##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended September 30, 2007
 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.
  Delaware
    
    41-1838504(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1 Imation WayOakdale, Minnesota
    
    55128(Address of principal executive offices)
    
    (Zip Code)
 (651) 704-4000
 Not Applicable
 
 þ o
  þ o o
 o þ




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##### 



IMATION CORP.
TABLE OF CONTENTS
 PAGEPART I
    
    FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTSCondensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Report of Independent Registered Public Accounting Firm
    
    
    20ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    21ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    31ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    31PART II
    
    OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    32ITEM 1A.
    
    RISK FACTORS
    
    
    33ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    33ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    34ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    34ITEM 5.
    
    OTHER INFORMATION
    
    
    34ITEM 6.
    
    EXHIBITS
    
    
    34SIGNATURE
    
    
    35EXHIBIT INDEX
    
    
    36Awareness LetterSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Financial Statements
 IMATION CORP.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In millions, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue
    
    $
    525.5
    
    
    $
    424.7
    
    
    $
    1,360.2
    
    
    $
    1,125.7Cost of goods sold
    
    
    439.8
    
    
    
    336.4
    
    
    
    1,120.2
    
    
    
    874.0Gross profit
    
    
    85.7
    
    
    
    88.3
    
    
    
    240.0
    
    
    
    251.7Operating
expense (income):Selling, general and administrative
    
    
    61.6
    
    
    
    47.4
    
    
    
    151.5
    
    
    
    127.1Research and development
    
    
    8.5
    
    
    
    12.6
    
    
    
    30.5
    
    
    
    37.7Restructuring and other
    
    
    (0.7
    )
    
    
    
    
    
    
    20.7
    
    
    
    10.7Total
    
    
    69.4
    
    
    
    60.0
    
    
    
    202.7
    
    
    
    175.5Operating income
    
    
    16.3
    
    
    
    28.3
    
    
    
    37.3
    
    
    
    76.2Other (income) and expense:Interest income
    
    
    (1.5
    )
    
    
    (2.2
    )
    
    
    (6.5
    )
    
    
    (9.8
    )Interest expense
    
    
    0.8
    
    
    
    0.3
    
    
    
    1.4
    
    
    
    0.7Other expense, net
    
    
    1.5
    
    
    
    0.8
    
    
    
    3.7
    
    
    
    6.4Total
    
    
    0.8
    
    
    
    (1.1
    )
    
    
    (1.4
    )
    
    
    (2.7
    )Income from continuing operations before income taxes
    
    
    15.5
    
    
    
    29.4
    
    
    
    38.7
    
    
    
    78.9Income tax provision
    
    
    6.1
    
    
    
    10.9
    
    
    
    15.0
    
    
    
    28.1Income from continuing operations
    
    
    9.4
    
    
    
    18.5
    
    
    
    23.7
    
    
    
    50.8Gain on disposal of discontinued business, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Net income
    
    $
    9.4
    
    
    $
    18.5
    
    
    $
    23.7
    
    
    $
    52.0Earnings per common share  basic:Continuing operations
    
    $
    0.24
    
    
    $
    0.54
    
    
    $
    0.65
    
    
    $
    1.47Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.03Net income
    
    $
    0.24
    
    
    $
    0.54
    
    
    $
    0.65
    
    
    $
    1.50Earnings per common share  diluted:Continuing operations
    
    $
    0.24
    
    
    $
    0.53
    
    
    $
    0.64
    
    
    $
    1.44Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.03Net income
    
    $
    0.24
    
    
    $
    0.53
    
    
    $
    0.64
    
    
    $
    1.48Weighted average basic shares outstanding
    
    
    39.4
    
    
    
    34.5
    
    
    
    36.4
    
    
    
    34.6Weighted average diluted shares outstanding
    
    
    39.7
    
    
    
    35.1
    
    
    
    36.8
    
    
    
    35.2Cash dividends paid per common share
    
    $
    0.16
    
    
    $
    0.14
    
    
    $
    0.46
    
    
    $
    0.40
  3




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##### Table of Contents



IMATION CORP.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In millions)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    133.1
    
    
    $
    252.5Accounts receivable, net
    
    
    457.0
    
    
    
    308.1Inventories, net
    
    
    377.7
    
    
    
    258.0Other current assets
    
    
    104.0
    
    
    
    58.3Total current assets
    
    
    1,071.8
    
    
    
    876.9Property, plant and equipment, net
    
    
    183.3
    
    
    
    178.0Intangible assets, net
    
    
    376.1
    
    
    
    230.2Goodwill
    
    
    130.8
    
    
    
    67.6Other assets
    
    
    30.7
    
    
    
    30.2Total assets
    
    $
    1,792.7
    
    
    $
    1,382.9LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    318.3
    
    
    $
    227.3Accrued payroll
    
    
    14.9
    
    
    
