are not allocated to the segments.

 

Information related to our segments is as follows:

 

Americas

 

 

The Americas segment was our largest segment comprising 48.8 percent, 50.6 percent and 50.6 percent of our total consolidated revenue in 2010, 2009 and 2008, respectively. The Americas segment revenue decreased in 2010, compared

with 2009, due to price declines of nine percent and volume declines of six percent. From a product perspective, we experienced lower revenues from traditional storage products of $82.2 million and electronics and accessories of $48.8 million, offset partially by increases in emerging storage products of $8.8 million. Operating income decreased in 2010, compared with 2009, driven primarily by lower gross profits from traditional storage products, offset partially by higher gross margins on emerging storage products. Operating income as a percentage of revenue decreased in 2010, compared with 2009, driven primarily by lower revenue and lower gross margin percentages on traditional storage products, offset partially by lower SG&A.

 

The Americas segment revenue decreased in 2009, compared with 2008, due to price declines of 11 percent and volume declines of 6 percent. From a product perspective, we experienced revenue declines across all product categories. Operating income decreased in 2009, compared with 2008, driven primarily by lower gross profits in traditional storage products, specifically magnetic products. Operating income decreased in 2009, compared with 2008, due primarily to declining revenues and gross margins in traditional storage products, offset partially by lower SG&A expense.

 

Europe

 

 

 

NM - Not meaningful

 

The Europe segment revenue comprised 19.8 percent, 22.5 percent and 25.4 percent of our total consolidated revenue in 2010, 2009 and 2008, respectively. The Europe segment revenue decreased in 2010 compared with 2009, due to price declines of 5 percent, volume declines of 15 percent and unfavorable foreign currency impacts of 2 percent. From a product perspective, we experienced lower revenues from traditional storage products of $90.2 million, offset partially by increases in emerging storage products of $8.0 million. Operating income decreased in 2010, compared with 2009, driven by the lower revenue on traditional storage products, offset partially by lower SG&A costs.

 

The Europe segment revenue decreased in 2009 compared with 2008, due to price declines of 6 percent, volume declines of 15 percent and unfavorable foreign currency impacts of 6 percent. From a product perspective, we experienced declines in all products except emerging storage products. Operating income decreased in 2009, compared with 2008, driven primarily by lower revenues and by lower gross profits in traditional storage products, offset partially by lower SG&A expense.

 

North Asia

 

 

The North Asia segment revenue comprised 21.6 percent, 18.6 percent and 15.6 percent of our total consolidated revenue in 2010, 2009 and 2008, respectively. The North Asia segment revenue increased in 2010, compared with 2009, due to overall volume increases of 15 percent and favorable foreign currency impacts of 6 percent, offset partially by price erosion of 18 percent. From a product perspective, we experienced higher revenues from emerging storage products of $10.6 million and electronics and accessories of $3.3 million, offset partially by decreases in traditional storage products of $5.5 million. Operating income declined in 2010, compared with 2009, driven by slightly lower margins in traditional storage products.

 

The North Asia segment revenue decreased in 2009, compared with 2008, due to price declines of 19 percent, offset by volume increases of 16 percent and favorable foreign currency impacts of 2 percent. From a product perspective, we

experienced revenue declines in traditional storage products of $17.7 million, offset by increases in emerging storage products of $15.7 million. Operating income as a percentage of revenue declined in 2009, compared with 2008, primarily due to lower gross profits in traditional storage products, offset partially by lower SG&A expense.

 

South Asia

 

 

The South Asia segment revenue comprised 9.8 percent, 8.4 percent and 8.4 percent of our total consolidated revenue in 2010, 2009 and 2008, respectively. The South Asia segment revenue increased in 2010, compared with 2009, due to overall volume increases of six percent and favorable foreign currency impacts of six percent, offset partially by price erosion of eight percent. From a product perspective, we experienced higher revenues from emerging storage products of $14.7 million and electronics and accessories of $4.9 million, offset partially by decreases in traditional storage products of $14.2 million. Operating income increased in 2010, compared with 2009, driven by higher gross margin percentages across all product categories, offset partially by increased SG&A costs.

