GlassBridge Enterprises, Inc. - Annual Report: 2015 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
Form 10-K
________________________________________________
(Mark One) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2015 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission file number: 1-14310
____________________________
IMATION CORP.
(Exact name of registrant as specified in its charter)
Delaware | 41-1838504 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1 Imation Way Oakdale, Minnesota (Address of principal executive offices) | 55128 (Zip Code) | |
(651) 704-4000
(Registrant’s telephone number, including area code)
________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $.01 per share | New York Stock Exchange, Inc.; Chicago Stock Exchange, Incorporated | |
________________________________________________
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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).
Large accelerated filer | o | Accelerated filer | þ | Non-accelerated filer | o | Smaller reporting company | o |
(Do not check if a smaller reporting company) | |||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 $4.06 as reported on the New York Stock Exchange on June 30, 2015, was $165.0 million.
The number of shares outstanding of the registrant’s common stock on February 29, 2016 was 37,267,442.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of registrant’s Proxy Statement for registrant’s 2016 Annual Meeting are incorporated by reference into Part III.
IMATION CORP.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015
TABLE OF CONTENTS
Page | ||
1
PART I
Item 1. | Business. |
General
Imation Corp., a Delaware Corporation, is a global data storage and data security company. With a 60-year history of technology leadership, the Company's mission is to help organizations create an integrated storage, private cloud, file sync and share enterprise solution. The Company historically operated in two reportable segments: Consumer Storage and Accessories (which consisted of our Consumer Storage Media and Audio and Accessories businesses) and Tiered Storage and Security Solutions (which consisted of our Commercial Storage Media and Storage and Security Solutions (i.e. Nexsan and IronKey) businesses.
The company is executing on a restructuring plan whereby it is in the final phases of winding down its Consumer Storage and Accessories, Audio and Accessories, and Commercial Storage Media businesses (combined the "legacy businesses"). Additionally, in January 2016, we sold our IronKey business (which was part of our historical Tiered Storage and Security Solutions reportable segment). Going forward, we will focus on our Nexsan business as well as explore strategic alternatives to deploy our excess capital.
As used in this document, the terms “Imation”, “the Company”, “we”, “us”, and “our” mean Imation Corp. and its subsidiaries and consolidated entities unless the context indicates otherwise.
Strategic Direction
Imation was formed in 1996 from the spin-off of substantially all the businesses that comprised the data storage and imaging systems groups of 3M Company. The Company had historically undertaken a series of strategic transformations to leverage Imation’s global footprint and deep roots in data storage to become a leading player in data storage and security solutions.
In May, 2015, through a proxy contest, shareholders elected three directors nominated by the Clinton Group, Inc. ("Clinton") to the Imation Board of Directors. These directors comprised half of the seats of the Imation board.
In August 2015, Imation formed a Strategic Alternatives Committee of its Board to develop initiatives for strategic value creation and to work with management to make recommendations to the Board regarding the Company’s use of excess capital. On October 19, 2015, the Company announced that it will actively explore alternative uses for its excess capital. Interim Chief Executive Officer, Robert B. Fernander is leading the evaluation and deployment of capital in conjunction with the Strategic Alternatives Committee. The scope of the opportunities to consider may be outside Imation’s historical focus, and may be sourced in the private or public markets. The Company generally expects to evaluate opportunities to acquire businesses that we can actively manage and oversee, but the Company may also invest in opportunities that we will not control, such as index funds, mutual funds and other investment funds that offer attractive returns without significantly compromising liquidity.
On September 27, 2015, the Company adopted a restructuring plan which began the termination process of its legacy businesses including commercial storage media (magnetic tape), consumer storage media (optical disc and flash drive) and audio and accessories. The plan also called for the aggressive rationalization of Imation’s corporate overhead. The strategic shift resulted from continued losses due to secular declines in Imation’s legacy businesses, and it aimed to reduce the cost structure and streamline the organization in light of these declines. The Company expects that it will incur approximately $120 million in total charges for the restructuring plan excluding tax impact. The charges are mostly non-cash, with cash charges expected to be approximately $35 million. The Company will complete the majority of the restructuring plan during the first quarter of 2016, with most of the charges already incurred in the third and fourth quarters of 2015.
On October 14, 2015, Imation acquired substantially all of the equity of Connected Data, Inc. (CDI), an emerging enterprise-class, private cloud sync and share company, in a transaction valued at $6.7 million. The acquisition of CDI augments Imation’s vision to deliver a comprehensive and secure storage, backup and collaboration ecosystem.
During the third quarter of 2015, management and the Board of Directors evaluated the Nexsan and IronKey businesses. As a result of this assessment, we significantly revised our previous business strategy by narrowing our product portfolio and reducing the operating expenses associated with these businesses.
In late December 2015, the Company also amended its cash investment policy to permit investment activity in public company stock, index funds, mutual funds, and other investment funds that offer attractive returns without significantly compromising liquidity, at all times considering the applicable risks. In January 2016, the Board of
2
Directors approved investing up to 25 percent of the Company’s cash in investment funds with the focus on producing attractive risk-adjusted rates of return while maintaining liquidity. On February 8, 2016, the Company entered into a subscription agreement to invest up to $20 million of its excess cash in the Clinton Lighthouse Equity Strategies Fund (Offshore) Ltd. (“Clinton Lighthouse”). Clinton Lighthouse is a market neutral, statistical arbitrage fund which provides daily liquidity to its investors. The Fund is managed by Clinton Group Inc., a shareholder of the Company. One of Clinton’s senior portfolio managers is Joseph A. De Perio, Imation’s Chairman of the Board. Due to the arrangement, Clinton waived its customary management fee and agreed to receive incentive compensation in the form of shares of Imation common stock at a value of $1.00 per share, which may be reset from time to time. The Board of Directors, in conjunction with management, reviewed various funds and voted to approve this investment, with Mr. De Perio abstaining from the vote. Management will continue to seek out and evaluate other attractive investment options under its cash management policy.
On January 4, 2016, Imation completed the sale of its corporate headquarters facility in Oakdale, Minnesota, to Larson Family Real Estate LLLP for a gross purchase price of $11.5 million, with net proceeds of approximately $11 million. As previously described in the Company’s Form 10-Q for the quarter ended September 30, 2015, the Company classified its corporate headquarters facility as an asset held for sale. The Company will keep a small team and its headquarters in Minnesota.
Also on January 4, 2016, the Company also sold its Memorex trademark and two associated trademark licenses to DPI Inc., a St. Louis-based branded consumer electronics company for $9.4 million.
On February 2, 2016, the Company sold its IronKey business to Kingston Digital, Inc. and DataLocker Inc. in two asset purchase agreements. To Kingston Digital, Inc., we sold the assets representing the Company’s business of developing, designing, manufacturing and selling IronKey mobile security solutions. This includes Windows to Go USB flash drives, Windows to Go use cases and encrypted USB flash drives and external USB hard drives. The sale specifically excluded the software and services aspect of the IronKey business. Kingston Digital, Inc. paid a purchase price of $4.25 million at closing for certain assets, including inventory, and the Company retained accounts receivable and accounts payable relating to that business. To DataLocker, Imation sold the assets of the Company’s business of software and services for its IronKey products, including services related to Windows to Go USB flash drives. DataLocker paid a purchase price of $0.4 million at closing and agreed to assume certain service obligations in the amount of approximately $2 million, as well as pay the Company earn-outs in the event certain service revenue targets are achieved.
Our current business segments were formed in 2015 to align with our go-forward and legacy operations. A description of our 2015 segments follows directly below. Upon completion of Imation’s restructuring plan in 2016, there will be one operating business segment: Nexsan.
Nexsan Segment
This segment operates as its own product line. Our storage systems portfolio ranges from high volume, dense storage products to innovative unified hybrid storage solutions for small and medium commercial businesses, enterprise and government customers.
This product line offers strong growth potential and is the main target of our investment spending. It consists of Imation Nexsan and Connected Data products, There are more than 11,000 Nexsan customers worldwide with over 38,000 systems deployed since 1999. Imation’s Nexsan portfolio features solid-state optimized unified hybrid storage systems, secure automated archive solutions and high-density enterprise storage arrays. Our solutions are ideal for mission-critical IT applications such as virtualization, cloud, databases and collaborations and energy efficient, high-density storage for backup and archiving. Nexsan systems are delivered through a worldwide network of cloud service providers, value-added resellers (VARs) and solutions integrators. We offer global customers four main solution sets:
• | The NST® hybrid storage line (SAN & NAS) which addresses the high-growth hybrid storage market by combining solid state technology with spinning disk for high performance and capacity; |
• | The Nexsan E-Series disk arrays which provide industry-leading storage density, reliability and power management to the block-based storage market; |
• | The Assureon® line which delivers secure archive systems for data offload, compliance and secure cloud deployment; and |
• | The Transporter line, which delivers private cloud sync and share services for connected workers in security and cost-sensitive work environments. Transporter, which came from the CDI acquisition, is a secure, on- |
3
site alternative to Dropbox and provides mobile access, file sync-and-share and global replication. Unlike Dropbox, Transporter enables an enterprise to create a private cloud. Transporter extends existing file servers and NAS systems, is non-disruptive to current systems and processes and has a much higher capacity and performance, while being significantly less expensive than public cloud storage.
This product family addresses growth segments of the data storage market. We have added sales, engineering resources and value-added resellers around the world to build Nexsan’s presence in key geographies. Recently, we have rationalized the infrastructure to concentrate on the strongest opportunities. Our targeted vertical markets include government, healthcare, and media and entertainment.
IronKey Segment
The IronKey portfolio, which was part of Imation in 2015 but was sold in early 2016, met the challenge of protecting today’s mobile workforce, featuring secure USB solutions for data transport and mobile workspaces. The IronKey line includes the world’s leading hardware encrypted USB drives, PC on a Stick® workspaces for Microsoft® Windows To Go®, and cloud-based or on-premises centralized secure device management solutions.
Storage Media and Accessories (Legacy Business) Business Segment
The Storage Media and Accessories business segment distributes differentiated products through retail and commercial channels across the globe. Storage Media and Accessories consist of the Commercial Storage Media, Consumer Storage Media and Audio and Accessories product categories. This business continues to be impacted by lower revenues from the expected secular declines in magnetic tape and optical media products. Due to the declines in the business, in 2015, we adopted a restructuring plan in which the Company will terminate sales and operations of this legacy business. The strategic shift of winding down the legacy business is still in process and is expected to be complete in Q1 2016. Our strategy is to maximize cash flows, extract working capital from this business and manage our cost structure efficiently as the business winds down.
Commercial Storage Media
Our magnetic tape media products are used for business and operational continuity planning, disaster recovery, data backup, near-line data storage and retrieval, and for cost-effective mass and archival storage. Our magnetic tape revenues decreased consistent with the overall market and we are in the process of terminating this business.
Consumer Storage Media
Our Consumer Storage Media product line includes optical products, USB flash drives, flash cards and external hard disk drives. Imation’s optical products consist of DVDs, CDs and Blu-ray™ recordable media. Our strategy is to maximize cash flows, extract working capital from this business and manage our cost structure efficiently as the business winds down. We marketed our optical media brands as well as USB flash drives, flash cards and external hard disk drives under our Imation, Memorex and TDK Life on Record brands. We sourced these products from manufacturers primarily in Asia and sold them through a variety of retail and commercial distribution channels globally.
Our Brands
The Nexsan brand was acquired by Imation at the end of 2012. We began operations in 2013. Imation Nexsan Storage Solutions are ideal for a broad range of applications including virtual machine storage, cloud storage, database, surveillance, bulk storage, backup and recovery, disaster recovery and archive. The Nexsan products are sold to small and medium-size enterprise customers across a range of vertical markets exclusively through our worldwide network of VARs.
The Transporter brand was acquired by Imation in 2015 though Connected Data, Inc. Transporter is a secure, on-premise, cost-efficient alternative to Dropbox that allows users to bypass the cloud when sharing business files to their mobile devices. Transporter products allow us to fill the growing demand for secure file synchronization to mobile devices.
The Imation brand has been at the forefront of data storage and digital technology for many years. Imation brand products include magnetic tape media, recordable CDs, DVDs and Blu-ray discs, flash products and hard disk drives.
The IronKey brand was purchased in 2011 for its secure storage and workspace management software and service. In 2012, we consolidated our Mobile Security portfolio around the IronKey brand. Our products included hardware encrypted USB drives, PC on a Stick IronKey Workspaces for Microsoft Windows To Go and cloud-based
4
or on-premises centralized secure device management solutions. On February 2, 2016, we closed on the sale of our IronKey business.
The Memorex brand included recordable CDs, DVDs and Blu-ray discs, optical drives and optical storage accessories. We sold consumer electronics products under the Memorex brand until October 15, 2013 when we divested our Memorex consumer electronics business. On January 4, 2016, we sold the Memorex trademark and two associated trademark licenses.
The TDK Life on Record logo is a trademark owned by TDK Corporation and had been licensed exclusively to Imation since 2007. TDK Life on Record brand products include recordable CDs, DVDs and Blu-ray discs, flash drives, tape cartridges, headphones and speakers which are sold to commercial customers and individual consumers. TDK Life on Record brand products are sold across the globe. On September 28, 2015, we entered into an agreement to terminate our license agreement with TDK Corporation.
Geographic Regions
Both of our reporting segments serve customers in all geographic regions worldwide. The United States represents the largest current individual market for our products and offers several sophisticated channels of distribution including VARs, OEMs and retail outlets. However, most of our revenue comes from markets outside the United States. Western Europe exhibits traits similar to North America in terms of overall breadth of product offerings, high penetration of end user markets and range of sophistication of distribution channels. Emerging markets in Eastern Europe represent potential growth markets for our products as Information Technology (IT) end user and consumer markets grow. Our Asian and Pacific region serves China, Hong Kong, Korea, Australia, Singapore, India and Taiwan. Japan is the single largest market outside the United States. We also sell our products in the Middle East and parts of Africa.
Seasonality
Our revenues are subject to some levels of seasonality. Historically, our fourth quarter has been the highest revenue quarter of the year due to stronger consumer and information technology spending in the fourth quarter of the calendar year. Our revenues are also subject to secular decline of the markets for magnetic tape products as well as for optical media products.
Customers, Marketing and Distribution
Our products are sold to businesses and individual consumers. No one customer accounted for 10 percent or more of our revenue in 2015, 2014 or 2013.
We market Imation products through a combination of distributors, wholesalers, VARs, OEMs and retail outlets. Worldwide, approximately 68 percent of our 2015 revenue came from distributors and VARs, 28 percent came from the retail channel and 4 percent came from OEMs. We maintain a Company sales force and a network of distributors and VARs 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 technology changes, frequent new product introductions and performance improvements, diverse distribution channels, aggressive marketing and pricing practices and ongoing variable price erosion. Competition is based on many 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, intellectual property, compatibility and global product support capability.
Imation Nexsan storage system products operate in a large and competitive data storage market. Demand for data storage capacity is expected to increase, and customers require flexible solutions that include data security and protection, performance and scalability. We believe we have a diverse and competitive product portfolio that addresses a wide range of customer needs. Our primary competitors for our Nexsan products include mid-range storage systems and products from EMC, NetApp, Pure Storage, Overland, Violin, Dot Hill, Nimble and a number of smaller, privately held storage system companies.
Imation Nexsan Transporter appliances compete in the file Sync and Share market. Cloud storage continues to increase in usage, but concerns about security, availability and cost are growing. Primary competitors are Dropbox, Box and Google Drive. We are highly differentiated with our patented peer to peer synchronization approach which provides for lower overall cost and greatly enhanced data availability and security.
5
Imation IronKey products compete in the mobile workspace market and the secure mobile security market. Demand for mobile workspace, especially given the BYOD trend, is expected to grow, and customers require solutions that include security, ease of use, performance and central management, which IronKey products provide. Secure storage demand is flat but is seeing an extended life. Our primary competitors for our IronKey products include other Microsoft Windows-certified providers, such as Spyrus and Kingston.
The magnetic tape industry has consistently addressed the growth in demand for storage capacity with higher capacity cartridges, resulting in a lower cost per gigabyte, which leads to a decline in the actual number of media units shipped. In addition, lower cost disk and storage optimization strategies, such as virtual tape and de-duplication, continue to compete with magnetic tape. Therefore, tape revenue continues to decline. Our major competitors include Fuji, Sony, Maxell and HP.
Our main competitors in recordable optical media include Maxell, JVC, Sony and Verbatim. The optical market is in secular decline as digital streaming, hard disk and flash media replace optical media in some applications such as music and video recording. Our different brands have varying strengths in different regions of the world.
In standard flash media, Imation’s primary competitors include Kingston, SanDisk, Lexar and PNY. In standard external and removable hard drives, our major competitors are Western Digital and Seagate. The traditional 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 portfolio size, inventories, channel placement and promotional activity are critical elements for success.
Audio and accessories products are sold based on a range of factors, including brand and reputation, product features and designs, distribution coverage, innovation and price. Our competitors in the audio and accessories products market consist of numerous manufacturers and brands. The global audio and accessories products market is very large and highly diverse in terms of competitors, channels and products.
Product Sourcing
We contract for the manufacturing of all products we sell and distribute from a variety of third-party providers that manufacture predominantly outside the United States. When required, we manufacture in a manner consistent with Country of Origin Guidelines. We seek to differentiate our products through unique designs, product positioning, packaging, merchandising and branding.
Our legacy businesses purchased finished and semi-finished products, including optical media and USB flash drives, and consumer electronic products, primarily from Asian suppliers. For our optical media, we procured our supply primarily from three companies.
Our go-forward Nexsan business purchases the components and semi-finished products from the various suppliers, primarily in the US and Mexico.
Research, Development and Engineering
Our success depends on the development and timely introduction of new products. Beginning in 2013, we narrowed our research and development efforts to priority projects in our growth areas of data protection and management, storage hardware, removable hard drive systems, disk-based storage systems and related software. We maintain advanced research facilities and invest both in researching, developing and engineering potential new products, as well as improving existing products. Our research and development expense was $19.2 million, $18.8 million and $18.4 million for 2015, 2014 and 2013, respectively. We invest in focused research, development, engineering and capital equipment in order to remain competitive and successfully develop and source products that meet market requirements. While the total amount of the research and development expense may decrease following the sale of the IronKey business in February, 2016, the percentage of expense dedicated to research and development will likely increase in 2016 as we continue to focus on Nexsan/CDI research and development.
6
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 20 years from the date a patent application is filed. United States trademark registrations are for a term of 10 years and are renewable every 10 years as long as the trademarks are used in the regular course of trade. On September 28, 2015, we entered into an agreement to terminate our license agreement with TDK Corporation pursuant to which TDK had granted the Company 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.
During 2015, we were awarded 17 United States patents and acquired two key patents with the acquisition of Connected Data. At the end of 2015, Imation held over 180 patents in the United States. Currently, we are pursuing strategies to market non-core patents with the goal of monetizing these assets.
Employees
At December 31, 2015, we employed approximately 600 people worldwide, with approximately 280 employed in the United States and approximately 320 employed internationally. We expect the number of worldwide employees to be reduced to approximately 200 by the end of Q1 2016.
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 that liability has been reasonably estimated. We review these accruals periodically as remediation and investigatory activities proceed and adjust them accordingly. Compliance with environmental regulations has not had a material adverse effect on our financial results. We did not have any environmental accruals as of December 31, 2015.
International Operations
Approximately 61 percent of our total revenue in 2015 came from sales outside the United States, primarily through subsidiaries, sales offices, distributors, VARs and relationships with OEMs throughout Europe, Asia, Latin America and Canada. We do not own any manufacturing facilities. See Note 14 - Business Segment Information and Geographic Data in our Notes to Consolidated Financial Statements for further information on our international operations.
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 March 15, 2016 is set forth below:
Robert B. Fernander, age 57, is Interim Chief Executive Officer. Mr. Fernander has served on the Board of Directors of the Company since May 22, 2015. Since September 2014, Mr. Fernander has served as an advisor and provided consulting services for I/O Switch Technologies, Inc., a developer of data center technologies, Storage Strategies NOW, an industry analyst firm that offers written publications and analysis for IT users, business and technology leaders and venture capitalists, and FLM.TV, a company focused on delivering, distributing, and marketing independent film. Prior to that, Mr. Fernander served as the Chief Revenue Officer of Datagres Technologies Inc., a data storage optimization software company, from September 2013 until September 2014. During his time at Datagres Technologies Inc., Mr. Fernander also served on its board of directors. Mr. Fernander served as the CEO and a member of the board of directors of Gnodal Limited, a storage and computer networking company, from 2012 until 2013 when it was acquired by Cray Inc. From 2007 until 2012, Mr. Fernander served on the board of directors and as the CEO of Pivot3 Inc., a hyper converged storage and compute platform. Prior to serving at Pivot3, Mr. Fernander served as an executive at several private startup companies. For over four years, Mr. Fernander served as a Vice President at Compaq Computer Corporation, a company that developed, sold and supported computers and related products and services. For over nine years, Mr. Fernander also held several sales and marketing leadership positions at Sun Microsystems, Inc., a company that sold computers, computer components, computer software and information technology services.
7
Barry L. Kasoff, age 58, is Chief Restructuring Officer and Interim Chief Financial Officer. Mr. Kasoff has served on the Board of Directors of the Company since May 22, 2015. Mr. Kasoff currently serves as the President of Realization Services, Inc. (RSI), a full-service management consulting firm specializing in assisting companies and capital stakeholders in troubled business environments, and has served in such capacity since founding RSI in 1997.
Gregory J. Bosler, age 54, is Senior Vice President and Group President, Consumer Storage and Accessories. Mr. Bosler will leave the Company by the end of March 2016 when the legacy business wind down is substantially completed. From October 2010 to December 2015, he was Senior Vice President of Global Business Management. 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.
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 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.
8
Item 1A. | Risk Factors. |
Our business faces many risks. Any of the risks discussed below, or elsewhere in this Form 10-K or our other SEC filings, could have a material impact on our business, financial condition or results of operations.
We must make strategic decisions from time to time as to the products, technologies and businesses in which we invest and if we focus on products, technologies or business that do not perform in line with our strategic expectations or if market conditions change, our financial results could be adversely impacted. In February 2011 we announced our transformation strategy, which includes improving gross margins, exiting low margin products, introducing new products in secure and scalable storage, and organic and inorganic growth. In October 2012, we announced the acceleration of our transformation by reorganizing our businesses into two channel-focused business segments, and increasing our focus on data storage and data security. In August 2015, we formed a Strategic Alternatives Committee of our Board and, in October 2015, announced that the Strategic Alternatives Committee would work with management to make recommendations to the Board regarding our use of excess capital. Specifically, the Strategic Alternatives Committee will examine acquisition opportunities and develop initiatives for strategic value creation which may include opportunities outside of industries that comprised the Company's historical focus. If we are not successful in implementing these strategies or if market conditions change adversely for our chosen products or technologies, 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. We have experienced revenue declines over the prior year in 2015, 2014 and 2013 of $200.3 million or 27.5 percent, $131.3 million or 15.3 percent and $145.9 million or 14.5 percent, respectively. Historically, magnetic and optical products have provided the majority of our revenues. The overall market for these products has been impacted by industry wide dynamics, including competing formats as well as continuing improvements in compression and deduplication technologies and as such, we have decided to aggressively wind down our legacy business. If we are not successful in growing new product revenues from our acquisitions of Nexsan and Connected Data, Inc., our financial results could be negatively impacted.
Our participation in any future joint investment could be adversely affected by our lack of sole decision-making authority, our reliance on a partner’s financial condition and disputes between us and our partners. We may in the future make acquisitions of partial ownership interests in businesses or otherwise acquire businesses jointly or establish joint ventures with third parties. In such circumstances, we may not be in a position to exercise significant decision-making authority regarding a target business, partnership or other entity if we do not own a substantial majority of the equity interests of the target. These investments may involve risks not present were a third party not involved, including the possibility that partners might become insolvent or fail to fund their shares of required capital contributions. In addition, partners may have economic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such partners, some of which may possess more industry or technical knowledge or have better access to capital and other resources, may also seek similar acquisition targets as us and we may be in competition with them for such business combination targets. Disputes between us and partners may result in litigation or arbitration that would increase our costs and expenses and divert a substantial amount of our management’s time and effort away from our business. Consequently, actions by, or disputes with, partners might result in subjecting assets owned by the partnership to additional risk. We may also, in certain circumstances, be liable for the actions of our third-party partners. For example, in the future, we may agree to guarantee indebtedness incurred by a partnership or other entity. Such a guarantee may be on a joint and several basis with our partner, in which case, we may be liable in the event such partner defaults on its guarantee obligation.
Future acquisitions or business opportunities could involve unknown risks that could harm our business and adversely affect our financial condition. As part of our strategic plan to use excess capital, including through acquisitions, we may acquire interests in a number of different businesses, some of which may be outside of industries that have comprised our historical focus. We have in the past, and may in the future, acquire businesses or make acquisitions, directly or indirectly through our subsidiaries, that involve unknown risks, some of which will be particular to the industry in which the business or acquisition targets operate, including risks in industries with which we are not familiar or experienced. Although we intend to conduct extensive business, financial and legal due diligence in connection with the evaluation of future business or acquisition opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such businesses or acquisitions, especially if we are unfamiliar with the relevant industry. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the businesses or acquisitions, which could adversely affect our financial condition and
9
liquidity. In addition, our financial condition and results of operations may be adversely impacted depending on the specific risks applicable to any business or company we acquire and our ability to address those risks.
We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not ultimately consummated, which could materially adversely affect our financial condition and subsequent attempts to locate and acquire or invest in another business. We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments with respect to such transaction will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, business opportunity or financing and capital market transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.
We may engage in business combinations that are dilutive to existing shareholders, 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 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 acquired businesses 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 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 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 ensure 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.
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 differentiated 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 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 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 for the introduction and acceptance of new products, the timing of which is not entirely in our control. In addition, there can be no
10
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 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 obtaining rights to use competitive technologies, we may become less competitive in certain markets.
If we do not successfully implement restructuring plans and realize the benefits expected from the restructuring, our financial results will be affected. From time to time we have initiated restructuring programs related to our business strategy to, among other things, reduce operating expenses and address product line rationalization and infrastructure. We may not be able to realize the expected benefits and cost savings if we do not successfully implement these plans. If we are unable to restructure our operations successfully as needed, or on a timely basis, our expectations of future results of operations, including certain cost savings expected to result from the restructuring, may not be met. If difficulties are encountered or such cost savings are otherwise not realized, it could have a material adverse effect on our business, financial condition and results of operations.
Our international operations subject us to economic risks including risk of foreign currency fluctuations and negative or uncertain global or regional economic conditions any of which could adversely affect our business and operating results. We conduct our business on a global basis, with approximately 61 percent of our 2015 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. Additionally, some of our international 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. Foreign currency fluctuations can also affect reported profits of our non-U.S. operations where transactions are generally denominated in local currencies. A recession in any of the regions we serve might affect product demand and cause fluctuations in exchange rates. 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, including exchange rate volatility in the Euro and the Japanese Yen, 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.
We use third-party contract manufacturing services and supplier-provided parts, components, and sub-systems 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 and third-party contract manufacturing to secure raw materials, parts and components used in our products exposes us to volatility in the price 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. Additionally, we may experience changes in the supply and cost of raw materials and key components of our products resulting from the effects of natural disasters. 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.
Any potential acquisition or investment in a foreign business or a company with significant foreign operations may subject us to additional risks. Acquisitions or investments by us in a foreign business or other companies with significant foreign operations subject us to risks inherent in business operations outside of the United States. These risks include, for example, currency fluctuations, complex foreign regulatory regimes, punitive
11
tariffs, unstable local tax policies, trade embargoes, risks related to shipment of raw materials and finished goods across national borders, restrictions on the movement of funds across national borders and cultural and language differences. If realized, some of these risks may have a material adverse effect on our business, results of operations and liquidity.
We may incur asset impairment charges for intangible assets and goodwill in the future. We evaluate assets on our balance sheet, including such intangible assets and goodwill, annually as of November 30th or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries that would require an impairment test. The test for impairment of intangible assets requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value. The test for impairment of goodwill requires a comparison of the carrying value of the reporting unit for which goodwill is assigned with the fair value of the reporting unit calculated based on discounted future cash flows. If the carrying value of the reporting unit is greater than the fair value a second step is performed to calculate any impairment.
Our security products must provide appropriate levels of security to adequately store and protect our customers' data. Many of our secure storage products include software and hardware security such as user authentication, data encryption, and portable digital identities which are designed to prevent digital security breaches. Third parties may attempt to hack into our products in order to, among other things, compromise the integrity of those products or obtain confidential information. If our products do not provide adequate security and that security is compromised, we could lose existing customers, have difficulty attracting new customers, experience increases in operating expenses, become subject to litigation and loss of reputation or suffer other adverse consequences. There can be no assurance that our efforts to upgrade the security of our products or develop new products to keep pace with continuing changes in technology will be successful or that product issues will not arise in the future. Any significant breakdown, intrusion, interruption, corruption or destruction of our secure storage products could have a material adverse effect on our financial results.
The loss of a major customer, partner, or reseller would adversely affect us. Our future sales are dependent on the success of our customers, partners, and resellers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. We depend on the sales of our major customers, partners, and resellers and any material delay, cancellation or reduction of orders from these groups would have a material adverse effect on our results of operations. Developments adverse to our major customers, partners, and resellers or their products, or the failure of these groups to pay for components or services, would also have an adverse effect on us.
Changes in European law or practice related to the imposition or collectability of optical levies could adversely affect us. Many European countries impose levies on imports of optical products and other products to compensate copyright owners for legal private copying. Imation is involved in litigation in several of those countries related to its obligation to pay levies on sales of our products to commercial channel customers. Based on current European law, we no longer pay levies on commercial channel sales. Because we have previously paid levies on such sales, we have offset certain levies payable on sales in the consumer channel with amounts previously overpaid with respect to commercial channel sales. If a court were to rule against us on this issue, we may be required to pay all, or a portion of, our unpaid levies to the collecting societies. In addition, any reduction in the current levy rates applicable to consumer channel sales could reduce our ability to offset for past overpayments on commercial channel sales. Other changes in levy rates or structures could impact our ability to compete in certain markets or otherwise reduce our profitability.
In a volatile global economic environment, 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 working capital investments in receivables and inventory and our need to build inventory levels in advance of our most active selling seasons. The seasonality of our products could change as a result of our acquisitions and divestitures.
12
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. 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.
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 tax guidance and related interpretations as well as inspections by tax authorities could materially impact our tax receivables and payables 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. 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.
Our success depends in part on our ability to obtain and protect our intellectual property rights 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. 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 audio and data storage product categories are 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.
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 audio and data storage products. We are often indemnified by our suppliers; litigation, however, is always subject to many uncertainties and outcomes that are not predictable. We use legal and appropriate means to contest litigation threatened or filed against us, but we have found there is a strong tendency toward litigation in the patent area in our industry and this litigation environment poses a business risk. We cannot ascertain the ultimate aggregate amount of any monetary liability or financial impact that may be incurred by us in litigation.
Changes in the capital and credit markets may negatively affect our ability to access financing. Without such financing we may be unable to achieve our objectives for strategic acquisitions and internal growth. Disruption of the global financial and credit markets may have an effect on our long-term liquidity and financial condition. While we have been able to achieve our past acquisitions through operating cash flows and without permanently borrowing on our outstanding credit facilities, the need may arise to obtain additional funding, in particular as we focus on exploring acquisition opportunities as part of our strategic plan to use excess capital. Based on our current plan of operations we believe our cash will be sufficient to meet our anticipated operating expenses, capital expenditures and debt service obligations for at least the next twelve months; however there is no assurance that circumstances will not change, or that we may require additional capital to fund acquisitions or the operating expenses of acquired businesses.
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. No assurance can be given that we will be able to attract and retain employees and key talent. A failure to attract and retain key personnel could also have a material adverse impact on our business.
Changing laws and regulations have resulted in increased compliance costs for us, which could affect our operating results. Changing laws, regulations and standards relating to corporate governance and
13
public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulations regarding conflict minerals and newly enacted SEC regulations have created additional compliance requirements. We are committed to maintaining high standards of internal controls over financial reporting, corporate governance and public disclosure. As a result, we intend to continue to invest appropriate resources as necessary to comply with evolving standards which may result in increased expenses. Laws enacted that directly or indirectly affect the production, distribution, packaging, cost of raw materials and fuel could impact our business and financial results.
We rely on our aging information systems to conduct our business, and failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed. The efficient operation of our business is dependent on computer hardware and software systems. Information systems are vulnerable to security breach by computer hackers and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent security breaches. In addition, the unavailability of the information systems or failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased overhead costs, causing our business and results of operations to suffer. Any interruption or failure of our information systems or any breach of security could adversely affect our business and results of operations.
The announcement of our review of strategic alternatives and our strategic plan to explore acquisition opportunities could adversely affect our business, financial results and operations, and there can be no assurance that any transaction will result from this review or plan. In August 2015, we formed a Strategic Alternatives Committee of our Board and, in October 2015, announced that the Strategic Alternatives Committee would work with management to make recommendations to the Board regarding our use of excess capital. Specifically, the Strategic Alternatives Committee will examine acquisition opportunities and develop initiatives for strategic value creation which may include opportunities outside of industries that comprise the Company's historical focus. There can be no assurance that our strategic plan will result in any transaction or any change to our overall structure or our business model, or that any transaction or change will enhance shareholder value or the value of any of our business units. Any transaction that is identified and pursued would be dependent on factors that may be beyond our control, including, among others, global economic conditions, the market environment, the possible requirement for shareholder approval of the transaction, the interest of third parties in the Company or our businesses and the availability of financing on reasonable terms or at all. We do not intend to provide updates or make any comments regarding the evaluation of strategic alternatives unless our Board of Directors has approved a specific transaction or management otherwise deems disclosure appropriate. We expect to incur expenses associated with identifying and evaluating strategic alternatives. In addition, the process of reviewing strategic alternatives and implementing any course of action ultimately selected may be disruptive to the Company’s business operations, may distract the Company’s management team from their day-to-day responsibilities and could make it more difficult to retain customers, vendors and employees. Any of these risks or uncertainties could adversely affect the Company’s business, financial condition, results of operations or cash flows.
The Company may face risks associated with the transition of its Board of Directors. Shareholders elected three new directors to the Company's Board of Directors at the Annual Meeting of Shareholders on May 20, 2015, replacing three incumbent directors who had been nominated by the Company for reelection. Thereafter, the remaining directors resigned and four new individuals were appointed to the Board of Directors. Following this change, many aspects of the Company's strategies, structure and operating practices have been and will continue to be under review by the Board of Directors and will be subject to change. There can be no assurance that any changes on strategies, structure or operating practices resulting from this review will be successfully implemented or result in an increase in the Company's stock price.
The market price of our common stock is volatile. The market price of our common stock has been, and may continue to be, volatile. Any of the factors discussed above or such as the following may affect the market price of our common stock:
• | actual or anticipated fluctuations in our operating results; |
• | announcements of technological innovations by us or our competitors which may decrease the volume and profitability of sales of our existing products and increase the risk of inventory obsolescence; |
• | new products introduced by us or our competitors; |
14
• | periods of severe pricing pressures due to oversupply or price erosion resulting from competitive pressures or industry consolidation; |
• | developments with respect to patents or proprietary rights; |
• | conditions and trends in the consumer electronics and data storage industries; |
• | contraction in our operating results or growth rates; |
• | the potential impact of activist investors; |
• | changes in financial estimates by securities analysts relating specifically to us or the industries in which we participate in general; and |
• | macroeconomic conditions that affect the market generally. |
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 cannot meet the continued listing requirements of the NYSE, the NYSE may delist our common shares, which would have an adverse impact on the trading volume, liquidity and market price of our common shares.
