##### 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 June 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 LOGO)
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
  Large accelerated filer þ
    Accelerated filer o
    Non-accelerated filer 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 Six Months Ended June 30, 2007 and 2006
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Report of Independent Registered Public Accounting Firm
    
    
    17ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    18ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    27ITEM 4. CONTROLS AND PROCEDURES
    
    
    27PART II OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    27ITEM 1A. RISK FACTORS
    
    
    28ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    28ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    29ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    29ITEM 5. OTHER INFORMATION
    
    
    29ITEM 6. EXHIBITS
    
    
    29SIGNATURE
    
    
    30EXHIBIT INDEX
    
    
    31Awareness LetterCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906




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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue
    
    $
    412.8
    
    
    $
    365.8
    
    
    $
    834.7
    
    
    $
    701.0Cost of goods sold
    
    
    340.3
    
    
    
    281.6
    
    
    
    680.4
    
    
    
    537.6Gross profit
    
    
    72.5
    
    
    
    84.2
    
    
    
    154.3
    
    
    
    163.4Operating expense:Selling, general and administrative
    
    
    44.7
    
    
    
    44.4
    
    
    
    89.9
    
    
    
    79.7Research and development
    
    
    9.6
    
    
    
    12.3
    
    
    
    22.0
    
    
    
    25.1Restructuring and other
    
    
    20.8
    
    
    
    8.9
    
    
    
    21.4
    
    
    
    10.7Total
    
    
    75.1
    
    
    
    65.6
    
    
    
    133.3
    
    
    
    115.5Operating income (loss)
    
    
    (2.6
    )
    
    
    18.6
    
    
    
    21.0
    
    
    
    47.9Other (income) and expense:Interest income
    
    
    (2.5
    )
    
    
    (2.9
    )
    
    
    (5.0
    )
    
    
    (7.6
    )Interest expense
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.4Other expense, net
    
    
    1.5
    
    
    
    2.5
    
    
    
    2.2
    
    
    
    5.6Total
    
    
    (0.7
    )
    
    
    (0.2
    )
    
    
    (2.2
    )
    
    
    (1.6
    )Income (loss) from continuing operations before income taxes
    
    
    (1.9
    )
    
    
    18.8
    
    
    
    23.2
    
    
    
    49.5Income tax provision (benefit)
    
    
    (0.5
    )
    
    
    5.9
    
    
    
    8.9
    
    
    
    17.2Income (loss) from continuing operations
    
    
    (1.4
    )
    
    
    12.9
    
    
    
    14.3
    
    
    
    32.3Gain on disposal of discontinued business, net of income taxes
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    1.2Net income (loss)
    
    $
    (1.4
    )
    
    $
    14.1
    
    
    $
    14.3
    
    
    $
    33.5Earnings (loss) per common share  basic:Continuing operations
    
    $
    (0.04
    )
    
    $
    0.37
    
    
    $
    0.41
    
    
    $
    0.93Discontinued operations
    
    $
    
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.03Net income (loss)
    
    $
    (0.04
    )
    
    $
    0.41
    
    
    $
    0.41
    
    
    $
    0.97Earnings (loss) per common share  diluted:Continuing operations
    
    $
    (0.04
    )
    
    $
    0.37
    
    
    $
    0.41
    
    
    $
    0.92Discontinued operations
    
    $
    
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.03Net income (loss)
    
    $
    (0.04
    )
    
    $
    0.40
    
    
    $
    0.41
    
    
    $
    0.95Weighted average basic shares outstanding
    
    
    34.9
    
    
    
    34.6
    
    
    
    34.9
    
    
    
    34.7Weighted average diluted shares outstanding
    
    
    34.9
    
    
    
    35.2
    
    
    
    35.3
    
    
    
    35.3Cash dividends paid per common share
    
    $
    0.16
    
    
    $
    0.14
    
    
    $
    0.30
    
    
    $
    0.26
  3




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IMATION CORP.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In millions)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    242.7
    
    
    $
    252.5Accounts receivable, net
    
    
    279.2
    
    
    
    308.1Inventories, net
    
    
    292.6
    
    
    
    258.0Other current assets
    
    
    73.5
    
    
    