    23.7Other current liabilities
    
    
    229.8
    
    
    
    140.6Current portion of long-term debt
    
    
    10.0
    
    
    
    Total current liabilities
    
    
    573.0
    
    
    
    391.6Other liabilities
    
    
    54.4
    
    
    
    45.0Long-term debt
    
    
    23.8
    
    
    
    Commitments and contingenciesShareholders equity
    
    
    1,141.5
    
    
    
    946.3Total liabilities and shareholders equity
    
    $
    1,792.7
    
    
    $
    1,382.9
  4




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##### Table of Contents



IMATION CORP.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In millions)
 (Unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash Flows from Operating Activities:Net income
    
    $
    23.7
    
    
    $
    52.0Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    33.4
    
    
    
    28.1Stock-based compensation
    
    
    7.6
    
    
    
    8.0Excess tax benefits from exercise of stock options
    
    
    (0.2
    )
    
    
    (2.8
    )Deferred income taxes
    
    
    (2.0
    )
    
    
    (2.9
    )Gain on sale of Specialty Papers
    
    
    
    
    
    
    (2.1
    )Non-cash restructuring and other charges
    
    
    2.8
    
    
    
    1.1Other
    
    
    2.9
    
    
    
    6.7Changes in operating assets and liabilities:Accounts receivable
    
    
    2.4
    
    
    
    (7.5
    )Inventories
    
    
    (11.6
    )
    
    
    (34.6
    )Other assets
    
    
    (9.8
    )
    
    
    1.4Accounts payable
    
    
    (33.1
    )
    
    
    21.6Accrued payroll and other liabilities
    
    
    (2.7
    )
    
    
    22.9Net cash provided by operating activities
    
    
    13.4
    
    
    
    91.9Cash Flows from Investing Activities:Acquisition of businesses, net of cash acquired
    
    
    (33.0
    )
    
    
    (331.9
    )Capital expenditures
    
    
    (11.8
    )
    
    
    (12.1
    )Purchase of investments
    
    
    (0.2
    )
    
    
    (0.2
    )Proceeds from sale of investments
    
    
    
    
    
    
    28.9Proceeds from sale of Specialty Papers
    
    
    
    
    
    
    2.3Other, net
    
    
    0.1
    
    
    
    3.2Net cash used in investing activities
    
    
    (44.9
    )
    
    
    (309.8
    )Cash Flows from Financing Activities:Purchase of treasury stock
    
    
    (79.6
    )
    
    
    (35.6
    )Dividend payments
    
    
    (16.9
    )
    
    
    (13.9
    )Repayment of debt
    
    
    (3.8
    )
    
    
    Exercise of stock options
    
    
    7.5
    
    
    
    22.9Excess tax benefits from exercise of stock options
    
    
    0.2
    
    
    
    2.8Net cash used in financing activities
    
    
    (92.6
    )
    
    
    (23.8
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    4.7
    
    
    
    3.9Net change in cash and cash equivalents
    
    
    (119.4
    )
    
    
    (237.8
    )Cash and cash equivalents  beginning of period
    
    
    252.5
    
    
    
    483.0Cash and cash equivalents  end of period
    
    $
    133.1
    
    
    $
    245.2
  5




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IMATION CORP.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1  Basis of Presentation
    Note 2  Taxes
 Accounting for Uncertainty in Income Taxes
     6




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Note 3  Weighted Average Basic and Diluted Shares Outstanding
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Weighted average number of shares outstanding during the period
    
    
    39.4
    
    
    
    34.5
    
    
    
    36.4
    
    
    
    34.6Dilutive effect of stock-based compensation plans
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.6Weighted average number of diluted shares outstanding during
the period
    
    
    39.7
    
    
    
    35.1
    
    
    
    36.8
    
    
    
    35.2
  Note 4  Stock-Based Compensation
  Stock Options
  WeightedStock
    
    
    AverageOptions
    
    
    Exercise PriceOutstanding December 31, 2006
    
    
    3,378,979
    
    
    $
    34.48Granted
    
    
    596,312
    
    
    
    37.63Exercised
    
    
    (285,632
    )
    
    
    26.48Forfeited
    
    
    (394,262
    )
    
    
    38.48Outstanding September 30, 2007
    
    
    3,295,397
    
    
    $
    35.26
  7




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##### Table of Contents



Note 5  Supplemental Balance Sheet Information
 September 30,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006(Unaudited)Accounts ReceivableAccounts receivable
    
    $
    474.8
    
    
    $
    320.9Less allowances
    
    
    (17.8
    )
    
    
    (12.8
    )Accounts receivable, net
    
    $
    457.0
    
    
    $
    308.1InventoriesFinished goods
    
    $
    316.2
    
    
    $
    217.6Work in process
    
    
    32.8
    
    
    
    19.6Raw materials and supplies
    
    
    28.7
    
    
    