On February 2, 2016, the Company received written notice (the “Notice”) from NYSE Regulation, Inc. that the Company fell below the continued listing standards of the New York Stock Exchange (“NYSE”). The Notice indicated that the Company was not in compliance with Section 802.01B of the NYSE Listed Company Manual because its average global market capitalization over a consecutive 30 trading-day period was less than $50 million, and its stockholders’ equity was less than $50 million. The Company has already notified the NYSE that, in accordance with applicable NYSE rules, it intends to submit a plan within 45 days from the Company’s receipt of the Notice to cure the deficiency and return to compliance with NYSE continued listing requirements. The plan will advise the NYSE of definitive action the Company has taken, or is taking, that would bring it into conformity with market capitalization listing standards within 18 months of receipt of the Notice. The NYSE will review the plan and, within 45 days of its receipt, determine whether the Company has made a reasonable demonstration of an ability to conform to the relevant standards in the 18 month period. If the NYSE accepts the plan, the Company’s common stock will continue to be listed and traded on the NYSE during the 18 month cure period, subject to the Company’s compliance with other continued listing standards, and the Company will be subject to quarterly monitoring by the NYSE for compliance with the plan. If the NYSE does not accept the plan, the Company’s common stock would be subject to suspension and delisting proceedings.
On February 16th, 2016, we received a letter from the NYSE notifying us that, for 30 consecutive trading days, the average closing price for our common shares was below the minimum $1.00 per share requirement for continued listing on the NYSE under Item 802.01C of the NYSE’s Listed Company Manual. The notice does not have an immediate effect on the listing of our common shares, and our common shares will continue to trade on the NYSE under the symbol “IMN.” It is also standard for the NYSE to automatically de-list any stock that has any trade (even intra-day) below $0.15 per share. As of February 29, 2016, our common shares closed at a price of $0.861 per share. We have 180 days, or until August 14, 2016, to regain compliance with the NYSE’s $1.00 minimum share price requirement. We can regain compliance at any time during the six-month cure period if on the last trading day of any calendar month during the cure period our common shares have a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of such month. Notwithstanding the foregoing, if we determine that we must cure the price condition by taking an action that will require approval of our shareholders, we may also regain compliance by: (i) obtaining the requisite shareholder approval by no later than our next annual meeting, (ii) implementing the action promptly thereafter and (iii) the price of our common shares promptly exceeding $1.00 per share, and the price remaining above that level for at least the following 30 trading days.
A delisting of our common shares from the NYSE would negatively impact us because it would: (i) reduce the liquidity and market price of our common shares; (ii) reduce the number of investors willing to hold or acquire our common shares, which could negatively impact our ability to raise equity financing; (iii) limit our ability to use a registration statement to offer and sell freely tradeable securities, thereby preventing us from accessing the public capital markets, and (iv) impair our ability to provide equity incentives to our employees.
15
The success of our strategic alternatives business strategy is dependent in part on our ability to attract and retain talented personnel. As we explore strategic alternatives to deploy our excess capital, the success of our business strategy will depend in part on the abilities and expertise of our management and other personnel in interpreting and responding to economic, market and other conditions and data in order to, among other things, locate and adopt appropriate opportunities and acquire, monitor and divest businesses and investments. The loss of, or inability to attract, talented individuals to execute our strategic alternatives business strategy could adversely impact our business and results of operations.
The implementation of a new accounting system for most of our subsidiaries could interfere with our business and operations. We are in the process of implementing a new accounting system, NetSuite, for all of our subsidiaries except for Nexsan. The implementation of new systems and enhancements may be disruptive to our business and can be time-consuming and divert management’s attention. Any disruptions relating to our systems or any problems with the implementation, particularly any disruptions impacting our operations or our ability to accurately report our financial performance on a timely basis during the implementation period, could materially and adversely affect our business and operations.
Decreasing revenues and greater losses in our Nexsan product line may have a material and adverse effect on our business, results of operations and capital resources. For the last three fiscal years the revenues attributable to the Nexsan product line have declined and losses have been significant. As Nexsan is expected to be our go forward business, any further material declines in revenues or increased losses could have a material and adverse effect on our business and results of operations. If we are unable to grow revenue, increase profit margins or cut costs, our capital resources may be negatively impacted.
Clinton Group’s investment of some of our excess cash may not be successful and may result in losses. Our recent entry into a subscription agreement with Clinton Group for which they will manage $20 million of our excess cash for investment in Clinton Lighthouse Equities Strategy Fund (Offshore) Ltd. may not produce positive returns and may result in losses. Clinton Group’s investment strategies can perform poorly for a number of reasons, including general market conditions, investment decisions that are made and the performance of the companies and securities in which it invests on our behalf. In addition, volatility may lead to under-performance which could adversely affect our results of operations.
Item 1B. | Unresolved Staff Comments. |
None.
Item 2. | Properties. |
Our worldwide headquarters is located in Oakdale, Minnesota, in the United States of America. On January 4, 2016, the Company sold its Oakdale, Minnesota facility. See Note 18 - Subsequent Events for further information on the sale. 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.
16
Facility | Function | Segment(s) Using Space |
Oakdale, Minnesota (owned) (1) | Sales/Administrative/Laboratory facility/Corporate headquarters | All |
Thousand Oaks, California (leased) | Sales/Assembly | Nexsan |
Campbell, California (leased) | Sales/Distribution center | IronKey |
Hoofddorp, Netherlands (leased) | Sales/Administrative/European regional headquarters | Storage Media and Accessories |
Tokyo, Japan (leased) | Sales/Administrative/ Japan headquarters | Storage Media and Accessories |
Kings Park, Australia (leased) | Sales/Administrative/Distribution center/Asia Pacific regional headquarters | Storage Media and Accessories |
Montreal, Canada (leased) | Sales/Research & development | Nexsan |
Panama City, Panama (leased) | Sales/Administrative/Latin America regional headquarters | Storage Media and Accessories |
Derby, United Kingdom (leased) | Sales/Assembly | Nexsan |
(1) On January 4, 2016, the Company sold its Oakdale, Minnesota facility. See Note 18 - Subsequent Events for further information on the sale.
Item 3. | Legal Proceedings. |
In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. Performance under these indemnities would generally be triggered by a breach of terms of the contract or by a supportable third-party claim. There have 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 businesses are 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, 2015, we are unable to reasonably estimate the ultimate aggregate amount of any monetary liability or financial impact that we may incur with respect to these matters. It is reasonably possible that the ultimate resolution of these matters could materially affect our financial condition, results of operations and cash flows.
On May 22, 2013, Imation was sued in U.S. District Court for the District of Delaware by five entities: One-Blue, LLC (One-Blue), which is an entity with licensing authority for a pool of patents relating to Blu-ray discs, and four members of One-Blue, Koninklijke Philips N.V., Panasonic Corporation, Pioneer Corporation and Sony Corporation. The plaintiffs alleged that Imation's sales of certain Blu-ray discs infringed six patents and sought unspecified damages, treble damages, and attorney's fees. The parties entered into a Settlement Agreement covering these U.S. patent claims for a nominal amount, and effective November 12, 2015, these claims were dismissed.
SpearPoint Capital Fund LP et al. v. Mark E. Lucas, et al. This shareholder derivative action was filed in Delaware Chancery Court on February 9, 2015. It names as defendants the Company and the members of its Board of Directors. Plaintiffs contend that the defendants paid excessive compensation to the directors. They seek
17
damages for breaches of fiduciary duties, waste of corporate assets and unjust enrichment. They also seek corporate governance reforms related to the Company’s compensation practices. The Directors have responded to the complaint denying all the allegations; the Company, as the nominal defendant has responded denying the allegations as well. The parties are now engaged in discovery. Trial, should it be necessary, has been scheduled for June 2016.
Copyright Levies
In many European Union (EU) member countries, the sale of recordable optical media is subject to a private copyright levy. The levies are intended to compensate copyright holders with "fair compensation" for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (Directive). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which, in turn, are expected to distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law making activities. On October 21, 2010, the Court of Justice of the European Union (CJEU) ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The CJEU stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The CJEU ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons presumed to be making private copies. Within this disclosure, we use the term "commercial channel sales" when referring to products intended for uses other than private copying and "consumer channel sales" when referring to products intended for uses including private copying.
Since the Directive was implemented in 2002, we estimate that we have paid in excess of $100 million in levies to various ongoing collecting societies related to commercial channel sales. Based on the CJEU's October 2010 ruling and subsequent litigation and law making activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various collecting societies. Accordingly, subsequent to the October 21, 2010 CJEU ruling, we began withholding levy payments to the various collecting societies and, in 2011, we reversed our existing accruals for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions except Italy and France due to court rulings that are discussed below. As of December 31, 2015 and 2014, we had accrued liabilities of $5.1 million and $9.3 million, respectively, associated with levies related to consumer channel sales for which we are withholding payment.
Since the October 2010 CJEU ruling, we evaluate quarterly on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and (ii) accrued, but unpaid, copyright levies on prior period consumer channel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law making activities within each jurisdiction as well as throughout the EU. However, we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions except Italy and France due to court rulings. In 2015, we reversed $3.8 million of copyright levies as a reduction of cost of sales. We did not reverse any amounts into cost of goods sold for prior year obligations in 2014. In 2013, we reversed $23.1 million of copyright levies as a reduction of cost of sales. See the following for discussion of reversals of copyright levies in 2015 and 2013.
Italy. During the second quarter of 2013, an Italian court rendered a decision associated with a copyright levy matter to which Imation was not a party. This decision (i) confirmed and provided further specificity to the October 21, 2010 ruling of the CJEU that levies should not be paid on commercial channel sales and (ii) evaluated, via audit, the plaintiff's documentation and evidence for distinguishing between levies paid on commercial and consumer channel sales. During the second quarter of 2013, Imation reversed $13.6 million of Italian copyright levies (existing at the time of a 2013 Italian court decision) that arouse from consumer channel sales that had been accrued but not paid to cost of sales. Based on the ruling of this Italian court, in combination with other applicable levy and law-making activities within the EU, including Italy, we believed there was sufficient evidence that we may offset the ongoing levy liability with the Italian collecting society for Imation's sales in the consumer channel against the estimated $39.0 million we have overpaid for copyright levies in Italy (due to us paying levies on commercial channel sales prior to the October 21, 2010 CJEU ruling). We continued this practice of offsetting until December 2015. In December 2015, we settled our claim for reimbursement of the levies that Imation had paid for sales into
18
its commercial channel with the Italian collecting society, S.I.A.E. The settlement was for $1.0 million and is recorded as a reduction in cost of sales.
France. As the case in Italy, Imation has overpaid levies related to sales into its commercial channel in an amount of $55.1 million. Likewise, Imation has been offsetting the ongoing levy liability with the French collecting society for Imation's sales in the consumer channel against the estimated $55.1 million we have overpaid for copyright levies in France (due to paying levies on commercial channel sales prior to the October 21, 2010 CJEU ruling). During the fourth quarter of 2013, Imation reversed $9.5 million of French copyright levies (existing at the time of a 2013 French court decision) that arouse from consumer channel sales that had been accrued but not paid to cost of sales. To date, Imation has offset approximately $14.4 million.
We believe that we have utilized a methodology, and have sufficient documentation and evidence, to fully support our estimates that we have overpaid $55.1 million to the French collection society of levies on commercial channel sales and that we have incurred (but not paid) $14.4 million of levies on consumer channel sales in France. However, such amounts are currently subjected to challenge in court and there is no certainty that our estimates would be upheld and supported. in December 2012, Imation filed a complaint against the French collecting society, Copie France, for reimbursement of the $55.1 million in commercial channel levies that Imation had paid prior to October 2010. Copie France has counterclaimed for all levies that Imation has not paid since October 2010. On December 8, 2015, there was a hearing in the Paris District Court. A ruling is expected during the first quarter of 2016.
Other Jurisdictions. During the first quarter of 2015, Imation reversed $2.8 million accrual for German copyright levies on optical products as the result of a favorable German court decision retroactively setting levy rates at a level much lower than the rates sought by the German collecting society. The reversal was recorded as a reduction of cost of sales. At December 31, 2015, the recovery of some or all of the copyright levies previously paid on commercial sales in EU jurisdictions other than Italy, France and Germany represents a gain contingency that has not yet met the required criteria for recognition in our financial statements. There is no assurance that we will realize any of this gain contingency. We also have an estimated $5.1 million of accrued but unpaid levies associated with consumer sales in EU jurisdictions other than Italy and France that we continue to carry on our books.
We are subject to several pending or threatened legal actions by the individual European national levy collecting societies in relation to private copyright levies under the Directive. Those actions generally seek payment of the commercial and consumer optical levies withheld by Imation. Imation has corresponding claims in those actions seeking reimbursement of levies improperly collected by those collecting societies. We are subject to threatened actions by certain customers of Imation seeking reimbursement of funds they allege relate to commercial levies that they claim they should not have paid. Although these actions are subject to the uncertainties inherent in the litigation process, based on the information presently available to us, management does not expect that the ultimate resolution of these actions will have a material adverse effect on our financial condition, results of operations or cash flows. We anticipate that additional court decisions may be rendered in 2016 that may directly or indirectly impact our levy exposure in specific European countries which could trigger a review of our levy exposure in those countries.
Item 4. | Mine Safety Disclosures. |
Not Applicable.
PART II
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
(a) — (b)
As of February 29, 2016, there were 37,267,442 shares of our common stock, $0.01 par value (common stock), outstanding and held by 17,892 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 2015 or 2014. Future dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors.
Unregistered Sales of Equity Securities
19
There were no unregistered sales of equity securities in 2015 and 2014. Additionally, no unregistered securities were sold in 2015 or 2014.
Market for our Common Stock
The following table sets forth, for the periods indicated, the intraday high and low sales prices of common stock as reported on the New York Stock Exchange.
2015 Sales Prices | 2014 Sales Prices | ||||||||||||||
High | Low | High | Low | ||||||||||||
First quarter | $ | 4.35 | $ | 3.48 | $ | 6.60 | $ | 4.31 | |||||||
Second quarter | $ | 4.75 | $ | 3.63 | $ | 6.04 | $ | 3.22 | |||||||
Third quarter | $ | 4.36 | $ | 2.04 | $ | 3.73 | $ | 2.69 | |||||||
Fourth quarter | $ | 2.70 | $ | 1.25 | $ | 4.16 | $ | 2.80 | |||||||
(c)
Issuer Purchases of Equity Securities
(a) | (b) | (c) | ||||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs | ||||||||
October 1, 2015 - October 31, 2015 | — | $ | — | — | 2,004,542 | |||||||
November 1, 2015 - November 30, 2015 | — | — | — | 2,004,542 | ||||||||
December 1, 2015 - December 31, 2015 | 306 | 1.84 | — | 2,004,542 | ||||||||
Total | 306 | $ | 1.84 | — | 2,004,542 | |||||||
(a) The purchases in this column were shares that were surrendered to Imation by participants in our stock-based compensation plans (the Plans) to satisfy the tax obligations related to the vesting of restricted stock awards.
(b) The average price paid in this column related to shares that were surrendered to Imation by participants in the Plans to satisfy the tax obligations related to the vesting of restricted stock awards.
(c) On May 3, 2012, the Company announced that on May 2, 2012 our Board of Directors authorized a share repurchase program of 5 million shares of common stock. The authorization has no expiration date.
See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for additional information regarding the Company's equity compensation plan.
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 ArcaEx Tech 100 Index (formerly known as the Pacific Stock Exchange High Technology Index) and the S&P Small Cap 600 Index, over the same period. The graph and table assume the investment of $100 on December 31, 2010 in each of our common stock, the S&P Small Cap 600 Index and the ArcaEx Tech 100 Index and reinvestment of all dividends.
20
(Total Return Index) | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | ||||||||||||
Imation Corp. | $ | 100.00 | 55.58 | 45.30 | 47.24 | 36.76 | 13.29 | |||||||||||
S&P Small Cap 600 Index | $ | 100.00 | 98.75 | 113.38 | 158.11 | 167.17 | 159.82 | |||||||||||
ArcaEx Tech 100 Index | $ | 100.00 | 99.25 | 119.00 | 159.74 | 182.45 | 178.96 | |||||||||||
The stock performance graph shall not be deemed soliciting material or to be filed with the SEC 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 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 or the Exchange Act.
21
Item 6. | Selected Financial Data.* |
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
(Dollars in millions, except per share data) | |||||||||||||||||||
Statement of Operations Data: | |||||||||||||||||||
Net revenue | $ | 529.2 | $ | 729.5 | $ | 860.8 | $ | 1,006.7 | $ | 1,166.6 | |||||||||
Gross profit | 101.3 | 138.4 | 188.7 | 189.3 | 205.4 | ||||||||||||||
Selling, general and administrative | 137.8 | 174.7 | 181.6 | 191.1 | 182.4 | ||||||||||||||
Research and development | 19.2 | 18.8 | 18.4 | 20.4 | 18.3 | ||||||||||||||
Litigation (gain) settlement | — | — | (2.5 | ) | — | 2.0 | |||||||||||||
Goodwill impairment | 36.1 | 35.4 | — | 23.3 | 1.6 | ||||||||||||||
Intangible impairments | 37.6 | — | — | 251.8 | — | ||||||||||||||
Restructuring and other | 47.9 | 13.6 | 11.3 | 21.1 | 21.5 | ||||||||||||||
Operating loss | (177.3 | ) | (104.1 | ) | (20.1 | ) | (318.4 | ) | (20.4 | ) | |||||||||
Loss from continuing operations | (194.0 | ) | (112.4 | ) | (24.4 | ) | (324.8 | ) | (35.2 | ) | |||||||||
Loss from discontinued operations | — | (2.3 | ) | (20.0 | ) | (15.9 | ) | (11.5 | ) | ||||||||||
Net loss | (194.0 | ) | (114.7 | ) | (44.4 | ) | (340.7 | ) | (46.7 | ) | |||||||||
Loss per common share from continuing operations: | |||||||||||||||||||
Basic | (4.84 | ) | (2.74 | ) | (0.60 | ) | (8.67 | ) | (0.93 | ) | |||||||||
Diluted | (4.84 | ) | (2.74 | ) | (0.60 | ) | (8.67 | ) | (0.93 | ) | |||||||||
Net loss per common share: | |||||||||||||||||||
Basic | (4.84 | ) | (2.80 | ) | (1.10 | ) | (9.09 | ) | (1.24 | ) | |||||||||
Diluted | (4.84 | ) | (2.80 | ) | (1.10 | ) | (9.09 | ) | (1.24 | ) | |||||||||
Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 70.4 | $ | 114.6 | $ | 132.6 | $ | 108.7 | $ | 223.1 | |||||||||
Accounts receivable, net | 25.4 | 134.4 | 163.3 | 220.8 | 234.9 | ||||||||||||||
Inventories | 10.5 | 57.7 | 84.3 | 166.0 | 208.8 | ||||||||||||||
Property, plant and equipment, net | 4.6 | 45.0 | 51.6 | 58.9 | 55.4 | ||||||||||||||
Intangible assets, net | 4.2 | 57.9 | 68.6 | 81.9 | 321.7 | ||||||||||||||
Total assets | 168.4 | 499.2 | 641.8 | 793.5 | 1,149.3 | ||||||||||||||
Accounts payable | 44.3 | 95.5 | 94.7 | 162.7 | 205.2 | ||||||||||||||
Long-term debt | — | — | — | — | — | ||||||||||||||
Total liabilities | 144.0 | 258.4 | 268.6 | 393.1 | 425.6 | ||||||||||||||
Total shareholders’ equity | 24.4 | 240.8 | 373.2 | 400.4 | 723.7 | ||||||||||||||
Other Information: | |||||||||||||||||||
Current ratio | 1.4 | 1.6 | 1.9 | 1.6 | 2.0 | ||||||||||||||
Days sales outstanding(1) | 32 | 55 | 56 | 59 | 58 | ||||||||||||||
Days of inventory supply(1) | 132 | 44 | 61 | 89 | 85 | ||||||||||||||
Capital expenditures | $ | 3.0 | $ | 5.6 | $ | 7.0 | $ | 10.2 | $ | 7.3 | |||||||||
Number of employees | 600 | 910 | 940 | 1,230 | 1,130 | ||||||||||||||
_______________________________________
* See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the financial information presented in this table.
(1) | These operational measures, which we regularly use, are provided to assist in the investor’s further understanding of our operations. Days sales outstanding is calculated using the count-back method, which calculates the number of days of most recent revenue that are reflected in the net accounts receivable balance. Days of inventory supply is calculated using the current period inventory balance divided by an estimate of the inventoriable portion of cost of goods sold expressed in days. |
22
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Imation Corp., a Delaware Corporation is a global data storage and data security company. With a 60-year history of technology leadership, the Company's mission is to help organizations to create an integrated storage, private cloud, file sync and share enterprise solution. The Company historically operated in three two focused business segments: Nexsan, IronKey and Storage Media and Accessories (the legacy businesses). Going forward, we will focus on our Nexsan product lines. The Company is also exploring strategic alternatives to deploy its excess capital.
The following discussion is intended to be read in conjunction with Item 1. Business and our Consolidated Financial Statements and related Notes that appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Imation's actual results could differ materially from those anticipated due to various factors discussed below under “Cautionary Statements Regarding Forward-Looking Statements” and in Item 1A. Risk Factors of this Annual Report on Form 10-K.
The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and our subsidiaries. See Note 2 - Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for further information regarding consolidation. References to “Imation,” the “Company,” “we,” “us” and “our” are to Imation Corp., and its subsidiaries and consolidated entities unless the context indicates otherwise. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP).
Overview
Imation was formed in 1996 from the spin-off of substantially all the businesses that comprised the data storage and imaging systems groups of 3M Company. The Company has undertaken a series of strategic transformations to leverage Imation’s global footprint and deep roots in data storage to become a leading player in data storage and security solutions.
In May 2015, through a proxy contest, shareholders elected three directors nominated by the Clinton Group, Inc. (“Clinton”) to the Imation Board of Directors. These directors comprised half of the seats of the Imation board.
In August 2015, Imation formed a Strategic Alternatives Committee of its Board to develop initiatives for strategic value creation and to work with management to make recommendations to the Board regarding the Company’s use of excess capital.
On September 27, 2015, the Company adopted a restructuring plan which began the termination process of its legacy businesses including commercial storage media (magnetic tape), consumer storage media (optical disc and flash drive) and audio and accessories. The plan also called for the aggressive rationalization of Imation’s corporate overhead. The strategic shift resulted from continued losses due to secular declines in Imation’s legacy businesses, and it aimed to reduce the cost structure and streamline the organization in light of these declines. The Company expects that it will incur approximately $120 million in total charges for the restructuring plan excluding tax impact. The charges are mostly non-cash, with cash charges expected to be approximately $35 million. The Company will complete the majority of the restructuring plan during the first quarter of 2016, with most of the charges already incurred in the third and fourth quarters of 2015.
On October 14, 2015, Imation acquired substantially all of the equity of Connected Data, Inc. (CDI), an emerging enterprise-class, private cloud sync and share company, in a transaction valued at $6.7 million. The acquisition of CDI augments Imation’s vision to deliver a comprehensive and secure storage, backup and collaboration ecosystem.
During the third quarter of 2015, management and the Board of Directors evaluated the Nexsan business. As a result of this assessment, we significantly revised our previous business strategy by narrowing our product portfolio and reducing the operating expenses associated with these businesses.
On January 4, 2016, Imation completed the sale of its corporate headquarters facility in Oakdale, Minnesota, to Larson Family Real Estate LLLP for a gross purchase price of $11.5 million, with net proceeds of approximately $11 million. As previously described in the Company’s Form 10-Q for the quarter ended September 30, 2015, the Company classified its corporate headquarters facility as an asset held for sale. The Company will keep a small team and its headquarters in Minnesota.
Also on January 4, 2016, the Company also sold its Memorex trademark and two associated trademark licenses to DPI Inc., a St. Louis-based branded consumer electronics company for $9.4 million.
23
On February 2, 2016, the Company sold its IronKey business to Kingston Digital, Inc. and DataLocker Inc. in two asset purchase agreements. To Kingston Digital, Inc., we sold the assets representing the Company’s business of developing, designing, manufacturing and selling IronKey mobile security solutions. This includes Windows to Go USB flash drives, Windows to Go use cases and encrypted USB flash drives and external USB hard drives. The sale specifically excluded the software and services aspect of the IronKey business. Kingston Digital, Inc. paid a purchase price of $4.3 million at closing for certain assets, including inventory, and the Company retained accounts receivable and accounts payable relating to that business. To DataLocker, Imation sold the assets of the Company’s business of software and services for its IronKey products, including services related to Windows to Go USB flash drives. DataLocker paid a purchase price of $0.4 million at closing and agreed to assume certain service obligations in the amount of approximately $2 million, as well as pay the Company earnouts in the event certain service revenue targets are achieved.
Our current business segments were formed in 2015 to align with our go-forward and legacy operations. A description of our 2015 segments follows directly below. Upon completion of Imation’s restructuring plan in 2016, there will be one operating business segment: Nexsan.
Nexsan Segment
This segment operates as its own product line. Our storage systems portfolio ranges from high volume, dense storage products to innovative unified hybrid storage solutions for small and medium commercial businesses, enterprise and government customers.
This product line offers strong growth potential and is the main target of our investment spending. It consists of Imation Nexsan and Connected Data products. There are more than 11,000 Nexsan customers worldwide with over 38,000 systems deployed since 1999. Imation’s Nexsan portfolio features solid-state optimized unified hybrid storage systems, secure automated archive solutions and high-density enterprise storage arrays. Our solutions are ideal for mission-critical IT applications such as virtualization, cloud, databases and collaborations and energy efficient, high-density storage for backup and archiving. Nexsan systems are delivered through a worldwide network of cloud service providers, value-added resellers (VARs) and solutions integrators. We offer global customers four main solution sets:
• | The NST® hybrid storage line (SAN & NAS), which addresses the high-growth hybrid storage market by combining solid state technology with spinning disk for high performance and capacity; |
• | The Nexsan E-Series disk arrays, which provide industry-leading storage density, reliability and power management to the block-based storage market; |
• | The Assureon® line, which delivers secure archive systems for data offload, compliance and secure cloud deployment; and |
• | The Transporter line, which delivers private cloud sync and share services for connected workers in security and cost-sensitive work environments. Transporter, which came from the CDI acquisition, is a secure, on-site alternative to Dropbox and provides mobile access, file sync-and-share and global replication. Unlike Dropbox, Transporter enables an enterprise to create a private cloud. Transporter extends existing file servers and NAS systems, is non-disruptive to current systems and processes and has a much higher capacity and performance, while being significantly less expensive than public cloud storage. |
This product family addresses growth segments of the data storage market. We have added sales, engineering resources and value-added resellers around the world to build Nexsan’s presence in key geographies. Recently, we have rationalized the infrastructure to concentrate on the strongest opportunities. Our targeted vertical markets include government, healthcare, and media and entertainment.
IronKey Segment
The IronKey portfolio, which was part of Imation in 2015 but was sold in early 2016, met the challenge of protecting today’s mobile workforce, featuring secure USB solutions for data transport and mobile workspaces. The IronKey line includes the world’s leading hardware encrypted USB drives, PC on a Stick® workspaces for Microsoft® Windows To Go®, and cloud-based or on-premises centralized secure device management solutions.
Storage Media and Accessories (Legacy Business) Business Segment
The Storage Media and Accessories business segment distributes differentiated products through retail and commercial channels across the globe. Storage Media and Accessories consist of the Commercial Storage Media, Consumer Storage Media and Audio and Accessories product categories. This business continues to be impacted by lower revenues from the expected secular declines in magnetic tape and optical media products. Due to the
24
declines in the business, in 2015, we adopted a restructuring plan in which the Company will terminate sales and operations of this legacy business. The strategic shift of winding down the legacy business is still in process and is expected to be complete in 2016. Our strategy is to maximize cash flows, extract working capital from this business and manage our cost structure efficiently as the business winds down.
Commercial Storage Media
Our magnetic tape media products are used for business and operational continuity planning, disaster recovery, data backup, near-line data storage and retrieval, and for cost-effective mass and archival storage. Our magnetic tape revenues decreased consistent with the overall market, and we are in the process of terminating this business.
Consumer Storage Media
Our Consumer Storage Media product line includes optical products, USB flash drives, flash cards and external hard disk drives. Imation’s optical products consist of DVDs, CDs and Blu-ray™ recordable media. Our strategy is to maximize cash flows, extract working capital from this business and manage our cost structure efficiently as the business winds down. We marketed our optical media brands, as well as USB flash drives, flash cards and external hard disk drives, under our Imation, Memorex and TDK Life on Record brands. We sourced these products from manufacturers primarily in Asia and sold them through a variety of retail and commercial distribution channels globally.
Executive Summary
Consolidated Results of Operations for the Twelve Months Ended December 31, 2015
• | Revenue of $529.2 million in 2015 was down 27.5 percent compared with revenue of $729.5 million in 2014 driven by secular declines in our optical and tape products, business divestitures, the announcement to terminate our legacy business and currency impacts. Revenue for 2015 compared to 2014 was negatively impacted by 5.9 percent due to foreign currency impacts. |
• | Gross margin was 19.1 percent in in 2015 and 19.0 percent in 2014. The increase in gross margin was driven primarily by product mix and volumes which was partially offset by $9.7 million of inventory write-offs taken during 2015 as a result of our actions to end sales and operations in our legacy business. |
• | Selling, general and administrative expense was $137.8 million in 2015, down $36.9 million compared with $174.7 million in 2014. The decrease from prior year is due to lower costs from business divestitures, lower costs resulting from the wind down of our legacy business, corporate reductions, lower depreciation and amortization from impairments, currency impacts and lower compensation expense. The decrease was partially offset by increased charges for accounts receivable write-offs taken in 2015 and incremental investment in Nexsan and IronKey which included hiring sales resources, introducing new products and promoting the brand globally. |
• | Research and development expense was $19.2 million in 2015, up $0.4 million, compared with $18.8 million in 2014 which reflects the Company's increased investment in higher margin Nexsan projects. The increase was partially offset by spending reductions in our legacy business. |
• | Restructuring and other expense was $47.9 million in 2015 compared to $13.6 million in 2014. Restructuring and other expense in 2015 includes restructuring charges of $28.6 million and other expense of $19.3 million. Restructuring charges were primarily related to severance from announcement to terminate our legacy business and further reduce and rationalize our corporate overhead. Other expense relates to asset write downs and consulting costs which is partially offset by the gain on the termination of the TDK license, the gain on the sale of our RDX Storage product line and pension curtailments. Restructuring and other expense in 2014 includes restructuring charges of $5.4 million and other expense of $8.2 million. |
• | Operating loss from continuing operations was $177.3 million in 2015 compared to $104.1 million in 2014. Operating loss from continuing operation in 2015 includes a goodwill impairment charge of $36.1 million and intangible asset impairments of $37.6 million. Operating loss from continuing operations in 2014 included a goodwill impairment charge of $35.4 million. |
• | Other expense was $4.2 million in 2015, down $1.0 million, compared with $5.2 million in 2014 due to currency impacts and hedging benefits. The decrease was partially offset by increased interest expense from the write off of capitalized debt fees from the cancellation of our credit facilities and other expense from losses on trading securities and foreign currency translation losses. |
25
• | The income tax provision was $12.5 million in 2015 as compared to $3.1 million in 2014. The increase is primarily due to the recording of valuation allowances on deferred tax assets from operations outside the United States offset by reduced income tax liability outside of the United States and reduced liability on unremitted foreign earnings. |
• | Diluted loss per share from continuing operations was $4.84 for 2015 compared with $2.74 for 2014. |
Cash Flow/Financial Condition for the Twelve Months Ended December 31, 2015
• | Cash and cash equivalents totaled $70.4 million as of December 31, 2015, down $44.2 million compared with $114.6 million at December 31, 2014. |
• | Cash used in operating activities was $17.8 million in 2015 compared with cash provided by operating activities of $7.8 million in 2014. Cash used in operating activities in 2015 was primarily related to the Legacy Business restructuring costs and investment in Nexsan and IronKey, which was offset by cash generated by our legacy business. |
• | Cash used in financing activities was $20.2 million in 2015 compared with cash used in financing activities of $2.6 million in 2014. Cash used in financing activities in 2015 was primarily related to the credit facility loan pay off. |
Results of Operations
Net Revenue
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Net revenue | $ | 529.2 | $ | 729.5 | $ | 860.8 | (27.5 | )% | (15.3 | )% | |||||||
Our worldwide revenue in 2015 decreased compared with 2014 due to the Legacy Business wind down and declines in Nexsan and IronKey of $197.9 million, $0.7 million and $1.7 million, respectively. Within the Legacy Business, revenue decreased during the first three quarters of the year due to the ongoing declines in magnetic tape and optical media products and decreased in the fourth quarter due to our actions to terminate our global sales and operations. The Legacy Business was also impacted by the termination of our use of TDK licensing rights and the divestiture of the RDX product line. Within the Nexsan and IronKey segment, revenue decrease was due to the business realignment and the foreign currency translation. See Segment Results for further discussion of our reporting segments. Our worldwide revenue for 2015 compared to 2014 was negatively impacted by foreign currency translation of 5.9 percent.
Our worldwide revenue in 2014 decreased compared with 2013 due to declines in the Nexsan, IronKey and Storage Media and Accessories business segments of 18.8 percent, 8.0 percent and 15.1 percent, respectively. Within the Storage and Security Solutions segment, revenue decreased due to marketplace sluggishness in the first half of 2014. Within the Storage Media and Accessories segment, revenue decreased due to declines in the Consumer Storage Media products and Commercial Storage Media products. Optical media has been impacted by declining revenue consistent with the overall market. Tape media has been impacted by industry wide dynamics including competing formats, as well as continuing improvements in compression and deduplication technologies. See Segment Results for further discussion of our reporting segments. Revenue for 2014 compared to 2013 was negatively impacted by foreign currency translation of 2.0 percent.
Gross Profit
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Gross profit | $ | 101.3 | $ | 138.4 | $ | 188.7 | (26.8 | )% | (26.7 | )% | |||||||
Gross margin | 19.1 | % | 19.0 | % | 21.9 | % | |||||||||||
Gross profit decreased in 2015 compared with 2014 due to lower revenues and $9.7 million of inventory write-offs taken as a result of our actions to end sales and operations in our legacy business.
26
Total gross margin increased 0.1 percentage points in 2015 compared with 2014 primarily due to our product mix moving towards the higher margins of our Nexsan and IronKey products and the benefit of the accrual reversal of $3.8 million for Italian and German copyright levies in 2015. This was partially offset from inventory write-offs of $9.7 million taken as a result of our actions to end sales and operations in our legacy business.
Gross profit decreased in 2014 compared with 2013 due to lower revenues and the benefit of an accrual reversal of $23.1 million for Italian and French copyright levies in 2013. The levy accrual reversal had a 2.7 percent positive impact on margin in 2013. See Note 15 - Litigation, Commitments and Contingencies in our Notes to Consolidated Financial Statements for more information on the levy reversal. Gross profit during 2014 was also impacted by higher inventory write-offs to rationalize certain product lines.
Total gross margin decreased 2.9 percentage points in 2014 compared with 2013 due to the benefit of the accrual reversal of $23.1 million for Italian and French copyright levies in 2013 discussed above. Excluding the levy reversal, the gross margin for 2013 and 2014 was essentially flat year over year.