    58.3Total current assets
    
    
    888.0
    
    
    
    876.9Property, plant and equipment, net
    
    
    172.2
    
    
    
    178.0Intangible assets, net
    
    
    223.2
    
    
    
    230.2Goodwill
    
    
    60.0
    
    
    
    67.6Other assets
    
    
    34.4
    
    
    
    30.2Total assets
    
    $
    1,377.8
    
    
    $
    1,382.9LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    219.6
    
    
    $
    227.3Accrued payroll
    
    
    9.5
    
    
    
    23.7Other current liabilities
    
    
    131.8
    
    
    
    140.6Total current liabilities
    
    
    360.9
    
    
    
    391.6Other liabilities
    
    
    44.6
    
    
    
    45.0Commitments and contingenciesShareholders equity
    
    
    972.3
    
    
    
    946.3Total liabilities and shareholders equity
    
    $
    1,377.8
    
    
    $
    1,382.9
  4




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IMATION CORP.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In millions)
 (Unaudited)
 Six Months EndedJune 30,2007
    
    
    2006Cash Flows from Operating Activities:Net income
    
    $
    14.3
    
    
    $
    33.5Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    21.0
    
    
    
    17.6Stock-based compensation
    
    
    7.9
    
    
    
    5.0Excess tax benefits from exercise of stock options
    
    
    (0.2
    )
    
    
    (2.7
    )Deferred income taxes
    
    
    0.8
    
    
    
    (3.1
    )Gain on sale of Specialty Papers
    
    
    
    
    
    
    (2.1
    )Non-cash restructuring and other charges
    
    
    2.8
    
    
    
    1.1Other
    
    
    1.8
    
    
    
    4.7Changes in operating assets and liabilities:Accounts receivable
    
    
    29.4
    
    
    
    10.2Inventories
    
    
    (33.1
    )
    
    
    (26.2
    )Other assets
    
    
    (3.9
    )
    
    
    7.3Accounts payable
    
    
    (8.5
    )
    
    
    4.9Accrued payroll and other liabilities
    
    
    (16.8
    )
    
    
    3.1Net cash provided by operating activities
    
    
    15.5
    
    
    
    53.3Cash Flows from Investing Activities:Acquisition of business, net of cash acquired
    
    
    5.5
    
    
    
    (331.5
    )Capital expenditures
    
    
    (9.4
    )
    
    
    (7.1
    )Purchase of investments
    
    
    (0.2
    )
    
    
    (0.2
    )Proceeds from sale of investments
    
    
    
    
    
    
    28.9Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    3.3Proceeds from sale of Specialty Papers
    
    
    
    
    
    
    2.3Net cash used in investing activities
    
    
    (4.1
    )
    
    
    (304.3
    )Cash Flows from Financing Activities:Purchase of treasury stock
    
    
    (17.8
    )
    
    
    (25.4
    )Dividend payments
    
    
    (10.5
    )
    
    
    (9.0
    )Exercise of stock options
    
    
    5.8
    
    
    
    18.2Excess tax benefits from exercise of stock options
    
    
    0.2
    
    
    
    2.7Net cash used in financing activities
    
    
    (22.3
    )
    
    
    (13.5
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1.1
    
    
    
    5.3Net change in cash and cash equivalents
    
    
    (9.8
    )
    
    
    (259.2
    )Cash and cash equivalents  beginning of period
    
    
    252.5
    
    
    
    483.0Cash and cash equivalents  end of period
    
    $
    242.7
    
    
    $
    223.8
  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
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Weighted average number of shares outstanding during the period
    
    
    34.9
    
    
    
    34.6
    
    
    
    34.9
    
    
    
    34.7Dilutive effect of stock-based compensation plans
    
    
    
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.6Weighted average number of diluted shares outstanding during the period
    
    
    34.9
    
    
    
    35.2
    
    
    
    35.3
    
    
    
    35.3
  Note 4  Stock-Based Compensation
  Stock Options
  WeightedStock
    
    
    AverageOptions
    
    
    Exercise PriceOutstanding December 31, 2006
    
    
    3,378,979
    
    
    $
    34.48Granted
    
    
    589,812
    
    
    