 

The South Asia segment revenue decreased in 2009, compared with 2008, due to price declines of eight percent, volume declines of six percent and unfavorable foreign currency impacts of three percent. From a product perspective, we experienced revenue declines in traditional storage products of $34.8 million, offset by increases in electronics and accessories of $6.1 million. Operating income as a percentage of revenue declined in 2009, compared with 2008, primarily due to lower gross profits in traditional storage products, offset partially by lower SG&A expense.

 

Corporate and Unallocated

 

 

The corporate and unallocated operating loss includes costs which are not allocated to the business segments in management’s evaluation of segment performance such as litigation settlement expense, goodwill impairment expense, research and development expense, corporate expense, stock-based compensation expense and restructuring and other expense. The operating loss in 2010 included an asset impairment charge of $31.2 million, a goodwill impairment charge of $23.5 million, restructuring and other charges of $19.9 million, inventory write-offs of $14.2 million and a litigation settlement charge of $2.6 million.

 

The operating loss in 2009 included a litigation settlement charge of $49.0 million, restructuring and other charges of $26.6 million and asset impairment charges of $2.7 million.

 

The operating loss in 2008 included goodwill impairment charges of $32.4 million, restructuring and other charges of $28.9 million and asset impairment charges of $5.0 million.

 

Financial Position

 

As of December 31, 2010, our cash and cash equivalents balance was $304.9 million, an increase of $141.5 million compared with December 31, 2009. The increase was primarily attributable to significant progress within our working capital initiatives and earnings before interest, taxes, depreciation and amortization (EBITDA).

 

Accounts receivable days sales outstanding was 57 days as of December 31, 2010, down three days from December 31, 2009. 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 69 days as of December 31, 2010, down six days compared with 75 days as of December 31, 2009. Days of inventory supply is calculated using the current period inventory balance divided by an estimate of the inventoriable portion of cost of goods sold expressed in days. The decrease in days of inventory supply was driven by efforts to reduce inventories.

 

Our other current assets balance as of December 31, 2010 was $74.2 million, a decrease of $90.2 million from $164.4 million as of December 31, 2009. The decrease was primarily due to decreases in taxes receivable of $33.1 million, deferred income taxes of $33.6 and non-trade receivables of $8.2 million.

 

We did not have any goodwill remaining as of December 31, 2010 compared with $23.5 million as of December 31, 2009. The decrease was a result of the goodwill impairment charge of $23.5 million that was recorded in 2010.

 

Our intangible assets balance as of December 31, 2010 was $320.4 million, a decrease of $16.9 million from $337.3 million as of December 31, 2009. The decrease was primarily due to the amortization of intangible assets offset partially by the capitalization of the $5.0 million we paid to ProStor Systems to extend our license agreement with them related to RDX removable hard disk systems.

 

Our accounts payable balance as of December 31, 2010 was $219.2 million, an increase of $17.8 million from $201.4 million as of December 31, 2009. The increase was due to our working capital initiatives which extended payment terms with vendors resulting in an increase in the accounts payable balance.

 

Our other current liabilities balance as of December 31, 2010 was $172.3 million, an increase of $1.8 million from $170.5 million as of December 31, 2009.

 

Our other liabilities balance as of December 31, 2010 was $77.8 million, a decrease of $16.9 million from $94.7 million as of December 31, 2009. The decrease was due primarily to decreases in pension accruals of $9.4 million and litigation settlement accruals of $6.7 million.

 

In some countries, primarily Europe and Canada, the sale of recordable optical media is subject to a private copying levy, which is an extra charge on purchases of these products. Imation collects the levies upon sale, and submits payment of the levies to copyright collective non-government agencies for distribution to content providers as “fair compensation” for the harm caused to them due to private copies made by natural persons of protected works. For several years the amount of the levy in Europe has been in question and the subject of various litigation and law making activities, to which we are not a party. We have continued to accrue the levies but are awaiting resolution before submitting some of the required payments. Depending on final outcome of the various litigation and law making activities, if some amount less than what we have accrued does not need to be paid, this amount will be recorded as a reduction to our cost of goods sold in the period that the resolution is determined.

Liquidity and Capital Resources

 

Cash Flows provided by Operating Activities:

 

 

Cash flows from operating activities can fluctuate significantly from period to period as many items can significantly impact cash flows. In 2010, 2009 and 2008 we contributed $9.9 million, $10.3 million and $7.6 million to our pensions worldwide, respectively. Operating cash outflows included restructuring payments of $9.5 million, $22.3 million and $32.0 million in 2010, 2009 and 2008, respectively, and litigation settlement payments of $8.2 million and $20.0 million in 2010 and 2009, respectively. During 2010 we recorded a non-cash goodwill impairment charge of $23.5 million, asset impairment charges of $31.2 million, inventory impairment charges of $14.2 million and a valuation allowance against our U.S. deferred tax assets of $105.6 million.