    20.8Total inventories, net
    
    $
    377.7
    
    
    $
    258.0Other Current AssetsDeferred income taxes
    
    $
    39.6
    
    
    $
    26.0Other
    
    
    64.4
    
    
    
    32.3Total other current assets
    
    $
    104.0
    
    
    $
    58.3Property, Plant and EquipmentProperty, plant and equipment
    
    $
    630.9
    
    
    $
    634.7Less accumulated depreciation
    
    
    (447.6
    )
    
    
    (456.7
    )Property, plant and equipment, net
    
    $
    183.3
    
    
    $
    178.0Other AssetsDeferred income taxes
    
    $
    16.9
    
    
    $
    16.3Other
    
    
    13.8
    
    
    
    13.9Total other assets
    
    $
    30.7
    
    
    $
    30.2Other Current LiabilitiesEmployee separation costs
    
    $
    17.9
    
    
    $
    2.2Rebates
    
    
    96.8
    
    
    
    65.3Income taxes
    
    
    3.3
    
    
    
    9.7Liability for cash settlement
    
    
    25.0
    
    
    
    Other
    
    
    86.8
    
    
    
    63.4Total other current liabilities
    
    $
    229.8
    
    
    $
    140.6Other LiabilitiesPension
    
    $
    6.1
    
    
    $
    9.8Deferred income taxes
    
    
    9.4
    
    
    
    5.7Other
    
    
    38.9
    
    
    
    29.5Total other liabilities
    
    $
    54.4
    
    
    $
    45.0
 8




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Note 6  Acquisitions
 2007 Acquisitions
 TDK Recording Media
        9




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(In millions)
    
    AmountCash consideration
    
    $
    29.5Cash consideration to minority interest holders
    
    
    3.9Common stock issued
    
    
    216.7Liability for cash settlement
    
    
    25.0Direct acquisition costs
    
    
    8.2Other
    
    
    5.1Total preliminary purchase price
    
    $
    288.4
  (In millions)
    
    AmountCash and cash equivalents
    
    $
    27.6Accounts receivable
    
    
    145.1Inventories
    
    
    90.1Other current assets
    
    
    14.9Property, plant and equipment
    
    
    16.3Goodwill
    
    
    38.5Intangibles
    
    
    132.1Other assets
    
    
    2.8Accounts payable
    
    
    (120.6
    )Accrued payroll
    
    
    (2.2
    )Other current liabilities
    
    
    (42.3
    )Deferred tax liability arising on acquisition
    
    
    (4.2
    )Other liabilities
    
    
    (9.7
    )$
    288.4
 Memcorp
  10




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(In millions)
    
    AmountCash consideration
    
    $
    27.3Promissory notes
    
    
    37.5Direct acquisition costs
    
    
    1.1Total preliminary purchase price
    
    $
    65.9
  (In millions)
    
    AmountInventories
    
    $
    10.9Other current liabilities
    
    
    (2.6
    )Goodwill
    
    
    32.5Intangibles
    
    
    25.1$
    65.9
   (In millions)
    
    AmountUnrestricted notes, due July 9, 2010, payable
quarterly, bearing interest of 6%
    
    $
    30.0Offset notes, payable and due January 9, 2009,
bearing interest of 6%
    
    
    3.8$
    33.8
   Goodwill and
Other Intangible Assets
  11




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2006 Acquisition
 Memorex International Inc.
      Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In millions, except per share amounts)
    
    2007
    
    2006
    
    2007
    
    2006Net revenue
    
    $
    581.4
    
    
    $
    645.5
    
    
    $
    1,790.7
    
    
    $
    1,893.8Income from continuing operations
    
    
    7.6
    
    
    
    25.5
    
    
    
    15.8
    
    
    
    57.4Net income
    
    
    7.6
    
    
    
    26.7
    
    
    
    15.8
    
    
    
    58.6Earnings per common share  basic:Continuing operations
    
    $
    0.19
    
    
    $
    0.62
    
    
    $
    0.39
    
    
    $
    1.39Net income
    
    $
    0.19
    
    
    $
    0.65
    
    
    $
    0.39
    
    
    $
    1.42Earnings per common share  diluted:Continuing operations
    
    $
    0.19
    
    
    $
    0.61
    
    
    $
    0.38
    
    
    $
    1.37Net income
    
    $
    0.19
    
    
    $
    0.64
    
    
    $
    0.38
    
    
    $
    1.40
  12




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Note 7  Intangible Assets and Goodwill
  Trade
    
    
    
    
    
    
    Customer(In millions)
    
    Names
    
    
    Software
    
    
    Relationships
    
    
    Other
    
    
    TotalSeptember 30, 2007Cost
    
    $
    329.9
    
    
    $
    53.8
    
    
    $
    60.2
    
    
    $
    9.1
    
    
    $
    453.0Accumulated Amortization
    
    
    (9.9
    )
    