    37.64Exercised
    
    
    (216,621
    )
    
    
    26.83Forfeited
    
    
    (197,401
    )
    
    
    40.03Outstanding June 30, 2007
    
    
    3,554,769
    
    
    $
    35.16
  7




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##### Table of Contents



Note 5  Supplemental Balance Sheet Information
 June 30,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006(Unaudited)Accounts ReceivableAccounts receivable
    
    $
    295.2
    
    
    $
    320.9Less allowances
    
    
    (16.0
    )
    
    
    (12.8
    )Accounts receivable, net
    
    $
    279.2
    
    
    $
    308.1InventoriesFinished goods
    
    $
    237.0
    
    
    $
    217.6Work in process
    
    
    27.3
    
    
    
    19.6Raw materials and supplies
    
    
    28.3
    
    
    
    20.8Total inventories, net
    
    $
    292.6
    
    
    $
    258.0Other Current AssetsDeferred income taxes
    
    $
    36.1
    
    
    $
    26.0Other
    
    
    37.4
    
    
    
    32.3Total other current assets
    
    $
    73.5
    
    
    $
    58.3Property, Plant and EquipmentProperty, plant and equipment
    
    $
    623.4
    
    
    $
    634.7Less accumulated depreciation
    
    
    (451.2
    )
    
    
    (456.7
    )Property, plant and equipment, net
    
    $
    172.2
    
    
    $
    178.0Other AssetsDeferred income taxes
    
    $
    15.3
    
    
    $
    16.3Other
    
    
    19.1
    
    
    
    13.9Total other assets
    
    $
    34.4
    
    
    $
    30.2Other Current LiabilitiesEmployee separation costs
    
    $
    13.4
    
    
    $
    2.2Rebates
    
    
    55.0
    
    
    
    65.3Income taxes
    
    
    6.4
    
    
    
    9.7Other
    
    
    57.0
    
    
    
    63.4Total other current liabilities
    
    $
    131.8
    
    
    $
    140.6Other LiabilitiesPension
    
    $
    5.9
    
    
    $
    9.8Deferred income taxes
    
    
    8.2
    
    
    
    5.7Other
    
    
    30.5
    
    
    
    29.5Total other liabilities
    
    $
    44.6
    
    
    $
    45.0
 Note 6  Acquisition
  8




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Three Months
    
    Six MonthsEnded
    
    Ended(In millions, except per share amounts)
    
    June 30, 2006
    
    June 30, 2006Net revenue
    
    $
    398.4
    
    
    $
    845.1Income from continuing operations
    
    
    14.0
    
    
    
    25.5Net income
    
    
    15.2
    
    
    
    26.7Earnings per common share  basic:Continuing operations
    
    $
    0.40
    
    
    $
    0.73Net income
    
    $
    0.44
    
    
    $
    0.77Earnings per common share  diluted:Continuing operations
    
    $
    0.40
    
    
    $
    0.72Net income
    
    $
    0.43
    
    
    $
    0.76
  Note 7  Intangible Assets and Goodwill
  Trade
    
    
    
    
    
    
    Customer(In millions)
    
    Names
    
    
    Software
    
    
    Relationships
    
    
    Other
    
    
    TotalJune 30, 2007Cost
    
    $
    201.0
    
    
    $
    51.4
    
    
    $
    34.2
    
    
    $
    7.3
    
    
    $
    293.9Accumulated Amortization
    
    
    (7.1
    )
    
    
    (50.5
    )
    
    
    (8.3
    )
    
    
    (4.8
    )
    
    
    (70.7
    )Net
    
    $
    193.9
    
    
    $
    0.9
    
    
    $
    25.9
    
    
    $
    2.5
    
    
    $
    223.2
 9




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Trade
    
    
    
    
    
    
    Customer(In millions)
    
    Names
    
    
    Software
    
    
    Relationships
    
    
    Other
    
    
    TotalDecember 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
    
    $
    13.1
    
    
    $
    11.7
    
    
    $
    10.2
    
    
    $
    9.9
    
    
    $
    9.8
  (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
    )Other adjustments, net
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Foreign currency translation adjustment
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Balance as of June 30, 2007
    