 

Cash Flows (used in) provided by Investing Activities:

 

 

In 2010, we paid $5.0 million to extend our license agreement with ProStor Systems related to RDX removable hard disk systems. In 2010, compared with 2009, capital expenditures decreased due to tenant improvements of $2.9 million in 2009 associated with certain leased out office space in our Oakdale, Minnesota headquarters.

 

Proceeds from the sale of assets in 2009 included the sale of our Anaheim, California real estate which netted $12.2 million of cash during the fourth quarter.

 

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.

Cash Flows used in Financing Activities:

 

 

Cash used in financing activities of $1.0 million and $3.2 million during 2010 and 2009, respectively, were due to cash payments made to amend and extend our line of credit. These issuance costs were capitalized in our Consolidated Balance Sheets.

 

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, of which 2.3 million shares remain outstanding as of December 31, 2010. We did not repurchase shares during 2010 or 2009. As of December 31, 2010, we held, in total, 4.2 million shares of treasury stock acquired at an average price of $25.68 per share.

 

No dividends were declared or paid during 2010 and 2009. We paid cash dividends of $0.56 per share or $20.9 million during 2008. Any future dividends are at the discretion of and subject to the approval of our Board of Directors.

 

On March 30, 2006, we entered into a credit agreement (the Credit Agreement) with a group of banks that were party to our prior credit agreement. The Credit Agreement was most recently amended on August 3, 2010 when we entered into a Fourth Amendment to the Credit Agreement (the Fourth Amendment) to add Imation Europe B.V. as a borrower (European Borrower), reduce the borrowing rate 50 basis points and extend the maturity one year. While the amendment did not change the senior revolving credit facility amount of $200 million, it provides for sublimits of $150 million in the United States and $50 million in Europe.

 

Our U.S. obligations under the Credit Agreement as amended (collectively the Amended Credit Agreement) are guaranteed by the material domestic subsidiaries of Imation Corp. (the Guarantors) and are secured by a first priority lien (subject to customary exceptions) on the real property comprising Imation Corp.’s corporate headquarters and all of the personal property of Imation Corp., its subsidiary Imation Enterprises Corp., which is also an obligor under the Credit Agreement, and the Guarantors.

 

Borrowings under the Amended Credit Agreement bore interest through December 31, 2010 at a rate equal to (i) the Eurodollar Rate (as defined in the Amended Credit Agreement) plus 3.00 percent or (ii) the Base Rate (as defined in the Amended Credit Agreement) plus 2.00 percent. Commencing January 1, 2011, the applicable margins for the Eurodollar Rate and the Base Rate became subject to adjustments based on average daily Availability (as defined in the Amended Credit Agreement), as set forth in the definition of “Applicable Rate” in the Credit Agreement. Advances under the U.S. portion of the Credit Facility are limited to the lesser of (a) $150,000,000 and (b) the “U.S. borrowing base.” The U.S. borrowing base is equal to the following:

 

 

 

Our European obligations under the Credit Agreement are secured by a first priority lien on substantially all of the material personal property of the European Borrower. Advances under the European portion of the Credit Facility are limited to the lesser of (a) $50,000,000 and (b) the “European borrowing base.” The European borrowing base calculation is fundamentally the same as the U.S. borrowing base, subject to certain differences to account for European law and other similar issues.

 

The Amended Credit Agreement expires on March 29, 2013 and contains covenants which are customary for similar credit arrangements, including covenants relating to financial reporting and notification; payment of indebtedness, taxes and other obligations; compliance with applicable laws; and limitations regarding additional liens, indebtedness, certain acquisitions, investments and dispositions of assets. We were in compliance with all covenants as of December 31, 2010. The Amended Credit Agreement also contains a conditional financial covenant that requires us to have a Consolidated Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) of not less than 1.20 to 1.00 during certain periods described in the Amended Credit Agreement. At December 31, 2010 the condition did not arise such that the Consolidated Fixed Charge Coverage Ratio was required as a covenant. As of December 31, 2010, our total availability under the credit facility was $149.4 million.