    
    (51.5
    )
    
    
    (10.0
    )
    
    
    (5.5
    )
    
    
    (76.9
    )Net
    
    $
    320.0
    
    
    $
    2.3
    
    
    $
    50.2
    
    
    $
    3.6
    
    
    $
    376.1December 31, 2006Cost
    
    $
    200.9
    
    
    $
    51.7
    
    
    $
    34.2
    
    
    $
    7.3
    
    
    $
    294.1Accumulated Amortization
    
    
    (4.2
    )
    
    
    (50.0
    )
    
    
    (5.7
    )
    
    
    (4.0
    )
    
    
    (63.9
    )Net
    
    $
    196.7
    
    
    $
    1.7
    
    
    $
    28.5
    
    
    $
    3.3
    
    
    $
    230.2
  (In millions)
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012Amortization expense
    
    $
    22.5
    
    
    $
    20.9
    
    
    $
    19.7
    
    
    $
    19.2
    
    
    $
    19.1
  Weighted
    
    
    TDK
    
    
    WeightedAverage
    
    
    Recording
    
    
    Average(In millions)
    
    Memcorp
    
    
    Life
    
    
    Media
    
    
    LifeTradename license
    
    $
    13.7
    
    
    12 years
    
    $
    115.0
    
    
    30 yearsCustomer relationships
    
    
    10.0
    
    
    6 years
    
    
    16.0
    
    
    6 yearsOther
    
    
    1.4
    
    
    3 years
    
    
    1.1
    
    
    18 monthsIdentifiable
intangible assets
acquired
    
    $
    25.1
    
    
    
    
    
    
    $
    132.1
   (In millions)
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    TotalBalance as of December 31, 2006
    
    $
    63.3
    
    
    $
    2.5
    
    
    $
    1.8
    
    
    $
    67.6Memorex post-closing purchase price adjustments
    
    
    (7.9
    )
    
    
    
    
    
    
    
    
    
    
    (7.9
    )Memcorp acquisition
    
    
    32.5
    
    
    
    
    
    
    
    
    
    
    
    32.5TDK Recording Media acquisition (1)
    
    
    10.7
    
    
    
    17.8
    
    
    
    10.0
    
    
    
    38.5Other adjustments, net
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Foreign currency translation adjustment
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Balance as of September 30, 2007
    
    $
    98.8
    
    
    $
    20.2
    
    
    $
    11.8
    
    
    $
    130.8
 
 (1)
    
    Preliminary allocation of TDK Recording Media goodwill in the respective regions was based on
preliminary purchase price
allocation. 13




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Note 8  Restructuring and Other
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September(In millions)
    
    2007
    
    
    30, 2007RestructuringSeverance and other
    
    $
    2.9
    
    
    $
    18.0Pension curtailment (Note 10)
    
    
    
    
    
    
    1.4Lease termination costs
    
    
    0.2
    
    
    
    0.6Total restructuring
    
    
    3.1
    
    
    
    20.0Terminated employment agreement
    
    
    (3.8
    )
    
    
    (0.7
    )Asset impairments
    
    
    
    
    
    
    1.4Total
    
    $
    (0.7
    )
    
    $
    20.7
 Restructuring
 2007 Cost Reduction Restructuring Program
    14




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LiabilityInitial
    
    
    Adjustments
    
    
    
    
    
    
    as ofProgram
    
    
    to Initial
    
    
    Cumulative
    
    
    September 30,(In millions)
    
    Amounts
    
    
    Amounts
    
    
    Usage
    
    
    2007Severance and other
    
    $
    15.1
    
    
    $
    2.9
    
    
    $
    (2.7
    )
    
    $
    15.3
 Initial
    
    
    
    
    
    
    
    
    
    Balance as ofHeadcount
    
    
    
    
    
    Cumulative
    
    September 30,Amounts
    
    Additions
    
    Reductions
    
    2007Total employees affected
    
    
    675
    
    
    
    64
    
    
    
    (98
    )
    
    
    641
 TDK Restructuring Costs
  LiabilityInitial
    
    
    
    
    
    
    as ofProgram
    
    
    Cumulative
    
    
    September 30,(In millions)
    
    Amounts
    
    
    Usage
    
    
    2007Severance and other
    
    $
    2.6
    
    
    $
    
    
    
    $
    2.6
 Initial
    
    
    
    
    
    Balance as ofHeadcount
    
    Cumulative
    
    September 30,Amounts
    
    Reductions
    
    2007Total employees affected
    
    
    162
    
    
    
    
    
    
    
    162
 2006 Imation and Memorex Restructuring Program
  Terminated Employment Agreement
   Asset impairments
  15




---



##### Table of Contents



Note 9  Comprehensive Income (Loss)
  September 30,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006Cumulative currency translation adjustment
    