    $
    55.6
    
    
    $
    2.6
    
    
    $
    1.8
    
    
    $
    60.0
 Note 8  Restructuring and Other
  Three Months
    
    
    Six MonthsEnded
    
    
    Ended(In millions)
    
    June 30, 2007
    
    
    June 30, 2007RestructuringSeverance and other
    
    $
    15.1
    
    
    $
    15.1Pension curtailment (Note 10)
    
    
    1.4
    
    
    
    1.4Lease termination costs
    
    
    
    
    
    
    0.416.5
    
    
    
    16.9Terminated employment agreement
    
    
    3.1
    
    
    
    3.1Asset impairments
    
    
    1.2
    
    
    
    1.4Total
    
    $
    20.8
    
    
    $
    21.4
 Restructuring
 2007 Cost Reduction Restructuring Program
  10




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Initial
    
    
    
    
    
    
    LiabilityProgram
    
    
    Cumulative
    
    
    as of(In millions)
    
    Amounts
    
    
    Usage
    
    
    June 30, 2007Severance and other
    
    $
    15.1
    
    
    $
    (1.7
    )
    
    $
    13.4
 Initial
    
    
    
    
    
    Balance as ofHeadcount
    
    Cumulative
    
    June 30,Amounts
    
    Reductions
    
    2007Total employees affected
    
    
    675
    
    
    
    (39
    )
    
    
    636
 2006 Imation and Memorex Restructuring Program
  Terminated Employment Agreement
  Asset impairments
  11




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Note 9  Comprehensive Income (Loss)
  June 30,
    
    
    December 31,(In millions)
    
    2007
    
    
    2006Cumulative currency translation adjustment
    
    $
    (62.6
    )
    
    $
    (77.5
    )Pension liability adjustments, net of income tax
    
    
    (7.1
    )
    
    
    (13.6
    )Cash flow hedging and other, net of income tax
    
    
    (1.0
    )
    
    
    (0.3
    )Total accumulated other comprehensive loss
    
    $
    (70.7
    )
    
    $
    (91.4
    )
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (1.4
    )
    
    $
    14.1
    
    
    $
    14.3
    
    
    $
    33.5Currency translation adjustment
    
    
    7.6
    
    
    
    5.6
    
    
    
    14.9
    
    
    
    8.7Pension liability adjustments, net of income taxPrior service cost
    
    
    0.3
    
    
    
    
    
    
    
    0.3
    
    
    
    Net actuarial (gain)/loss
    
    
    6.4
    
    
    
    
    
    
    
    6.4
    
    
    
    Less: amortization of costs included in net
periodic pension cost
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Cash flow hedging and other, net of income tax
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.7
    )
    
    
    0.6Total comprehensive income
    
    $
    12.8
    
    
    $
    19.7
    
    
    $
    35.0
    
    
    $
    42.8
 Note 10  Pension Plans
 Employer Contributions
  Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of
FASB Statements No. 87, 88, 106, and 132(R
 Components of Net Periodic Pension Cost
 United States
    
    
    International
    
    
    United States
    
    
    InternationalThree Months Ended June 30,
    
    
    Six Months Ended June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    1.5
    
    
    $
    2.3
    
    
    $
    0.2
    
    
    $
    0.1
    
    
    $
    3.5
    
    
    $
    4.6
    
    
    $
    0.2
    
    
    $
    0.2Interest cost
    
    
    1.9
    
    
    
    1.8
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    3.7
    
    
    
    3.6
    
    
    
    1.7
    
    
    
    1.6Expected return on plan assets
    
    
    (2.5
    )
    
    
    (2.5
    )
    
    
    (1.1
    )
    
    
    (0.8
    )
    
    
    (4.9
    )
    
    
    (5.0
    )
    
    
    (1.9
    )
    
    
    (1.6
    )Amortization of unrecognized items
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.2Net periodic pension cost
    
    $
    0.9
    
    
    $
    1.8
    
    
    $
    
    
    
    $
    0.2
    
    
    $
    2.4
    
    
    $
    3.6
    
    
    $
    0.1
    
    
    $
    0.4Curtailment
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    Total pension cost
    