Selling, General and Administrative (SG&A)
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Selling, general and administrative | $ | 137.8 | $ | 174.7 | $ | 181.6 | (21.1 | )% | (3.8 | )% | |||||||
As a percent of revenue | 26.0 | % | 23.9 | % | 21.1 | % | |||||||||||
SG&A expense decreased in 2015 compared with 2014 due to lower costs from business divestitures, the lower costs resulting from the wind down of our legacy business, corporate reductions, lower depreciation and amortization, currency impacts and lower compensation expense. We reduced legacy operating costs by $28.5 million in 2015 which reflect our continued commitment to cutting costs and right sizing Imation's operations.
SG&A expense decreased in 2014 compared with 2013 due primarily to our cost reduction efforts. We reduced legacy operating costs by $18.2 million in 2014 across the organization in order to operate as a smaller company with more focused product lines and streamlined core operational processes. Incremental investment in Nexsan and IronKey partially offset these reductions in 2014 which included hiring sales resources, introducing new products and promoting the brand globally.
Research and Development (R&D)
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Research and development | $ | 19.2 | $ | 18.8 | $ | 18.4 | 2.1 | % | 2.2 | % | |||||||
As a percent of revenue | 3.6 | % | 2.6 | % | 2.1 | % | |||||||||||
R&D expense increased in 2015 compared with 2014 which reflects the Company's increased investment in higher margin projects in Nexsan business. The increase was partially offset by spending reductions in our legacy business. We reduced legacy R&D expense in this business by $0.6 million leaving total legacy spending of $2.4 million in 2015.
R&D expense increased in 2014 compared with 2013 which reflects the Company's increased investment in higher margin projects in Nexsan and IronKey. We reduced legacy R&D expense by $1.0 million leaving total legacy spending of $3.0 million in 2014.
Goodwill Impairment
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Goodwill impairment | $ | 36.1 | $ | 35.4 | $ | — | |||||
2015 Goodwill Analysis
27
We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year and during an interim period if an event occurs or circumstances change that would warrant impairment testing. During the third quarter of 2015, management and the Board of Directors engaged in an assessment of the Nexsan and IronKey businesses of the Company. As a result of this assessment, we significantly revised our previous business strategy by adjusting our product portfolio to a smaller product offering as well as changing our investment philosophy associated with these businesses such that the investment in operating expenses will be significantly reduced. Because of our strategy change, smaller product portfolio and reduced future investment, we revised our forecasts, which we determined to be a triggering event requiring us to review our goodwill related to our Nexsan and IronKey reporting units for impairment.
In determining the estimated fair value of these reporting units, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized discount rates of approximately 16.0 percent and terminal growth rates ranging from zero to 3.0 percent.
As a result of this assessment, it was determined that the carrying values of our Nexsan and IronKey reporting units exceeded their estimated fair values. Accordingly, we performed a Step 2 goodwill impairment test which compared the implied value of the goodwill associated with each of these reporting units to the carrying value of the goodwill associated with each of these reporting units. Based on this analysis, the carrying value of the goodwill associated with Nexsan exceeded its implied value by $28.1 million, the carrying value of the goodwill associated with IronKey exceeded its implied value by $8.0 million. Consequently, we recorded an impairment charge of $36.1 million in the Consolidated Statements of Operations for the year ended December 31, 2015.
On October 14, 2015, the Company acquired the equity of Connected Data, Inc. (“CDI”) in a cash and stock transaction valued at $6.7 million.
The CDI acquisition has been accounted for in accordance with ASC 805, using the acquisition method of accounting. The assets acquired and liabilities assumed in connection with the CDI acquisition, including identifiable intangible assets, have been measured at their fair value. The purchase price consists of approximately $3.3 million in cash and debt assumed, 1,511,151 shares of Imation common stock valued at approximately $2.6 million. In addition, up to $5.0 million in cash and shares in earn outs are possible based upon CDI’s performance through 2016 and the first half of 2017. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between $0 and $5.0 million. The contingent consideration earn out was valued at $0.8 million.
The purchase price allocation resulted in goodwill of $3.8 million, primarily attributable to strategic synergies and workforce that did not qualify for separate recognition (i.e acquired workforce). Goodwill associated with the acquisition of CDI is included in the Nexsan reporting unit for the purposes of goodwill impairment testing.
As of December 31, 2015, we had a goodwill balance of $3.8 million.
See Note 2 - Summary of Significant Accounting Policies and Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements for further background and information on goodwill impairments.
2014 Goodwill Analysis
During the first and then again in the third quarter of 2014, we adjusted our internal forecast for our Nexsan reporting unit due to lower than anticipated results. We considered these factors to be an event that warranted an interim test as to whether goodwill was impaired in each of these periods. The first quarter test resulted in no impairment of goodwill as the estimated fair value of the reporting unit exceeded its carrying value. In performing Step 1 of the third quarter test, it was determined that the carrying value of our Nexsan reporting unit exceeded its estimated fair value. Accordingly, we performed a Step 2 goodwill impairment test which compared the implied value of the goodwill associated with Nexsan to the carrying value of such goodwill. Based on this analysis, the carrying value of the Nexsan goodwill exceeded its implied value by $35.4 million and, consequently, we recorded an impairment charge of that amount in the Consolidated Statements of Operations.
In determining the estimated fair value of the reporting unit, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and
28
EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized a discount rate of 16.5 percent and a terminal growth rate of 3.0 percent. Because our Nexsan reporting unit had not been able to achieve its anticipated results, we increased our discount rate by 2.0 percent over the estimated market discount rate of 14.5 percent.
During the fourth quarter of 2014, we performed our annual impairment testing of goodwill for our Nexsan and IronKey reporting units. In performing Step 1 of these tests, we compared the estimated fair value of these reporting units to the carrying value. These impairment tests resulted in no fourth quarter impairment as the estimated fair value of each reporting unit exceeded the carrying value for the Nexsan and IronKey reporting units.
In determining the estimated fair value of the reporting units for our annual test performed in the fourth quarter of 2014, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized a discount rate of 16.5 percent and a terminal growth rate of 3.0 percent for each reporting unit.
2013 Goodwill Analysis
During the fourth quarter of 2013, we performed our annual impairment testing of goodwill for our Nexsan and IronKey reporting units. These impairment tests resulted in no impairment of goodwill as the estimated fair value of each reporting unit exceeded the carrying value in Step 1 of the impairment tests for the Nexsan and IronKey reporting units. There were no triggering events that occurred during 2013 that warranted an interim goodwill impairment test to be performed.
For the 2013 impairment test for the IronKey reporting unit, we used forecasted cash flows over a ten year period, a terminal growth rate of 3.0 percent and a discount rate of 15.5 percent. The discount rate reflects the relative risk of achieving cash flows as well as any other specific risks or factors related to the IronKey reporting unit.
For the 2013 impairment test for the Nexsan reporting unit, we used forecasted cash flows over a ten year period, a terminal growth rate of 3.0 percent and a discount rate of 13.5 percent. The discount rate reflected the relative risk of achieving cash flows as well as any other specific risks or factors related to the Nexsan reporting unit.
See Note 2 - Summary of Significant Accounting Policies and Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements as well as Critical Accounting Policies and Estimates for further background and information on goodwill impairments.
Intangible Impairments
2015 Intangible Asset Analysis
During the third quarter of 2015, management and the Board of Directors engaged in a detailed strategic and financial assessment of the Company. As a result of this assessment, we significantly revised our previous business strategy by adjusting our product portfolio to a smaller product offering as well as changing our investment philosophy such that the investment in operating expenses will be significantly reduced. Because of our strategy change, smaller product portfolio and reduced future investment, we revised our forecasts, which we determined to be a triggering event for impairment testing. This required the assessment of the recoverability of the long-lived assets (including definite-lived intangible assets).
We compared the carrying value of our asset groups with their estimated undiscounted future cash flows and determined that the carrying value of certain asset groups exceeded the undiscounted cash flows expected to be generated by the asset group. For those asset groups, we then compared the carrying value of the asset group to its estimated fair value to determine the amount by which our long-lived assets (primarily intangible assets) with the asset group were impaired. As a result of these analyses, we recorded an impairment charge of $37.6 million in the Consolidated Statements of Operations for the year ended December 31, 2015.
In determining the estimated fair value of the asset groups, we used the income approach, a valuation technique under which we estimate future cash flows using the asset group's financial forecasts. Our expected cash
29
flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized discount rates ranging of approximately 16.0 percent and terminal growth rates ranging from zero to 3.0 percent.
On October 14, 2015, the Company acquired the equity of Connected Data, Inc. (“CDI”) in a cash and stock transaction valued at $6.7 million.
The CDI acquisition has been accounted for in accordance with ASC 805, using the acquisition method of accounting. The assets acquired and liabilities assumed in connection with the CDI acquisition, including identifiable intangible assets, have been measured at their fair value. The purchase price consists of approximately $3.3 million in cash and debt assumed, 1,511,151 shares of Imation common stock valued at approximately $2.6 million. In addition, up to $5.0 million in cash and shares in earn outs are possible based upon CDI’s performance through 2016 and the first half of 2017. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between $0 and $5.0 million. The contingent consideration earn out was valued at $0.8 million.
The purchase price allocation resulted in intangible of $4.3 million, primarily attributable to developed technology. The intangible will be amortized over a period of 6 years.
As of December 31, 2015, we had an intangible balance of $4.2 million related to developed technology.
See Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements for more information on intangible assets including our valuation approach and assumptions.
2014 Intangible Asset Analysis
As a part of our annual goodwill impairment test for our Nexsan and IronKey reporting units, we also tested for the impairment of long-lived assets, including intangible assets with the asset groups included in our Nexsan and IronKey reporting units. In performing these tests, we compared the carrying values of these asset groups with their estimated undiscounted future cash flows and determined that the undiscounted cash flows expected to be generated by the asset groups exceeded their carrying values resulting in no impairment. During the first and third quarters of 2014, as noted below under our 2014 goodwill analysis discussion, we performed interim goodwill impairment testing for our Nexsan reporting unit due to lower than anticipated results. We determined these factors to be an event that warranted interim tests as to whether our intangible assets associated with Nexsan were impaired. Based on our impairment analysis performed in the first and third quarters of 2014, we concluded that we did not have an impairment of our intangible assets associated with Nexsan at those times.
See Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements for more information on intangible assets including our valuation approach and assumptions.
2013 Intangible Asset Analysis
As a part of our annual goodwill impairment test for our Nexsan and IronKey reporting units, we also tested for the impairment of long-lived assets, including intangible assets with the asset groups included in our Nexsan and IronKey reporting units. In performing these tests, we compared the carrying values of these asset groups with their estimated undiscounted future cash flows and determined that the undiscounted cash flows expected to be generated by the asset groups exceeded their carrying values resulting in no impairment. There were no interim triggering events that occurred during 2013 that warranted an impairment test to be performed on our long-lived assets (including intangible assets) other than goodwill.
See Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements for more information on our impairment of intangible assets.
Litigation Settlement
A $2.5 million gain from a litigation settlement from a long-standing case in Brazil was recognized in 2013.
Restructuring and Other
On September 27, 2015, the Company adopted a restructuring plan pursuant to which it will terminate sales and operations of its legacy business and further reduce and rationalize its corporate overhead (the Restructuring Plan). The Company will continue its Nexsan and Connected Data, Inc. businesses.
30
The Company is entering into the Restructuring Plan as a result of continued losses due to secular declines in its legacy business and to reduce the cost structure and streamline the organization in light of these changes. The Company expects that it will incur approximately $120 million total charges for the Restructuring Plan excluding tax impact and approximately $35 million of the total charges will require cash expenditures. The Company expects that the Restructuring Plan and associated wind down of its legacy business will substantially complete the plan during the first quarter of 2016.
In October 2012, the Board of Directors approved our Global Process Improvement (GPI) Program in order to realign our business structure and significantly reduce operating expense over time. This restructuring program addressed product line rationalization and infrastructure and included a planned reduction in our global workforce. The GPI restructuring program is closed and current and future related charges will be reported as part of the Restructuring Plan discussed above.
The components of our restructuring and other expense included in our Consolidated Statements of Operations were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Restructuring | |||||||||||
Severance and related | $ | 24.5 | $ | 3.9 | $ | 2.1 | |||||
Lease termination costs | 1.5 | 0.3 | 0.7 | ||||||||
Other | 2.6 | 1.2 | 2.4 | ||||||||
Total restructuring | $ | 28.6 | $ | 5.4 | $ | 5.2 | |||||
Other | |||||||||||
Settlement of UK pension plan (Note 9) | — | 0.5 | 10.6 | ||||||||
Gain on sale of fixed assets held for sale | — | — | (9.8 | ) | |||||||
Acquisition and integration related costs | 0.5 | — | 2.8 | ||||||||
Pension settlement/curtailment (Note 9) | (0.8 | ) | 0.2 | 2.1 | |||||||
Contingent consideration fair value adjustment (Note 4) | — | — | |||||||||
Intangible asset abandonment (Note 6) | — | — | — | ||||||||
Asset disposals / write down | 24.6 | 1.8 | — | ||||||||
Other | (5.0 | ) | 5.7 | 0.4 | |||||||
Total | $ | 47.9 | $ | 13.6 | $ | 11.3 | |||||
Restructuring
Total restructuring charges of $28.6 million recorded for the year ended December 31, 2015 related to severance from announcement to terminate our legacy business and further reduce and rationalize our corporate overhead. Total restructuring charges of $5.4 million recorded for the year ended December 31, 2014 and $5.2 million for the year ended December 31, 2013 related to the GPI Program.
Other
Certain amounts recorded in Other are discussed elsewhere in our Notes to Consolidated Financial Statements. See note references in table above.
During the year ended December 31, 2015 we recorded $24.6 million of charges associated with asset write downs primarily related to the write down of our corporate headquarters facility. The $5.0 million of gain in other includes the gain on the termination of the TDK license, the gain on the sale of our RDX Storage product line and pension curtailments. These gains were partially offset by certain employee costs and consulting fees for external and related parties. The $0.5 million in acquisition and integration costs relate to the acquisition of Connected Data, Inc.
During the year ended December 31, 2014 we recorded $1.8 million of assets disposals and write-downs from which $1.0 million related to our Weatherford, Oklahoma facility and $0.8 million related to miscellaneous asset disposals. The $5.7 million of other expenses includes certain employee costs and consulting fees.
31
During the year ended December 31, 2013 a gain of $9.8 million related to the sale of our Camarillo, California manufacturing facility was recorded. The $1.0 million of other expenses includes certain employee costs and consulting fees.
Operating Loss From Continuing Operations
Years Ended December 31, | Percent Change | ||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||
(In millions) | |||||||||||||||
Operating loss | $ | (177.3 | ) | $ | (104.1 | ) | $ | (20.1 | ) | NM | NM | ||||
As a percent of revenue | (33.5 | )% | (14.3 | )% | (2.3 | )% | |||||||||
_______________________________________
NM - Not meaningful
Operating loss from continuing operations increased in 2015 compared with 2014 primarily due to increased restructuring and other charges and goodwill and intangible asset impairments of $36.1 million and $37.6 million, respectively. Operating loss from continuing operations increased in 2014 compared with 2013 primarily due to a goodwill impairment of $35.4 million in 2014 and a reversal of an accrual of $23.1 million in 2013 for copyright levies, as a result of Italian and French court rulings in 2013. See discussion above for further information on our 2014 impairment losses. See Note 15 - Litigation, Commitments and Contingencies in our Notes to Consolidated Financial Statements for more information on the 2013 levy reversal.
Other (Income) and Expense
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Interest income | $ | (0.4 | ) | $ | (0.5 | ) | $ | (0.2 | ) | (20.0 | )% | 150.0 | % | ||||
Interest expense | 3.3 | 2.6 | 2.5 | 26.9 | % | 4.0 | % | ||||||||||
Other, net | 1.3 | 3.1 | 0.6 | (58.1 | )% | 416.7 | % | ||||||||||
Total | $ | 4.2 | $ | 5.2 | $ | 2.9 | (19.2 | )% | 79.3 | % | |||||||
As a percent of revenue | 0.8 | % | 0.7 | % | 0.3 | % | |||||||||||
Other expense was $4.2 million, $5.2 million and $2.9 million in 2015, 2014 and 2013, respectively. The decrease in other expense for 2015 compared with 2014 was due to currency impacts and hedging benefits in 2015. The decrease in 2015 was partially offset by increased interest expense from the write off of capitalized debt fees from the cancellation of our credit facilities and other expense from losses on trading securities and foreign currency translation losses for entities for which liquidation is substantially complete. The increase in other expense for 2014 compared with 2013 was driven by other, net expense. Other, net expense includes foreign currency (gains) losses from changes in foreign exchange rates on foreign denominated assets and liabilities. We attempt to mitigate the exposure to foreign currency volatility through our hedging program; however, our program is not designed to fully hedge our risk, and as a result, we experience some volatility in our foreign currency (gains) losses, especially in periods of significant foreign currency fluctuation. Foreign currency (gains) losses were a gain of $1.0 million in 2015, a loss of $2.2 million in 2014 and a gain of $0.5 million in 2013.
Income Tax Provision
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Income tax provision | $ | 12.5 | $ | 3.1 | $ | 1.4 | |||||
Effective tax rate | NM | NM | NM | ||||||||
_______________________________________
NM - Not meaningful
32
We maintain a valuation allowance related to our U.S. deferred tax assets and the majority of our foreign deferred tax assets. Because of the valuation allowances, the tax provision generally represents taxes outside of the U.S. plus discrete tax events that may occur from time to time. This also causes the effective tax rates to be not meaningful. The effective tax rates for 2015, 2014 and 2013 are not meaningful.
In comparing our 2015 tax provision of $12.5 million to our 2014 tax provision of $3.1 million, the increase was primarily due to the recording of valuation allowances on the deferred tax assets from operations outside the United States offset by reduced income tax liability outside the United States and reduced tax liability on unremitted foreign earnings.
In comparing our 2014 tax provision of $3.1 million to our 2013 tax provision of $1.4 million, the increase was primarily due to the $1.7 million tax expense associated with the change in the permanent reinvestment assertion of unremitted foreign earnings recorded during 2014.
As of December 31, 2015 and 2014, we had valuation allowances of $325.3 million and $262.4 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 operating loss carryforwards, deferred tax deductions, capital loss carryforwards and tax credit carryforwards.
Loss from discontinued operations
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Net revenue | $ | — | $ | 0.4 | $ | 40.7 | |||||
(Loss) gain on sale of discontinued businesses, net of income taxes | — | (1.7 | ) | 0.9 | |||||||
Loss from operations of discontinued businesses, before income taxes | — | (0.6 | ) | (14.2 | ) | ||||||
Adjustment to carrying value of disposal group | — | — | (6.7 | ) | |||||||
Income tax benefit | — | — | — | ||||||||
Loss from discontinued businesses, net of income taxes | $ | — | $ | (2.3 | ) | $ | (20.0 | ) | |||
Loss from discontinued operations represents the results of operations from our former XtremeMac and Memorex consumer electronics businesses. The 2014 loss includes a $1.2 million adjustment to expected proceeds on the sale of the XtremeMac business and a $0.5 million loss on the initial sale of the XtremeMac business, which closed on January 31, 2014. The 2013 loss represents the results of operations from our XtremeMac and Memorex consumer electronics businesses as well as a $6.7 million write-down of the carrying value of the XtremeMac disposal group to its estimated fair value. This was partially offset by a $0.9 million gain on the sale of the Memorex consumer electronics business which occurred on October 15, 2013. The increase in operating loss for 2014 compared with 2013 reflects the write-down of the carrying value discussed above, lower revenues and lower gross margins in these businesses, in addition to severance expense of $1.6 million recorded in 2014. See Note 4 - Acquisitions and Divestitures in our Notes to Consolidated Financial Statements for more information on the divestitures of these two businesses.
Segment Results
Beginning in the fourth quarter of 2015, in conjunction with our accelerated wind-down of the Company's legacy business, the Company changed the manner in which it evaluates the operations of the Company and makes decisions around the allocation of resources. The Company operated in three reportable segments as of December 31, 2015: “Nexsan”, “IronKey” and "Storage Media and Accessories." Nexsan is expected to be our go forward business. (See Note 18 - Subsequent Events on the sale of IronKey on February 2, 2016). Storage Media and Accessories (consisting of our Commercial Storage Media, Consumer Storage Media and Audio and Accessories product categories) is collectively referred to as our "legacy business" and is in the process of being wound-down (which is expected to be completed in the first quarter of 2016). Going forward, we will focus on Nexsan business and evaluating other investment opportunities.
The segment information for prior periods have been revised to conform to the 2015 reportable segment presentation.
33
We evaluate segment performance based on revenue and operating income (loss). The operating income (loss) 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 results. Corporate and unallocated amounts include litigation settlement expense, goodwill impairment, intangible impairments, intangible asset abandonment, corporate expense, contingent consideration adjustments, inventory write-offs related to our restructuring programs and restructuring and other expenses which are not allocated to how management evaluates segment performances.
During the first quarter of 2013, we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. The operating results for these businesses are presented in our Consolidated Statements of Operations as discontinued operations and are not included in segment results for any periods presented. See Note 4 - Acquisitions and Divestitures for further information.
Information related to our segments is as follows:
Nexsan
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Net revenue | $ | 62.8 | $ | 63.5 | $ | 78.2 | (1.1 | )% | (18.8 | )% | |||||||
Operating (loss) | (25.4 | ) | (34.3 | ) | (14.8 | ) | (25.9 | )% | 131.8 | % | |||||||
As a percent of revenue | (40.4 | )% | (54.0 | )% | (18.9 | )% | |||||||||||
The decrease in Nexsan revenue in 2015 compared with 2014 was due to rationalization of the product lines and regional footprint.
Operating loss decreased in 2015 compared with 2014 due to improved margins and lower selling, general and administrative expenses. During the third quarter of 2015, management revised our business strategy in Nexsan business such that operating expenses were significantly reduced due to the rationalizing of product lines and footprint.
Operating loss increased in 2014 compared with 2013 due to revenue declines and an increased investment in R&D and SG&A driven by hiring sales and engineering resources and value-added resellers, introducing new products and promoting the brand globally.
IronKey
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Net revenue | $ | 18.9 | $ | 20.6 | $ | 22.4 | (8.3 | )% | (8.0 | )% | |||||||
Operating (loss) | (6.9 | ) | (10.4 | ) | (12.5 | ) | (33.7 | )% | (16.8 | )% | |||||||
As a percent of revenue | (36.5 | )% | (50.5 | )% | (55.8 | )% | |||||||||||
The decrease in revenue in 2015 compared with 2014 was due to the strategic shift associated with IronKey to focus on reducing the operating loss instead of continuing to invest for expected revenue growth. We sold the IronKey business in February, 2016. (See Note 18)
Operating loss decreased in 2015 compared with 2014 due to improved margins and lower selling, general and administrative expenses.
34
Storage Media and Accessories
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Net revenue | $ | 447.5 | $ | 645.4 | $ | 760.2 | (30.7 | )% | (15.1 | )% | |||||||
Operating income (loss) | (2.2 | ) | 25.7 | 55.9 | (108.6 | )% | (54.0 | )% | |||||||||
As a percent of revenue | (0.5 | )% | 4.0 | % | 7.4 | % | |||||||||||
The decrease in Storage Media and Accessories segment revenue in 2015 compared with 2014 was driven by declines in Commercial Storage Media, Consumer Storage Media and Audio and Accessories product lines and currency impacts. Revenue decreased during the first three quarters of the year due to the ongoing declines in magnetic tape and optical media products and decreased in the fourth quarter due to our actions to terminate our global sales and operations. The wind down of our legacy business is expected to be complete in early 2016. The Storage Media and Accessories segment was also impacted by the termination of our use of TDK licensing rights and the divestiture of the RDX product line.
Operating results decreased in 2015 compared with 2014, due primarily to lower revenue and inventory write-offs of $9.7 million and accounts receivable write-offs of $5.2 million taken as a result of our actions to end sales and operations in our legacy businesses.
The decrease in Storage Media and Accessories segment revenue in 2014 compared with 2013 was driven by declines in the Commercial Storage Media and Consumer Storage Media product lines which was partially offset by an increase in Audio and Accessories. Commercial Storage Media products decreased $37.6 million in 2014 compared with 2013. From a product perspective, the decrease in Commercial Storage Media product revenue was primarily composed of lower revenue from magnetic tape products of $34.1 million compared with 2013. Tape media has been impacted by industry wide dynamics including competing formats, as well as continuing improvements in compression and deduplication technologies driving the secular declines in this category. Consumer Storage Media revenue decreased due to expected secular declines in optical media products of $76.3 million. Partially offsetting the decrease in revenue from Consumer Storage Media was an increase in Audio and Accessories products, as we saw revenue increase in consumer electronic accessories and TDK Life on Record consumer electronic products.
Operating income decreased in 2014 compared with 2013 due primarily to lower revenue and margins on our Commercial Storage Media business in 2014 and the reversal of $23.1 million of accruals for Italian and French copyright levies in the second and fourth quarters of 2013, respectively. This was partially offset by lower SG&A expense.
Corporate and Unallocated
Years Ended December 31, | Percent Change | ||||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In millions) | |||||||||||||||||
Operating loss | $ | (142.8 | ) | $ | (85.1 | ) | $ | (48.7 | ) | 67.8 | % | 74.7 | % | ||||
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, intangible impairments, intangible asset abandonment, corporate expense, contingent consideration adjustments, and other expenses.
Corporate and unallocated amounts above include non-cash goodwill impairment charges of $36.1 million and $35.4 million for the years ended December 31, 2015 and 2014, respectively, non-cash intangible asset impairment charges of $37.6 million for the year ended December 31, 2015, restructuring and other costs of $47.9 million, $13.6 million and $11.3 million for the years ended December 31, 2015, 2014 and 2013, respectively, and other corporate expenses of $21.2 million and $36.1 million and $39.1 million for the years ended December 31, 2015, 2014, and 2013, respectively. The 2013 operating loss also included a $10.6 million loss related to the settlement of our UK pension plan and a $9.8 million gain on the sale of land at a previously closed facility and a litigation settlement gain of $2.5 million.
35
Financial Position
Our cash and cash equivalents balance as of December 31, 2015 was $70.4 million, a decrease of $44.2 million from $114.6 million as of December 31, 2014. The decrease was primarily driven by the investment in Nexsan and IronKey, net debt repayments of $18.5 million, restructuring payments of $12.6 million, restricted cash of $9.9 million, capital expenditures of $3.0 million, and share repurchases of $1.7 million, offset by cash generated from legacy businesses.
Our accounts receivable balance as of December 31, 2015 was $25.4 million, a decrease of $109.0 million from $134.4 million as of December 31, 2014 as a result of lower sales during the period and write-offs taken as a result of our actions to end sales and operations of our legacy business. This resulted in a Days sales outstanding of 32 days as of December 31, 2015, compared to 55 Days sales outstanding in December 31, 2014. 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.
Our inventory balance as of December 31, 2015 was $10.5 million, a decrease of $47.2 million from $57.7 million as of December 31, 2014. The decrease in inventory is due to the depletion of inventory and write-offs taken as a result of our actions to end sales and operations of our legacy business. Days of inventory supply was 132 days as of December 31, 2015, up 88 days from December 31, 2014. The increase reflects longer lead times for the remaining Nexsan and IronKey businesses. 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.
Our accounts payable balance as of December 31, 2015 was $44.3 million, a decrease of $51.2 million from $95.5 million as of December 31, 2014. The decrease in accounts payable was mainly due fewer purchases and spending as a result of our actions to end sales and operations of our legacy business and further reduce and rationalize our corporate overhead.
Liquidity and Capital Resources
We have various resources available to us for purposes of managing liquidity and capital needs. Our primary sources of liquidity include our cash and cash equivalents. Our primary operating liquidity needs relate to our working capital and funding our operations.
We had $70.4 million cash on hand as of December, 2015. In Q1 2016, we generated approximately $25 million from non-core asset sales. In addition, we expect to extract $5 million to $10 million from our legacy business working capital (accounts receivables minus accounts payables). Our liquidity needs for 2016 include the following: restructuring payments of approximately $15 million to $20 million, other liabilities of approximately $5 million to $10 million, cash necessary to fund our expected operating loss of $9 million to $16 million, capital expenditures of approximately $1 million to $3 million, operating lease payments of approximately $2 million, pension funding of approximately $1 million to $2 million, any amounts associated with organic investment opportunities and any amounts associated with the repurchase of common stock under the authorization discussed above. In addition, we may need to pay up to $20 million of accounts payables currently under dispute.
We expect that our cash positions in the U.S, and outside of the U.S. will provide liquidity sufficient to meet our needs for our operations and our obligations in the countries in which we operate. We also plan to raise additional capital if necessary.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. Restricted cash is related to contractual obligations or restricted by management and is included in other current assets or other assets on our Consolidated Balance Sheets depending on the timing of the restrictions. The restricted cash balance in other current assets as of December 31, 2015 was $9.9 million which relates to court ordered vendor payment disputes, future employee payments and bank deposits. The restricted cash balance in other assets as of December 31, 2015 and 2014 was $1.9 million and $2.2 million, respectively, which relates to cash set aside as indemnification for certain customers.
Analysis of Cash Flows
Cash Flows Provided by (Used In) Operating Activities:
36
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Net loss | $ | (194.0 | ) | $ | (114.7 | ) | $ | (44.4 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities | 131.7 | 68.8 | 32.1 | ||||||||
Changes in operating assets and liabilities | 44.5 | 38.1 | 34.4 | ||||||||
Net cash provided by (used in) operating activities | $ | (17.8 | ) | $ | (7.8 | ) | $ | 22.1 | |||
Cash flows from operating activities can fluctuate from period to period as many items can impact cash flows. Cash used in operating activities in 2015 was driven primarily by the net loss, partially offset by cash provided from working capital reductions. Operating cash outflows included restructuring payments of $12.6 million, $6.7 million and $19.4 million in 2015, 2014 and 2013, respectively.
During 2015 and 2014 we recorded non-cash goodwill impairment charges of $36.1 million and $35.4 million, respectively. During 2015 we recorded an intangible asset impairment charges of $37.6 million.
Cash Flows Provided by (Used in) Investing Activities:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Capital expenditures | $ | (3.0 | ) | $ | (5.6 | ) | $ | (7.0 | ) | ||
Proceeds from sale of assets and business | 3.3 | 3.4 | 11.0 | ||||||||
Recovery of investments | — | — | 0.2 | ||||||||
Acquisitions, net of cash acquired | (3.1 | ) | — | 1.6 | |||||||
Purchase of tradename | — | — | — | ||||||||
Net cash provided by (used in) investing activities | $ | (2.8 | ) | $ | (2.2 | ) | $ | 5.8 | |||
In 2015, we received $3.3 million from the sales of our Memorex consumer electronic business and Weatherford, Oklahoma property. Cash used in investing activities included $4.3 million for the acquisition of Connected Data, Inc. Cash used in investing activities also included $3.0 million of capital expenditures.
In 2014, we received $3.4 million from the sales of our XtremeMac and Memorex consumer electronic business. Cash used in investing activities also included $5.6 million of capital expenditures.
In 2013, we received $10.1 million for land classified as held for sale and $0.9 million related to the sale of our Memorex consumer electronics business. Cash provided by investing activities also included $7.0 million of capital expenditures.
See Note 4 - Acquisitions in our Notes to Consolidated Financial Statements for further information regarding our acquisitions.
Cash Flows Used in Financing Activities:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Purchase of treasury stock | $ | (1.7 | ) | $ | (2.5 | ) | $ | (2.5 | ) | ||
Debt issuance costs | — | — | (0.4 | ) | |||||||
Debt borrowings | 16.5 | 38.7 | 4.9 | ||||||||
Debt repayments | (35.0 | ) | (39.2 | ) | (4.9 | ) | |||||
Contingent consideration payments | — | — | (0.5 | ) | |||||||
Exercise of stock options | — | 0.4 | — | ||||||||
Net cash used in financing activities | $ | (20.2 | ) | $ | (2.6 | ) | $ | (3.4 | ) | ||
37
On May, 2, 2012, our Board of Directors authorized a share repurchase program that allowed for the repurchase of 5.0 million shares of common stock. The Company's previous authorization, which had 1.2 million shares remaining for purchase, was canceled with the new authorization. Since the inception of this authorization, we have repurchased 3.0 million shares of common stock at an average price of $3.84 per share and as of December 31, 2015 we had remaining authorization to repurchase up to 2.0 million shares. We repurchased 0.4 million, 0.8 million and 0.6 million shares in 2015, 2014 and 2013, respectively.
No dividends were declared or paid during 2015, 2014 or 2013. Any future dividends are at the discretion of and subject to the approval of our Board of Directors.
Cash used in financing activities included borrowings of $16.5 million, $38.7 million and $4.9 million and repayments of $35.0 million, $39.2 million and $4.9 million during 2015, 2014 and 2013, respectively on our credit facilities primarily for the use in financing our working capital seasonal needs. During 2015 we did not capitalize any debt issuance costs.
Credit Facilities
As of December 31, 2015 and December 31, 2014, we had short-term borrowings of $0.2 million and $18.9 million, respectively. The decrease in outstanding debt from December 31, 2014 is due to the termination of the Company's credit agreements with various banks in the United States, Europe and Japan.
On October 30, 2015, the Company terminated its Japan Credit Agreement entered into on July 16, 2013. At the time of termination, the Company paid down its short-term borrowings of $7.6 million. Additionally, capitalized costs for the credit facility of $0.1 million were charged to interest expense. The Company incurred an early termination penalty less than $0.1 million in connection with the termination.
On November 25, 2015, the Company terminated its Amended Credit Agreement entered into on May 18, 2012. At the time of termination, the Company paid down its short-term borrowings of $10.4 million. Additionally, capitalized costs for the credit facility of $1.1 million were charged to interest expense. No early termination penalty was incurred by the Company in connection with the termination.
We had $48.2 million of cash outside the U.S. at December 31, 2015. As of December 31, 2014, the Company had changed its position on the permanent reinvestment assertion of its unremitted foreign earnings. The deferred tax liability recorded as of December 31, 2015 for the impact of future repatriation of the unremitted foreign earnings is $9.4 million. Of this liability, $8.2 million would be fully offset by net operating losses, and the remaining $1.2 million liability is related to foreign tax withholding. We also have significant net operating loss carryforwards offset by a full valuation allowance in the U.S.
Related Party Transactions
See Note 16 - Related Party Transactions for information on related party transactions between the Company and Imation's Board of Directors and Executive Officers.
Off-Balance Sheet Arrangements
Other than the operating lease commitments discussed in Note 15 - Litigation, Commitments and Contingencies in our Notes to Consolidated Financial Statements, we are not using off-balance sheet arrangements, including special purpose entities.
Summary of Contractual Obligations
Payments Due by Period | |||||||||||||||||||
Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||
(In millions) | |||||||||||||||||||
Operating lease obligations | $ | 5.7 | $ | 2.7 | $ | 1.7 | $ | 1.0 | $ | 0.3 | |||||||||
Purchase obligations (1) | 4.0 | 4.0 | — | — | — | ||||||||||||||
Short-term debt | 0.2 | 0.2 | — | — | — | ||||||||||||||
Other liabilities (2) | 14.9 | 0.4 | 0.3 | — | 14.2 | ||||||||||||||
Total | $ | 24.8 | $ | 7.3 | $ | 2.0 | $ | 1.0 | $ | 14.5 | |||||||||
_______________________________________
38
(1) | The majority of the purchase obligations consist of 90-day rolling estimates. In most cases, we provide suppliers with a three to six month rolling forecast of our demand. The forecasted amounts are generally not binding on us. However, it may take 60 to 90 days from the purchase order issuance to receipt, depending on supplier and inbound lead time. |
(2) | Timing of payments for the vast majority of other liabilities cannot be reasonably determined and, as such, have been included in the “More Than 5 Years” category. |
The table above does not include payments for non-contributory defined benefit pension plans. It is our general practice, at a minimum, to fund amounts sufficient to meet the requirements set forth in applicable benefits laws and local tax laws. From time to time, we contribute additional amounts, as we deem appropriate. We expect to contribute approximately $1 million to $2 million to our pension plans in 2016 and have $20.7 million recorded in other liabilities related to pension plans as of December 31, 2015. See Note 9 - Retirement Plans in our Notes to Consolidated Financial Statements for information on our pension plans.