    $
    (51.6
    )
    
    $
    (77.5
    )Pension liability adjustments, net of income tax
    
    
    (9.2
    )
    
    
    (13.6
    )Cash flow hedging and other, net of income tax
    
    
    (0.8
    )
    
    
    (0.3
    )Total accumulated other
comprehensive loss
    
    $
    (61.6
    )
    
    $
    (91.4
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    9.4
    
    
    $
    18.5
    
    
    $
    23.7
    
    
    $
    52.0Currency translation adjustment
    
    
    11.0
    
    
    
    (1.8
    )
    
    
    25.9
    
    
    
    6.9Pension liability adjustments, net of income taxPrior service cost
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    Net actuarial (gain)/loss
    
    
    (2.1
    )
    
    
    
    
    
    
    4.3
    
    
    
    Less: amortization of costs included in net
periodic pension cost
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    Cash flow hedging and other, net of income tax
    
    
    0.2
    
    
    
    0.4
    
    
    
    (0.5
    )
    
    
    1.0Total comprehensive income
    
    $
    18.5
    
    
    $
    17.1
    
    
    $
    53.5
    
    
    $
    59.9
 Note 10  Pension Plans
 Employer Contributions
  U.S.
Pension Plan Curtailment and Settlement
 Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans (SFAS 158)  an amendment of FASB Statements No. 87,
88, 106, and 132(R)
 Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits
  16




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##### Table of Contents



Components of Net Periodic Pension Cost
 United States
    
    
    International
    
    
    United States
    
    
    InternationalThree Months Ended September 30,
    
    
    Nine Months Ended September 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    1.6
    
    
    $
    2.3
    
    
    $
    0.1
    
    
    $
    0.2
    
    
    $
    5.1
    
    
    $
    6.9
    
    
    $
    0.3
    
    
    $
    0.4Interest cost
    
    
    1.9
    
    
    
    1.8
    
    
    
    0.9
    
    
    
    0.9
    
    
    
    5.6
    
    
    
    5.4
    
    
    
    2.6
    
    
    
    2.5Expected return on plan assets
    
    
    (2.5
    )
    
    
    (2.4
    )
    
    
    (1.0
    )
    
    
    (1.0
    )
    
    
    (7.4
    )
    
    
    (7.4
    )
    
    
    (2.9
    )
    
    
    (2.6
    )Amortization of unrecognized items
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.2
    
    
    
    0.3Net periodic pension cost
    
    $
    1.0
    
    
    $
    1.8
    
    
    $
    0.1
    
    
    $
    0.2
    
    
    $
    3.4
    
    
    $
    5.4
    
    
    $
    0.2
    
    
    $
    0.6Curtailment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    Settlement loss
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    Total pension cost
    
    $
    1.7
    
    
    $
    1.8
    
    
    $
    0.1
    
    
    $
    0.2
    
    
    $
    5.5
    
    
    $
    5.4
    
    
    $
    0.2
    
    
    $
    0.6
  Note 11  Derivatives and Hedging Activities
 Cash Flow Hedges
  Other Hedges
  Fair Value Disclosure
  Note 12  Business Segment Information
  17




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net RevenueAmericas
    
    $
    288.5
    
    
    $
    248.1
    
    
    $
    733.0
    
    
    $
    577.0Europe
    
    
    152.4
    
    
    
    125.2
    
    
    
    421.8
    
    
    
    379.5Asia Pacific
    
    
    84.6
    
    
    
    51.4
    
    
    
    205.4
    
    
    
    169.2Total
    
    $
    525.5
    
    
    $
    424.7
    
    
    $
    1,360.2
    
    
    $
    1,125.7Operating Income (Loss)Americas
    
    $
    14.6
    
    
    $
    31.4
    
    
    $
    61.2
    
    
    $
    92.9Europe
    
    
    10.8
    
    
    
    11.2
    
    
    
    29.8
    
    
    
    35.7Asia Pacific
    
    
    4.4
    
    
    
    3.7
    
    
    
    14.8
    
    
    
    13.4Corporate and unallocated
    
    
    (13.5
    )
    
    
    (18.0
    )
    
    
    (68.5
    )
    
    
    (65.8
    )Total
    
    $
    16.3
    
    
    $
    28.3
    
    
    $
    37.3
    
    
    $
    76.2
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net RevenueMagnetic
    
    $
    177.6
    
    
    $
    161.0
    
    
    $
    490.4
    
    
    $
    493.4Optical
    
    
    234.3
    
    
    
    191.2
    
    
    
    619.6
    
    
    
    473.0Flash
    
    
    39.2
    
    
    
    46.1
    
    
    
    117.7
    
    
    
    92.7Electronic Products,
Accessories & Other
    
    
    74.4
    
    
    
    26.4
    
    
    
    132.5
    
    
    