    $
    2.3
    
    
    $
    1.8
    
    
    $
    
    
    
    $
    0.2
    
    
    $
    3.8
    
    
    $
    3.6
    
    
    $
    0.1
    
    
    $
    0.4
 12




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##### Table of Contents



Note 11  Derivatives and Hedging Activities
 Cash Flow Hedges
  Other Hedges
  Fair Value Disclosure
  Note 12  Business Segment Information
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net RevenueAmericas
    
    $
    229.4
    
    
    $
    185.7
    
    
    $
    444.5
    
    
    $
    328.9Europe
    
    
    126.7
    
    
    
    125.4
    
    
    
    269.4
    
    
    
    254.3Asia Pacific
    
    
    56.7
    
    
    
    54.7
    
    
    
    120.8
    
    
    
    117.8Total
    
    $
    412.8
    
    
    $
    365.8
    
    
    $
    834.7
    
    
    $
    701.0
 13




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Operating Income (Loss)Americas
    
    $
    22.1
    
    
    $
    30.0
    
    
    $
    46.6
    
    
    $
    61.5Europe
    
    
    7.9
    
    
    
    11.2
    
    
    
    19.0
    
    
    
    24.5Asia Pacific
    
    
    4.0
    
    
    
    4.0
    
    
    
    10.4
    
    
    
    9.7Corporate and unallocated
    
    
    (36.6
    )
    
    
    (26.6
    )
    
    
    (55.0
    )
    
    
    (47.8
    )Total
    
    $
    (2.6
    )
    
    $
    18.6
    
    
    $
    21.0
    
    
    $
    47.9
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net RevenueMagnetic
    
    $
    150.4
    
    
    $
    156.1
    
    
    $
    312.8
    
    
    $
    332.4Optical
    
    
    192.6
    
    
    
    158.0
    
    
    
    385.3
    
    
    
    281.8Flash
    
    
    42.8
    
    
    
    28.1
    
    
    
    78.5
    
    
    
    46.6Other
    
    
    27.0
    
    
    
    23.6
    
    
    
    58.1
    
    
    
    40.2Total
    
    $
    412.8
    
    
    $
    365.8
    
    
    $
    834.7
    
    
    $
    701.0
 Note 13  Litigation, Commitments and Contingencies
    14




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##### Table of Contents



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  Subsequent Events
     15




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##### Table of Contents



Note 16  Review Report of Independent Registered Public Accounting Firm
  16




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      /s/ PricewaterhouseCoopers LLPPricewaterhouseCoopers LLP 
 17




---



##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
       Executive Summary
 Consolidated Results of Operations for the Three-Month Period Ended June 30, 2007
 
    
    Revenue of $412.8 million in the three-month period ended June 30, 2007 was up 12.8
percent over the same period last year.
    
    Operating loss of $2.6 million in the three-month period ended June 30, 2007 is compared
with operating income of $18.6 million in the same period last year.
 18




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##### Table of Contents




    
    Restructuring and other charges of $20.8 million and $8.9 million were included in
operating income (loss) for the three-month periods ended June 30, 2007 and 2006,
respectively.
    
    Diluted loss per share from continuing operations was $0.04 for the three-month period
ended June 30, 2007 compared with diluted earnings per share from continuing operations of
$0.37 for the same period last year.
 Consolidated Results of Operations for the Six-Month Period Ended June 30, 2007
 
    
    Revenue of $834.7 million in the six-month period ended June 30, 2007 was up 19.1
percent over the same period last year.
    
    Operating income of $21.0 million in the six months ended June 30, 2007 is compared with
$47.9 million of operating income in the same period last year.
    
    Restructuring and other charges of $21.4 million and $10.7 million were included in
operating income for the six-month periods ended June 30, 2007 and 2006, respectively.
    
    Diluted earnings per share from continuing operations was $0.41 for the six-month period
ended June 30, 2007 compared with diluted earnings per share from continuing operations of
$0.92 for the same period last year.
 Cash Flow/Financial Condition for the Six-Month Period Ended June 30, 2007
 
    
    Cash flow from operations totaled $15.5 million in the six-month period ended June 30,
2007.
    