 

Our liquidity needs for 2011 include the following: restructuring payments of up to $40 million, approximately $15 million related to organic investment opportunities, litigation settlement payments of $10.9 million, pension funding of approximately $10 million to $15 million, capital expenditures of approximately $10 million, operating lease payments of approximately $9 million (see Note 15 to the Consolidated Financial Statements for further information), any amounts associated with strategic acquisitions and any amounts associated with 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 sources of financing, will provide liquidity sufficient to meet these and our other operational needs.

 

Off-Balance Sheet Arrangements

 

Other than the operating lease commitments discussed in Note 15 to the Consolidated Financial Statements, we are not using off-balance sheet arrangements, including special purpose entities.

 

Summary of Contractual Obligations

 

 

 

 

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 $10 million to $15 million to our pension plans in 2011 and have $27.0 million recorded in other liabilities related to pension plans as of December 31, 2010.

 

The table above does not include possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was $17.5 million as of December 31, 2010. 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.

 

The acquisition agreements related to the TDK Recording Media, Memcorp and XtremeMac business acquisitions contained certain earn out provisions. For the year ended December 31, 2010, no additional cash consideration was paid to TDK Recording Media, Memcorp or XtremeMac. In addition, the earn out periods for the three business acquisitions ended during 2010; accordingly, there are no future payment obligations.

 

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 are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax obligations based on expected taxable income, statutory tax rates and tax credits allowed in the various jurisdictions in which we operate. Tax laws require certain items to be included in our tax returns at different times than the items are reflected in our results of operations. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some are temporary differences that will reverse over time. Temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We must assess the likelihood that our deferred tax assets will be realized and establish a valuation allowance to the extent necessary. Significant judgment is required in evaluating our tax positions, and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

 

We record income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We measure deferred tax assets and liabilities using the enacted statutory tax rates that are expected to apply in the years in which the temporary differences are expected to be recovered or paid.

 

We regularly assess the likelihood that our deferred tax assets will be recovered in the future. A valuation allowance is recorded to the extent we conclude a deferred tax asset is not considered to be more-likely-than-not to be realized. We consider all positive and negative evidence related to the realization of the deferred tax assets in assessing the need for a valuation allowance. If we determine we will not realize all or part of our deferred tax assets, an adjustment to the deferred tax asset will be charged to earnings in the period such determination is made.

 

During the fourth quarter of 2010, we recognized significant restructuring charges related to our U.S. operations. Due to these charges and cumulative losses incurred in recent years, we were no longer able to conclude that it was more-likely-than-not that our U.S. deferred tax assets would be fully realized. Therefore, during 2010, we recorded a charge to

establish a valuation allowance of $105.6 million related to our U.S. deferred tax assets. The valuation allowance charge is included in income tax provision on our Consolidated Statement of Operations.

 

The accounting estimate for valuation allowances against 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. Our accounting for deferred tax consequences represents our best estimate of future events. A valuation allowance established or revised as a result of our assessment is recorded through income tax provision (benefit) in our Consolidated Statements of Operations. Changes in our current estimates due to unanticipated events, or other factors, could have a material effect on our financial condition and results of operations.

 

At December 31, 2010, our net deferred tax asset was $17.9 million. These deferred tax assets are net of valuation allowance of $127.4 million. The valuation allowance relates to our U.S. deferred tax assets not expected to be utilized in the future, and various worldwide operating loss carry forwards that we do not expect to realize.

 

Our income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we record accruals for items that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position in the financial statements is that the position must be 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, 2010 was $14.9 million, excluding accrued interest and penalties described below. If the unrecognized tax benefits were recognized in our Consolidated Financial Statements, $4.3 million would ultimately affect income tax expense and our related effective tax rate. The other $10.6 million of unrecognized tax benefit would reduce income tax expense, but would be offset by an increase in valuation allowance against deferred tax assets.

 

Interest and penalties recorded for uncertain tax positions are included in our income tax provision. As of December 31, 2010, $2.6 million of interest and penalties was accrued, excluding the tax benefit of deductible interest. The reversal of accrued interest and penalties would affect income tax expense and our related effective tax rate.

 

Our U.S. federal income tax returns for 2006 through 2009 remain subject to examination by the Internal Revenue Service. The years 2004 through 2009 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 jurisdiction.