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:
Uncertain Tax Positions. 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, 2015 was $1.7 million, excluding accrued interest and penalties described below. If the unrecognized tax benefits were recognized in our Consolidated Financial Statements, $1.5 million would affect income tax expense and our related effective tax rate.
Interest and penalties recorded for uncertain tax positions are included in our income tax provision. As of December 31, 2015, $0.1 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 2012 through 2014 are subject to examination by the Internal Revenue Service (IRS). With few exceptions, we are no longer subject to examination by foreign tax jurisdictions or state and local tax jurisdictions for years before 2009.
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.
Intangibles. We record all assets and liabilities acquired in purchase acquisitions, including intangibles, at estimated 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, if necessary, subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using certain valuation methods including discounted cash flow analysis. We evaluate assets on our balance sheet, including such intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors such as unfavorable variances from forecasted cash flows, established
39
business plans or volatility inherent to external markets and industries may indicate a possible impairment that would require an impairment test. While we believe that the current carrying value of these assets is not impaired, materially different assumptions regarding future performance of our businesses, which in many cases require subjective judgments concerning estimates, could result in significant impairment losses. The test for impairment requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value. See Note 6 - Intangible Assets and Goodwill for information on our 2015 and 2014 intangible assets.
Goodwill. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, at fair value. The initial recognition of goodwill and subsequent impairment analysis 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. We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year (as of November 30th) or if an event occurs or circumstances change that would warrant impairment testing during an interim period.
Goodwill is considered impaired when its carrying amount exceeds its implied fair value. 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. 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. See Note 6 - Intangible Assets and Goodwill for information on our 2015 and 2014 goodwill.
In determining the estimated fair value of the reporting units, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts and the market approach, a valuation technique that provides an estimate of the value of the reporting unit based on a comparison to other similar businesses. Our expected cash flows are affected by various significant assumptions, including projected revenue, gross margin and expense expectations, terminal growth rate and a discount rate. Our analyses utilize discounted forecasted cash flows over a multi-year period depending on the reporting unit with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for these cash flow assumptions.
Copyright Levies. In many European Union (EU) member countries, the sale of recordable optical media is subject to a private copyright levy. The levies are intended to compensate copyright holders with "fair compensation" for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (Directive). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which, in turn, are expected to distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law making activities. On October 21, 2010, the Court of Justice of the European Union (CJEU) ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The CJEU stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The CJEU ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons presumed to be making private copies. Within this disclosure, we use the term "commercial channel sales" when referring to products intended for uses other than private copying and "consumer channel sales" when referring to products intended for uses including private copying.
Since the Directive was implemented in 2002, we estimate that we have paid in excess of $100 million in levies to various ongoing collecting societies related to commercial channel sales. Based on the CJEU's October 2010 ruling and subsequent litigation and law making activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various collecting societies. Accordingly, subsequent to the October 21, 2010 ECJ ruling, we began withholding levy payments to the various collecting societies and, in 2011, we reversed our existing accruals for unpaid levies related to commercial channel sales. However, we continued to
40
accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions except France due to court rulings. See Note 15 - Commitments and Contingencies in our Notes to Consolidated Financial Statements for discussion of these court rulings. As of December 31, 2015 and 2014, we had accrued liabilities of $5.1 million and $9.3 million, respectively, associated with levies related to consumer channel sales for which we are withholding payment.
Since the October 2010 CJEU ruling, we evaluate quarterly on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) accrued, but unpaid, copyright levies on prior period consumer channel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law making activities within each jurisdiction as well as throughout the EU. In 2015, we reversed $3.8 million of copyright levies as a reduction of cost of sales. We did not reverse any amounts into cost of goods sold for prior year obligations in 2014. In 2013, we reversed $23.1 million of copyright levies as a reduction of cost of sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions except Italy and France due to court rulings. As of December 31, 2015 and 2014, we had accrued liabilities of $5.1 million and $9.3 million, respectively, associated with levies related to consumer channel sales for which we are withholding payment. See Note 15 - Commitments and Contingencies in our Notes to Consolidated Financial Statements for discussion of reversals of copyright levies.
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 our financial condition, results of operations and cash flows 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 our Consolidated Balance Sheet as of December 31, 2015, would not be material to our financial condition, results of operations and cash flows. As additional information becomes available, the potential liability related to pending litigation will be assessed and estimates will be revised as necessary.
Recently Issued Accounting Standards
See Note 2 — Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for disclosure related to recently issued accounting standards.
Cautionary Statements Regarding 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include information concerning strategic initiatives and potential acquisitions, the results of operations of our existing business lines and our ability to implement our restructuring plans, as well as other actions, strategies and expectations, and are identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may,” “will,” “could,” “might,” or “continues” or similar expressions. Such statements are subject to a wide range of 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 various factors set forth from time to time in our filings with the Securities and Exchange Commission including the following: our ability to successfully implement our strategy for our existing business as well as other lines of business that we may pursue; our ability to grow our business in new products with profitable margins and the rate of revenue decline for certain existing products; our ability to meet future revenue growth, gross margin and earnings targets; our participation in any future joint investment could be adversely affected by our lack of sole decision-making authority, our reliance on a partner's financial condition and disputes between us and our partners; future acquisitions or business opportunities could involve unknown risks that could harm our business and adversely affect our financial condition; our ability to successfully identify suitable acquisition targets to implement
41
our new strategy and to compete for these opportunities with others who may have greater resources; our ability to conduct due diligence on businesses we acquire to ensure that we have identified and addressed key aspects of liability and risk; the impact of expending significant resources in considering acquisition targets or business opportunities that are not consummated; we may engage in business combinations that are dilutive to existing shareholders, result in unanticipated accounting charges or otherwise harm our result of operations, and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses; the impact of additional material charges and expenses associated with our oversight of acquired or target businesses and the integration of acquired businesses into our systems for financial reporting; previous or future acquisitions might not be successful and might adversely affect our business, operating results, or financial condition; our ability to successfully integrate current and future acquired businesses into our existing operations and achieve the expected economic benefits; our ability to effectively increase the size of our organization, if needed, and manage our growth; acquisitions may require capital infusions; the possible need to raise additional debt or equity financing for acquisitions in addition to the use of our excess cash; the ability to quickly develop, source, introduce and deliver differentiated and innovative products; our potential dependence on third parties for new product introductions or technologies in order to introduce our own new products; our ability to successfully implement restructuring plans; foreign currency fluctuations; the ready availability and price of energy and key raw materials or critical components including the effects of natural disasters and our ability to pass along raw materials price increases to our customers; potential acquisitions or investments in a foreign business or company with significant foreign operations may subject us to additional risks; continuing uncertainty in global and regional economic conditions; our ability to identify, value, integrate and realize the expected benefits from any acquisition which has occurred or may occur in connection with our strategy; the possibility that our goodwill and intangible assets or any goodwill or intangible assets that we acquire may become impaired; the ability of our security products to withstand cyber-attacks; the loss of a major customer, partner or reseller; changes in European law or practice related to the imposition or collectability of optical levies; the seasonality and volatility of the markets in which we operate; significant changes in discount rates and other assumptions used in the valuation of our pension plans; changes in tax laws, regulations and results of inspections by various tax authorities; tax consequences associated with our acquisition, holding and disposition of target companies and assets; 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 outcome of any pending or future litigation and patent disputes; our ability to access financing to achieve strategic objectives and growth due to changes in the capital and credit markets; our ability to retain and attract key employees to manage our existing businesses and the businesses we may acquire; increased compliance with changing laws and regulations potentially affecting our operating results; failure to adequately protect our information systems from cyber-attacks; the effect of the announcement of our review of strategic alternatives; the effect of the transition of our Board of Directors; the volatility of our stock price due to our results or market trends; and the ability to meet the continued listing requirements of the NYSE; loss of or inability to attract talented individuals to executive our strategic alternatives business strategy; the implementation of new systems and enhancements may be disruptive and could impact our ability to accurately report our financial results; decreasing revenues and greater losses in our Nexsan business may have a material and adverse effect on our business, results of operations and capital resources; the investment in Clinton Lighthouse Equities Strategy Fund (Offshore) Ltd. may not product positive returns and may results in losses, as well as various factors set forth from time to time in Item 1A of this Form 10-K and from time to time in our filings with the SEC.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to various market risks including volatility in foreign currency exchange rates and credit risk. International operations, which comprised approximately 61 percent of our revenue in 2015, 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.
42
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 - Fair Value Measurements and Derivative Financial Instruments in our Notes to Consolidated Financial Statements.
As a result of our actions to terminate our Storage Media and Accessories businesses, the foreign exchange risk has significantly decreased from prior year. As of December 31, 2015, we did not have any foreign currency forward or option contracts outstanding. This compares to $163.2 million notional amount of foreign currency forward and option contracts as of December 31, 2014, of which $29.4 million hedged recorded balance sheet exposures.
We are exposed to credit risk associated with cash investments. We do not believe that our cash investments present significant credit risk because the counterparties to the instruments consist of major financial institutions.
43
Item 8. | Financial Statements and Supplementary Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Imation Corp.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of operations, of comprehensive loss, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Imation Corp. and its subsidiaries (the “Company”) at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 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, 2015, based on criteria established in Internal Control - Integrated Framework (2013) 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 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.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 15, 2016
44
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions, except per share amounts) | |||||||||||
Net revenue | $ | 529.2 | $ | 729.5 | $ | 860.8 | |||||
Cost of goods sold | 427.9 | 591.1 | 672.1 | ||||||||
Gross profit | 101.3 | 138.4 | 188.7 | ||||||||
Operating expenses: | |||||||||||
Selling, general and administrative | 137.8 | 174.7 | 181.6 | ||||||||
Research and development | 19.2 | 18.8 | 18.4 | ||||||||
Intangible impairments | 37.6 | — | — | ||||||||
Litigation settlement | — | — | (2.5 | ) | |||||||
Goodwill impairment | 36.1 | 35.4 | — | ||||||||
Restructuring and other | 47.9 | 13.6 | 11.3 | ||||||||
Total | 278.6 | 242.5 | 208.8 | ||||||||
Operating loss | (177.3 | ) | (104.1 | ) | (20.1 | ) | |||||
Other (income) expense | |||||||||||
Interest income | (0.4 | ) | (0.5 | ) | (0.2 | ) | |||||
Interest expense | 3.3 | 2.6 | 2.5 | ||||||||
Other expense, net | 1.3 | 3.1 | 0.6 | ||||||||
Total | 4.2 | 5.2 | 2.9 | ||||||||
Loss from continuing operations before income taxes | (181.5 | ) | (109.3 | ) | (23.0 | ) | |||||
Income tax provision | 12.5 | 3.1 | 1.4 | ||||||||
Loss from continuing operations | (194.0 | ) | (112.4 | ) | (24.4 | ) | |||||
Discontinued operations: | |||||||||||
(Loss)/gain on sale of discontinued businesses, net of income taxes | — | (1.7 | ) | 0.9 | |||||||
Loss from discontinued operations, net of income taxes | — | (0.6 | ) | (20.9 | ) | ||||||
Loss from discontinued operations | — | (2.3 | ) | (20.0 | ) | ||||||
Net loss | $ | (194.0 | ) | $ | (114.7 | ) | $ | (44.4 | ) | ||
Loss per common share — basic: | |||||||||||
Continuing operations | $ | (4.84 | ) | $ | (2.74 | ) | $ | (0.60 | ) | ||
Discontinued operations | — | (0.06 | ) | (0.49 | ) | ||||||
Net loss | (4.84 | ) | (2.80 | ) | (1.10 | ) | |||||
Loss per common share — diluted: | |||||||||||
Continuing operations | $ | (4.84 | ) | (2.74 | ) | $ | (0.60 | ) | |||
Discontinued operations | — | (0.06 | ) | (0.49 | ) | ||||||
Net loss | (4.84 | ) | (2.80 | ) | (1.10 | ) | |||||
Weighted average shares outstanding: | |||||||||||
Basic | 40.1 | 41.0 | 40.5 | ||||||||
Diluted | 40.1 | 41.0 | 40.5 | ||||||||
Cash dividend paid per common share | $ | — | $ | — | $ | — | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
45
IMATION CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Net loss | $ | (194.0 | ) | $ | (114.7 | ) | $ | (44.4 | ) | ||
Other comprehensive income (loss), net of tax: | |||||||||||
Net unrealized (losses) gains on derivative financial instruments: | |||||||||||
Net holding gains arising during the period | (1.4 | ) | 6.1 | 7.0 | |||||||
Reclassification adjustment for net realized (gains) losses recorded in net loss | (3.7 | ) | (3.4 | ) | (7.3 | ) | |||||
Total net unrealized (losses) gains on derivative financial instruments | (5.1 | ) | 2.7 | (0.3 | ) | ||||||
Net pension adjustments, net of tax: | |||||||||||
Liability adjustments for defined benefit pension plans | (1.5 | ) | (10.4 | ) | 10.7 | ||||||
Reclassification of adjustments for defined benefit plans recorded in net loss | 2.0 | 1.4 | 5.5 | ||||||||
Total net pension adjustments | 0.5 | (9.0 | ) | 16.2 | |||||||
Unrealized foreign currency translation losses | (6.7 | ) | (15.7 | ) | (4.5 | ) | |||||
Total other comprehensive income (loss), net of tax | (11.3 | ) | (22.0 | ) | 11.4 | ||||||
Comprehensive loss | $ | (205.3 | ) | $ | (136.7 | ) | $ | (33.0 | ) | ||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
46
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
As of December 31, | |||||||
2015 | 2014 | ||||||
(In millions, except per | |||||||
share amounts) | |||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 70.4 | $ | 114.6 | |||
Accounts receivable, net | 25.4 | 134.4 | |||||
Inventories | 10.5 | 57.7 | |||||
Assets held for sale | 20.6 | 1.2 | |||||
Other current assets | 24.8 | 31.5 | |||||
Total current assets | 151.7 | 339.4 | |||||
Property, plant and equipment, net | 4.6 | 45.0 | |||||
Intangible assets, net | 4.2 | 57.9 | |||||
Goodwill | 3.8 | 36.1 | |||||
Other assets | 4.1 | 20.8 | |||||
Total assets | $ | 168.4 | $ | 499.2 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities | |||||||
Accounts payable | $ | 44.3 | $ | 95.5 | |||
Short-term debt | 0.2 | 18.9 | |||||
Other current liabilities | 65.6 | 98.2 | |||||
Total current liabilities | 110.1 | 212.6 | |||||
Other liabilities | 33.9 | 45.8 | |||||
Total liabilities | 144.0 | 258.4 | |||||
Shareholders’ equity | |||||||
Preferred stock, $.01 par value, authorized 25 million shares, none issued and outstanding | — | — | |||||
Common stock, $.01 par value, authorized 100 million shares, 44.4 million issued | 0.4 | 0.4 | |||||
Additional paid-in capital | 1,042.0 | 1,034.6 | |||||
Retained deficit | (893.9 | ) | (699.9 | ) | |||
Accumulated other comprehensive loss | (96.1 | ) | (84.8 | ) | |||
Treasury stock, at cost | (28.0 | ) | (9.5 | ) | |||
Total shareholders’ equity | 24.4 | 240.8 | |||||
Total liabilities and shareholders’ equity | $ | 168.4 | $ | 499.2 | |||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
47
IMATION CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Common Stock | Additional Paid-in Capital | Retained Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | ||||||||||||||||||
(In millions, except per share amounts) | |||||||||||||||||||||||
Balance as of December 31, 2012 | $ | 0.4 | $ | 1,052.6 | $ | (540.8 | ) | $ | (74.2 | ) | $ | (37.6 | ) | $ | 400.4 | ||||||||
Net loss | (44.4 | ) | (44.4 | ) | |||||||||||||||||||
Purchase of treasury stock | (2.5 | ) | (2.5 | ) | |||||||||||||||||||
Restricted stock grants and other | (4.2 | ) | 7.9 | 3.7 | |||||||||||||||||||
401(k) matching contribution | (3.6 | ) | 5.3 | 1.7 | |||||||||||||||||||
Stock-based compensation related to options | 2.9 | 2.9 | |||||||||||||||||||||
Net change in cumulative translation adjustment | (4.5 | ) | (4.5 | ) | |||||||||||||||||||
Pension adjustments, net of tax | 16.2 | 16.2 | |||||||||||||||||||||
Cash flow hedging, net of tax | (0.3 | ) | (0.3 | ) | |||||||||||||||||||
Balance as of December 31, 2013 | $ | 0.4 | $ | 1,047.7 | $ | (585.2 | ) | $ | (62.8 | ) | $ | (26.9 | ) | $ | 373.2 | ||||||||
Net loss | (114.7 | ) | (114.7 | ) | |||||||||||||||||||
Exercise of stock options | (1.7 | ) | 2.1 | 0.4 | |||||||||||||||||||
Purchase of treasury stock | (2.5 | ) | (2.5 | ) | |||||||||||||||||||
Restricted stock grants and other | (10.3 | ) | 13.5 | 3.2 | |||||||||||||||||||
401(k) matching contribution | (2.5 | ) | 4.3 | 1.8 | |||||||||||||||||||
Stock-based compensation related to options | 1.4 | 1.4 | |||||||||||||||||||||
Net change in cumulative translation adjustment | (15.7 | ) | (15.7 | ) | |||||||||||||||||||
Pension adjustments, net of tax | (9.0 | ) | (9.0 | ) | |||||||||||||||||||
Cash flow hedging, net of tax | 2.7 | 2.7 | |||||||||||||||||||||
Balance as of December 31, 2014 | $ | 0.4 | $ | 1,034.6 | $ | (699.9 | ) | $ | (84.8 | ) | $ | (9.5 | ) | $ | 240.8 | ||||||||
Net loss | (194.0 | ) | (194.0 | ) | |||||||||||||||||||
Purchase of treasury stock | (1.7 | ) | (1.7 | ) | |||||||||||||||||||
Restricted stock grants and other | 3.8 | (3.2 | ) | 0.6 | |||||||||||||||||||
Value of shares received in TDK transaction | (13.6 | ) | (13.6 | ) | |||||||||||||||||||
Issuance of stock for acquisition | 2.6 | 2.6 | |||||||||||||||||||||
Contingent consideration in shares | 0.6 | 0.6 | |||||||||||||||||||||
Stock-based compensation related to options | 0.4 | 0.4 | |||||||||||||||||||||
Net change in cumulative translation adjustment | (6.7 | ) | (6.7 | ) | |||||||||||||||||||
Pension adjustments, net of tax | 0.5 | 0.5 | |||||||||||||||||||||
Cash flow hedging, net of tax | (5.1 | ) | (5.1 | ) | |||||||||||||||||||
Balance as of December 31, 2015 | $ | 0.4 | $ | 1,042.0 | $ | (893.9 | ) | $ | (96.1 | ) | $ | (28.0 | ) | $ | 24.4 | ||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
48
IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Cash Flows from Operating Activities: | |||||||||||
Net loss | $ | (194.0 | ) | $ | (114.7 | ) | $ | (44.4 | ) | ||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
Depreciation and amortization | 16.8 | 21.7 | 23.7 | ||||||||
Stock-based compensation | 1.7 | 5.3 | 6.9 | ||||||||
Deferred income taxes and valuation allowance | 13.0 | 3.2 | (4.7 | ) | |||||||
Goodwill, intangible and other asset impairments | 99.3 | 37.8 | 7.1 | ||||||||
Inventory write-offs | 9.7 | 4.6 | 2.7 | ||||||||
Bad debt expense | 5.2 | 1.0 | 1.0 | ||||||||
Pension settlement and curtailments | 0.2 | 0.2 | 12.7 | ||||||||
Changes in fair value of contingent consideration | — | — | (0.6 | ) | |||||||
Gain on sale of land | — | — | (9.8 | ) | |||||||
Gain from RDX sale | (4.5 | ) | — | — | |||||||
Gain from TDK transaction (non-cash) | (9.1 | ) | — | — | |||||||
Other, net | (0.6 | ) | (5.0 | ) | (6.9 | ) | |||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | 101.2 | 18.1 | 47.8 | ||||||||
Inventories | 35.2 | 15.5 | 64.2 | ||||||||
Assets held for sale | (19.4 | ) | 4.0 | (2.7 | ) | ||||||
Other assets | 29.0 | 11.4 | 10.5 | ||||||||
Accounts payable | (50.4 | ) | 6.8 | (63.3 | ) | ||||||
Accrued payroll and other liabilities | (41.5 | ) | (15.5 | ) | (29.6 | ) | |||||
Restricted cash | (9.6 | ) | (2.2 | ) | 7.5 | ||||||
Net cash provided by (used in) operating activities | (17.8 | ) | (7.8 | ) | 22.1 | ||||||
Cash Flows from Investing Activities: | |||||||||||
Capital expenditures | (3.0 | ) | (5.6 | ) | (7.0 | ) | |||||
Proceeds from sale of assets and business | 3.3 | 3.4 | 11.0 | ||||||||
Recovery of investments | — | — | 0.2 | ||||||||
Acquisitions, net of cash acquired | (3.1 | ) | — | 1.6 | |||||||
Net cash provided by (used in) investing activities | (2.8 | ) | (2.2 | ) | 5.8 | ||||||
Cash Flows from Financing Activities: | |||||||||||
Purchase of treasury stock | (1.7 | ) | (2.5 | ) | (2.5 | ) | |||||
Debt issuance costs | — | — | (0.4 | ) | |||||||
Debt borrowings | 16.5 | 38.7 | 4.9 | ||||||||
Debt repayments | (35.0 | ) | (39.2 | ) | (4.9 | ) | |||||
Contingent consideration payments | — | — | (0.5 | ) | |||||||
Exercise of stock options | — | 0.4 | — | ||||||||
Net cash used in financing activities | (20.2 | ) | (2.6 | ) | (3.4 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (3.4 | ) | (5.4 | ) | (0.6 | ) | |||||
Net change in cash and cash equivalents | (44.2 | ) | (18.0 | ) | 23.9 | ||||||
Cash and cash equivalents — beginning of period | 114.6 | 132.6 | 108.7 | ||||||||
Cash and cash equivalents — end of period | $ | 70.4 | $ | 114.6 | $ | 132.6 | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
49
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Background and Basis of Presentation
Background
Imation Corp., a Delaware Corporation, is a global data storage and data security company. With a 60-year history of technology leadership, the Company's mission is to help organizations create an integrated storage, private cloud, file sync and share enterprise solution. The Company historically operated in two reportable segments: Consumer Storage and Accessories (which consisted of our Consumer Storage Media and Audio and Accessories businesses) and Tiered Storage and Security Solutions (which consisted of our Commercial Storage Media and Storage and Security Solutions (i.e. Nexsan and IronKey) businesses).
The company is executing on a restructuring plan whereby it is in the final phases of winding down its Consumer Storage and Accessories, Audio and Accessories, and Commercial Storage Media businesses (combined the "legacy businesses"). Additionally, in January 2016, we sold our IronKey business (which was part of our historical Tiered Storage and Security Solutions reportable segment). Going forward, we will focus on our Nexsan business as well as explore strategic alternatives to deploy any excess capital.
Basis of Presentation
The financial statements are presented on a consolidated basis and include the accounts of the Company and our wholly-owned subsidiaries. See Note 2 - Summary of Significant Accounting Policies for further information regarding consolidation. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant inter-company transactions have been eliminated.
The Company’s continued operations and ultimate ability to continue as a going concern will depend on its ability to enhance revenue and operating results, enter into strategic relationships or raise additional capital. The Company can provide no assurances that such plans will occur and if the Company is unable to return to profitability or otherwise raise sufficient capital, there would be a material adverse effect on its business.
Note 2 — Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported asset and liability amounts and the contingent asset and liability disclosures at the date of the financial statements, as well as the revenue and expense amounts reported during the period. Actual results could differ from those estimates.
Foreign Currency. For our international operations, where the local currency has been determined to be the functional currency, assets and liabilities are translated at year-end exchange rates with cumulative translation adjustments included as a component of shareholders’ equity. Income and expense items are translated at average foreign exchange rates prevailing during the year. Gains and losses from foreign currency transactions are included in our Consolidated Statements of Operations.
Cash Equivalents. Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the time of purchase. The carrying amounts reported in our Consolidated Balance Sheets for cash equivalents approximate fair value.
Restricted Cash. Cash related to contractual obligations or restricted by management for specific use is classified as restricted and is included in other current assets and/or other assets on our Consolidated Balance Sheets depending on the timing of the restrictions. We had $9.9 million of restricted cash in other current assets as of December 31, 2015 which relates to court ordered vendor payment disputes, employee severance payments and collateral deposits required by our bank associated with outstanding letters of credit. In other assets we had $1.9 million and $2.2 million of restricted cash as of December 31, 2015 and 2014, respectively, which relates to cash set aside as indemnification for certain customers.
Trade Accounts Receivable and Allowances. Trade accounts receivable are stated net of estimated allowances, which primarily represent estimated amounts associated with customer returns, discounts on payment terms and the inability of certain customers to make the required payments. When determining the allowances, we take several factors into consideration, including prior history of accounts receivable credit activity and write-offs, the overall composition of accounts receivable aging, the types of customers and our day-to-day knowledge of
50
specific customers. Changes in the allowances are recorded as reductions of net revenue or as bad debt expense (included in selling, general and administrative expense), as appropriate, in our Consolidated Statements of Operations. In general, accounts which have entered into an insolvency action, have been returned by a collection agency as uncollectible or whose existence can no longer be confirmed are written off in full and both the receivable and the associated allowance are removed from our Consolidated Balance Sheet. If, subsequent to the write-off, a portion of the account is recovered, it is recorded as a reduction of bad debt expense in our Consolidated Statements of Operations at the time cash is received.
Inventories. Inventories are valued at the lower of cost or market, with cost determined on a first-in, first-out basis. We provide estimated inventory write-downs for excess, slow-moving and obsolete inventory as well as inventory with a carrying value in excess of estimated net realizable value.
Derivative Financial Instruments. We recognize all derivatives on the balance sheet at their estimated fair value. Fair value of our derivative contracts with durations of twelve months or less are classified as current and durations of greater than twelve months as non-current. Changes in the estimated fair value of derivatives that are not designated as, and qualify for, hedge accounting are recorded in our results of operations. We do not hold or issue derivative financial instruments for speculative or trading purposes, and we are not a party to leveraged derivatives. If a derivative is designated as, and qualifies for, hedge accounting, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the underlying assets or liabilities through operations or recognized in accumulated other comprehensive loss in shareholders’ equity until the underlying hedged item is recognized in operations. These gains and losses are generally recognized as an adjustment to cost of goods sold for inventory-related hedge transactions, or as adjustments to foreign currency transaction gains or losses included in non-operating expenses for foreign denominated payables- and receivables-related hedge transactions. Cash flows attributable to these derivatives are included with cash flows of the associated hedged items. The ineffective portion of a derivative’s change in fair value is immediately recognized in our Consolidated Statements of Operations. See Note 12 - Fair Value Measurements for more information on our derivative financial instruments.
Investments. Investments include trading investments. The corresponding gain or loss associated with these investments is reported in our Consolidated Statements of Operations as a component of other expense.
Assets Held for Sale. Assets held for sale consists of assets recorded at the lower of the carrying value or fair value less costs to sell for which management has committed to plan to sell the assets, the sale is probable and will occur within a year. We had $20.6 million and $1.2 million of assets held for sale as of December 31, 2015 and 2014, respectively. The assets classified as held for sale as of December 31, 2015 relate to our corporate headquarter facility, Canadian facility and the assets to be sold related to the Memorex trademark transaction. See Note 18 - Subsequent Events for further information on the corporate headquarter facility and Memorex transactions. The assets classified as held for sale as of December 31, 2014 relate to our Weatherford, Oklahoma facility.
Property, Plant and Equipment. Property, plant and equipment, including leasehold and other improvements that extend an asset’s useful life or productive capabilities, are recorded at cost. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed are removed from the related accounts, and the gains or losses are reflected in the results of operations.
Property, plant and equipment are generally depreciated on a straight-line basis over their estimated useful lives. The estimated depreciable lives range from 10 to 20 years for buildings and 5 to 10 years for machinery and equipment. Leasehold and other improvements are amortized over the remaining life of the lease or the estimated useful life of the improvement, whichever is shorter. Depreciation expense was $7.0 million, $8.8 million and $9.4 million for 2015, 2014 and 2013, respectively.
Intangible Assets. We record all assets and liabilities acquired in purchase acquisitions, including intangibles, at estimated fair value. The initial recognition of intangible assets, the determination of useful lives and, if necessary, subsequent impairment analyses require management to make subjective estimates of how the acquired assets will perform in the future using certain valuation methods. See Note 6 - Intangible Assets and Goodwill for further information on our intangible assets and impairment testing.
Goodwill. Goodwill is the excess of the cost of an acquired entity over the estimated fair value of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is considered impaired when its carrying amount exceeds its implied fair value. The Company may assess qualitative factors to determine whether it is more likely than not that
51
the fair value of the reporting unit is less than its carrying amount, including goodwill. If we determine in this assessment that the fair value of the reporting unit is more than its carrying amount we may conclude that there is no need to perform Step 1 of the impairment test. We have an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing Step 1 of the goodwill impairment test.
Step 1 of the impairment test involves comparing the fair value of the reporting unit to which goodwill was assigned to its carrying amount. If fair value is deemed to be less than carrying value, Step 2 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. See Note 6 - Intangible Assets and Goodwill for further information on our goodwill and impairment testing.
Impairment of Long-Lived Assets. We periodically review the carrying value of our property and equipment and our intangible assets to test whether current events or circumstances indicate that such carrying value may not be recoverable. For the testing of long-lived assets that are "held for use," if the tests indicate that the carrying value of the asset group that contains the long-lived asset being evaluated is greater than the expected undiscounted cash flows to be generated by such asset or asset group, an impairment loss would be recognized. The impairment loss is determined by the amount by which the carrying value of such asset group exceeds its estimated fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. See Note 6 - Intangible Assets and Goodwill for further information on impairment testing.
Assets to be disposed of and qualify as being "held for sale" are carried at the lower of their carrying value or fair value less costs to sell. Management judgment is necessary to estimate the fair value of assets and, accordingly, actual results could vary significantly from such estimates.
Revenue Recognition. We sell a wide range of data storage, mobile security and consumer storage solutions audio products and accessories. Net revenue consists primarily of data storage, mobile security, magnetic, optical, flash media, consumer electronics and accessories sales. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, installation has been completed (if applicable) or services have been rendered, fees are fixed or determinable and collectability is reasonably assured. For product sales, delivery is considered to have occurred when the risks and rewards of ownership transfer to the customer. For inventory maintained at the customer site, revenue is recognized at the time these products are sold by the customer. We base our estimates for returns on historical experience and have not experienced significant fluctuations between estimated and actual return activity. Non-income based taxes collected from customers are also recorded as revenue and include levies and various excise taxes, mainly in non-U.S. jurisdictions. These taxes included in revenue in 2015, 2014, and 2013 were $4.9 million, $7.1 million, and $10.3 million, respectively.
The majority of the Company’s Nexsan and IronKey products have both software and non-software components that together deliver the products’ essential functionality. The software is embedded within the hardware and sold together as a single storage solution to the customer. Accordingly, the software and non-software components do not qualify as separate units of accounting as prescribed in Accounting Standards Codification (ASC) 605-25 and are combined as a single unit of accounting. There are no situations where revenue is recognized separately for software.
We also offer services in conjunction with our Nexsan and IronKey products which may include installation, training, hardware maintenance and software support. For such services that are determined to be essential to the functionality of the product, the product and services do not qualify as separate units of accounting as prescribed in ASC 605-25 and are combined as a single unit of accounting. In situations where the sale of our Storage and Security Solutions products and associated services qualify as multiple element arrangements, we allocate arrangement consideration to each unit of accounting based on its relative selling price, and revenue is recognized for each element when all of the criteria for revenue recognition for such elements have been met. Revenue from services is not a significant component of total consolidated revenues.
Revenue associated with stand-alone service arrangements (such as maintenance arrangements) that are sold separately is recorded ratably over the service period.
52
Rebates that are provided to our customers are accounted for as a reduction of revenue at the time of sale based on an estimate of the cost to honor the related rebate programs. The rebate programs that we offer vary across our businesses as we serve numerous markets. The most common incentives relate to amounts paid or credited to customers that are volume-based and rebates to support promotional activities.
Concentrations of Credit Risk. We sell a wide range of products and services to a diversified base of customers around the world and perform ongoing credit evaluations of our customers’ financial condition. Therefore, we believe there is no material concentration of credit risk. No single customer represented more than 10 percent of total net revenue or accounts receivable in 2015, 2014, or 2013.
Cost of Goods Sold. Cost of goods sold includes raw materials, direct labor, manufacturing overhead, shipping and receiving costs, freight costs, depreciation of manufacturing equipment and other less significant indirect costs related to the production of our products.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses include sales and marketing, customer service, finance, legal, human resources, information technology, general management and similar expenses.
Research and Development Costs. Research and development costs are expensed as incurred. Research and development costs include salaries, payroll taxes, employee benefit costs, supplies, depreciation and maintenance of research equipment.
Rebates Received. We receive rebates from some of our inventory vendors if we achieve pre-determined purchasing thresholds. These rebates are accounted for as a reduction of the price of the vendor's products and are included as a reduction of our cost of goods sold in the period in which the purchased inventory is sold.
Income Taxes. 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 in 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.
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. In accordance with accounting rules, 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 it is more-likely-than-not that 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.
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. Interest and penalties recorded for uncertain tax positions are included in our income tax provision.
Treasury Stock. Our repurchases of shares of common stock are recorded at cost as treasury stock and are presented as a reduction of shareholders’ equity. When treasury shares are reissued, we use a last-in, first-out method, and the difference between repurchase cost and fair value at reissuance is treated as an adjustment to equity.
Stock-Based Compensation. Stock-based compensation awards classified as equity awards are measured at fair value at the date of grant and expensed over their vesting or service periods. We also have stock appreciation
53
rights outstanding which are considered liability awards as the settlement of these awards, if they were to vest, would be in cash. If these awards were determined to be probable of achieving its stock price conditions and revenue performance conditions, we would record the estimated fair value of such awards as a liability and re-measure their estimated value each reporting period.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions used in the valuation model are supported primarily by historical indicators and current market conditions. Expected volatilities are based on historical volatility of our stock and are calculated using the historical weekly close rate for a period of time equal to the expected term. The risk-free rate for the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. We use historical data and management judgment to estimate option exercise and employee termination activity within the valuation model. The expected term of stock options granted is based on historical data and represents the period of time that stock options granted are expected to be outstanding. It is calculated on an aggregated basis and estimated based on an analysis of options already exercised and any foreseeable trends or changes in recipients’ behavior. In determining the expected term, we consider the vesting period of the awards, the contractual term of the awards, historical average holding periods, stock price history, impacts from recent restructuring initiatives and the relative weight for each of these factors. The dividend yield, if applicable, is based on the latest dividend payments made on or announced by the date of the grant. Forfeitures are estimated based on historical experience and current demographics. See Note 8 - Stock-Based Compensation for further information regarding stock-based compensation.