    Total cash and cash equivalents were $242.7 million as of June 30, 2007, compared with
$252.5 million at year-end 2006.
    
    We repurchased approximately 470,000 shares during the first six months of 2007 for $17.8 million.
    
    Dividends of $0.14 per share and $0.16 per share were paid in March and June 2007, respectively.
 Results of Operations
 Net Revenue
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeNet revenue
    
    $
    412.8
    
    
    $
    365.8
    
    
    
    12.8
    %
    
    $
    834.7
    
    
    $
    701.0
    
    
    
    19.1
    %
  Gross Profit
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeGross profit
    
    $
    72.5
    
    
    $
    84.2
    
    
    
    -13.9
    %
    
    $
    154.3
    
    
    $
    163.4
    
    
    
    -5.6
    %Gross margin
    
    
    17.6
    %
    
    
    23.0
    %
    
    
    
    
    
    
    18.5
    %
    
    
    23.3
    %
 19




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##### Table of Contents



Selling, General and Administrative (SG&A)
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeSelling, general and administrative
    
    $
    44.7
    
    
    $
    44.4
    
    
    
    0.7
    %
    
    $
    89.9
    
    
    $
    79.7
    
    
    
    12.8
    %As a percent of revenue
    
    
    10.8
    %
    
    
    12.1
    %
    
    
    
    
    
    
    10.8
    %
    
    
    11.4
    %
   Research and Development (R&D)
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeResearch and development
    
    $
    9.6
    
    
    $
    12.3
    
    
    
    -22.0
    %
    
    $
    22.0
    
    
    $
    25.1
    
    
    
    -12.4
    %As a percent of revenue
    
    
    2.4
    %
    
    
    3.4
    %
    
    
    
    
    
    
    2.6
    %
    
    
    3.6
    %
  Restructuring and Other
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeRestructuring and other
    
    $
    20.8
    
    
    $
    8.9
    
    
    
    133.7
    %
    
    $
    21.4
    
    
    $
    10.7
    
    
    
    100.0
    %As a percent of revenue
    
    
    5.0
    %
    
    
    2.4
    %
    
    
    
    
    
    
    2.6
    %
    
    
    1.5
    %
   20




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##### Table of Contents



Operating Income (Loss)
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeOperating income (loss)
    
    $
    (2.6
    )
    
    $
    18.6
    
    
    
    -114.0
    %
    
    $
    21.0
    
    
    $
    47.9
    
    
    
    -56.2
    %As a percent of revenue
    
    
    -0.6
    %
    
    
    5.1
    %
    
    
    
    
    
    
    2.5
    %
    
    
    6.8
    %
  Performance by Business Segment
   Americas
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeNet revenue
    
    $
    229.4
    
    
    $
    185.7
    
    
    
    23.5
    %
    
    $
    444.5
    
    
    $
    328.9
    
    
    
    35.1
    %Operating income
    
    
    22.1
    
    
    
    30.0
    
    
    
    -26.3
    %
    
    
    46.6
    
    
    
    61.5
    
    
    
    -24.2
    %As a percent of revenue
    
    
    9.6
    %
    
    
    16.2
    %
    
    
    
    
    
    
    10.5
    %
    
    
    18.7
    %
  21




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##### Table of Contents



Europe
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeNet revenue
    
    $
    126.7
    
    
    $
    125.4
    
    
    
    1.0
    %
    
    $
    269.4
    
    
    $
    254.3
    
    
    
    5.9
    %Operating income
    
    
    7.9
    
    
    
    11.2
    
    
    
    -29.5
    %
    
    
    19.0
    
    
    
    24.5
    
    
    
    -22.4
    %As a percent of revenue
    
    
    6.2
    %
    
    
    8.9
    %
    
    
    
    
    
    
    7.1
    %
    
    
    9.6
    %
   Asia Pacific
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeNet revenue
    
    $
    56.7
    
    
    $
    54.7
    
    
    
    3.7
    %
    
    $
    120.8
    
    
    $
    117.8
    
    
    
    2.5
    %Operating income
    
    
    4.0
    
    
    
    4.0
    
    
    
    0.0
    %
    
    
    10.4
    
    
    
    9.7
    
    
    