 

The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular issue may require the use of cash and could result in increased income tax expense. Favorable resolution could result in reduced income tax expense. It is reasonably possible that our unrecognized tax benefits could increase or decrease significantly during the next twelve months due to the resolution of certain U.S. and international tax uncertainties; however it is not possible to estimate the potential change at this time.

 

Litigation.  We record a liability when a loss from litigation is known or considered probable and the amount can be reasonably estimated. Our 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, we believe 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, 2010, would not be material to our financial position. As additional information becomes available, the potential liability related to pending litigation will be assessed and estimates will be revised as necessary.

 

Intangibles.  We record all assets and liabilities acquired in purchase acquisitions, including intangibles, at fair value. Intangible assets with a definite life are amortized based on a pattern in which the economic benefits of the assets are consumed, typically with useful lives ranging from one to 30 years. The initial recognition of intangible assets, the determination of useful lives 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. As of December 31, 2010, we had $320.4 million of definite-lived intangible assets subject to amortization. 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.

 

Goodwill.  We record all assets and liabilities acquired in purchase acquisitions, including goodwill at fair value. The initial recognition of goodwill 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 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.

 

During 2010 we realigned our corporate segments and reporting structure with how the business will be managed going forward. As part of this reorganization, we combined our Electronic Products segment with our Americas segment, and we separated our Asia Pacific segment into North Asia and South Asia regions.

 

Our reporting units for goodwill are our operating segments with the exception of the Americas segment which is further divided between the Americas-Consumer and Americas-Commercial reporting units as determined by sales channel. As a result of the segment change, the goodwill of $23.5 million which was previously allocated to the Electronics Products segment was merged into the Americas-Consumer reporting unit. The Americas-Consumer reporting unit had a fair value that was significantly less than its carrying amount prior to the combination, which is a triggering event for an interim goodwill impairment test. Goodwill is considered impaired when its carrying amount exceeds its implied fair value. A two-step impairment test was performed to identify a potential impairment and measure an impairment loss to be recognized. Based on the goodwill test performed, we determined that the carrying amount of the reporting unit significantly exceeded its fair value and that the goodwill was fully impaired.

 

The first step of the impairment test involves comparing the fair value of the reporting unit to which goodwill was assigned to its carrying amount. In calculating fair value, we used a weighting of the valuations calculated using the income approach and a market approach. The summation of our reporting units’ fair values is compared and reconciled to our market capitalization as of the date of our impairment test.

 

Based on the goodwill test performed, we determined that the carrying amount of the reporting unit significantly exceeded its fair value. The indicated excess in carrying amount over fair value of the Americas-Consumer reporting unit and goodwill is as follows:

 

 

The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of the reporting unit’s goodwill an impairment loss must be recognized for the excess. This involves measuring the fair value of the reporting unit’s assets and liabilities (both recognized and unrecognized) at the time of the impairment test. The difference between the reporting unit’s fair value and the fair values assigned to the reporting unit’s individual assets and liabilities is the implied fair value of the reporting unit’s goodwill. Based on this step of the impairment test, we determined that the full amount of remaining goodwill, $23.5 million, was impaired.

 

Excess Inventory and Obsolescence.  We write down our inventory for excess, slow moving and obsolescence to the net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those we project, additional write downs may be required. As of December 31, 2010, the excess inventory and obsolescence accrual was $42.4 million.

 

Rebates.  We maintain an accrual for customer rebates that totaled $53.4 million as of December 31, 2010 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.

Restructuring Reserves.  Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans. Generally, these charges are reflected in the quarter in which the Board approves the associated actions, the actions are probable and the amounts are estimable. In the event that the Board approves the associated actions post the balance sheet date, but ultimately confirms the existence of a probable liability as of the balance sheet date, a reasonable estimate of these charges are recorded in the period in which the probable liability existed. This estimate takes into account all information available as of the date the financial statements are issued. Severance amounts for which affected employees were required to render service in order to receive benefits at their termination dates were measured at the date such benefits were communicated to the applicable employees and recognized as expense over the employees’ remaining service periods.