Weighted Average Basic and Diluted Shares Outstanding. Basic (loss) earnings per common share is calculated using the weighted average number of shares outstanding during the year. Diluted (loss) earnings per common share is computed on the basis of the weighted average basic shares outstanding plus the dilutive effect of our stock-based compensation plans using the “treasury stock” method. Unvested restricted stock and treasury shares are excluded from the calculation of weighted average number of common shares outstanding. Once restricted stock vests, it is included in our common shares outstanding.
Potential common shares are excluded from the computation of diluted (loss) earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss available to common shareholders. Stock options are also anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company's common stock for the period. See Note 3 - (Loss) Earnings per Common Share for our calculation of weighted average basic and diluted shares outstanding.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued new accounting guidance related to revenue recognition. This new guidance will replace all current U.S. GAAP guidance on revenue recognition and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In July 2015, the guidance was revised to be effective for interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of this new guidance on our financial position and results of operations.
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-15 - Presentation of Financial Statements, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued and if Management’s plans will alleviate that doubt. Management will be required to make this evaluation for both annual and interim reporting periods. The accounting guidance is effective for Imation beginning in the first quarter of 2016.
In April 2015, the Financial Accounting Standards Board issued new accounting guidance related to debt issuance costs. Under this new standard, debt issuance costs reported on the consolidated balance sheet would be
54
reflected as a direct deduction from the related debt liability rather than as an asset. For Imation, this is effective January 1, 2016, with early adoption permitted. Retroactive application to prior periods is required. As this standard impacts only the classification of certain amounts within the consolidated balance sheet, Imation does not expect this new standard to have a material impact on our financial position and results of operations.
In May 2015, the Financial Accounting Standards Board issued new accounting guidance related to the disclosures for investments in certain entities that calculate net asset value per share (or its equivalent). This standard modifies existing disclosure requirements such that investments for which the practical expedient is used to measure their fair value at net asset value (NAV) would be removed from the fair value hierarchy disclosures. Instead, an entity would be required to include those investments as a reconciling item such that the total fair value amount of investments in the fair value hierarchy disclosure is consistent with the amount on the balance sheet. Changes were also made to the requirements in a sponsor’s employee benefit plan asset disclosures. For Imation, this standard is effective January 1, 2016, with retrospective application required. Early adoption is permitted. As this standard only impacts certain disclosures, it will not impact the Company’s consolidated results of operations and financial condition.
In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. For Imation, this standard is effective prospectively beginning January 1, 2017, with early adoption permitted. The Company is currently assessing the impact of this new ASU on Imation’s consolidated results of operations and financial condition.
In September 2015, the Financial Accounting Standard Board issued Accounting Standard Update (ASU) No. 2015-16, Business Combinations (Topic 805), which requires that an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change in provisional amounts, calculated as if the accounting had been completed at the acquisition date. This guidance requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The accounting guidance is effective for Imation beginning in the first quarter of 2016. The Company is currently assessing the impact of this new ASU on Imation’s consolidated results of operations and financial condition.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which revises the accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownership interests in an entity, including investments in partnerships, unincorporated joint ventures and limited liability companies (collectively, equity securities) that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify under current guidance as available for sale in other comprehensive income (OCI). They also will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. Instead, for these types of equity investments that do not otherwise qualify for the net asset value practical expedient, entities will be permitted to elect a practicability exception and measure the investment at cost less impairment plus or minus observable price changes (in orderly transactions). The ASU also establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option (FVO) has been elected. Under this guidance, an entity would be required to separately present in OCI the portion of the total fair value change attributable to instrument-specific credit risk as opposed to reflecting the entire amount in earnings. For derivative liabilities for which the FVO has been elected, however, any changes in fair value attributable to instrument-specific credit risk would continue to be presented in net income, which is consistent with current guidance. For Imation, this standard is effective beginning January 1, 2018 via a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily
55
determinable fair values which is applied prospectively. The Company is currently assessing this ASU’s impacts on our consolidated results of operations and financial condition.
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. ASU 2016-02 is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements. ASU 2016-02 will be effective for the company beginning on January 1, 2019. Early adoption is permitted. The company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which amends the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. This accounting guidance simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This determination is still required to be performed at a jurisdiction-by-jurisdiction basis. This accounting guidance is effective for Imation beginning in the first quarter of 2017, but we have elected to adopt this guidance prospectively as of December 31, 2015. As a result, we have classified all deferred tax liabilities and assets as non-current in the Consolidated Balance Sheet at December 31, 2015. Amounts on the December 31, 2014 Consolidated Balance Sheet were not retrospectively adjusted.
Note 3 — (Loss) Earnings per Common Share
The following table sets forth the computation of the weighted average basic and diluted loss per share:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions, except per share amounts) | |||||||||||
Numerator: | |||||||||||
Loss from continuing operations | $ | (194.0 | ) | $ | (112.4 | ) | $ | (24.4 | ) | ||
Loss from discontinued operations | — | (2.3 | ) | (20.0 | ) | ||||||
Net loss | $ | (194.0 | ) | $ | (114.7 | ) | $ | (44.4 | ) | ||
Denominator: | |||||||||||
Weighted average number of common shares outstanding during the period | 40.1 | 41.0 | 40.5 | ||||||||
Dilutive effect of stock-based compensation plans | — | — | — | ||||||||
Weighted average number of diluted shares outstanding during the period | 40.1 | 41.0 | 40.5 | ||||||||
Basic loss per common share: | |||||||||||
Continuing operations | $ | (4.84 | ) | $ | (2.74 | ) | $ | (0.60 | ) | ||
Discontinued operations | — | (0.06 | ) | (0.49 | ) | ||||||
Net loss | (4.84 | ) | (2.80 | ) | (1.10 | ) | |||||
Diluted loss per common share: | |||||||||||
Continuing operations | $ | (4.84 | ) | $ | (2.74 | ) | $ | (0.60 | ) | ||
Discontinued operations | — | (0.06 | ) | (0.49 | ) | ||||||
Net loss | (4.84 | ) | (2.80 | ) | (1.10 | ) | |||||
Anti-dilutive shares excluded from calculation | 3.6 | 4.5 | 6.1 | ||||||||
56
Note 4 — Acquisitions and Divestitures
Acquisitions
Connected Data, Inc.
On October 14, 2015, the Company acquired 100% of the stock of Connected Data, Inc. (CDI) to augment the Company’s vision in delivering a comprehensive and secure storage, backup and collaboration ecosystem. The purchase price consisted of a cash payment of $0.7 million, issuance of 1,511,151 unregistered shares of Imation common stock valued at $2.6 million (based on applying a 15% liquidity discount to the fair value of our stock) at acquisition date, $2.6 million associated with the repayment of all of CDI's outstanding debt at the time of acquisition and future contingent consideration totaling up to $5 million (considered to have an estimated fair value of $0.8 million at the time of acquisition) for a total purchase price of $6.7 million. The purchase price allocation resulted in goodwill of $3.8 million which is primarily attributable to its workforce, strategic synergies and intangible assets that do not qualify for separate recognition. This goodwill is not deductible for tax purposes.
The following table illustrates our finalized allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed as of acquisition date:
Amount | |||
(In millions) | |||
Cash | $ | 0.2 | |
Inventory | 0.2 | ||
Prepaid and other | 0.1 | ||
Intangible assets | 4.3 | ||
Goodwill | 3.8 | ||
Accounts payable | (0.7 | ) | |
Accrued expenses | (1.1 | ) | |
Deferred revenue - current | (0.1 | ) | |
$ | 6.7 | ||
Our allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible asset:
Weighted | |||||
Average | |||||
Amount | Life | ||||
(In millions) | |||||
Other - developed technology | $ | 4.3 | 6 years | ||
Actual results related to CDI included in the Consolidated Statements of Operations for the fiscal year ended December 31, 2015 were not material.
Due to the immateriality of this acquisition, no pro forma disclosures have been presented.
Goodwill acquired in the acquisition of CDI was fully allocated to our Nexsan reporting unit. Upon the acquisition of CDI, we quickly began integrating CDI with our Nexsan business, both operationally and with respect to its management team.
The contingent consideration arrangement includes the potential for three separate payments of cash and unregistered shares of Imation common stock based on defined revenue targets. The first contingent consideration payment is for $0.1 million of cash and 313,538 shares of unregistered Imation common stock. The first contingent payment is based on revenue targets achieved from January 1, 2016 to June 30, 2016. The second contingent consideration payment is for $0.3 million of cash and 574,819 shares of unregistered Imation common stock. The second contingent payment is based on revenue targets achieved from July 1, 2016 to December 31, 2016. The third contingent consideration payment is for $0.3 million of cash and 574,819 shares of unregistered Imation common stock. The third contingent payment is based on revenue targets achieved from January 1, 2017 to June 30, 2017. We used the real option valuation technique for calculating the estimated fair value of contingent consideration with a 15% discount rate.
57
Discontinued Operations
On February 13, 2013, we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. As a part of exiting these disposal groups, we sold the assets directly associated with these businesses, which primarily included inventory, tooling and intangible assets.
Memorex
On October 15, 2013 we completed the sale of the Memorex consumer electronics business for $9.3 million of total consideration consisting of two separate receivables from the purchaser. The first was a $3.8 million note receivable that required a $0.9 million payment in December 2013 with the remainder to be paid by March 31, 2014. We received the required $0.9 million cash payment during the fourth quarter of 2013. The $2.9 million note receivable balance was restructured into four installments with final payment due in 2015. Imation received $1.6 million of note receivable balance in 2014 and the remaining $1.3 million was paid in 2015. The second receivable was for $5.5 million and did not bear interest. This second receivable required payments between 2014 and 2018 in increasing annual increments (ranging from $0.2 million in 2014 to $2.2 million in 2018). Our arrangement for the sale of this business also provided Imation with the ability to receive additional consideration through 2018 to the extent the purchaser’s sales exceed certain thresholds.
On January 4, 2016, the Company sold its Memorex trademark and corresponding trademark licenses. Amounts due to the Company after January 4, 2016 associated with the $5.5 million receivable described above were part of the assets sold in this transaction and were classified as an asset held for sale on our Consolidated Balance Sheet as of December 31, 2015. See Note 18 - Subsequent Events for information on the Memorex trademark sale. The remaining receivable due to Imation from the 2013 sale of the Memorex consumer electronics business is $0.2 million and is classified as an other current asset on our Consolidated Balance Sheet as of December 31, 2015.
The sale of our Memorex consumer electronics business resulted in a net gain of $0.9 million which was recorded as an element of discontinued operations during the year ended December 31, 2013.
XtremeMac
On January 31, 2014 we completed the sale of the XtremeMac business. The sales price consisted of $0.3 million of cash consideration received at closing and an interest-bearing note receivable of $0.3 million due on December 15, 2015. The sales price also included additional future cash consideration originally estimated at $3.0 million and which was based on the proceeds the purchaser was able to achieve from selling the acquired inventory. During 2013, we adjusted downward our estimate of the expected consideration to be received by $1.2 million. Accordingly, we adjusted the carrying value of the XtremeMac disposal group, and recorded a charge of $1.2 million in 2013 which brought our total full-year 2013 impairment charge associated with this disposal group to $6.7 million. We recorded a charge of an additional $1.2 million in 2014 related to the expected consideration, which is included in the loss on sale of discontinued businesses. We have collected the remaining consideration. The impairment charges are recorded as an element of discontinued operations.
Results of Discontinued Operations
The operating results for these businesses are presented in our Consolidated Statements of Operations as discontinued operations for all periods presented and reflect revenues and expenses that are directly attributable to these businesses that were eliminated from our ongoing operations.
58
The key components of the results of discontinued operations were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Net revenue | $ | — | $ | 0.4 | $ | 40.7 | |||||
(Loss) gain on sale of discontinued businesses, net of income taxes | $ | — | $ | (1.7 | ) | $ | 0.9 | ||||
Loss from operations of discontinued businesses, before income taxes | — | (0.6 | ) | (14.2 | ) | ||||||
Adjustment to carrying value of disposal group | — | — | (6.7 | ) | |||||||
Income tax benefit | — | — | — | ||||||||
Loss from discontinued businesses, net of income taxes | $ | — | $ | (2.3 | ) | $ | (20.0 | ) | |||
Due to the expected finalization of the wind-down of our legacy business in 2016 as well as the sale of IronKey in 2016, it is expected that a substantial amount of our historical operations will require presentation as discontinued operations in future periods.
Note 5 — Supplemental Balance Sheet Information
Additional supplemental balance sheet information is provided in the tables that follow.
As of December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Inventories | |||||||
Finished goods | $ | 2.4 | $ | 51.1 | |||
Work in process | 0.7 | 0.7 | |||||
Raw materials and supplies | 7.4 | 5.9 | |||||
Total inventories | $ | 10.5 | $ | 57.7 | |||
Property, Plant and Equipment | |||||||
Land | $ | — | $ | 1.2 | |||
Buildings and leasehold improvements | 4.9 | 94.7 | |||||
Machinery and equipment | 10.3 | 88.0 | |||||
Construction in progress | — | 0.1 | |||||
Total | 15.2 | 184.0 | |||||
Less accumulated depreciation | (10.6 | ) | (139.0 | ) | |||
Property, plant and equipment, net | $ | 4.6 | $ | 45.0 | |||
Assets held for sale | |||||||
Corporate headquarter facility (Note 18) | $ | 11.0 | $ | — | |||
Other facilities | 0.2 | 1.2 | |||||
Memorex trademark and associated receivables (Note 18) | 9.4 | — | |||||
Total assets held for sale | $ | 20.6 | $ | 1.2 | |||
During 2015, we classified our corporate headquarters facility as an asset held for sale. The amounts transferred out of property, plant and equipment and accumulated depreciation in 2015, was $125.6 million and $93.5 million, respectively. The carrying value of $32.1 million was subsequently written down to $11.0 million, which is the value of net proceeds received from the property sale that occurred on January 4, 2016 and is reported in assets held for sale on our Consolidated Balance Sheet as of December 31, 2015. See Note 7 - Restructuring and Other Expense for further information on the facility write down and Note 18 - Subsequent Events for further information on the facility sale.
59
As a result of our restructuring plan to wind down our legacy business, the Company recorded $3.5 million of write downs of property, plant and equipment for the year ended December 31, 2015. Property, plant and equipment and accumulated depreciation in 2015 were adjusted based on fair market value by $24.6 million and $21.1 million, respectively. See Note 7 - Restructuring and Other Expense
Accounts Receivable* | |||
(In millions) | |||
Reserves and Allowances | |||
Balance, as of December 31, 2012 | $ | 18.0 | |
Additions | 6.6 | ||
Write-offs, net of recoveries | (10.1 | ) | |
Balance, as of December 31, 2013 | $ | 14.5 | |
Additions | 2.9 | ||
Write-offs, net of recoveries | (8.3 | ) | |
Balance, as of December 31, 2014 | $ | 9.1 | |
Additions | 9.9 | ||
Write-offs, net of recoveries | (10.0 | ) | |
Balance, as of December 31, 2015 | $ | 9.0 | |
*Accounts receivable reserves and allowances include estimated amounts for customer returns, discounts on payment terms and the inability of certain customers to make the required payment.
Other current assets includes $9.9 million of restricted cash as of December 31, 2015. There was no restricted cash in other current assets as of December 31, 2014.
Other current liabilities (included as a separate line item in our Consolidated Balance Sheet) includes the following:
As of December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Rebates payable | $ | 5.5 | $ | 26.9 | |||
Accrued payroll | 6.2 | 18.4 | |||||
Deferred Revenue | 8.2 | 8.3 | |||||
Restructuring accruals (Note 7) | 16.9 | 1.3 | |||||
Other current liabilities | 28.8 | 43.3 | |||||
Total other current liabilities | $ | 65.6 | $ | 98.2 | |||
60
Note 6 — Intangible Assets and Goodwill
Intangible Assets
Intangible assets consist of the following:
Trade Names | Software | Customer Relationships | Developed Technology & Other | Total | |||||||||||||||
(In millions) | |||||||||||||||||||
December 31, 2014 | |||||||||||||||||||
Cost | $ | 34.2 | $ | 60.1 | $ | 20.0 | $ | 26.2 | $ | 140.5 | |||||||||
Accumulated amortization | (14.0 | ) | (55.3 | ) | (3.7 | ) | (9.6 | ) | (82.6 | ) | |||||||||
Intangible assets, net | $ | 20.2 | $ | 4.8 | $ | 16.3 | $ | 16.6 | $ | 57.9 | |||||||||
December 31, 2015 | |||||||||||||||||||
Cost | $ | — | $ | — | $ | — | $ | 4.3 | $ | 4.3 | |||||||||
Accumulated amortization | — | — | — | (0.1 | ) | (0.1 | ) | ||||||||||||
Intangible assets, net | $ | — | $ | — | $ | — | $ | 4.2 | $ | 4.2 | |||||||||
The following table presents the changes in intangible assets:
Trade Names | Software | Customer Relationships | Developed Technology & Other | Total | |||||||||||||||
(In millions) | |||||||||||||||||||
December 31, 2014 | $ | 20.2 | $ | 4.8 | $ | 16.3 | $ | 16.6 | $ | 57.9 | |||||||||
Acquisition | — | — | — | 4.3 | 4.3 | ||||||||||||||
Amortization | (3.8 | ) | (1.7 | ) | (1.6 | ) | (2.7 | ) | (9.8 | ) | |||||||||
Impairment losses | (6.0 | ) | (3.1 | ) | (14.7 | ) | (13.8 | ) | (37.6 | ) | |||||||||
Foreign currency translation | — | — | — | (0.2 | ) | (0.2 | ) | ||||||||||||
TDK brand transaction (Note 16) | (4.5 | ) | — | — | — | (4.5 | ) | ||||||||||||
Memorex trademark (Note 18) | (5.9 | ) | — | — | — | (5.9 | ) | ||||||||||||
December 31, 2015 | $ | — | $ | — | $ | — | $ | 4.2 | $ | 4.2 | |||||||||
For purposes of long-lived asset impairment assessments, we have generally determined our asset groups to be at the level of each brand as this is the lowest level for which identifiable cash flows are available and are largely independent of the cash flows of other assets. Each reporting period, we review our long-lived assets and associated asset groups to determine if there is a triggering event which would require that we perform an impairment test.
2015 Intangible Asset Analysis
During the third quarter of 2015, management and the Board of Directors engaged in a detailed strategic and financial assessment of the Company. As a result of this assessment, we significantly revised our previous business strategy by adjusting our product portfolio to a smaller product offering as well as changing our investment philosophy such that the investment in operating expenses will be significantly reduced. Because of our strategy change, smaller product portfolio and reduced future investment, we revised our forecasts, which we determined to be a triggering event for impairment testing. This required the assessment of the recoverability of the long-lived assets (including definite-lived intangible assets).
We compared the carrying value of our asset groups with their estimated undiscounted future cash flows and determined that the carrying value of certain asset groups exceeded the undiscounted cash flows expected to be generated by the asset group. For those asset groups, we then compared the carrying value of the asset group to its estimated fair value to determine the amount by which our long-lived assets (primarily intangible assets) with the asset group were impaired. As a result of these analyses, we recorded an impairment charge of $37.6 million in the Consolidated Statements of Operations for the period ended September 30, 2015. In Q4 2015 we recorded an intangible asset of $4.3 million related to the CDI acquisition.
61
In determining the estimated fair value of the asset groups, we used the income approach, a valuation technique under which we estimate future cash flows using the asset group's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 years period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized discount rates of approximately 16% percent and terminal growth rates ranging from zero to 3.0 percent.
As of December 31, 2015, we had an intangible asset balance of $4.2 million related to developed technology.
See Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements for more information on intangible assets including our valuation approach and assumptions.
2014 Intangible Asset Analysis
As a part of our annual goodwill impairment test for our Nexsan and IronKey reporting units, we also tested for the impairment of long-lived assets, including intangible assets with the asset groups included in our Nexsan and IronKey reporting units. In performing these tests, we compared the carrying values of these asset groups with their estimated undiscounted future cash flows and determined that the undiscounted cash flows expected to be generated by the asset groups significantly exceeded their carrying values resulting in no impairment. During the first and third quarters of 2014, as noted below under our 2014 goodwill analysis discussion, we performed interim goodwill impairment testing for our Nexsan reporting unit due to lower than anticipated results. We determined these factors to be an event that warranted interim tests as to whether our intangible assets associated with Nexsan were impaired. Based on our impairment analysis performed in the first and third quarters of 2014, we concluded that we did not have an impairment of our intangible assets associated with Nexsan at those times.
Amortization Expense
Amortization expense from continuing operations for intangible assets consisted of the following:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Amortization expense | $ | 9.8 | $ | 12.9 | $ | 13.2 | |||||
Based on the intangible assets in service as of December 31, 2015, estimated amortization expenses for each of the next five years ending December 31 is as follows:
2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||
(In millions) | |||||||||||||||||||
Amortization expense | $ | 0.7 | $ | 0.7 | $ | 0.7 | $ | 0.7 | $ | 0.6 | |||||||||
62
Goodwill
See Note 14 for discussion regarding our changes to reportable segments which occurred in the fourth quarter of 2015. The following table presents the changes in goodwill allocated to our reportable segments:
Nexsan | IronKey | Storage Media and Accessories | Total | |||||||||||
(In millions) | ||||||||||||||
Balance as of December 31, 2013: | ||||||||||||||
Goodwill | $ | 64.1 | $ | 32.9 | $ | 152.3 | $ | 249.3 | ||||||
Accumulated impairment losses | — | (24.9 | ) | (152.3 | ) | (177.2 | ) | |||||||
64.1 | 8.0 | — | 72.1 | |||||||||||
Goodwill impairment | (35.4 | ) | — | (35.4 | ) | |||||||||
Foreign currency translation | (0.6 | ) | — | (0.6 | ) | |||||||||
Balance as of December 31, 2014: | ||||||||||||||
Goodwill | 63.5 | 32.9 | 152.3 | 248.7 | ||||||||||
Accumulated impairment losses | (35.4 | ) | (24.9 | ) | (152.3 | ) | (212.6 | ) | ||||||
28.1 | 8.0 | — | 36.1 | |||||||||||
Goodwill from acquisition of Connected Data, Inc. | 3.8 | — | 3.8 | |||||||||||
Goodwill impairment | (28.1 | ) | (8.0 | ) | — | (36.1 | ) | |||||||
Foreign currency translation | — | — | — | |||||||||||
Balance as of December 31, 2015: | ||||||||||||||
Goodwill | 67.3 | 32.9 | 152.3 | 252.5 | ||||||||||
Accumulated impairment losses | (63.5 | ) | (32.9 | ) | (152.3 | ) | (248.7 | ) | ||||||
$ | 3.8 | $ | — | $ | — | $ | 3.8 | |||||||
We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. Goodwill acquired in the acquisition of CDI was fully allocated to the Nexsan reporting unit. Upon the acquisition of CDI, we began quickly integrating CDI with our Nexsan business, both operationally and with respect to its management team.
2015 Goodwill Analysis
We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year and during an interim period if an event occurs or circumstances change that would warrant impairment testing. During the third quarter of 2015, management and the Board of Directors engaged in an assessment of the Nexsan and IronKey businesses of the Company. As a result of this assessment, we significantly revised our previous business strategy by adjusting our product portfolio to a smaller product offering as well as changing our investment philosophy associated with these businesses such that the investment in operating expenses will be significantly reduced. Because of our strategy change, smaller product portfolio and reduced future investment, we revised our forecasts, which we determined to be a triggering event requiring us to review our goodwill related to our Nexsan and IronKey reporting units for impairment.
In determining the estimated fair value of these reporting units, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized discount rates of approximately 16.0 percent and terminal growth rates ranging from zero to 3.0 percent.
63
As a result of this assessment, it was determined that the carrying values of our Nexsan and IronKey reporting units exceeded their estimated fair values. Accordingly, we performed a Step 2 goodwill impairment test which compared the implied value of the goodwill associated with each of these reporting units to the carrying value of the goodwill associated with each of these reporting units. Based on this analysis, the carrying values of the goodwill associated with Nexsan exceeded its implied value by $28.1 million and the carrying values of the goodwill associated with IronKey exceeded its implied value by $8.0 million. Consequently, we recorded an impairment charge of 36.1 million in the Consolidated Statements of Operations for the year ended December 31, 2015.
See Note 2 - Summary of Significant Accounting Policies and Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements as well as Critical Accounting Policies and Estimates for further background and information on goodwill impairments.
2014 Goodwill Analysis
During the first and then again in the third quarter of 2014, we adjusted our internal forecast for our Nexsan reporting unit due to lower than anticipated results. We considered these factors to be an event that warranted an interim test as to whether goodwill was impaired in each of these periods. The first quarter test resulted in no impairment of goodwill as the estimated fair value of the reporting unit exceeded its carrying value. In performing Step 1 of the third quarter test, it was determined that the carrying value of our Nexsan reporting unit exceeded its estimated fair value. Accordingly, we performed a Step 2 goodwill impairment test which compared the implied value of the goodwill associated with Nexsan to the carrying value of such goodwill. Based on this analysis, the carrying value of the Nexsan goodwill exceeded its implied value by $35.4 million and, consequently, we recorded an impairment charge of that amount in the Consolidated Statements of Operations.
In determining the estimated fair value of the reporting unit, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized a discount rate of 16.5 percent and a terminal growth rate of 3.0 percent. Because our Nexsan reporting unit had not been able to achieve its anticipated results, we increased our discount rate by 2.0 percent over the estimated market discount rate of 14.5 percent.
During the fourth quarter of 2014, we performed our annual impairment testing of goodwill for our Nexsan and IronKey reporting units. In performing Step 1 of these tests, we compared the estimated fair value of these reporting units to the carrying value. These impairment tests resulted in no fourth quarter impairment as the estimated fair value of each reporting unit exceeded the carrying value for the Nexsan and IronKey reporting units, respectively.
In determining the estimated fair value of the reporting units for our annual test performed in the fourth quarter of 2014, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized a discount rate of 16.5 percent and a terminal growth rate of 3.0 percent for each reporting unit.
Note 7 — Restructuring and Other Expense
Restructuring expenses generally include severance and related charges, lease termination costs and other costs related to restructuring programs. Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans. Generally, these charges are reflected in the period in which the Board approves the associated actions, the actions are probable and the amounts are estimable which may occur prior to the communication to the affected employee(s). This estimate takes into account all information available as of the date the financial statements are issued.
Restructuring Plan
On September 27, 2015, the Company adopted a restructuring plan pursuant to which it wind down all sales and operations of its legacy business in an accelerated manner and further reduce and rationalize its corporate overhead (the Restructuring Plan).
64
The Company entered into the Restructuring Plan as a result of continued losses due to secular declines in its legacy business and to reduce the cost structure and streamline the organization in light of these changes. The Company expects that it will incur approximately $120 million in total charges for the Restructuring Plan excluding tax impact and approximately $35 million of the total charges will require cash expenditures. The Company expects that the Restructuring Plan and associated wind down of its legacy business will be substantially complete during the first quarter of 2016.
In October 2012, the Board of Directors approved our Global Process Improvement (GPI) Program in order to realign our business structure and significantly reduce operating expense over time. This restructuring program addressed product line rationalization and infrastructure and included a planned reduction in our global workforce. The GPI restructuring program is closed and 2015 charges (beginning with the third quarter of 2015) and future related charges will be reported as part of the Restructuring Plan discussed above.
Restructuring and Other Expense
The components of our restructuring and other expense included in our Consolidated Statements of Operations were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Restructuring | |||||||||||
Severance and related | $ | 24.5 | $ | 3.9 | $ | 2.1 | |||||
Lease termination costs | 1.5 | 0.3 | 0.7 | ||||||||
Other | 2.6 | 1.2 | 2.4 | ||||||||
Total restructuring | $ | 28.6 | $ | 5.4 | $ | 5.2 | |||||
Other | |||||||||||
Settlement of UK pension plan (Note 9) | — | 0.5 | 10.6 | ||||||||
Gain on sale of fixed assets held for sale | — | — | (9.8 | ) | |||||||
Acquisition and integration related costs | 0.5 | — | 2.8 | ||||||||
Pension settlement/curtailment (Note 9) | (0.8 | ) | 0.2 | 2.1 | |||||||
Asset disposals / write down | 24.6 | 1.8 | — | ||||||||
Other | (5.0 | ) | 5.7 | 0.4 | |||||||
Total | $ | 47.9 | $ | 13.6 | $ | 11.3 | |||||
Restructuring Expense
During the year ended December 31, 2015 we recorded $28.6 million of total restructuring charges for which $24.5 million relates to severance almost exclusively associated with our Restructuring Plan. Total restructuring charges of $5.4 million and $5.2 million for the years ended December 31, 2014 and 2013, respectively, were related to the GPI program.
Other Expense
Certain amounts recorded in Other are discussed elsewhere in our Notes to Consolidated Financial Statements. See note references in table above.
During the year ended December 31, 2015, we had $0.5 million of acquisition and integration related costs related to the acquisition of Connected Data, Inc.
During the year ended December 31, 2015 we recorded $24.6 million of charges associated with asset disposals / asset write downs for which $21.0 million relates to the write down of our corporate headquarters facility and $3.6 million relates to other miscellaneous asset disposals and write downs caused by our restructuring efforts. During 2015, based on the Board of Director's and management's decision to sell tour corporate headquarters facility in light of the other restructuring activities that were approved in September 2015, we classified our corporate headquarters facility as an asset held for sale. The carrying value of our corporate headquarters facility of $32.1 million was subsequently written down to $11.0 million which is the value of net proceeds received from the property sale that occurred on January 4, 2016.
65
The $5.0 million of gain in other includes a $9.1 million gain on the termination of the TDK license, a $4.5 million gain on the sale of our RDX Storage product line. These gains were partially offset by certain employee costs, consulting fees for external and related parties directly associated with our restructuring efforts, the US pension cost and others. See Note 16 - Related Party Transactions for further information on the TDK transaction and related party consulting fees. See Note 12 - Fair Value Measurements for further information on the RDX transaction.
During the year ended December 31, 2014 we had $1.8 million of asset disposals / asset write downs for which $1.0 million relates to the write down of our Weatherford, Oklahoma facility and $0.8 million relates to miscellaneous asset disposals.
During the year ended December 31, 2014, we had $5.7 million of other expenses which includes certain employee costs and consulting fees directly associated with our restructuring efforts.
During the year ended December 31, 2013, a gain of $9.8 million was recorded related to the sale of our Camarillo, California manufacturing facility.
Restructuring Accruals
Activity related to the new and existing restructuring accruals was as follows:
Severance and Related | Lease Termination Costs | Other | Total | ||||||||||||
(In millions) | |||||||||||||||
Accrued balance at December 31, 2013 | $ | 2.2 | $ | 0.4 | $ | 0.8 | $ | 3.4 | |||||||
Charges | 3.7 | 0.1 | 0.6 | 4.4 | |||||||||||
Usage | (5.1 | ) | (0.2 | ) | (1.4 | ) | (6.7 | ) | |||||||
Currency impacts | — | — | 0.2 | 0.2 | |||||||||||
Accrued balance at December 31, 2014 | $ | 0.8 | $ | 0.3 | $ | 0.2 | $ | 1.3 | |||||||
Charges | 24.5 | 1.5 | 2.6 | 28.6 | |||||||||||
Usage | (11.1 | ) | (0.6 | ) | (1.3 | ) | (13.0 | ) | |||||||
Currency impacts | — | — | — | — | |||||||||||
Accrued balance at December 31, 2015 | $ | 14.2 | $ | 1.2 | $ | 1.5 | $ | 16.9 | |||||||
Cost of Goods Sold
In addition to the restructuring charges recorded in restructuring in other, we recorded inventory write-offs of $9.7 million, $4.6 million, and $2.7 million related to the rationalization of certain product lines for the years ended December 31, 2015, 2014 and 2013, respectively, which are included in cost of goods sold in our Consolidated Statement of Operations.
Note 8 — Stock-Based Compensation
Stock compensation consisted of the following:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Stock compensation expense | $ | 1.7 | $ | 5.3 | $ | 6.3 | |||||
We have stock-based compensation awards outstanding under four plans (collectively, the Stock Plans). We have stock options outstanding under our 2000 Stock Incentive Plan (2000 Incentive Plan) and 2005 Stock Incentive Plan (2005 Incentive Plan), and we have stock options and restricted stock outstanding under our 2008 Stock Incentive Plan (2008 Incentive Plan). We have stock options, restricted stock and stock appreciations rights (SARs) outstanding under our 2011 Stock Incentive Plan (2011 Incentive Plan). Restricted stock granted and stock option awards exercised are issued from our treasury stock. The purchase of treasury stock is discretionary and will be subject to determination by our Board of Directors each quarter following its review of our financial performance and other factors.
No further shares are available for grant under the Directors Plan, the 2000 Incentive Plan, the 2005 Incentive Plan or the 2008 Incentive Plan. Stock-based compensation awards issued under these plans generally have terms
66
of ten years and, for employees, vest over a four-year period. Awards issued to directors under these plans become fully exercisable on the first anniversary of the grant date. Stock options granted under these plans are not incentive stock options. Exercise prices of awards issued under these plans are equal to the fair value of the Company's stock on the date of grant. As of December 31, 2015, there were 2,135,693 stock-based compensation awards outstanding that were issued under these plans and consist of stock options and restricted stock.
The 2011 Incentive Plan was approved and adopted by our shareholders on May 4, 2011 and became effective immediately. The 2011 Incentive Plan was amended and approved by our shareholders on May 8, 2013. The 2011 Incentive Plan permits the grant of stock options, SARs, restricted stock, restricted stock units, dividend equivalents, performance awards, stock awards and other stock-based awards. The aggregate number of shares of our common stock that may be issued under all stock-based awards made under the 2011 Incentive Plan is 6.0 million. The number of shares available for awards, as well as the terms of outstanding awards, is subject to adjustments as provided in the 2011 Incentive Plan for stock splits, stock dividends, recapitalization and other similar events. Awards may be granted under the 2011 Incentive Plan until the earlier to occur of May 3, 2021 or the date on which all shares available for awards under the 2011 Incentive Plan have been granted; provided, however, that incentive stock options may not be granted after February 10, 2021.
Stock-based compensation awards issued under the 2011 Incentive Plan generally have a term of ten years and, for employees, vest over a three-year period. Awards issued to directors under this plan become fully exercisable on the first anniversary of the grant date. Stock options granted under these plans are not incentive stock options. Exercise prices of awards issued under these plans are equal to the fair value of the Company's stock on the date of grant.
As of December 31, 2015 we had 3,578,304 of stock-based compensation awards consisting of stock options and restricted stock outstanding under the 2011 Incentive Plan. As of December 31, 2015 there were 125,649 shares available for grant under our 2011 Incentive Plan.
Stock Options
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the valuation model are supported primarily by historical indicators and current market conditions. Volatility was calculated using the historical weekly close rate for a period of time equal to the expected term. The risk-free rate of return was determined by using the U.S. Treasury yield curve in effect at the time of grant. The expected term was calculated on an aggregated basis and estimated based on an analysis of options already exercised and any foreseeable trends or changes in recipients’ behavior. In determining the expected term, we considered the vesting period of the awards, the contractual term of the awards, historical average holding periods, stock price history, impacts from recent restructuring initiatives and the relative weight for each of these factors. The dividend yield was based on the latest dividend payments made on or announced by the date of the grant.