    7.2
    %As a percent of revenue
    
    
    7.1
    %
    
    
    7.3
    %
    
    
    
    
    
    
    8.6
    %
    
    
    8.2
    %
   Corporate and Unallocated
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    ChangeOperating costs
    
    $
    36.6
    
    
    $
    26.6
    
    
    
    37.6
    %
    
    $
    55.0
    
    
    $
    47.8
    
    
    
    15.1
    %
  22




---



##### Table of Contents



Impact of Changes in Foreign Currency Rates
    Financial Position
      Liquidity and Capital Resources
   23




---



##### Table of Contents



24




---



##### Table of Contents



Contractual Obligations
  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.
 Subsequent Events
   25




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##### Table of Contents



Forward-Looking Statements and Risk Factors
   
    
    Our revenue for 2007 is targeted between $2.000 billion and $2.050 billion, which
represents growth of approximately 25 percent to 30 percent over 2006. While the total
revenue outlook has not changed, the relative contributions for the base business and the
TDK Recording Media Business have changed.
    
    Operating income for 2007 is targeted between $64 and $69 million. This outlook is
changed from the previous outlook of operating income between $82 million and $87 million.
    
    Diluted earnings per share is targeted between $1.13 and $1.21 for the full year 2007
and reflects increased shares outstanding due to the share issuance related to the TDK
transaction partially offset by planned share repurchase activity. This outlook is changed
from the previous outlook for diluted earnings per share between $1.41 and $1.54.
    
    Capital spending for 2007 is targeted to be approximately $15 million to $20 million.
    
    The tax rate for 2007 is anticipated in a range of 36 percent to 38 percent, absent any one-time items that may occur.
    
    Depreciation and amortization for 2007 is targeted to be approximately $45 million.
  26




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##### Table of Contents



Quantitative and Qualitative Disclosures about Market Risk
   
 Controls and Procedures.
   
 PART II. OTHER INFORMATION
 
 Legal Proceedings
   27




---



##### 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 of
    
    Average
    
    as Part of Publicly
    
    Yet Be PurchasedShares
    
    Price Paid
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    or Programs
    
    ProgramsApril 1, 2007  April 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000,000May 1, 2007  May 31, 2007
    
    
    48,830
    
    
    
    $37.91
    
    
    
    30,000
    
    
    
    4,970,000June 1, 2007  June 30, 2007
    
    
    443,400
    
    
    
    $37.69
    
    
    
    443,400
    
    
    
    4,526,600Total
    
    
    492,230
    
    
    
    $37.71
    
    
    
    473,400
    
    
    
    4,526,600
 
 (a)
    
    The purchases in this column include shares repurchased as part of our publicly
announced program and in addition includes 18,830 shares for the period May 1  May 31,
2007 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)
    
    In 1997, our Board of Directors authorized the repurchase of up to 6.0 million shares
of our common stock and in 1999 increased the authorization to a total of 10.0 million
shares. On August 4, 2004, our Board of Directors announced an increase in the
authorization for repurchase of common stock, expanding the then remaining share repurchase
authorization of 1.8 million shares as of June 30, 2004, to a total of 6.0 million shares.
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.During the three months ended June 30, 2007, we repurchased 0.5 million shares under the
latest authorization and held 8.3 million shares of treasury stock acquired at an average
price of $23.69 per share. Authorization for repurchases of an additional 4.5 million shares
remains outstanding at June 30, 2007, and such authorization has no expiration date. 28




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##### Table of Contents



Defaults upon Senior Securities.
  
 Submission of Matters to a Vote of Security Holders
   VotesDirectors
    
    Voted For
    
    WithheldCharles A. Haggerty
    
    
    27,669,900
    
    
    
    5,107,717Glen A. Taylor
    
    
    23,239,169
    
    
    
    9,538,448Daryl J. White
    
    
    27,433,278
    
    
    
    5,344,339
   
 Other Information.
  
 Exhibits.
  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
 29




---



##### Table of Contents



SIGNATURE
  Imation Corp.Date: August 3, 2007
    /s/ Paul R. ZellerPaul R. ZellerVice President and Chief Financial Officer
(duly authorized officer and principal financial officer) 30




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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
 31