 

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, projected salary increases and mortality rates. The annual measurement date for these assumptions is December 31. See Note 9 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 5.0 percent at December 31, 2010, as compared with 5.5 percent at December 31, 2009. A discount rate reduction of 0.25 percent increases U.S. pension plan expense (pre-tax) by approximately $0.1 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 U.S. pension plan expense for 2010, 2009 and 2008 was 8.0 percent. A reduction of 0.25 percent for the expected return on plan assets assumption will increase 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 four years. Beginning in 2011, the projected salary increase assumption is not applicable in the United States due to the elimination of benefit accruals as of January 1, 2011. See Note 9 to the Consolidated Financial Statements for further information regarding this change in benefits. Mortality assumptions were obtained from the IRS 2011 Static Mortality Table.

 

Recently Issued Accounting Standards

 

In January 2010, the Financial Accounting Standards Board (FASB) issued additional disclosure requirements for assets and liabilities held at fair value. Specifically, the new guidance requires a gross presentation of activities within the Level 3 roll forward and adds a new requirement to disclose transfers in and out of Level 1 and 2 measurements. This guidance is applicable to all entities currently required to provide disclosures about recurring and nonrecurring fair value measurements. The effective date for these disclosures is the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. The disclosures did not have a material impact on our Consolidated Financial Statements.

 

In December 2010, the FASB issued additional guidance for entities with reporting units that have carrying amounts equal to zero or are negative. These entities are required to assess whether it is more likely than not that the reporting

units’ goodwill is impaired. If it is determined that it is more likely than not that the goodwill of one or more of its reporting units is impaired, then Step 2 of the goodwill impairment test for those reporting unit(s) should be performed. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The effective date for this guidance is for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. We do not expect this guidance to have a material impact on our Consolidated Financial Statements.

 

In December 2010, the FASB issued additional and amended disclosure requirements for supplementary pro forma information related to business combinations. The effective date for this guidance is prospective for business combinations in which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. While early adoption is permitted, no business acquisitions occurred during 2010 that would necessitate our adoption of this guidance during 2010. We do not expect this guidance to have a material impact on our Consolidated Financial Statements.

 

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 implement our strategy; our ability to grow our business in new products with profitable margins and the rate of revenue decline for certain existing products; changes in tax laws, regulations and results of inspections by various tax authorities; our potential dependence on third parties for new product introductions or technologies in order to introduce our own new products; our ability to introduce new offerings in a timely manner either independently or in association with TDK, OEMs and other third parties and the market acceptance of newly introduced product and service offerings; continuing uncertainty in global and regional economic conditions; our ability to identify, integrate and realize the expected benefits from any acquisition which may occur in connection with our strategy; our ability to realize the benefits from our global sourcing and development strategy for magnetic data storage products and the related restructuring; the volatility of the markets in which we operate; foreign currency fluctuations; our ability to source and deliver products to our customers at acceptable quality, volume and cost levels; significant changes in discount rates and other assumptions used in the valuation of our pension plans; the ready availability and price of energy and key raw materials or critical components; our ability to meet our revenue growth, gross margin and earnings targets; our ability to secure adequate supply of certain high demand products at acceptable prices; our ability to efficiently source, warehouse and distribute our products globally; a material change in customer relationships or in customer demand for products; the future financial and operating performance of major customers and industries served; our ability to successfully defend our intellectual property rights and the ability or willingness of our suppliers to provide adequate protection against third party intellectual property or product liability claims; the possibility that our long-lived assets for any goodwill that we acquire in the future may become impaired, the outcome of any pending or future litigation; the volatility of our stock price due to our results or market trends, as well as various factors set forth from time to time in our filings with the SEC.

 

We are exposed to various market risks including volatility in foreign currency exchange rates and credit risk. International operations, which comprised approximately 57 percent of our revenue in 2010, 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, our revenue or costs are adversely impacted 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.

 

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 12 to the Consolidated Financial Statements.

 

As of December 31, 2010, we had $293.1 million notional amount of foreign currency forward and option contracts of which $47.1 million hedged recorded balance sheet exposures. This compares to $136.8 million notional amount of foreign currency forward and option contracts as of December 31, 2009, of which $88.8 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, 2010 by $16.3 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.

 

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, of 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 (the “Company”) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 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, 2010, 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.

 

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.

 

Minneapolis, Minnesota

March 2, 2011

IMATION CORP.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

IMATION CORP.

 

CONSOLIDATED BALANCE SHEETS

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

IMATION CORP.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)