The following table summarizes our weighted average assumptions used in the valuation of options for the years ended December 31:
2015 | 2014 | 2013 | ||||||
Volatility | 41 | % | 46 | % | 43 | % | ||
Risk-free interest rate | 1.84 | % | 1.93 | % | 1.05 | % | ||
Expected life (months) | 72 | 73 | 72 | |||||
Dividend yield | — | % | — | % | — | % | ||
67
The following table summarizes our stock option activity:
Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||
(millions) | ||||||||||||
Outstanding December 31, 2012 | 5,818,472 | $ | 16.57 | 5.9 | $ | — | ||||||
Granted | 1,034,406 | 3.85 | ||||||||||
Exercised | — | — | ||||||||||
Canceled | (1,069,192 | ) | 25.22 | |||||||||
Forfeited | (412,148 | ) | 7.13 | |||||||||
Outstanding December 31, 2013 | 5,371,538 | $ | 13.11 | 6.1 | $ | 0.8 | ||||||
Granted | 61,275 | 3.72 | ||||||||||
Exercised | (87,569 | ) | 3.97 | |||||||||
Canceled | (881,069 | ) | 19.05 | |||||||||
Forfeited | (566,189 | ) | 4.14 | |||||||||
Outstanding December 31, 2014 | 3,897,986 | $ | 13.07 | 4.8 | $ | — | ||||||
Granted | 1,314,547 | 1.45 | ||||||||||
Exercised | (20,000 | ) | 3.84 | |||||||||
Canceled | (574,368 | ) | 19.68 | |||||||||
Forfeited | (66,944 | ) | 6.16 | |||||||||
Outstanding December 31, 2015 | 4,551,221 | $ | 9.02 | 4.4 | $ | — | ||||||
Of the options granted during the year ended December 31, 2015 and 2014, 24,547 and 61,275, respectively, were performance-based options that vest based on the Company's performance against Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) targets for the subsequent three year period.
The aggregate intrinsic value of all outstanding stock options was less than $0.1 million, less than $0.1 million and $0.8 million as of December 31, 2015, 2014 and 2013, respectively. The intrinsic value of options exercised during 2015 and 2014 was less than $0.1 million. The weighted average grant date fair value of options granted during the years 2015, 2014 and 2013 was $0.60, $1.72 and $1.61, respectively.
The following table summarizes exercisable options and options expected to vest as of December 31, 2015:
Exercisable Options | Options Expected to Vest | ||||||||||||||||
Weighted Average Remaining | Weighted Average | Weighted Average Remaining | Weighted Average | ||||||||||||||
Range of Exercise | Stock | Contractual | Exercise | Stock | Contractual | Exercise | |||||||||||
Prices | Options | Life (Years) | Price | Options | Life (Years) | Price | |||||||||||
$3.48 to $6.16 | 833,362 | 3.8 | $ | 5.18 | 1,158,188 | 8.2 | $ | 1.73 | |||||||||
$6.17 to $9.64 | 422,603 | 2.3 | 8.62 | — | 0.0 | — | |||||||||||
$9.65 to $19.20 | 1,244,009 | 2.5 | 10.05 | — | 0.0 | — | |||||||||||
$19.21 to $23.95 | 7,500 | 1.0 | 20.31 | — | 0.0 | — | |||||||||||
$23.96 to $28.70 | 342,612 | 1.3 | 24.61 | — | 0.0 | — | |||||||||||
$28.71 to $39.38 | 152,170 | 0.8 | 37.25 | — | 0.0 | — | |||||||||||
$39.39 to $41.75 | 93,985 | 0.3 | 41.61 | — | 0.0 | — | |||||||||||
$41.76 to $46.97 | — | 0.0 | — | — | 0.0 | — | |||||||||||
$3.48 to $46.97 | 3,096,241 | 2.5 | $ | 12.47 | 1,158,188 | 8.2 | $ | 1.73 | |||||||||
Total stock-based compensation expense associated with stock options related to continuing operations recognized in our Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
68
was $0.4 million, $1.4 million and $2.7 million, respectively. This expense would result in related tax benefits of $0.1 million, $0.5 million and $0.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. However, these tax benefits are included in the U.S. deferred tax assets which are subject to a full valuation allowance, and due to the valuation allowance, we did not recognize the related tax benefits in 2015, 2014 or 2013. As of December 31, 2015 there was $0.7 million of total unrecognized compensation expense related to outstanding stock options. That expense is expected to be recognized over a weighted average period of 2.8 years.
No related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2015, 2014 or 2013.
Restricted Stock
The following table summarizes our restricted stock activity:
Restricted Stock | Weighted Average Grant Date Fair Value Per Share | |||||
Nonvested as of December 31, 2012 | 1,025,804 | $ | 7.12 | |||
Granted | 837,443 | 3.75 | ||||
Vested | (561,099 | ) | 6.99 | |||
Forfeited | (109,827 | ) | 6.59 | |||
Nonvested as of December 31, 2013 | 1,192,321 | $ | 4.87 | |||
Granted | 1,229,249 | 3.65 | ||||
Vested | (734,533 | ) | 5.19 | |||
Forfeited | (338,120 | ) | 3.95 | |||
Nonvested as of December 31, 2014 | 1,348,917 | $ | 3.81 | |||
Granted | 1,724,518 | 2.89 | ||||
Vested | (868,985 | ) | 3.90 | |||
Forfeited | (1,041,674 | ) | 3.85 | |||
Nonvested as of December 31, 2015 | 1,162,776 | $ | 2.34 | |||
Effective May 22, 2015, a “Change of Control” occurred under the terms of the Company’s Amended and Restated Severance and Change in Control Agreements and certain incentive award agreements with its executives as a result of the election of three new directors to the Company’s Board of Directors by shareholders at the shareholder meeting on May 20, 2015 (the "May 2015 Change of Control Event"). Upon a change of control, under the terms of the agreements with these executives, the performance-based restricted shares are converted into a right to receive cash, and a portion of such awards vest immediately and are settled in cash. As a result, 225,347 restricted shares covered by such at the time of the May 2015 Change of Control Event vested immediately, and a cash payment of $1.0 million was made to settle such awards. The only situation in which such shares would have been settled in cash was pursuant to a change of control. Additionally, 866,820 restricted shares that were subject to vesting in the future were forfeited and were recorded as treasury shares.
Of the restricted stock granted during the year ended December 31, 2015 and 2014, 1,264,661 and 914,768, respectively, were performance-based restricted stock that vest based on various performance metrics such as revenue, EBITDA and liquidity.
The total fair value of shares that vested during the years 2015, 2014 and 2013 was $3.4 million, $3.8 million and $3.9 million, respectively.
Total stock-based compensation expense associated with restricted stock relating to continuing operations recognized in our Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 was $1.3 million, $3.9 million and $3.6 million, respectively. This expense would result in related tax benefits of $0.5 million, $1.5 million and $1.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. However, these tax benefits are included in the U.S. deferred tax assets which are subject to a full valuation allowance and due to the valuation allowance, we did not recognize the related tax benefit in 2015, 2014 and 2013. As of December 31, 2015 there was $1.6 million of total unrecognized compensation expense related to
69
outstanding restricted stock. That expense is expected to be recognized over a weighted average period of 3.6 years.
No related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2015, 2014 or 2013.
Stock Appreciation Rights (SARs)
The following table summarizes our stock appreciation rights activity:
Stock Appreciation Rights | ||
Outstanding as of December 31, 2012 | — | |
Granted | 3,108,128 | |
Canceled | (89,286 | ) |
Outstanding as of December 31, 2013 | 3,018,842 | |
Granted | 659,473 | |
Canceled | (703,383 | ) |
Outstanding as of December 31, 2014 | 2,974,932 | |
Granted | 2,725,330 | |
Canceled | (1,905,328 | ) |
Outstanding as of December 31, 2015 | 3,794,934 | |
During the years ended December 31, 2015 and 2014, we granted 2.7 million and 0.7 million SARs under the 2011 Incentive Plan to certain employees associated with our Nexsan and IronKey operations. These awards were issued to incentivize employees to grow revenues. These awards expire on December 31, 2017 and only vest when both stock price and revenue performance conditions specified by the terms of the SARs are met. Additionally, under the terms of the 2015 SARs, any cash payments to an individual under a 2015 vested SAR would reduce any cash payment received under any earlier SAR grant pertaining to that individual, if an when such earlier SAR vests. For the stock price condition, based on the terms of the awards, 50 percent of the SARs may vest if the 30-day average Imation stock price reaches $8 per share or more by December 31, 2017 and the remaining 50 percent of the SARs could vest if the 30-day average Imation stock price reaches $12 per share or more by December 31, 2017. Additionally, for the revenue performance condition, as a condition necessary for vesting, the net revenue of Nexsan or IronKey (depending on the award) must reach certain specified stretch targets by December 31, 2017. If exercised, the SARs require a cash payment to the holder in an amount based on the Imation stock price at the date of exercise as compared to the stock priced at the date of grant. As of December 31, 2015 and 2014 we have not recorded any compensation expense associated with these SARs based on the applicable accounting rules. We will continue to assess these SARs each quarter to determine if any expense should be recorded.
Note 9 — Retirement Plans
Pension Plans
We have various non-contributory defined benefit pension plans covering United States employees employed prior to January 1, 2010 and certain employees outside the United States, primarily in Germany and Japan. Total pension expense was $0.5 million, $0.2 million and $2.6 million in 2015, 2014 and 2013, respectively. The measurement date of our pension plans is December 31st. During the twelve months ended December 31, 2015 we contributed $1.2 million to our worldwide pension plans. We presently anticipate contributing between $1 million and $2 million to fund our worldwide pension plans in 2016. 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.
Effective January 1, 2010, the U.S. plan was amended to exclude new hires and rehires from participating in the plan. In addition, we eliminated benefit accruals under the U.S. plan as of January 1, 2011, thus “freezing” the defined benefit pension plan. Under the plan freeze, no pay credits were made to a participant’s account balance after December 31, 2010. However, interest credits will continue in accordance with the annual update process.
70
For the U.S. plan, employees who have completed three years or more of service, including service with 3M Company before July 1, 1996, or who have reached age 65, are entitled to pension benefits beginning at normal retirement age (65) based primarily on employees’ pay credits and interest credits. Through December 31, 2009, pay credits were made to each eligible participant's account equal to six percent of that participant's eligible earnings for the year. Beginning on January 1, 2010 and through December 31, 2010, pay credit contributions were reduced to three percent of each participant’s eligible earnings. In conjunction with the plan freeze, no additional pay credits were made to a participant’s account balance after December 31, 2010. A monthly interest credit is made to each eligible participant’s account based on the participant’s account balance as of the last day of the preceding year. The interest credit rate is established annually and is based on the interest rate of certain low-risk debt instruments. The interest credit rate was 3.04 percent for 2015. In accordance with the annual update process, the interest credit rate will be 3.03 percent for 2016.
In connection with actions taken under our announced restructuring programs, the number of employees accumulating benefits under our pension plan in the United States continues to decline. Participants in our U.S. plan have the option of receiving cash lump sum payments when exiting the plan, which a number of participants exiting the plan have elected to receive. Lump sum payments in 2015, 2014 and 2013 exceeded the service and interest costs associated with those years. As a result, a partial settlement event occurred in those years and, accordingly, we recognized a settlement loss of $1.7 million, $1.1 million and $2.1 million during 2015, 2014 and 2013, respectively. These settlement losses are included in restructuring and other in our Consolidated Statements of Operations.
The U.S. pension plan permits four payment options: a lump-sum option, a life income option, a survivor option or a period certain option.
During the year ended December 31, 2015, the Company recorded a pension curtailment gain of $1.5 million related to its pension plan in Japan. The pension plan in Japan was terminated as of December 31, 2015 and due to this termination, all assets associated with the plan which remain after paying out all benefits were classified as a current asset on the Consolidated Balance Sheet as of December 31, 2015, as the assets will be remitted back to the Company in 2016.
We maintained a defined benefit pension plan located in the United Kingdom (UK Plan) for former employees with no current employees in the plan. During the third quarter of 2013 we settled our UK Plan by way of a transaction with Pension Insurance Corporation (PIC) whereby PIC fully assumed the projected benefit obligation and underlying plan assets. The net balance assumed by PIC represented an asset balance of $6.4 million and no cash consideration took place between Imation and PIC associated with this transaction for the initial settlement. As a result of this transaction, we removed this net asset and related unrecognized net actuarial loss in other comprehensive loss and recorded a loss of $10.6 million in restructuring and other in our Consolidated Statements of Operations during the year ended December 31, 2013. Additionally, the settlement of the UK Plan resulted in the removal of a deferred tax liability related to the plan resulting in a $2.3 million credit to income tax expense for the year ended December 31, 2013. It is a standard practice in the United Kingdom (UK) for a review process by the UK government, entailing a review of the plan obligations and participant data, to occur upon a transaction such as this one involving a transfer of a pension plan. The regulatory review was finalized in 2014 and as result of the findings, we recorded a true-up of $0.5 million of additional loss in restructuring and other in our Consolidated Statements of Operations for the year ended December 31, 2014.
71
The benefit obligations and plan assets, changes to the benefit obligations and plan assets, and the funded status of the defined benefit pension plans were as follows:
United States | International | ||||||||||||||
As of December 31, | As of December 31, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions) | |||||||||||||||
Change in benefit obligation | |||||||||||||||
Benefit obligation, beginning of year | $ | 78.8 | $ | 78.5 | $ | 33.2 | $ | 31.4 | |||||||
Service cost | — | — | 0.2 | 0.3 | |||||||||||
Interest cost | 3.0 | 3.3 | 0.5 | 0.9 | |||||||||||
Actuarial (gain) loss | (0.8 | ) | 4.4 | (2.7 | ) | 6.5 | |||||||||
Benefits paid | (2.2 | ) | (1.8 | ) | (4.9 | ) | (1.6 | ) | |||||||
Settlement payments | (6.0 | ) | (5.6 | ) | — | — | |||||||||
Curtailments | — | — | (0.6 | ) | — | ||||||||||
Foreign exchange rate changes | — | — | (2.9 | ) | (4.3 | ) | |||||||||
Projected benefit obligation, end of year | $ | 72.8 | $ | 78.8 | $ | 22.8 | $ | 33.2 | |||||||
Change in plan assets | |||||||||||||||
Fair value of plan assets, beginning of year | $ | 67.5 | $ | 71.0 | $ | 23.6 | $ | 26.1 | |||||||
Actual return on plan assets | (0.8 | ) | 2.5 | 1.1 | 1.6 | ||||||||||
Foreign exchange rate changes | — | — | (1.8 | ) | (3.2 | ) | |||||||||
Company contributions | 0.6 | 1.4 | 0.6 | 0.7 | |||||||||||
Benefits paid | (2.2 | ) | (1.8 | ) | (4.9 | ) | (1.6 | ) | |||||||
Settlement payments | (6.0 | ) | (5.6 | ) | — | — | |||||||||
Fair value of plan assets, end of year | 59.1 | 67.5 | 18.6 | 23.6 | |||||||||||
Funded status of the plan, end of year | $ | (13.7 | ) | $ | (11.3 | ) | $ | (4.2 | ) | $ | (9.6 | ) | |||
Amounts recognized in our Consolidated Balance Sheets consisted of the following:
United States | International | ||||||||||||||
As of December 31, | As of December 31, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions) | |||||||||||||||
Current assets | $ | — | $ | — | $ | 2.8 | $ | — | |||||||
Noncurrent assets | — | — | — | 1.6 | |||||||||||
Noncurrent liabilities | (13.7 | ) | (11.3 | ) | (7.0 | ) | (11.2 | ) | |||||||
Accumulated other comprehensive loss — pre-tax | 20.3 | 19.0 | 7.3 | 10.4 | |||||||||||
Pre-tax amounts recognized in accumulated other comprehensive loss consisted of the following:
United States | International | ||||||||||||||
As of December 31, | As of December 31, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions) | |||||||||||||||
Net actuarial loss | $ | 20.3 | $ | 19.0 | $ | 7.3 | $ | 12.1 | |||||||
Prior service credit | — | — | — | (2.2 | ) | ||||||||||
Transition asset obligation | — | — | — | 0.5 | |||||||||||
Total | $ | 20.3 | $ | 19.0 | $ | 7.3 | $ | 10.4 | |||||||
72
The following table includes information for pension plans with an accumulated benefit obligation in excess of plan assets. The balances presented as of December 31, 2015 and 2014 exclude our Japan plan which had plan assets in excess of accumulated benefit obligation for both years.
United States | International | ||||||||||||||
As of December 31, | As of December 31, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions) | |||||||||||||||
Projected benefit obligation, end of year | $ | 72.8 | $ | 78.8 | $ | 22.8 | $ | 28.7 | |||||||
Accumulated benefit obligation, end of year | 72.8 | 78.8 | 22.8 | 28.7 | |||||||||||
Plan assets at fair value, end of year | 59.1 | 67.5 | 15.8 | 17.6 | |||||||||||
Components of net periodic pension cost included the following:
United States | International | ||||||||||||||||||||||
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||
2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Service cost | $ | — | $ | — | $ | — | $ | 0.2 | $ | 0.3 | $ | 0.5 | |||||||||||
Interest cost | 3.0 | 3.3 | 3.3 | 0.5 | 0.9 | 2.0 | |||||||||||||||||
Expected return on plan assets | (4.1 | ) | (4.8 | ) | (5.1 | ) | (0.7 | ) | (0.8 | ) | (2.5 | ) | |||||||||||
Amortization of net actuarial loss | 1.2 | 1.1 | 1.9 | 0.3 | 0.2 | 0.5 | |||||||||||||||||
Amortization of prior service credit | — | — | — | (0.2 | ) | (0.3 | ) | (0.4 | ) | ||||||||||||||
Amortization of transition obligation | — | — | — | 0.1 | 0.1 | 0.3 | |||||||||||||||||
Net periodic pension cost (credit) | 0.1 | (0.4 | ) | 0.1 | 0.2 | 0.4 | 0.4 | ||||||||||||||||
Settlements and curtailments | 1.7 | 1.1 | 2.1 | (1.5 | ) | (0.9 | ) | — | |||||||||||||||
Total pension cost | $ | 1.8 | $ | 0.7 | $ | 2.2 | $ | (1.3 | ) | $ | (0.5 | ) | $ | 0.4 | |||||||||
Total pension cost for each of our international plans individually ranged from less than $0.1 million to $0.3 million in 2015, $0.1 million to $0.4 million in 2014 and $0.1 million to $0.5 million in 2013. Total pension credit ranged from less than $0.1 million to $1.5 million during each of 2015, 2014 and 2013.
The estimated net actuarial loss, prior service credit and net obligations at transition for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit costs in 2016 are a $1.4 million loss, $0.2 million credit and $0.1 million obligation, respectively.
Assumptions used to determine benefit obligations were as follows (international assumptions are a weighted average of all of our international plans):
United States | International | ||||||||||
As of December 31, | As of December 31, | ||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||
Discount rate | 4.25 | % | 4.00 | % | 2.40 | % | 1.89 | % | |||
Rate of compensation increase | — | % | — | % | 3.00 | % | 2.92 | % | |||
Assumptions used to determine net periodic benefit costs were as follows (international assumptions are a weighted average of all of our international plans):
United States | International | ||||||||||||||||
As of December 31, | As of December 31, | ||||||||||||||||
2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||
Discount rate | 4.00 | % | 4.25 | % | 4.00 | % | 1.90 | % | 3.27 | % | 2.70 | % | |||||
Expected return on plan assets | 6.50 | % | 7.75 | % | 7.75 | % | 3.49 | % | 3.35 | % | 4.53 | % | |||||
Rate of compensation increase | — | % | — | % | — | % | 2.00 | % | 2.86 | % | 2.00 | % | |||||
73
The discount rate for the U.S. plan is determined through a modeling process utilizing a customized portfolio of high-quality bonds whose annual cash flows cover the expected benefit payments of the plan, as well as comparing the results of our modeling to other corporate bond and pension liability indices. Appropriate benchmarks are used to determine the discount rate for the international plans. The expected long-term rate of return on assets assumption is derived from a study that includes a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate. The expected long-term rate of return on assets assumption for the international plans reflects the investment allocation and expected total portfolio returns specific to each plan and country. Beginning in 2011, the projected salary increase assumption was not applicable for the U.S. plan due to the elimination of benefit accruals as of January 1, 2011.
The mortality table for the U.S. plan used the "RP 2014 Mortality Tables" for December 31, 2015.
The plans' asset allocations by asset category were as follows:
United States | International | ||||||||||
As of December 31, | As of December 31, | ||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||
Short-term investments | — | % | 1 | % | 1 | % | 1 | % | |||
Fixed income securities | 54 | % | 23 | % | 14 | % | 24 | % | |||
Equity securities | 45 | % | 57 | % | — | % | — | % | |||
Absolute return strategy equity funds | 1 | % | 19 | % | — | % | — | % | |||
Insurance contracts | — | % | — | % | 85 | % | 75 | % | |||
Total | 100 | % | 100 | % | 100 | % | 100 | % | |||
For the U.S. plan, we maintain target allocation percentages among various asset classes based on an investment policy established for the plan, which is designed to achieve long-term objectives of return, while mitigating against downside risk and considering expected cash flows. The current target asset allocation includes equity securities at 20 to 50 percent, fixed income securities at 45 to 75 percent and other investments at 0 to 5 percent. Other investments include short-term investments and absolute return strategy funds which are investments designed to achieve a certain return. Management reviews our U.S. investment policy for the plan at least annually. Outside the U.S., the investment objectives are similar to the U.S., subject to local regulations. In some countries, a higher percentage allocation to fixed income securities is required.
As of December 31, 2015, the following reflects estimated future benefit payments in each of the next five years and in the aggregate for the five years thereafter:
United States | International | ||
(In millions) | |||
2016 | $15.9 | $0.9 | |
2017 | 4.2 | 1.0 | |
2018 | 4.3 | 1.0 | |
2019 | 4.4 | 1.0 | |
2020 | 5.1 | 1.0 | |
2021-2025 | 22.7 | 5.4 | |
The assets in our defined benefit pension plans are measured at fair value on a recurring basis (at least annually). A three-level hierarchy is used for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability as of the measurement date.
Following is a description of the valuation methodologies used for assets measured at fair value.
Short-term investments. The carrying value of these assets approximates fair value because maturities are generally less than three months. Accordingly, these investments are classified as Level 1 financial instruments.
74
Mutual funds. Investments in mutual funds are valued using the net asset value (NAV) of shares held as of December 31st. The NAV is a quoted transactional price for participants in the fund which do not represent an active market. In relation to these investments, there are no unfunded commitments and the shares can be redeemed on a daily basis with minimal restrictions. Events that may lead to a restriction to transact with the funds are not considered probable. These investments are generally classified as Level 1 financial instruments, however for certain mutual funds, the NAV is not published, and accordingly, these investments are classified as Level 2 financial instruments. The investment objective of our mutual funds in the U.S. Plan is to provide capital appreciation through an investment strategy that allocates its assets among limited liability companies and/or separate investment accounts or to invest in large cap equity funds focusing on high quality yields through short maturity investments in spread sectors depending on the fund.
Common stocks. Investments in common stock are valued at the closing price reported on major markets on which the individual securities are traded. Accordingly, these investments are classified as Level 1 financial instruments.
Comingled trust funds. These assets are valued using the NAV of shares as of December 31st. The NAV is a quoted transactional price for participants in the fund which do not represent an active market. In relation to these investments, there are no unfunded commitments and the shares can be redeemed on a daily basis with minimal restrictions. Events that may lead to a restriction to transact with the funds are not considered probable. These investments are classified as Level 2 financial instruments. The Fund’s investment objective is to achieve long-term growth primarily by investing in a diversified portfolio of equity securities of companies located in any country other than the United States.
Insurance contracts. These assets are valued using quoted prices for similar assets. Accordingly, these investments are classified as Level 2 financial instruments.
These methods may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values. Furthermore, while we believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different value measurement. Investments, in general, are subject to various risks, including credit, interest and overall market volatility risks. There were no transfers into or out of Level 1 or Level 2 during the years ended December 31, 2015 or December 31, 2014.
The fair value of the plan assets by asset category were as follows:
United States | December 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||
(In millions) | |||||||||||||||
Mutual Funds | |||||||||||||||
Equity securities | |||||||||||||||
Large-cap growth funds | 10.2 | — | 10.2 | — | |||||||||||
International growth fund | 7.5 | 4.6 | 2.9 | — | |||||||||||
Fixed income securities | 0.8 | 0.8 | — | — | |||||||||||
Absolute return strategy funds | 0.7 | — | 0.7 | — | |||||||||||
Common stocks | 3.2 | 3.2 | — | — | |||||||||||
Commingled trust funds | 36.7 | — | 36.7 | — | |||||||||||
Total | $ | 59.1 | $ | 8.6 | $ | 50.5 | $ | — | |||||||
75
International | December 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||
(In millions) | |||||||||||||||
Short-term investments | |||||||||||||||
Other | $ | 0.1 | $ | — | $ | 0.1 | $ | — | |||||||
Commingled trust funds | 2.7 | — | 2.7 | — | |||||||||||
Insurance contracts | 15.8 | — | 15.8 | — | |||||||||||
Total | $ | 18.6 | $ | — | $ | 18.6 | $ | — | |||||||
United States | December 31, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||
(In millions) | |||||||||||||||
Short-term investments | |||||||||||||||
Money market securities | $ | 0.4 | $ | 0.4 | $ | — | $ | — | |||||||
Mutual Funds | |||||||||||||||
Equity securities | |||||||||||||||
Large-cap growth funds | 14.6 | — | 14.6 | — | |||||||||||
International growth fund | 10.8 | 7.3 | 3.5 | — | |||||||||||
Fixed income securities | 15.5 | 15.5 | — | — | |||||||||||
Absolute return strategy funds | 13.2 | — | 13.2 | — | |||||||||||
Common stocks | 7.3 | 7.3 | — | — | |||||||||||
Commingled trust funds | 5.7 | — | 5.7 | — | |||||||||||
Total | $ | 67.5 | $ | 30.5 | $ | 37.0 | $ | — | |||||||
International | December 31, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||
(In millions) | |||||||||||||||
Short-term investments | |||||||||||||||
Other | $ | 0.3 | $ | — | $ | 0.3 | $ | — | |||||||
Mutual Funds | |||||||||||||||
Fixed income securities | 5.7 | — | 5.7 | — | |||||||||||
Insurance contracts | 17.6 | — | 17.6 | — | |||||||||||
Total | $ | 23.6 | $ | — | $ | 23.6 | $ | — | |||||||
Employee Retirement Savings Plans
Effective January 1, 2011, our matching formula under our 401(k) retirement plan is 100 percent of employee contributions up to the first five percent of eligible compensation. We used shares of treasury stock to match employee 401(k) contributions for 2014 and 2013. Starting on January 1, 2015, we matched contributions in cash. Total expense related to 401(k) cash contributions was $1.4 million in 2015. Total expense related to the use of shares of treasury stock to match employee 401(k) contributions was $1.8 million and $1.7 million in 2014 and 2013, respectively. Starting on January 1, 2016, the Company will no longer make 401(k) matching contributions to the 401(k) retirement plan.
76
We also sponsor a variable compensation program in which we may, at our discretion, contribute up to three percent of eligible employee compensation to employees’ 401(k) retirement accounts, depending upon total Company performance. We use shares of treasury stock for this contribution. A contribution of $0.9 million was made under the variable compensation program during the year ended December 31, 2015 for 2014. A contribution of $0.4 million was made under the variable contribution program during the year ended December 31, 2014 for 2013. No contribution was made under the variable compensation program during the year ended December 31, 2013 for 2012. Starting on January 1, 2016, the Company will no longer make variable compensation contributions to employees' 401(k) retirement accounts.
Note 10 — Income Taxes
The components of loss from continuing operations before income taxes were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
U.S. | $ | (147.6 | ) | $ | (95.3 | ) | $ | (25.2 | ) | ||
International | (33.9 | ) | (14.0 | ) | 2.2 | ||||||
Total | $ | (181.5 | ) | $ | (109.3 | ) | $ | (23.0 | ) | ||
The components of the income tax provision from continuing operations were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Current | |||||||||||
Federal | $ | 0.1 | $ | 0.5 | $ | (0.7 | ) | ||||
State | (0.4 | ) | (0.5 | ) | — | ||||||
International | 0.5 | (0.1 | ) | 5.9 | |||||||
Deferred | |||||||||||
Federal | (0.3 | ) | 1.7 | — | |||||||
State | — | — | — | ||||||||
International | 12.6 | 1.5 | (3.8 | ) | |||||||
Total | $ | 12.5 | $ | 3.1 | $ | 1.4 | |||||
The income tax provision from continuing operations differs from the amount computed by applying the statutory United States income tax rate (35 percent) because of the following items:
77
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Tax at statutory U.S. tax rate | $ | (63.5 | ) | $ | (38.3 | ) | $ | (8.1 | ) | ||
State income taxes, net of federal benefit | (4.6 | ) | (3.2 | ) | (0.2 | ) | |||||
Net effect of international operations | 6.6 | 1.1 | 3.1 | ||||||||
Settlement of UK pension plan | — | — | (2.3 | ) | |||||||
Valuation allowances | 66.2 | 22.9 | (3.2 | ) | |||||||
Tax on unremitted earnings of foreign subsidiaries | (6.3 | ) | 15.9 | — | |||||||
U.S. tax on foreign earnings | 1.1 | 4.7 | 6.2 | ||||||||
Stock-based compensation | 1.2 | 2.1 | 3.1 | ||||||||
Uncertain tax positions | (0.3 | ) | (1.2 | ) | 2.2 | ||||||
Goodwill impairment | 10.8 | 10.7 | — | ||||||||
Capital losses | — | (11.4 | ) | — | |||||||
Other | 1.3 | (0.2 | ) | 0.6 | |||||||
Income tax provision | $ | 12.5 | $ | 3.1 | $ | 1.4 | |||||
Our 2015 tax provision of $12.5 million was significantly impacted by tax expense related to the recording of $12.6 million of valuation allowances on deferred tax assets associated with operations outside the United States.
Our 2014 tax provision of $3.1 million primarily represents tax expense related to operations outside the United States and tax expense recorded for the liability on unremitted foreign earnings of $1.7 million.
In 2015, 2014 and 2013 the net cash paid for income taxes, relating to both continuing and discontinued operations, was $1.9 million, $4.7 million and $4.6 million, respectively.
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 items are temporary differences that will reverse over time. We record the tax effect of temporary differences as deferred tax assets and deferred tax liabilities in our Consolidated Balance Sheets.
78
The components of net deferred tax assets and liabilities were as follows:
As of December 31, | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Accounts receivable allowances | $ | 2.1 | $ | 1.6 | |||
Inventories | 4.0 | 7.6 | |||||
Compensation and employee benefits | 5.6 | 6.6 | |||||
Tax credit carryforwards | 30.0 | 33.9 | |||||
Net operating loss carryforwards | 205.7 | 149.4 | |||||
Accrued liabilities and other reserves | 3.9 | 7.0 | |||||
Pension | 7.7 | 9.0 | |||||
Property, plant and equipment | 9.7 | 10.2 | |||||
Intangible assets, net | 49.2 | 49.6 | |||||
Capital losses | 14.1 | 11.5 | |||||
Other, net | 1.5 | 0.7 | |||||
Total deferred tax assets | 333.5 | 287.1 | |||||
Valuation allowance | (325.3 | ) | (262.4 | ) | |||
Net deferred tax assets | 8.2 | 24.7 | |||||
Unremitted earnings of foreign subsidiaries | (9.4 | ) | (15.7 | ) | |||
Total deferred tax liabilities | (9.4 | ) | (15.7 | ) | |||
Net deferred tax assets (liabilities) | $ | (1.2 | ) | $ | 9.0 | ||
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.
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.
We maintain a valuation allowance related to our U.S. deferred tax assets and the majority of our foreign deferred tax assets. The valuation allowance was $325.3 million and $262.4 million as of December 31, 2015 and 2014, respectively. The valuation allowance change in 2015 compared to 2014 was due primarily to operating losses and the recording of valuation allowances on deferred tax assets from operations outside the United States. In the third and fourth quarters of 2015, the Company initiated actions to wind down operations of the Company's legacy Storage Media and Accessories segment. The Company determined that it is no longer more likely than not that the foreign entities will be able to utilize their deferred tax assets. The valuation allowance change in 2014 compared to 2013 was primarily due to operating losses.
In November 2015, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which amends the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. This accounting guidance simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This determination is still required to be performed at a jurisdiction-by-jurisdiction basis. This accounting guidance is effective for Imation beginning in the first quarter of 2017, but we have elected to adopt this guidance prospectively as of December 31, 2015. As a result, we have classified all deferred tax liabilities and assets as non-current in the Consolidated Balance Sheet at December 31, 2015. Amounts on the December 31, 2014 Consolidated Balance Sheet were not retrospectively adjusted. The table below shows the components of our deferred tax balances as they are recorded on our Consolidated Balance Sheets:
79
As of December 31 | |||||||
2015 | 2014 | ||||||
(In millions) | |||||||
Deferred tax asset - current | — | 3.2 | |||||
Deferred tax asset - non-current | — | 8.1 | |||||
Deferred tax liability - current | — | — | |||||
Deferred tax liability - non-current | (1.2 | ) | (2.3 | ) | |||
Total | $ | (1.2 | ) | $ | 9.0 | ||
Federal net operating loss carryforwards totaling $467.1 million will begin expiring in 2026. This figure includes $27.9 million of federal net operating loss carryforwards, subject to Internal Revenue Code section 382. We have state income tax loss carryforwards of $459.2 million, $1.1 million of which will expire between 2016 and 2018 and the remaining will expire at various dates up to 2035. We have U.S. and foreign tax credit carryforwards of $30.0 million, $5.3 million of which will expire between 2016 and 2018, $22.3 million of which will expire between 2019 and 2032 and $2.4 million may be carried forward indefinitely. Federal capital losses of $36.7 million will expire between 2018 and 2020. Of the aggregate foreign net operating loss carryforwards totaling $76.9 million, $0.5 million will expire between 2016 and 2018, $33.1 million will expire at various dates up to 2025 and $43.3 million may be carried forward indefinitely.
During the fourth quarter of 2014, the Company changed its assertion related to the permanent reinvestment of foreign unremitted earnings due to its reassessment of possible future cash needs associated with the continued execution of its strategic transformation. Accordingly, the permanent reinvestment assertion of foreign unremitted earnings was removed and a deferred tax liability was recorded for the estimated impact of future repatriation of the unremitted foreign earnings. The deferred tax liability as of December 31, 2015 is $9.4 million. Net operating losses fully offset $8.2 million of this liability, and the remaining $1.2 million liability is related to foreign tax withholding, assuming such repatriation were to occur.
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.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2015 | 2014 | 2013 | |||||||||
(In Millions) | |||||||||||
Beginning Balance | $ | 2.1 | $ | 5.3 | $ | 4.4 | |||||
Additions: | |||||||||||
Additions for tax positions of current years | 0.3 | 0.3 | 0.3 | ||||||||
Additions for tax positions of prior years | — | 0.1 | 1.1 | ||||||||
Reductions: | |||||||||||
Reductions for tax positions of prior years | — | (1.9 | ) | (0.4 | ) | ||||||
Settlements with taxing authorities | — | (1.3 | ) | — | |||||||
Reductions due to lapse of statute of limitations | (0.7 | ) | (0.4 | ) | (0.1 | ) | |||||
Total | 1.7 | 2.1 | 5.3 | ||||||||
The total amount of unrecognized tax benefits, which excludes accrued interest and penalties described below, as of December 31, 2015 was $1.7 million. If the unrecognized tax benefits remaining at December 31, 2015 were recognized in our consolidated financial statements, $1.5 million would ultimately affect income tax expense and our related effective tax rate.
It is reasonably possible that the amount of the unrecognized tax benefits could increase or decrease significantly during the next twelve months; however, it is not possible to reasonably estimate the effect on the unrecognized tax benefit at this time.