    66.6Total
    
    $
    525.5
    
    
    $
    424.7
    
    
    $
    1,360.2
    
    
    $
    1,125.7
 Note 13  Litigation, Commitments and Contingencies
   18




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##### Table of Contents



Philips litigation
   SanDisk litigation
     Note 14  Recent Accounting Pronouncements
 Fair Value Measurement,
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment to FAS 115.
 Note 15  Review Report of Independent Registered Public Accounting Firm
  19




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      /s/ PricewaterhouseCoopers LLPPricewaterhouseCoopers LLP 
 20




---



##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
         21




---



##### Table of Contents



Factors Affecting Comparability of our Financial Results
    Executive Summary
 Consolidated Results of Operations for the Three-Month Period Ended September 30, 2007
 
    
    Revenue of $525.5 million, including revenue of $140.6 million from the acquired TDK
Recording Media and Memcorp businesses, in the three-month period ended September 30, 2007,
increased 23.7 percent over the same period last year.
    
    Operating income of $16.3 million in the three-month period ended September 30, 2007 is
compared with operating income of $28.3 million in the same period last year.
    
    Diluted earnings per share of $0.24 for the three-month period ended September 30,
2007 is compared with diluted earnings per share of $0.53 for the same period last year.
 Consolidated Results of Operations for the Nine-Month Period Ended September 30, 2007
 
    
    Revenue of $1,360.2 million, including revenue of $140.6 million from the acquired TDK
Recording Media and Memcorp businesses, in the nine-month period ended September 30, 2007,
was up 20.8 percent over the same period last year.
    
    Operating income of $37.3 million in the nine-month period ended September 30, 2007 is
compared with $76.2 million of operating income in the same period last year.
    
    Restructuring and other charges of $20.7 million and $10.7 million were included in
operating income for the nine-month periods ended September 30, 2007 and 2006,
respectively.
    
    Diluted earnings per share from continuing operations of $0.64 for the nine-month
period ended September 30, 2007 is compared with diluted earnings per share from continuing
operations of $1.44 for the same period last year.
 22




---



##### Table of Contents



Cash Flow/Financial Condition for the Nine-Month Period Ended September 30, 2007
 
    
    Cash flow from operations totaled $13.4 million in the nine-month period ended September
30, 2007.
    
    Total cash and cash equivalents were $133.1 million as of September 30, 2007, compared
with $252.5 million at year-end 2006. The reduction of $119.4 million is mainly due to
share repurchase activity of $79.6 million and payments associated with the acquisitions of
the TDK Recording Media and Memcorp businesses of $42.3 million.
    
    We issued approximately 6.8 million common shares during the third quarter of 2007 to
TDK in connection with the TDK Recording Media acquisition.
    
    We repurchased approximately 2.5 million shares during the first nine months of 2007 for
$79.6 million.
    
    We paid dividends of $0.14 per share in March 2007 and dividends of $0.16 per share in
June and September 2007.
 Results of Operations
 Net Revenue
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeNet revenue
    
    $
    525.5
    
    
    $
    424.7
    
    
    
    23.7
    %
    
    $
    1,360.2
    
    
    $
    1,125.7
    
    
    
    20.8
    %
  Gross Profit
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeGross profit
    
    $
    85.7
    
    
    $
    88.3
    
    
    
    -2.9
    %
    
    $
    240.0
    
    
    $
    251.7
    
    
    
    -4.6
    %Gross margin
    
    
    16.3
    %
    
    
    20.8
    %
    
    
    
    
    
    
    17.6
    %
    
    
    22.4
    %
  23




---



##### Table of Contents



Selling, General and Administrative (SG&A)
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeSelling, general and
administrative
    
    $
    61.6
    
    
    $
    47.4
    
    
    
    30.0
    %
    
    $
    151.5
    
    
    $
    127.1
    
    
    
    19.2
    %As a percent of revenue
    
    
    11.7
    %
    
    
    11.1
    %
    
    
    
    
    
    
    11.1
    %
    
    
    11.3
    %
  Research and Development (R&D)
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeResearch and development
    
    $
    8.5
    
    
    $
    12.6
    
    
    
    -32.5
    %
    
    $
    30.5
    
    
    $
    37.7
    
    
    
    -19.1
    %As a percent of revenue
    
    
    1.6
    %
    
    
    3.0
    %
    
    
    
    
    
    
    2.2
    %
    
    
    3.3
    %
  Restructuring and Other
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeRestructuring and other
    
    $
    (0.7
    )
    
    $
    
    
    
    n/m
    
    $
    20.7
    
    
    $
    10.7
    
    
    
    93.5
    %As a percent of revenue
    
    
    -0.1
    %
    
    
    n/m
    
    
    
    
    
    
    
    1.5
    %
    
    
    1.0
    %
 
     24




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##### Table of Contents



Operating Income
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeOperating income
    
    $
    16.3
    
    
    $
    28.3
    
    
    
    -42.4
    %
    
    $
    37.3
    
    
    $
    76.2
    
    
    
    -51.0
    %As a percent of revenue
    
    
    3.1
    %
    
    
    6.7
    %
    
    
    
    
    
    
    2.7
    %
    
    
    6.8
    %
  Performance by Business Segment
   Americas
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeNet revenue
    
    $
    288.5
    
    
    $
    248.1
    
    
    
    16.3
    %
    
    $
    733.0
    
    
    $
    577.0
    
    
    
    27.0
    %Operating income
    
    
    14.6
    
    
    
    31.4
    
    
    
    -53.5
    %
    
    
    61.2
    
    
    
    92.9
    
    
    
    -34.1
    %As a percent of revenue
    
    
    5.1
    %
    
    
    12.7
    %
    
    
    
    
    
    
    8.3
    %
    
    
    16.1
    %
   25




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##### Table of Contents



Europe
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeNet revenue
    
    $
    152.4
    
    
    $
    125.2
    
    
    
    21.7
    %
    
    $
    421.8
    
    
    $
    379.5
    
    
    
    11.1
    %Operating income
    
    
    10.8
    
    
    
    11.2
    
    
    
    -3.6
    %
    
    
    29.8
    
    
    
    35.7
    
    
    
    -16.5
    %As a percent of revenue
    
    
    7.1
    %
    
    
    8.9
    %
    
    
    
    
    
    
    7.1
    %
    
    
    9.4
    %
   Asia Pacific
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeNet revenue
    
    $
    84.6
    
    
    $
    51.4
    
    
    
    64.6
    %
    
    $
    205.4
    
    
    $
    169.2
    
    
    
    21.4
    %Operating income
    
    
    4.4
    
    
    
    3.7
    
    
    
    18.9
    %
    
    
    14.8
    
    
    
    13.4
    
    
    
    10.4
    %As a percent of revenue
    
    
    5.2
    %
    
    
    7.2
    %
    
    
    
    
    
    
    7.2
    %
    
    
    7.9
    %
   Corporate and Unallocated
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeOperating costs
    
    $
    13.5
    
    
    $
    18.0
    
    
    
    -25.0
    %
    
    $
    68.5
    
    
    $
    65.8
    
    
    
    4.1
    %
  26




---



##### Table of Contents



Impact of Changes in Foreign Currency Rates
    Financial Position
          27




---



##### Table of Contents



Liquidity and Capital Resources
       28




---



##### Table of Contents



Contractual Obligations
   Payments due by period1-3 years
    
    
    3-5 yearsRemaining
    
    
    (2008
    
    
    (2011
    
    
    More than3 months
    
    
    through
    
    
    through
    
    
    5 years(In millions)
    
    Total
    
    
    of 2007
    
    
    2010)
    
    
    2013)
    
    
    (2014+)Notes payable (1)
    
    $
    33.8
    
    
    $
    2.5
    
    
    $
    31.3
    
    
    $
    
    
    
    $
    Operating leases
    
    
    5.9
    
    
    
    2.6
    
    
    
    3.1
    
    
    
    0.2
    
    
    
    Purchase obligations (2)
    
    
    3.6
    
    
    
    0.9
    
    
    
    2.7
    
    
    
    
    
    
    
    Other liabilities (3)
    
    
    38.1
    
    
    
    30.9
    
    
    
    7.1
    
    
    
    0.1
    
    
    
    Total
    
    $
    81.4
    
    
    $
    36.9
    
    
    $
    44.2
    
    
    $
    0.3
    
    
    $
    
 
 (1)
    
    Additional interest payments from the debt include approximately $0.4 million which will be
paid in the fourth quarter of 2007, and $1.4 million, $1.2 million and $0.2 million which will
be paid in 2008, 2009 and 2010, respectively. 29




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##### Table of Contents



(2)
    
    The majority of the purchase obligations consist of 90-day rolling estimates. Each month, we
provide various suppliers with rolling forecasts of our demand for products for the next three
months. The forecasted amounts are generally binding on us as follows: 100 percent for the
first month, 75 percent for the second month and 50 percent for the third month.(3)
    
    We are contractually obligated to repay approximately $25 million for acquired cash with the
TDK Recording Media acquisition which will be paid in the fourth quarter of 2007. Critical Accounting Policies and Estimates
  Adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty
in Income Taxes
 Accounting for Uncertainty in Income Taxes
 Recently Issued Accounting Standards
 Fair Value Measurement,
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment to FAS 115.
 Forward-Looking Statements and Risk Factors
   
    
    Our revenue for 2007 is targeted between $2.00 billion and $2.05 billion, which
represents growth of approximately 25 percent to 30 percent over 2006. As a result, revenue
in the fourth quarter would range between $640 million and $690 million.
    