80
Interest and penalties recorded for uncertain tax positions are included in our income tax provision. During the years ended December 31, 2015, 2014 and 2013, we recognized approximately $0.1 million benefit, $0.4 million expense and $0.8 million expense, respectively, in interest and penalties. We had approximately $0.1 million, $0.2 million and $1.1 million accrued, excluding the tax benefit of deductible interest, for the payment of interest and penalties at December 31, 2015, 2014 and 2013, respectively. The reversal of accrued interest and penalties would affect income tax expense and our related effective tax rate.
Our federal income tax returns for 2012 through 2014 are subject to examination by the Internal Revenue Service (IRS). We currently have foreign tax audits underway in various jurisdictions. Based on available information, the uncertain tax position associated with these foreign audits have been assessed and included in our income tax provision. For state and foreign tax purposes, the statutes of limitation vary by jurisdiction. With few exceptions, we are no longer subject to examination by foreign tax jurisdictions or state and local tax jurisdictions for years before 2009.
Note 11 — Debt
2015 Debt
As of December 31, 2015, we had short-term borrowings of $0.2 million on credit lines. The decrease in outstanding debt from December 31, 2014 is due to the termination of the Company's credit agreements with various banks in the United States, Europe and Japan.
On October 30, 2015, the Company terminated its Japan Credit Agreement entered into on July 16, 2013. At the time of termination, the Company paid down its short-term borrowings of $7.6 million. Additionally, capitalized costs for the credit facility of $0.1 million were charged to interest expense. The Company incurred an early termination penalty less than $0.1 million in connection with the termination.
On November 25, 2015, the Company terminated its Amended Credit Agreement entered into on May 18, 2012. At the time of termination, the Company paid down its short-term borrowings of $10.4 million. Additionally, capitalized costs for the credit facility of $1.1 million were charged to interest expense. No early termination penalty was incurred by the Company in connection with the termination.
2014 Debt
As of December 31, 2014, we had short-term borrowings of $18.9 million. The borrowings in 2014 were primarily from our credit agreements with various banks in the United States, Europe, and Japan.
As of December 31, 2014 we had a 600 million Japanese Yen, or approximately $5.0 million overdraft line of credit available in Japan. As of December 31, 2014, we had outstanding borrowings under this overdraft line of 300 million Japanese Yen or approximately $2.5 million.
Other outstanding borrowings on lines of credit lines were $0.5 million for December 31, 2014.
Interest Expense
Our interest expense, which includes letter of credit fees, facility fees, commitment fees, amortization of debt issuance costs and write-offs of debt issuance costs, for 2015, 2014 and 2013 was $3.3 million, $2.6 million and $2.5 million, respectively. Cash paid for interest for 2015, 2014 and 2013, relating to both continuing and discontinued operations, was $1.2 million, $1.8 million and $1.7 million, respectively.
During 2015 and 2014 we did not capitalize any debt issuance costs. We did not have any capitalized debt costs on our Consolidated Balance Sheet as of December 31, 2015. In prior years, capitalized debt issue costs are recorded to Other assets in our Consolidated Balance Sheets and are being amortized over the term of the credit agreements.
81
Note 12 — Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or the exit price in an orderly transaction between market participants on the measurement date. A three-level hierarchy is used for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability as of the measurement date. Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs. A financial instrument's level within the hierarchy is based on the highest level of any input that is significant to the fair value measurement. Following is a description of our valuation methodologies used to estimate the fair value for our assets and liabilities.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The Company's non-financial assets such as goodwill, intangible assets and property, plant and equipment are recorded at fair value when an impairment is recognized or at the time acquired in a business combination. As discussed in Note 6 - Intangible Assets and Goodwill and Note 7 - Restructuring and Other Expense, during 2015 and 2014, we recorded impairment charges associated with goodwill, intangible assets or property, plant and equipment and reduced the carrying amount of such assets subject to the impairment to their estimated fair value. Additionally, as discussed in Note 4 - Acquisitions, the Company acquired Connected Data, Inc. during 2015 and recorded the acquired assets and liabilities, including goodwill, intangible assets and property, plant and equipment at their estimated fair value. The determination of the estimated fair value of such assets required the use of significant unobservable inputs which would be considered Level 3 fair value measurements.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at their estimated fair value on a recurring basis, including cash and cash equivalents, derivative instruments and our contingent consideration obligations associated with the acquisition of CDI.
The following table provides information by level for assets and liabilities that are measured at fair value on a recurring basis for year ended December 31, 2015:
Description | December 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | |||||||||||
(In millions) | |||||||||||||||
Assets: | |||||||||||||||
Trading securities | $ | 1.0 | $ | 1.0 | $ | — | $ | — | |||||||
Warrants | 0.4 | — | — | 0.4 | |||||||||||
Liabilities: | |||||||||||||||
Contingent consideration associated with CDI acquisition | 0.8 | — | 0.8 | — | |||||||||||
There was no activity to report for the year ended December 31, 2014.
Trading Securities
On August 13, 2015 the Company entered into an agreement to sell its RDX™ Storage product line, including $1.5 million of associated inventory, to Sphere 3D for approximately 1.5 million shares of Sphere 3D common stock and a warrant exercisable into up to an additional 250,000 shares (at a $0.01 exercise price per share) of Sphere 3D common stock. The Company recognized a gain of $4.5 million within "Restructuring and other" upon the closing of this transaction. For the year ended December 31, 2015 the Company recorded a $0.5 million loss on the value Sphere 3D shares held. The loss was recorded in other (income) expense in the Consolidated Statement of Operations as the investments are classified as trading securities under applicable accounting criteria. The Company sold 1.2 million shares of Sphere 3D common stock during the fourth quarter of 2015 for $2.7 million in proceeds. The estimated fair value of the remaining shares held is $0.5 million and is included in other current assets in our Consolidated Balance Sheet as of December 31, 2015.
82
The estimated fair value of the warrants exercisable into shares of Sphere 3D stock was $0.4 million as of December 31, 2015 and is included in other current assets. On February 22, 2016 the Company exercised the aforementioned warrant into 250,000 shares of Sphere 3D common stock.
Derivative Financial Instruments
We maintain a foreign currency exposure management policy that allows the use of derivative instruments, principally foreign currency forward, option contracts and option combination strategies to manage risks associated with foreign exchange rate volatility. Generally, these contracts are entered into to fix the U.S. dollar amount of the eventual cash flows. The derivative instruments range in duration at inception from between one to 16 months. The fair value of our derivative instruments is determined based on inputs that are observable in the public market, but are other than publicly quoted prices (Level 2). We are exposed to the risk of nonperformance by our counter-parties, but we do not anticipate nonperformance by any of these counter-parties. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits and by using major international banks and financial institutions as counter-parties.
Cash Flow Hedges. We attempt to substantially mitigate the risk that forecasted cash flows denominated in foreign currencies may be adversely affected by changes in the currency exchange rates through the use of option, forward and combination option contracts. The degree of our hedging can fluctuate based on management judgment and forecasted projections. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking the hedged items. This process includes linking all derivatives to forecasted transactions. We formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in the cash flows of hedged items. We did not have any contracts outstanding as of December 31, 2015. At December 31, 2014, our contracts had durations of 12 months or less. The fair value of the 2014 contracts is recorded in other current assets and other current liabilities on our Consolidated Balance Sheets.
Gains and losses related to cash flow hedges are deferred in accumulated other comprehensive loss with a corresponding asset or liability. When the hedged transaction occurs, the gains and losses in accumulated other comprehensive loss are reclassified into our Consolidated Statements of Operations in the same line as the item being hedged. If at any time it is determined that a derivative is ineffective, we discontinue hedge accounting prospectively, with the ineffective portion of a derivative's change in fair value being recognized in current period operations. During the year ended December 31, 2015, we deemed certain cash flow hedges as ineffective due to the wind down of our legacy business. As such, we discontinued hedge accounting and recorded a gain of $1.7 million to other expense in our Consolidated Statement of Operations for the year ended December 31, 2015.
The following table sets forth our cash flow hedges which are measured at fair value on a recurring basis.
December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||
Foreign currency option contracts | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Foreign currency forward contracts | — | — | — | — | 7.3 | — | |||||||||||||||||
Derivative liabilities | |||||||||||||||||||||||
Foreign currency option contracts | — | — | — | — | — | — | |||||||||||||||||
Foreign currency forward contracts | — | — | — | — | — | — | |||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 7.3 | $ | — | |||||||||||
Other Derivative Instruments. We used foreign currency forward contracts to manage the foreign currency exposure related to our monetary assets and liabilities denominated in foreign currencies. We record the estimated
83
fair value of these forward contracts within other current assets or other current liabilities on our Consolidated Balance Sheets and because we do not receive hedge accounting for these derivatives, changes in their value are recognized every reporting period in our Consolidated Statements of Operations.
For 2015, 2014 and 2013 we recorded foreign currency gains of $0.9 million, losses of $2.2 million, and gains of $0.5 million, respectively, in other expenses, net in our Consolidated Statements of Operations. These results reflect changes in foreign exchange rates on foreign denominated assets and liabilities and are net of losses of $0.3 million, losses of $0.8 million and gain of $1.7 million, from the related foreign currency forward contracts for 2015, 2014 and 2013, respectively.
The notional amounts and fair values of our derivative instruments recorded in other current assets and other current liabilities in our Consolidated Financial Statements were as follows:
December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||
Fair Value | Fair Value | ||||||||||||||||||||||
Notional Amount | Other Current Assets | Other Current Liabilities | Notional Amount | Other Current Assets | Other Current Liabilities | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Cash flow hedges designated as hedging instruments | $ | — | $ | — | $ | — | $ | 86.7 | $ | 7.3 | $ | — | |||||||||||
Other hedges not receiving hedge accounting | — | — | — | 23.4 | — | — | |||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 110.1 | $ | 7.3 | $ | — | |||||||||||
Other Assets and Liabilities
The carrying value of accounts receivable and accounts payable approximate their fair values due to the short-term duration of these items. Additionally, our borrowings of $0.2 million of outstanding debt at December 31, 2015, as further described in Note 11 - Debt, approximates fair value due to the short nature of this debt.
Note 13 — Shareholders' Equity
Treasury Stock
On May 2, 2012, our Board of Directors authorized a share repurchase program that allowed for the repurchase of 5.0 million shares of common stock. Since the inception of this authorization, we have repurchased 3.0 million shares of common stock for $13.3 million and, as of December 31, 2015, we had authorization to repurchase up to 2.0 million additional shares. During the year ended December 31, 2015, the Company purchased 0.4 million of treasury shares for $1.7 million. The treasury stock held as of December 31, 2015 was acquired at an average price of $3.84 per share. The following is a summary of treasury share activity:
Treasury Shares | ||
Balance as of December 31, 2012 | 1,563,321 | |
Purchases | 616,581 | |
Restricted stock grants and other | (622,241 | ) |
401(k) matching contribution | (435,735 | ) |
Balance as of December 31, 2013 | 1,121,926 | |
Purchases | 760,268 | |
Exercise of stock options | (87,569 | ) |
Restricted stock grants and other | (739,408 | ) |
401(k) matching contribution | (427,421 | ) |
Balance as of December 31, 2014 | 627,796 | |
Purchases | 382,448 | |
Exercise of stock options | (12,656 | ) |
Restricted stock grants and other | (513,878 | ) |
Shares received in TDK transaction (Note 16) | 6,675,764 | |
Balance as of December 31, 2015 | 7,159,474 | |
84
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss and related activity consisted of the following:
Gains (Losses) on Derivative Financial Instruments | Defined Benefit Plans | Foreign Currency Translation | Total | ||||||||||||
(In millions) | |||||||||||||||
Balance as of December 31, 2014 | $ | 5.1 | $ | (20.6 | ) | $ | (69.3 | ) | $ | (84.8 | ) | ||||
Other comprehensive (loss) income before reclassifications, net of tax (1) | (1.4 | ) | (1.5 | ) | (7.5 | ) | (10.4 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | (3.7 | ) | 2.0 | 0.8 | (0.9 | ) | |||||||||
Net current period other comprehensive income (loss) | (5.1 | ) | 0.5 | (6.7 | ) | (11.3 | ) | ||||||||
Balance as of December 31, 2015 | $ | — | $ | (20.1 | ) | $ | (76.0 | ) | $ | (96.1 | ) | ||||
(1) Income tax benefit of $0.8 million was recorded for unrealized gains on derivative financial instruments and no income tax expense was recorded for liability adjustments for defined benefit plans for the year ended December 31, 2015.
In 2015, the Company adopted a comprehensive restructuring plan pursuant to which it will wind down all sales and operations of its legacy business in an accelerated manner and further reduce and rationalize its corporate overhead. See Note 7 - Restructuring and Other Expense for further information on the Company's Restructuring Plan. U.S. GAAP requires accumulated foreign currency translation balances to be reclassified into the Consolidated Statement of Operations once the liquidation of the net assets of a foreign entity is complete. We reclassified $0.8 million of foreign currency translation losses to other expense in the Consolidated Statement of Operations for the year ended December 31, 2015. As of December 31, 2015, the Company had $76.0 million remaining of accumulated foreign currency translation losses in other comprehensive loss for which significant balances could be reclassified into the Consolidated Statement of Operations in the future.
Details of amounts reclassified from Accumulated other comprehensive loss and the line item in our Consolidated Statement of Operations for the year ended December 31, 2015 are as follows:
Amounts Reclassified from Accumulated Other Comprehensive Loss | Affected Line Item in the Statement Where Net Loss is Presented | ||||
(In millions) | |||||
(Gains) losses on cash flow hedges | $ | (5.6 | ) | Cost of goods sold | |
Income tax expense | 1.9 | Income tax (benefit) provision | |||
Net (gains) losses on cash flow hedges | (3.7 | ) | |||
Amortization of net actuarial loss | 1.7 | Selling, general and administrative | |||
Pension settlement loss | (0.2 | ) | Restructuring and other | ||
Income tax expense | 0.5 | Income tax (benefit) provision | |||
Net pension adjustments, net of tax | 2.0 | ||||
Foreign currency translation | 0.8 | Other (income) expense | |||
Total reclassifications for the period | $ | (0.9 | ) | ||
Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries. Reclassification adjustments are made to avoid double counting in comprehensive loss items that are also recorded as part of net loss and are presented net of taxes in the Consolidated Statements of Comprehensive Loss.
382 Rights Agreement
On August 6, 2015, the Board of Directors adopted a rights plan intended to avoid an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the Code), and thereby preserve
85
the current ability of the Company to utilize certain net operating loss carryovers and other tax benefits of the Company and its subsidiaries (the Tax Benefits). If the Company experiences an “ownership change,” as defined in Section 382 of Code, the Company’s ability to fully utilize the Tax Benefits on an annual basis will be substantially limited, and the timing of the usage of the Tax Benefits and such other benefits could be substantially delayed, which could therefore significantly impair the value of those assets. The rights plan is intended to act as a deterrent to any person or group acquiring “beneficial ownership” of 4.9% or more of the Company’s outstanding shares of common stock, without the approval of the Board. The description and terms of the Rights (as defined below) applicable to the rights plan are set forth in the 382 Rights Agreement, dated as of August 7, 2015 (the Rights Agreement), by and between the Company and Wells Fargo Bank, N.A., as Rights Agent.
As part of the Rights Agreement, the Board authorized and declared a dividend distribution of one right (a Right) for each outstanding share of the Company’s common stock, to stockholders of record at the close of business on September 10, 2015. Each Right entitles the holder to purchase from the Company a unit consisting of one one-hundredth of a share (a Unit) of Series A Participating Preferred Stock, par value $0.01 per share, of the Company (the Preferred Stock) at a purchase price of $15.00 per Unit, subject to adjustment (the Purchase Price). Until a Right is exercised, the holder thereof, as such, will have no separate rights as a stockholder of the Company, including the right to vote or to receive dividends in respect of Rights.
Under the Rights Agreement, an Acquiring Person is any person or group of affiliated or associated persons (a Person) who is or becomes the beneficial owner of 4.9% or more of the outstanding shares of the Company’s common stock other than as a result of repurchases of stock by the Company, dividends or distribution by the Company, stock issued under certain benefit plans or certain inadvertent actions by stockholders. For purposes of calculating percentage ownership under the Rights Agreement, outstanding shares of the Company’s common stock include all of the shares of common stock actually issued and outstanding. Beneficial ownership is determined as provided in the Rights Agreement and generally includes, without limitation, any ownership of securities a Person would be deemed to actually or constructively own for purposes of Section 382 of the Code or the Treasury Regulations promulgated thereunder. The Rights Agreement provides that the following shall not be deemed an Acquiring Person for purposes of the Rights Agreement: (i) the Company or any subsidiary of the Company and any employee benefit plan of the Company, or of any subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan or (ii) any Person that, as of August 7, 2015, is the beneficial owner of 4.9% or more of the shares of Common Stock outstanding (such Person, an Existing Holder) unless and until such Existing Holder acquires beneficial ownership of additional shares of common stock (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding shares of common stock or pursuant to a split or subdivision of the outstanding shares of common stock) in an amount in excess of 0.5% of the outstanding shares of common stock.
The Rights Agreement provides that a Person shall not become an Acquiring Person for purpose of the Rights Agreement in a transaction that the Board determines is exempt from the Rights Agreement, which determination shall be made in the sole and absolute discretion of the Board, upon request by any Person prior to the date upon which such Person would otherwise become an Acquiring Person, including, without limitation, if the Board determines that (i) neither the beneficial ownership of shares of common stock by such Person, directly or indirectly, as a result of such transaction nor any other aspect of such transaction would jeopardize or endanger the availability to the Company of the Tax Benefits or (ii) such transaction is otherwise in the best interests of the Company.
Initially, the Rights will not be exercisable and will be attached to all common stock representing shares then outstanding, and no separate Rights certificates will be distributed. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the common stock and become exercisable and a distribution date (a Distribution Date) will occur upon the earlier of (i) 10 business days (or such later date as the Board shall determine) following a public announcement that a Person has become an Acquiring Person or (ii) 10 business days (or such later date as the Board shall determine) following the commencement of a tender offer, exchange offer or other transaction that, upon consummation thereof, would result in a Person becoming an Acquiring Person.
Until the Distribution Date, common stock held in book-entry form, or in the case of certificated shares, common stock certificates, will evidence the Rights and will contain a notation to that effect. Any transfer of shares of common stock prior to the Distribution Date will constitute a transfer of the associated Rights. After the Distribution Date, the Rights may be transferred on the books and records of the Rights Agent as provided in the Rights Agreement.
If on or after the Distribution Date, a Person is or becomes an Acquiring Person, each holder of a Right, other than certain Rights including those beneficially owned by the Acquiring Person (which will have become void), will
86
have the right to receive upon exercise common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the Purchase Price.
In the event that, at any time following the first date of a public announcement that a Person has become an Acquiring Person or that discloses information which reveals the existence of an Acquiring Person or such earlier date as a majority of the Board becomes aware of the existence of an Acquiring Person (any such date, the Stock Acquisition Date), (i) the Company engages in a merger or other business combination transaction in which the Company is not the surviving corporation, (ii) the Company engages in a merger or other business combination transaction in which the Company is the surviving corporation and the common stock of the Company is changed or exchanged or (iii) 50% or more of the Company’s assets, cash flow or earning power is sold or transferred, each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price.
At any time following the Stock Acquisition Date and prior to the acquisition by the Acquiring Person of 50% or more of the outstanding common stock, the Board may exchange the Rights (other than Rights owned by such Person which have become void), in whole or in part, for common stock or Preferred Stock at an exchange ratio of one share of common stock, or one one-hundredth of a share of Preferred Stock (or of a share of a class or series of the Company’s preferred stock having equivalent rights, preferences and privileges), per Right, subject to adjustment.
The Rights and the Rights Agreement will expire on the earliest of (i) 5:00 P.M. New York City time on August 7, 2018, (ii) the time at which the Rights are redeemed or exchanged pursuant to the Rights Agreement, (iii) the date on which the Board determines that the Rights Agreement is no longer necessary for the preservation of material valuable Tax Benefits or is no longer in the best interest of the Company and its stockholders, (iv) the beginning of a taxable year to which the Board determines that no Tax Benefits may be carried forward and (v) the first anniversary of the adoption of the Agreement if stockholder approval has not been received by or on such date.
At any time until the earlier of the Distribution Date or the expiration date of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right. Immediately upon the action of the Board ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $0.001 redemption price.
Note 14 — Business Segment Information and Geographic Data
Beginning in the fourth quarter of 2015, in conjunction with our accelerated wind-down of the Company's legacy business, the Company changed the manner in which it evaluates the operations of the Company and makes decisions around the allocation of resources. The Company operated in three reportable segments as of December 31, 2015: “Nexsan”, “IronKey” and "Storage Media and Accessories." Nexsan is expected to be our go forward business. (See Note 18 - Subsequent Events on the sale of IronKey on February 2, 2016). Storage Media and Accessories (consisting of our Commercial Storage Media, Consumer Storage Media and Audio and Accessories product categories) is collectively referred to as our "legacy business" and is in the process of being wound-down (which is expected to be completed in the first quarter of 2016). Going forward, we will focus on Nexsan business and evaluating other investment opportunities.
The segment information for prior periods have been revised to conform to the 2015 reportable segment presentation.
We evaluate segment performance based on revenue and operating income (loss). The operating income (loss) 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 results. 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, intangible impairments, intangible asset abandonment, corporate expense, contingent consideration adjustments, inventory write-offs related to our restructuring programs and restructuring and other expenses. Inventory and accounts receivable write-offs incurred for the year-ended December 31, 2015 of $9.7 million and $5.2 million, respectively have been absorbed by their respective business segments.
During the first quarter of 2013, we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. The operating results for these businesses are presented in our Consolidated Statements of Operations as discontinued operations and are not included in segment results for any periods presented. See Note 4 - Acquisitions and Divestitures for further information.
87
Net revenue and operating income (loss) by segment were as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Net Revenue | |||||||||||
Nexsan | $ | 62.8 | $ | 63.5 | 78.2 | ||||||
IronKey | 18.9 | 20.6 | 22.4 | ||||||||
Storage Media and Accessories | 447.5 | 645.4 | 760.2 | ||||||||
Total Net Revenue | $ | 529.2 | $ | 729.5 | $ | 860.8 | |||||
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Operating Income (Loss) | |||||||||||
Nexsan | $ | (25.4 | ) | $ | (34.3 | ) | $ | (14.8 | ) | ||
IronKey | (6.9 | ) | (10.4 | ) | (12.5 | ) | |||||
Storage Media and Accessories | (2.2 | ) | 25.7 | 55.9 | |||||||
Total segment operating income (loss) | (34.5 | ) | (19.0 | ) | 28.6 | ||||||
Corporate and unallocated | (142.8 | ) | (85.1 | ) | (48.7 | ) | |||||
Total operating loss | (177.3 | ) | (104.1 | ) | (20.1 | ) | |||||
Interest income | (0.4 | ) | (0.5 | ) | (0.2 | ) | |||||
Interest expense | 3.3 | 2.6 | 2.5 | ||||||||
Other expense, net | 1.3 | 3.1 | 0.6 | ||||||||
Loss from continuing operations before income taxes | $ | (181.5 | ) | $ | (109.3 | ) | $ | (23.0 | ) | ||
We have not provided specific asset information by segment, as it is not provided to our chief operating decision maker for review at a segment specific level. Corporate and unallocated amounts above include non-cash goodwill impairment charges of $36.1 million and $35.4 million for the years ended December 31, 2015 and 2014, respectively, non-cash intangible asset impairment charges of $37.6 million for the year ended December 31, 2015, restructuring and other costs of $47.9 million, $13.6 million and $11.3 million for the years ended December 31, 2015, 2014 and 2013, respectively, and other corporate expenses of $21.2 million and $36.1 million and $39.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. The 2013 operating loss also included a $10.6 million loss related to the settlement of our UK pension plan and a $9.8 gain on the sale of land at a previously closed facility and a litigation settlement gain of $2.5 million.
The following table presents net revenue by geographical region based on the country in which the revenue originated:
Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Net Revenue | |||||||||||
United States | $ | 207.2 | $ | 253.6 | $ | 348.1 | |||||
International | 322.0 | 475.9 | 512.7 | ||||||||
Total | $ | 529.2 | $ | 729.5 | $ | 860.8 | |||||
The United States and Japan each comprise more than 10 percent of our total net revenue. Net revenue from Japan was 24.0 percent, 23.5 percent and 20.6 percent of total net revenue for the years ended December 31, 2015, 2014 and 2013, respectively.
The following table presents long-lived assets by geographical region:
88
As of December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Long-Lived Assets | |||||||||||
United States | $ | 3.0 | $ | 41.6 | $ | 47.0 | |||||
International | 1.6 | 3.4 | 4.6 | ||||||||
Total | $ | 4.6 | $ | 45.0 | $ | 51.6 | |||||
Note 15 — Litigation, Commitments and Contingencies
Litigation
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 supportable third-party claim. There have historically been no material losses related to such indemnifications. As of December 31, 2015 and 2014, estimated liability amounts associated with such indemnifications are inconsequential.
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 businesses are 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, 2015, we are unable to reasonably estimate the ultimate aggregate amount of any monetary liability or financial impact that we may incur with respect to these matters. It is reasonably possible that the ultimate resolution of these matters could materially affect our financial condition, results of operations and cash flows.
On May 22, 2013, Imation was sued in U.S. District Court for the District of Delaware by five entities: One-Blue, LLC (One-Blue), which is an entity with licensing authority for a pool of patents relating to Blu-ray discs, and four members of One-Blue, Koninklijke Philips N.V., Panasonic Corporation, Pioneer Corporation and Sony Corporation. The plaintiffs alleged that Imation's sales of certain Blu-ray discs infringed six patents and sought unspecified damages, treble damages, and attorney's fees. The parties entered into a Settlement Agreement covering these U.S. patent claims for a nominal amount and, effective November 12, 2015, these claims were dismissed.
SpearPoint Capital Fund LP et al. v. Mark E. Lucas, et al. This shareholder derivative action was filed in Delaware Chancery Court on February 9, 2015. It names as defendants the Company and the members of its Board of Directors. Plaintiffs contend that the defendants paid excessive compensation to the directors. They seek damages for breaches of fiduciary duties, waste of corporate assets and unjust enrichment. They also seek corporate governance reforms related to the Company’s compensation practices. The Directors have responded to the complaint denying all the allegations; the Company, as the nominal defendant has responded denying the allegations as well. The parties are now engaged in discovery. Trial, should it be necessary, has been scheduled for June 2016.
Operating Leases
We incur rent expense under operating leases, which primarily relate to equipment and office space. Most long-term leases include one or more options to renew at the then fair rental value for a period of approximately one to three years. The following table sets forth the components of net rent expense for the years ended December 31:
2015 | 2014 | 2013 | |||||||||
(In millions) | |||||||||||
Minimum lease payments | $ | 8.1 | $ | 7.8 | $ | 8.5 | |||||
Contingent rentals | 0.1 | 1.6 | 3.8 | ||||||||
Rental income | (8.2 | ) | (8.6 | ) | (8.4 | ) | |||||
Sublease income | — | — | (0.5 | ) | |||||||
Total rental expense, net | $ | — | $ | 0.8 | $ | 3.4 | |||||
89
Minimum lease payments and contingent rental expenses associated with agreements with warehouse providers are included as a component of cost of goods sold in our Consolidated Statements of Operations. The minimum lease payments under such arrangements were $0.6 million, $0.8 million and $0.9 million in 2015, 2014 and 2013, respectively. The contingent rental expenses under such arrangements were $0.7 million, $1.8 million and $2.8 million in 2015, 2014 and 2013, respectively.
The following table sets forth the minimum rental payments under operating leases with non-cancellable terms in excess of one year as of December 31, 2015. The Company will keep a small team and its headquarters in Minnesota in 2016, and those lease costs are included below. The amount for 2016 includes an estimate of the lease termination fees that we will have to pay in order to cancel certain leases upon the full wind-down of our legacy business.
2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | |||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||
Minimum lease payments | $ | 2.7 | $ | 0.9 | $ | 0.8 | $ | 0.6 | $ | 0.4 | $ | 0.3 | $ | 5.7 | |||||||||||||
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. We did not have any environmental accruals as of December 31, 2015.
Copyright Levies
In many European Union (EU) member countries, the sale of recordable optical media is subject to a private copyright levy. The levies are intended to compensate copyright holders with "fair compensation" for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (Directive). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which, in turn, are expected to distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law making activities. On October 21, 2010, the Court of Justice of the European Union (CJEU) ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The CJEU stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The CJEU ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons presumed to be making private copies. Within this disclosure, we use the term "commercial channel sales" when referring to products intended for uses other than private copying and "consumer channel sales" when referring to products intended for uses including private copying.
Since the Directive was implemented in 2002, we estimate that we have paid in excess of $100 million in levies to various ongoing collecting societies related to commercial channel sales. Based on the CJEU's October 2010 ruling and subsequent litigation and law making activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various collecting societies. Accordingly, subsequent to the October 21, 2010 CJEU ruling, we began withholding levy payments to the various collecting societies and, in 2011, we reversed our existing accruals for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions except Italy and France due to court rulings that are discussed below. As of December 31, 2015 and 2014, we had accrued liabilities of $5.1 million and $9.3 million, respectively, associated with levies related to consumer channel sales for which we are withholding payment.
Since the October 2010 CJEU ruling, we evaluate quarterly on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) whether accrued, but unpaid, copyright levies on prior period consumer channel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law making activities within each jurisdiction as well as throughout the EU. See following for discussion of reversals of copyright levies in 2013.
90
Italy. During the second quarter of 2013, an Italian court rendered a decision associated with a copyright levy matter to which Imation was not a party. This decision (i) confirmed and provided further specificity to the October 21, 2010 ruling of the CJEU that levies should not be paid on commercial channel sales and (ii) evaluated, via audit, the plaintiff's documentation and evidence for distinguishing between levies paid on commercial and consumer channel sales. During the second quarter of 2013, Imation reversed $13.6 million of Italian copyright levies (existing at the time of a 2013 Italian court decision) that arouse from consumer channel sales that had been accrued but not paid to cost of sales. Based on the ruling of this Italian court, in combination with other applicable levy and law-making activities within the EU, including Italy, we believed there was sufficient evidence that we may offset the ongoing levy liability with the Italian collecting society for Imation's sales in the consumer channel against the estimated $39.0 million we have overpaid for copyright levies in Italy (due to us paying levies on commercial channel sales prior to the October 21, 2010 CJEU ruling). We continued this practice of offsetting until December 2015. In December 2015, we settled our claim for reimbursement of the levies that Imation had paid for sales into its commercial channel with the Italian collecting society, S.I.A.E. The settlement was for $1.0 million and is recorded as a reduction in cost of sales.
France. As the case in Italy, Imation has overpaid levies related to sales into its commercial channel in an amount of $55.1 million. Likewise, Imation has been offsetting levy liability with the French collecting society for Imation's sales in the consumer channel against the $55.1 million we have overpaid for copyright levies in France (due to us paying levies on commercial channels sales prior to the October 21, 2010 CJEU ruling). During the fourth quarter of 2013, Imation reversed $9.5 million of French copyright levies (existing at the time of a 2013 French court decision) that arouse from consumer channel sales that had been accrued but not paid to cost of sales. To date, Imation has offset approximately $14.4 million.
We believe that we have utilized a methodology, and have sufficient documentation and evidence, to fully support our estimates that we have overpaid $55.1 million to the French collection society of levies on commercial channel sales and that we have incurred (but not paid) $14.4 million of levies on consumer channel sales in France. However, such amounts are currently subjected to challenge in court and there is no certainty that our estimates would be upheld and supported. In December 2012, Imation filed a complaint against the French collection society , Copie France, for reimbursement of the $55.1 million in commercial channel levies that Imation had paid prior to October 2010. On December 8, 2015, there was a hearing in the Paris District Court. A ruling is expected during the first quarter of 2016.
Other Jurisdictions. During the first quarter of 2015, Imation reversed $2.8 million accrual for German copyright levies on optical products as the result of a favorable German court decision retroactively setting levy rates at a level much lower than the rates sought by the German collecting society. The reversal was recorded as a reduction of cost of sales. At December 31, 2015, the recovery of some or all of the copyright levies previously paid on commercial sales in EU jurisdictions other than Italy, France and Germany represents a gain contingency that has not yet met the required criteria for recognition in our financial statements. There is no assurance that we will realize any of this gain contingency. We have an estimated $5.1 million of accrued but unpaid levies associated with consumer sales in EU jurisdictions other than Italy and France that we continue to carry on our books.
We are subject to several pending or threatened legal actions by the individual European national levy collecting societies in relation to private copyright levies under the Directive. Those actions generally seek payment of the commercial and consumer optical levies withheld by Imation. Imation has corresponding claims in those actions seeking reimbursement of levies improperly collected by those collecting societies. We are subject to threatened actions by certain customers of Imation seeking reimbursement of funds they allege relate to commercial levies that they claim they should not have paid. Although these actions are subject to the uncertainties inherent in the litigation process, based on the information presently available to us, management does not expect that the ultimate resolution of these actions will have a material adverse effect on our financial condition, results of operations or cash flows. We anticipate that additional court decisions may be rendered in 2016 that may directly or indirectly impact our levy exposure in specific European countries which could trigger a review of our levy exposure in those countries.
Accounts Payable
The Company is currently disputing trade payables with certain vendors associated with the legacy businesses. As of December 31, 2015, the Company has $26.0 million of trade payables recorded to these vendors, which is based on amounts billed to the Company, but not paid. The Company alleges historical nonperformance by these vendors and, accordingly, is disputing the amounts presently being claimed as being owed. To the extent the Company is able to settle this dispute for amounts lower than $26.0 million, it will record a gain at that time. As a
91
part of this dispute, these vendors have taken action to seize approximately $5.3 million of the Company's cash, which is recorded as restricted cash on the Company's consolidated balance sheet as of December 31, 2015.
Note 16 - Related Party Transactions
Clinton Relational Opportunity Master Fund, L.P. (the "Clinton Group") nominated 3 persons for election to Imation’s Board of Directors (the “Board”) at the Company's Annual Meeting of Shareholders on May 20, 2015. Shareholders elected Clinton Group’s three nominees, Joseph A. De Perio, Robert B. Fernander and Barry L. Kasoff, replacing three incumbent directors who were standing for reelection.
Mr. De Perio currently serves as Senior Portfolio Manager of the Clinton Group. During the third quarter of 2015, the Board authorized reimbursement to the Clinton Group for its documented expenses related to proxy contest fees for 2015 for $0.6 million. The fees were paid in 2015 and are recorded in restructuring and other charges for the year ended December 31, 2015. See Note 18 - Subsequent Events for additional transaction with the Clinton Group.
On August 17, 2015, Imation entered into a consulting agreement with Mr. Fernander to perform certain services including assisting the Company with a review and assessment of the Nexsan and IronKey businesses of the Company, for which he received consulting fees of $25,000 per week, subject to termination by the Company on a one week's notice. For the year ended December 31, 2015, the Company paid $0.3 million to Mr. Fernander for these services, which is recorded in restructuring and other charges.
On September 27, 2015, the Board of Directors appointed Mr. Fernander to serve as Interim Group President, Tiered Storage and Security Solutions, effective September 28, 2015, and terminated the consulting agreement with Mr. Fernander.
On August 17, 2015, the Board appointed Mr. Kasoff to serve as Interim President of the Company effective August 19, 2015. Effective October 14, 2015, in connection with the appointment of Mr. Fernander to the position of Interim Chief Executive Officer, the Board appointed Mr. Kasoff as Chief Restructuring Officer at the same level of compensation he received as Interim President. Effective November 25, 2015, the Board of Directors appointed Mr. Kasoff to also serve as the Company's Interim Chief Financial Officer.