    Full year 2007 operating income is targeted between
$55 million and $60 million
including restructuring and other charges of approximately $26 million. This outlook is changed from
the previous outlook of operating income between $51 million and
$56 million and
restructuring and other charges of approximately $30 million. Operating income for the fourth
quarter is estimated between $17.5 million and
$22.5 million including restructuring and other
charges of approximately $5.5 million.
 30




---



##### Table of Contents




    
    Diluted earnings per share for full year 2007 is targeted
between $0.92 and $1.02, which
includes the negative impact of $0.45 from restructuring and other charges. This is changed
from the previous outlook of diluted earnings per share of between
$0.86 and $0.96. Diluted
earnings per share for the fourth quarter is targeted between $0.28 and $0.38, which
includes the negative impact of approximately $0.09 from restructuring and other charges.
    
    Capital spending for 2007 is targeted to be approximately $15 million to $18 million.
    
    The tax rate for 2007 is anticipated in a range of 37 percent to 38 percent.
    
    Depreciation and amortization expense for 2007 is targeted between $45 million and
$47 million.
  
 Quantitative and Qualitative Disclosures about Market Risk
   
 Controls and Procedures.
  31




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Legal Proceedings
       32




---



##### Table of Contents



Risk Factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds.
    (c)
    
    
    (d)Total Number of
    
    
    Maximum Number(a)
    
    
    (b)
    
    
    Shares Purchased
    
    
    of Shares that MayTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    Yet Be Purchasedof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    ProgramsJuly 1, 2007 - July 31, 2007
    
    
    396,090
    
    
    $
    35.04
    
    
    
    396,000
    
    
    
    4,130,600August 1, 2007 - August 31, 2007
    
    
    760,000
    
    
    $
    30.59
    
    
    
    760,000
    
    
    
    3,370,600September 1, 2007 - September
30, 2007
    
    
    909,724
    
    
    $
    27.07
    
    
    
    909,601
    
    
    
    2,460,999Total
    
    
    2,065,814
    
    
    $
    29.89
    
    
    
    1,669,601
    
    
    
    2,460,999
 
 (a)
    
    The purchases in this column include shares repurchased as part of our publicly
announced program and in addition include 213 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 includes shares repurchased as part of
our publicly announced program and 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)
    
    The number of shares in this column represents the number of shares repurchased
as part of publicly announced programs to repurchase up to 5.0 million shares of our
common stock.(d)
    
    On April 19, 2007, our Board of Directors announced the authorization of the
repurchase of 5.0 million shares of common stock. The previous share repurchase
program, which had a remaining share repurchase authorization of 2.4 million shares,
was cancelled and replaced with the new authorization. As of September 30, 2007, we
have repurchased 2.5 million shares under the latest
authorization at an average price of $31.35 per share and held 3.5 million
shares of treasury stock.
Authorization for repurchases of an additional 2.5 million shares remains outstanding
at September 30, 2007, and such authorization has no expiration date. 
 33




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##### Table of Contents



Defaults Upon Senior Securities.
  
 Submission of Matters to a Vote of Security Holders
  
 Other Information.
  
 Exhibits.
  ExhibitNumber
    
    Description of Exhibit4.1
    
    First Amendment to Rights Agreement, dated as of July 30, 2007 (incorporated by reference to
Exhibit 4.3 to Imations Registration Statement on Form 8-A/A filed on August 1, 2007).10.1
    
    Amendment to the Credit Agreement between Imation Corp. and Consortium of Lenders dated
as of July 24, 2007 (incorporated by reference to Exhibit 10.1 to Imations Form 8-K Current Report
filed July 30, 2007).10.2
    
    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 August 3,
2007).10.3*
    
    Trademark License Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation
(incorporated by reference to Exhibit 10.2 to Imations Form 8-K Current Report filed August 3,
2007).10.4*
    
    IMN Trademark License Agreement, dated July 31, 2007, by and between IMN Data Storage Holdings C.V.
and TDK Corporation (incorporated by reference to Exhibit 10.3 to Imations Form 8-K Current Report
filed August 3, 2007).10.5*
    
    Supply Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation
(incorporated
by reference to Exhibit 10.4 to Imations Form 8-K Current Report filed August 3, 2007).15.1
    
    An awareness letter from the Companys independent registered public accounting firm
regarding unaudited interim financial statements.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.
 
 *
    
    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 . 34




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##### Table of Contents



SIGNATURE
  Imation Corp.Date: November 9, 2007
    /s/ Paul R. ZellerPaul R. ZellerVice President and Chief Financial Officer 
(duly authorized officer and principal financial officer) 35




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber
    
    Description of Exhibit15.1
    
    An awareness letter from the Companys independent registered public
accounting firm regarding unaudited interim financial statements31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 36