Mr. Kasoff also serves as president of Realization Services, Inc. (RSI), a management consulting firm specializing in assisting companies and capital stakeholders in troubled business environments. Pursuant to a consulting agreement between the Company and RSI dated August 17, 2015 and subsequent amendments, RSI is performing consulting services for the Company for the period from August 8, 2015 up to March 30, 2016, unless terminated earlier by the Company, including assisting the Company with a review and assessment of the Company’s business and the formulation of a business plan to enhance shareholder value going forward. RSI received consulting fees of $85,000 per week from the Company under the terms of the Agreement plus up to an additional $225,000 for services for the period from August 26, 2015 through September 18, 2015. For the period September 19, 2015 to November 16, 2015 RSI received consulting fees of $125,000 per week. For the period from November 17, 2015 through the remaining term of the agreement RSI received up to $172,000 per week. For the year ended December 31, 2015, the Company paid $3.0 million to RSI which is recorded in restructuring and other charges.
On August 31, 2015, Imation entered into a consulting agreement with Geoff Barrall, a member of the Board pursuant to which Mr. Barrall will perform certain services including formulating a business plan and budget for the Company which is subject to termination by the Company on a one week's notice. The consulting agreement with Mr. Barrall was terminated on October 12, 2015. For the year ended December 31, 2015, the Company paid $0.2 million to Mr. Barrall associated with his consulting agreement which is recorded in restructuring and other charges.
On October 14, 2015, Imation acquired substantially all of the equity of Connected Data, Inc. (CDI) for approximately $6.7 million in cash, shares of Imation common stock and repayment of debt. Mr. Barrall is the founder and, at the time of acquisition, was also the Chief Executive Officer of CDI. In consideration for his CDI common shares and options to purchase CDI common shares, Mr. Barrall received approximately $184,000 at the time of the acquisition and he will be eligible to receive up to an additional $260,000 to the extent certain CDI revenue targets are achieved for the 3 consecutive six-month periods commencing January 1, 2016. See Note 4 - Acquisitions and Divestitures for further information on the CDI acquisition.
TDK Corporation (TDK) owned approximately 18 percent of the Company's shares as of December 31, 2014 as a result of the arrangement to acquire the rights to the TDK Life on Record brand under an exclusive long-term
92
license from TDK. In connection with this arrangement, we entered into a supply agreement, dated July 31, 2007, with TDK (Supply Agreement).
In 2014 and 2013 we purchased products and services under the Supply Agreement which allowed us to purchase a limited number of LTO Tape media and Blu-ray removable recording media and accessory products for resale in the aggregate amounts of approximately $3 million and $28 million, respectively, from TDK or its affiliates. The Supply Agreement was terminated on March 31, 2014. We did not sell products nor provide services to TDK or its affiliates in 2015, 2014 or 2013. No trade payables to TDK or its affiliates were outstanding at December 31, 2015 or December 31, 2014. No trade receivables from TDK or its affiliates were outstanding as of December 31, 2015 or December 31, 2014.
In 2011, we discontinued our tape coating operations at our Weatherford, Oklahoma facility and closed the facility. We signed a strategic agreement with TDK to jointly develop and manufacture magnetic tape technologies in which we collaborated on the research and development of future tape formats in both companies’ research centers in the U.S. and Japan. At the end of 2013, TDK announced its intent to cease manufacturing of magnetic tape and, as a result, we transitioned to source our product from alternate magnetic tape suppliers during 2014.
On September 28, 2015, the Company entered into an agreement with TDK providing for the transfer of 6,675,764 shares of Imation common stock from TDK to Imation, the termination of the Company's license agreement with TDK and the termination of certain rights of TDK under its Investor Rights Agreement with the Company. The shares of Imation common stock were transferred back to Imation on October 29, 2015. The transaction resulted in receipt of $13.6 million of Imation stock (subsequently recorded into treasury shares), the transfer back to TDK of the rights to the TDK brand (which had a carrying value of $4.5 million at the time of the transaction) and an associated gain of $9.1 million. The gain is recorded in restructuring and other charges for the year ended December 31, 2015.
93
Note 17 - Quarterly Data (Unaudited)
First | Second | Third | Fourth | Total(1) | |||||||||||||||
(In millions, except per share amounts) | |||||||||||||||||||
2014 | |||||||||||||||||||
Net revenue | $ | 178.9 | $ | 178.6 | $ | 175.0 | $ | 197.0 | $ | 729.5 | |||||||||
Gross profit | 33.7 | 33.9 | 31.2 | 39.6 | 138.4 | ||||||||||||||
Goodwill impairment | — | — | 35.4 | — | 35.4 | ||||||||||||||
Restructuring and other | 2.1 | 5.2 | 4.2 | 2.1 | 13.6 | ||||||||||||||
Operating loss | (16.1 | ) | (20.1 | ) | (55.8 | ) | (12.1 | ) | (104.1 | ) | |||||||||
Loss from continuing operations | (16.8 | ) | (19.8 | ) | (61.4 | ) | (14.4 | ) | (112.4 | ) | |||||||||
Loss from discontinued operations | (0.7 | ) | (1.6 | ) | — | — | (2.3 | ) | |||||||||||
Net loss | (17.5 | ) | (21.4 | ) | (61.4 | ) | (14.4 | ) | (114.7 | ) | |||||||||
Loss per common share, continuing operations: | |||||||||||||||||||
Basic | $ | (0.41 | ) | $ | (0.48 | ) | $ | (1.49 | ) | $ | (0.35 | ) | $ | (2.74 | ) | ||||
Diluted | (0.41 | ) | (0.48 | ) | (1.49 | ) | (0.35 | ) | (2.74 | ) | |||||||||
Loss per common share, discontinued operations: | |||||||||||||||||||
Basic | (0.02 | ) | (0.04 | ) | — | — | (0.06 | ) | |||||||||||
Diluted | (0.02 | ) | (0.04 | ) | — | — | (0.06 | ) | |||||||||||
Loss per common share, net income: | |||||||||||||||||||
Basic | (0.43 | ) | (0.52 | ) | (1.49 | ) | (0.35 | ) | (2.80 | ) | |||||||||
Diluted | (0.43 | ) | (0.52 | ) | (1.49 | ) | (0.35 | ) | (2.80 | ) | |||||||||
2015 | |||||||||||||||||||
Net revenue | $ | 155.4 | $ | 150.6 | $ | 129.2 | $ | 94.0 | $ | 529.2 | |||||||||
Gross profit | 34.0 | 29.0 | 13.4 | 24.9 | 101.3 | ||||||||||||||
Goodwill impairment | — | — | 36.1 | — | 36.1 | ||||||||||||||
Intangible impairments | — | — | 37.6 | — | 37.6 | ||||||||||||||
Restructuring and other | 1.2 | 1.5 | 40.2 | 5.0 | 47.9 | ||||||||||||||
Operating loss | (13.0 | ) | (15.9 | ) | (148.7 | ) | 0.3 | (177.3 | ) | ||||||||||
Loss from continuing operations | (14.4 | ) | (17.4 | ) | (152.3 | ) | (9.9 | ) | (194.0 | ) | |||||||||
Loss from discontinued operations | — | — | — | — | — | ||||||||||||||
Net loss | (14.4 | ) | (17.4 | ) | (152.3 | ) | (9.9 | ) | (194.0 | ) | |||||||||
Loss per common share, continuing operations: | |||||||||||||||||||
Basic | $ | (0.35 | ) | $ | (0.42 | ) | $ | (3.70 | ) | $ | (0.27 | ) | $ | (4.84 | ) | ||||
Diluted | (0.35 | ) | (0.42 | ) | (3.70 | ) | (0.27 | ) | (4.84 | ) | |||||||||
Loss per common share, discontinued operations: | |||||||||||||||||||
Basic | — | — | — | — | — | ||||||||||||||
Diluted | — | — | — | — | — | ||||||||||||||
Loss per common share, net income: | |||||||||||||||||||
Basic | (0.35 | ) | (0.42 | ) | (3.70 | ) | (0.27 | ) | (4.84 | ) | |||||||||
Diluted | (0.35 | ) | (0.42 | ) | (3.70 | ) | (0.27 | ) | (4.84 | ) | |||||||||
_______________________________________
(1) | The sum of the quarterly loss per share may not equal the annual loss per share due to changes in average shares outstanding and rounding. |
94
Note 18 - Subsequent Events
On January 4, 2016, the Company completed the sale of its corporate headquarters facility in Oakdale, Minnesota to Larson Family Real Estate LLLP for a gross purchase price of $11.5 million. See Note 5 - Supplemental Balance Sheet Information for discussion regarding this facility being classified as held for sale as of December 31, 2015.
On January 4, 2016, the Company closed on the sale of its Memorex trademark and receivables associated with two associated trademark licenses to DPI Inc., a St. Louis-based branded consumer electronics company for $9.4 million. The Company classified all assets associated with the sale as assets held for sale on our Consolidated Balance Sheet as of December 31, 2015. These assets included the Memorex trademark intangible asset (which had a carrying value of $5.9 million at December 31, 2015) and receivables associated with two trademark licenses (one of which was the buyer of our Memorex consumer electronics business). The transaction resulted in an impairment of $1.8 million which was recorded in our Consolidated Statement of Operations for the year ended December 31, 2015 in restructuring and other charges.
On February 2, 2016, the Company closed on a sale of its IronKey business to Kingston Digital, Inc. and Datalocker Inc. in two coordinated asset sales. The Company received $4.7 million in cash at closing for the two sales. The Company sold to Kingston Digital, Inc. the assets representing the business of developing, designing, manufacturing and selling IronKey mobile security solutions, excluding the business of providing software and services, for $4.3 million. Imation retained the accounts receivable and accounts payable related to the business. The Company sold to Datalocker Inc. the assets representing the business of providing software and services for IronKey products for $0.4 million. Datalocker Inc. agreed to assume certain service obligations and additionally will pay Imation earnout payments during the next three years if certain service revenue targets are achieved. While the Company was exploring options associated with the IronKey business, the criteria to be considered as "held for sale" as of December 31, 2015 were not met at that time as we did not have Board approval. The accounting for the transaction will take place in the first quarter of 2016 and is expected to result in a gain of approximately $3.0 million.
On February 8, 2016, the Company entered into a subscription agreement with the Clinton Group for which they will manage $20 million of the Company's cash for investment. The funds will be invested in Clinton Lighthouse Equities Strategy Fund (Offshore) Ltd. which is a market neutral fund that provides daily liquidity to its investors. The agreement provides that the Clinton Group will be entitled to an incentive fee (payable in Imation common stock) at an annualized rate equal to twenty-five percent of the total investment return. The accounting for the incentive fee will take place when the Clinton Group performs their services.
On February 29, 2016 the Company closed on the sale of an Imation owned property in London, Ontario Canada for a net purchase price of approximately $0.6 million and a gain of $0.4 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Based on an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2015, the end of the period covered by this report, the Interim Chief Executive Officer, Robert B. Fernander, and the Interim Chief Financial Officer, Barry L. Kasoff have concluded that the disclosure controls and procedures were effective.
Changes in Internal Controls. During the quarter ended December 31, 2015, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting. Management of Imation is responsible for establishing and maintaining adequate internal control over financial reporting. Imation’s internal control system is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
95
Imation management assessed the effectiveness of Imation’s internal control over financial reporting as of December 31, 2015. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework version 2013. Based on our assessment, we concluded that, as of December 31, 2015, Imation’s internal control over financial reporting was effective, based on those criteria. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of our internal control over financial reporting, as stated in their report which appears herein.
Item 9B. Other Information.
None.
PART III
Except where otherwise noted, the information required by Items 10 through 14 is incorporated by reference from our definitive Proxy Statement pursuant to general instruction G(3) to Form 10-K, with the exception of the executive officers section of Item 10, which is included in Item 1 of this Form 10-K. We will file our definitive Proxy Statement pursuant to Regulation 14A by April 30, 2016.
Item 10. Directors, Executive Officers and Corporate Governance.
Board of Directors
Information regarding our Board of Directors as of March 15, 2016 is set forth below:
Robert B. Fernander, Interim Chief Executive Officer, Imation Corp. See Executive Officers in the Registrant in Item 1. Business for further information.
Barry L. Kasoff, Chief Restructuring Officer and Interim Chief Financial Officer, Imation Corp. See Executive Officers in the Registrant in Item 1. Business for further information.
Joesph De Perio, Senior Portfolio Manager, Clinton Group, Inc,
Tracy McKibben, President, MAC Energy Advisors LLC (a consulting and investment company that assists clients on investments and strategic opportunities across a global platform).
Donald Putnam, Managing Partner, Grail Partners LLC (an investment bank and financial advisory services company).
Robert Searing, Chief Operating Officer and Chief Financial Officer of BH Asset Management, LLC (a registered investment advisory firm).
Alex Spiro, Attorney, Brafman and Associates.
See Part I of this Form 10-K, “Executive Officers of the Registrant.” The Sections of the Proxy Statement entitled “Board of Directors-Director Independence and Determination of Audit Committee Financial Expert,” “Board of Directors-Meetings of the Board and Board Committees,” “Information Concerning Solicitation and Voting — Section 16(a) Beneficial Ownership Reporting Compliance” and “Item No. 1-Election of Directors — Information Concerning Directors” are incorporated by reference into this Form 10-K.
We adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer/controller, or persons performing similar functions and all our other employees. This code of ethics is part of our broader Business Conduct Policy, posted on our website. The Internet address for our website is http://www.imation.com and the Business Conduct Policy may be found on the “Corporate Governance” web page, which can be accessed from the “Investor Relations” page, which can be accessed from the main web page. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the required code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer/controller or persons performing similar functions by posting such information on our website, at the address and location specified above.
Materials posted on our website are not incorporated by reference into this Form 10-K.
96
Item 11. Executive Compensation.
The Sections of the Proxy Statement entitled “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Compensation of Named Executive Officers” and “Board of Directors — Compensation of Directors” are incorporated by reference into this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The Sections of the Proxy Statement entitled “Information Concerning Solicitation and Voting - Security Ownership of Certain Beneficial Owners” and “Information Concerning Solicitation and Voting - Security Ownership of Management” are incorporated by reference into this Form 10-K.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued under all of our existing equity compensation plans as of December 31, 2015, including the 2011 Stock Incentive Plan, 2008 Stock Incentive Plan, the 2005 Stock Incentive Plan and the 2000 Stock Incentive Plan. As of December 31, 2015, options and restricted stock had been granted under the 2000 Stock Incentive Plan, 2005 Stock Incentive Plan and 2008 Stock Incentive Plan, and options, restricted stock, restricted stock units and stock appreciation rights had been granted under the 2011 Stock Incentive Plan. Our shareholders have approved all of the compensation plans listed below.
Equity Compensation Plans Approved by Shareholders | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column) | |||||||||
2011 Stock Incentive Plan | 3,578,304 | (1) | $ | 2.31 | 8,276,182 | |||||||
2008 Stock Incentive Plan | 1,609,222 | (1) | $ | 10.38 | 16,701,157 | (2) | ||||||
2005 Stock Incentive Plan | 526,471 | $ | 31.29 | 16,475,699 | (2) | |||||||
Total | 5,713,997 | $ | 7.25 | 41,453,038 | ||||||||
(1) This number does not include restricted stock of 1,347,199 shares under our 2011 Stock Incentive Plan or 1,718 shares under our 2008 Stock Incentive Plan.
(2) No additional awards may be granted under our 2008 Stock Incentive Plan, 2005 Stock Incentive Plan, 2000 Stock Incentive Plan or 1996 Directors Stock Compensation Program.
97
Item 13. Certain Relationships and Related Transactions and Director Independence.
The Sections of the Proxy Statement entitled “Information Concerning Solicitation and Voting — Related Person Transactions and Related Person Transaction Policy,” “Board of Directors — Director Independence and Determination of Audit Committee Financial Expert” and "Board of Directors - Meetings of the Board and Board Committees" are incorporated by reference into this Form 10-K.
Item 14. Principal Accountant Fees and Services.
The Section of the Proxy Statement entitled “Audit and Other Fees and Audit and Finance Committee Pre-Approval Policy” is incorporated by reference into this Form 10-K.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
List of Documents Filed as Part of this Report
1. Financial Statements
Page | |
2. Financial Statement Schedules
All financial statement schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or the notes thereto.
3. Exhibits
The following Exhibits are filed as part of, or incorporated by reference into, this report:
Number | Description of Exhibit | |
2.1 | Asset Purchase Agreement, dated May 7, 2007, among Hopper Radio of Florida, Inc., Memcorp, Inc., Memcorp Asia Limited and Imation Corp. (incorporated by reference to Exhibit 2.1 of Imation’s Form 10-Q for the quarter ended March 31, 2007) | |
2.2 | Acquisition Agreement, dated April 19, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 2.1 to Imation’s Form 8-K Current Report filed on April 25, 2007) | |
2.3 | Acquisition Agreement, dated January 19, 2006, by and between Imation Corp. and Memorex International Inc. (incorporated by reference to Exhibit 2.1 to Imation’s Form 8-K Current Report filed on January 25, 2006) | |
2.4 | Inducement Agreement, dated January 19, 2006, among Hanny Holding Limited, Hanny Magnetics (B.V.I.) Limited, Investor Capital Management Asia Limited, Investor Capital Partners — Asia Fund L.P, Global Media Limited, Memorex Holdings Limited and Imation Corp. (incorporated by reference to Exhibit 2.2 to Imation’s Form 8-K Current Report filed on January 25, 2006) | |
2.5 | Purchase Agreement, dated October 5, 2011, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.5 of Imation's Annual Report on Form 10-K for the year ended December 31, 2011) | |
2.6 | First Amendment to Purchase Agreement, dated January 5, 2012, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.6 of Imation's Annual Report on Form 10-K for the year ended December 31, 2011) | |
98
Number | Description of Exhibit | |
2.7 | Second Amendment to Purchase Agreement, dated January 31, 2012, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.7 of Imation's Annual Report on Form 10-K for the year ended December 31, 2011) | |
2.8 | Third Amendment to Purchase Agreement, dated February 10, 2012, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.8 of Imation's Annual Report on Form 10-K for the year ended December 31, 2011) | |
2.9 | Fourth Amendment to Purchase Agreement, dated November 6, 2013, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.9 of Imation's Annual Report on Form 10-K for the year ended December 31, 2013) | |
2.10 | Agreement and Plan of Merger dated December 31, 2012, by and among Imation Corp., Naboo Merger Corp., and Nexsan Corporation (incorporated by reference to Exhibit 2.1 to Imation's Form 8-K/A Current Report filed on March 12, 2013) (Schedules have been omitted pursuant to Item 601(b(2) of Regulation S-K. Imation agrees to furnish a supplemental copy of any omitted schedule to the Securities and Exchange Commission upon request.) ** | |
3.1 | Restated Certificate of Incorporation of Imation Corp. (incorporated by reference to Exhibit 3.1 to Registration Statement on Form 10, No. 1-14310) | |
3.2 | Amended and Restated Bylaws of Imation Corp., effective November 7, 2013 (incorporated by reference to Exhibit 3.1 to Imation’s Form 10-Q for the quarter ended September 30, 2013) | |
3.3 | Certificate of Designation, Preferences and Rights of Series A Participating Preferred Stock of Imation Corp. (incorporated by reference to Exhibit 3.1 on Imation's Current Report on Form 8-K filed August 11, 2015) | |
4.1 | Rights Agreement, dated as of August 7, 2015, by and between Imation Corp. and Wells Fargo Bank, N.A., as Rights Agent (incorporated by reference to Exhibit 4.1 on Imation's Current Report on Form 8-K filed August 11, 2015) | |
10.1 | Trademark License Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on August 3, 2007) | |
10.2 | IMN Trademark License Agreement, dated July 31, 2007, by and between IMN Data Storage Holdings C.V. and TDK Corporation (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on August 3, 2007) | |
10.3 | Supply Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on August 3, 2007) | |
10.4 | Investor Rights Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on August 3, 2007) | |
10.5* | Stock Purchase and Merger Agreement, dated October 14, 2015, by and among Imation Corp., Imation Transporter Co., Connected Data, Inc., and certain other parties named therein (incorporated by reference to Imation's Current Report on Form 8-K filed October 20, 2015) | |
10.6* | Imation Corp. TDK Corporation Agreement dated September 28, 2015 (incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended September 30, 2015) | |
10.7 | Purchase and Sale Agreement between Imation Corp. and Larson Family Real Estate LLLP, dated December 18, 2015 | |
10.8 | First Amendment to the Purchase and Sale Agreement between Imation Corp. and Larson Family Real Estate LLLP, dated December 30, 2015 | |
10.9 | Purchase and Sale Agreement between Imation Corp. and DPI Inc., dated January 4, 2016 | |
10.10 | Third Amendment, dated as of May 18, 2012, to the Amended and Restated Credit Agreement (which amends and restates the entire Credit Agreement) among Imation Corp., Imation Enterprises Corp. and Imation Europe B.V., as borrowers, Bank of America, N.A., as administrative agent and l/c issuer, and a consortium of Lenders, dated as of August 3, 2010 (incorporated by reference to Exhibit 10.1 to Imation's Form 8-K Current Report filed on May 24, 2012)** | |
10.11 | Fourth Amendment, dated as of April 12, 2013, to the Amended and Restated Credit Agreement among Imation Corp., Imation Enterprises Corp. and Imation Europe B.V., as borrowers, Bank of America, N.A., as administrative agent and l/c issuer, and a consortium of Lenders, dated as of August 3, 2010(incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended March 31, 2013) | |
10.12 | Fifth Amendment, dated as of August 27, 2013, to the Amended and Restated Credit Agreement among Imation Corp., Imation Enterprises Corp. and Imation Europe B.V., as borrowers, Bank of America, N.A., as administrative agent and l/c issuer, and a consortium of Lenders, dated as of August 3, 2010 (incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended September 30, 2013) | |
99
Number | Description of Exhibit | |
10.13 | Form of Indemnity Agreement between Imation Corp. and each of its directors (incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the year ended December 31, 1996) | |
10.14* | 1996 Directors Stock Compensation Program, as amended May 8, 2002 (incorporated by reference to Exhibit 10.1 of Imation’s Form 10-Q for the quarter ended June 30, 2002) | |
10.15* | Imation Corp. 2000 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 2003) | |
10.16* | Form of 2000 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.9 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.17* | Amendment to 2000 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.8 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.18* | Form of Amendment to 2000 Employee Stock Incentive Plan Restricted Stock Award Agreements — Executive Officer (incorporated by reference to Exhibit 10.2 to Imation’s Form 8- K Current Report filed on February 13, 2006) | |
10.19* | Form of 2000 Stock Incentive Plan Stock Option Agreement — Executive Officers (incorporated by reference to Exhibit 10.11 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.20* | Form of 2000 Stock Incentive Plan Stock Option Agreement — Employees (incorporated by reference to Exhibit 10.10 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.21* | Form of 2000 Stock Incentive Plan Restricted Stock Award Agreement — Employees 2004 (incorporated by reference to Exhibit 10.1 of Imation’s Form 10-Q for the quarter ended September 30, 2004) | |
10.22* | Form of 2000 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers 2004 (incorporated by reference to Exhibit 10.2 of Imation’s Form 10-Q for the quarter ended September 30, 2004) | |
10.23* | Form of 2000 Stock Incentive Plan Stock Option Agreement — Employees 2004 (incorporated by reference to Exhibit 10.3 of Imation’s Form 10-Q for the quarter ended September 30, 2004) | |
10.24* | Form of 2000 Stock Incentive Plan Stock Option Agreement — Executive Officers 2004 (incorporated by reference to Exhibit 10.4 of Imation’s Form 10-Q for the quarter ended September 30, 2004) | |
10.25* | Imation Corp. 2005 Stock Incentive Plan, as amended November 9, 2005 (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on November 16, 2005) | |
10.26* | Form of 2005 Stock Incentive Plan Stock Option Agreement — Employees (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.27* | Form of 2005 Stock Incentive Plan Stock Option Agreement — Executive Officers (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.28* | Form of Amendment to 2005 Stock Incentive Plan Option Agreements — Executive Officer (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.29* | Form of 2005 Stock Incentive Plan Stock Option Agreement — Directors (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.30* | Form of Amendment to 2005 Stock Incentive Plan Stock Option Agreement — Directors (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on November 16, 2005) | |
10.31* | Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement — Employees (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.32* | Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.33* | Form of Amendment to 2005 Stock Incentive Plan Restricted Stock Award Agreements — Executive Officer (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.34* | Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement — Directors (incorporated by reference to Exhibit 10.7 to Imation’s Form 8-K Current Report filed on May 9, 2005) | |
10.35* | Form of Amendment to 2005 Stock Incentive Plan Restricted Stock Award Agreement — Directors (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on November 16, 2005) | |
10.36* | Form of Amendment to 2004 and 2005 Executive Officer Option Agreements under the 2000 Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
100
Number | Description of Exhibit | |
10.37* | Form of 2005 Stock Incentive Plan Amendment to 2005 Stock Option Agreements — Non-Employee Directors (incorporated by reference to Exhibit 10.7 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.38* | Form of 2005 Stock Incentive Plan Non-Employee Director Option Agreement (incorporated by reference to Exhibit 10.12 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.39* | Form of 2005 Stock Incentive Plan Amendment to 2005 Restricted Stock Award Agreements — Non-Employee Directors (incorporated by reference to Exhibit 10.8 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.40* | Form of 2005 Stock Incentive Plan Non-Qualified Stock Option Agreement for Executive Officers (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.41* | Form of 2005 Stock Incentive Plan Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.13 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.42* | Form of 2005 Stock Incentive Plan Executive Officer Option Agreement (incorporated by reference to Exhibit 10.10 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.43* | Form of 2005 Stock Incentive Plan Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.11 to Imation’s Form 8-K Current Report filed on February 13, 2006) | |
10.44* | Imation Corp. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.45* | Form of 2008 Stock Incentive Plan Non-Qualified Stock Option Agreement for Executive Officers (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.46* | Form of 2008 Stock Incentive Plan Non-Qualified Stock Option Agreement for Directors (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.47* | Form of 2008 Stock Incentive Plan Restricted Stock Agreement for Executive Officers (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.48* | Form of 2008 Stock Incentive Plan Restricted Stock Agreement for Directors (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on May 12, 2008) | |
10.49* | Form of 2008 Stock Incentive Plan Performance-Based Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Imation’s 10-Q for the quarter ended June 30, 2010) | |
10.50* | Form of 2008 Stock Incentive Plan Stock Option Agreement for Executive Officers (3 yr vest) (incorporated by reference to Exhibit 10.6 to Imation’s Form 10-Q for the quarter ended March 31, 2011) | |
10.51* | Form of 2008 Stock Incentive Plan Performance-Based Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to Imation’s 10-Q for the quarter ended June 30, 2010) | |
10.52* | Imation Corp. 2011 Stock Incentive Plan, as amended and restated (2013) (incorporated by reference to Exhibit 4.3 to Imation’s Form S-8 Registration Statement, File No. 333-188429, filed on May 8, 2013) | |
10.53* | Form of 2011 Stock Incentive Plan Stock Option Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 to Imation’s Form 10-Q for the quarter ended March 31, 2011) | |
10.54* | Form of 2011 Stock Incentive Plan Performance Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.3 to Imation’s Form 10-Q for the quarter ended March 31, 2011) | |
10.55* | Form of 2011 Stock Incentive Plan Amendment to Performance Award Agreement for Executive Officers (pre 2013) (incorporated by reference to Exhibit 10.9 to Imation’s Form 8-K Current Report filed on November 25, 2014) | |
10.56* | Form of 2011 Stock Incentive Plan Stock Option Agreement for Directors (incorporated by reference to Exhibit 10.4 to Imation’s Form 10-Q for the quarter ended March 31, 2011) | |
10.57* | Form of 2011 Stock Incentive Plan Restricted Stock Award Agreement for Directors (incorporated by reference to Exhibit 10.5 to Imation’s Form 10-Q for the quarter ended March 31, 2011) | |
10.58* | Form of 2011 Stock Incentive Plan Amendment to Performance Based Restricted Stock Award Agreement for Executive Officers (pre 2013) (incorporated by reference to Exhibit 10.8 to Imation’s Form 8-K Current Report filed on November 25, 2014) | |
10.59* | Form of 2011 Stock Incentive Plan Amendment to Performance Based Restricted Stock Award Agreement for Executive Officers (2013) (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on November 25, 2014) | |
10.60* | Form of 2011 Stock Incentive Plan Performance Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.55 to Imation's Annual Report on Form 10-K for the year ended December 31, 2012) | |
101
Number | Description of Exhibit | |
10.61* | Form of 2011 Stock Incentive Plan Amendment to Performance Award Agreement for Executive Officers (2013) (incorporated by reference to Exhibit 10.7 to Imation’s Form 8-K Current Report filed on November 25, 2014) | |
10.62* | Form of 2011 Stock Incentive Plan, Performance-Based Cash Award Agreement for Executive Officers for 2014 (incorporated by reference to Exhibit 10.1 of Imation’s Form 8-K filed June 16, 2014) | |
10.63* | Form of 2011 Stock Incentive Plan Amendment to Performance Award Agreement for Executive Officers (2014) (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K/A Current Report filed on January 15, 2015) | |
10.64* | Form of 2011 Stock Incentive Plan Performance Based Restricted Stock Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.3 to Imation's Form 10-Q for the quarter ended June 30, 2013) | |
10.65* | Form of 2011 Stock Incentive Plan, Performance-Based Restricted Stock Award Agreement for Executive Officers for 2014 (incorporated by reference to Exhibit 10.2 of Imation’s Form 8-K Current Report filed June 16, 2014) | |
10.66* | Form of 2011 Stock Incentive Plan Amendment to Performance Based Restricted Stock Award Agreement for Executive Officers (2014) (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on November 25, 2014) | |
10.67* | Form of 2011 Stock Incentive Plan Performance Based Restricted Stock Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on November 25, 2014) | |
10.68* | Form of 2011 Stock Incentive Plan Performance Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on November 25, 2014) | |
10.69* | Imation Corp. Director Compensation Program, effective May 4, 2005 (as amended effective May 20, 2015) (incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended June 30, 2015) | |
10.70* | Form of Restricted Stock Unit Award Agreement for Directors (incorporated by Reference to Imation’s Current Report on Form 8-K dated November 19, 2015) | |
10.71* | Imation Excess Benefit Plan (incorporated by reference to Exhibit 10.10 to Registration Statement on Form 10, No. 1-14310) | |
10.72* | Employment Offer Letter from Imation Corp. to Mark E. Lucas (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on February 17, 2009) | |
10.73* | Description of 2013 Annual Bonus Plan Target Approval (incorporated by reference to Imation’s Form 8-K Current Report filed on February 13, 2013) | |
10.74* | Description of 2014 Annual Bonus Plan Target Approval (incorporated by reference to Imation's Form 8-K Current Report filed on March 14, 2014) | |
10.75* | Description of 2015 Annual Bonus Plan Target Approval (incorporated by reference to Imation's Current Report on Form 8-K filed February 13, 2015) | |
10.76* | Form of Amended and Restated Severance and Change of Control Agreement (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on November 25, 2014) | |
10.77* | Employment Agreement dated October 14, 2015, between the Company and Robert. B. Fernander (incorporated by reference to Imation’s Current Report on Form 8-K filed October 20, 2015) | |
10.78* | Separation Agreement dated August 19, 2015, between the Company and Mark E. Lucas (incorporated by reference to Exhibit 10.1 on Imation's Current Report on Form 8-K filed August 19, 2015) | |
10.79* | Separation Agreement dated September 28, 2015, between the Company and R. Ian Williams (incorporated by reference to Exhibit 10.1 on Imation's Current Report on Form 8-K filed September 29, 2015) | |
10.80* | Separation Agreement dated as of November 25, 2015, between the Company and Scott J. Robinson (incorporated by reference to Exhibit 10.1 on Imation's Current Report on Form 8-K filed November 25, 2015) | |
10.81* | Separation Agreement dated as of January 13, 2016, between the Company and John P. Breedlove (incorporated by reference to Exhibit 10.1 on Imation’s Current Report on Form 8-K dated January 13, 2016) | |
10.82* | Barrall Consulting Agreement dated August 31, 2015 (incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended September 30, 2015) | |
10.83* | Fernander Consulting Agreement dated August 17, 2015 (incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended September 30, 2015) | |
102
Number | Description of Exhibit | |
10.84* | Realization Services Inc. (RSI) Consulting Agreement dated August 17, 2015 (incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended September 30, 2015) | |
10.85* | Amendment to Realization Services Inc. Consulting Agreement dated September 16, 2015 incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended September 30, 2015) | |
10.86* | Second Amendment to Realization Services Inc. Consulting Agreement dated November 17, 2015 | |
10.87* | Third Amendment to Realization Services Inc. Consulting Agreement dated January 1, 2016 | |
21.1 | Subsidiaries of Imation Corp. | |
23.1 | Consent of Independent Registered Public Accounting Firm | |
24.1 | Power of Attorney | |
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following financial information from Imation Corp.'s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013, (ii) the Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015, 2014 and 2013, (iii) the Consolidated Balance Sheets as of December 31, 2015 and 2014, (iv) the Consolidated Statements of Shareholders' Equity for the years ended December 31, 2015, 2014 and 2013, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013, and Notes to Consolidated Financial Statements | |
_______________________________________
* Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.
** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Imation Corp. | |||
By: | /s/ ROBERT B. FERNANDER | ||
Robert B. Fernander | |||
Interim Chief Executive Officer | |||
Date: March 15, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
104
Signature | Title | Date | ||||
/s/ ROBERT B. FERNANDER | Interim Chief Executive Officer and Director (Principal Executive Officer) | March 15, 2016 | ||||
Robert B. Fernander | ||||||
/s/ BARRY L. KASOFF | Chief Restructuring Officer and Interim Chief Financial Officer (Principal Financial and Accounting Officer) | March 15, 2016 | ||||
Barry L. Kasoff | ||||||
* | Director | March 15, 2016 | ||||
Joseph De Perio | ||||||
* | Director | March 15, 2016 | ||||
Tracy McKibben | ||||||
* | Director | March 15, 2016 | ||||
Donald Putnam | ||||||
* | Director | March 15, 2016 | ||||
Robert Searing | ||||||
* | Director | March 15, 2016 | ||||
Alex Spiro | ||||||
*By: | /s/ ROBERT B. FERNANDER | |||||
Robert B. Fernander Attorney-in-fact | ||||||
105
EXHIBIT INDEX
The following exhibits are filed as part of this report:
Exhibit Number | Description of Exhibit | |
10.7 | Purchase and Sale Agreement between Imation Corp. and Larson Family Real Estate LLLP, dated December 18, 2015 | |
10.8 | First Amendment to the Purchase and Sale Agreement between Imation Corp. and Larson Family Real Estate LLLP, dated December 30, 2015 | |
10.9 | Purchase and Sale Agreement between Imation Corp. and DPI Inc., dated January 4, 2016 | |
10.86 | Second Amendment to Realization Services Inc. Consulting Agreement dated November 17, 2015 | |
10.87 | Third Amendment to Realization Services Inc. Consulting Agreement dated January 1, 2016 | |
21.1 | Subsidiaries of Imation Corp. | |
23.1 | Consent of Independent Registered Public Accounting Firm | |
24.1 | Power of Attorney | |
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following financial information from Imation Corp.'s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013, (ii) the Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015, 2014 and 2013, (iii) the Consolidated Balance Sheets as of December 31, 2015 and 2014, (iv) the Consolidated Statements of Shareholders' Equity for the years ended December 31, 2015, 2014 and 2013, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013, and Notes to Consolidated Financial Statements | |
106