UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark
One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 1-14310
 
 
 IMATION CORP.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    41-1838504
(I.R.S. Employer
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
(Do not check if a smaller reporting company)
    
    Smaller reporting company 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, 2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Report of Independent Registered Public Accounting Firm
    
    
    22ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    23ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    36ITEM 4. CONTROLS AND PROCEDURES
    
    
    36PART II OTHER INFORMATION
    
    
    36ITEM 1. LEGAL PROCEEDINGS
    
    
    36ITEM 1A. RISK FACTORS
    
    
    37ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    39ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    39ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    39ITEM 5. OTHER INFORMATION
    
    
    39ITEM 6. EXHIBITS
    
    
    39SIGNATURE
    
    
    40EXHIBIT INDEX
    
    
    41




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##### 



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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue
    
    $
    527.5
    
    
    $
    525.5
    
    
    $
    1,605.4
    
    
    $
    1,360.2Cost of goods sold
    
    
    445.9
    
    
    
    439.8
    
    
    
    1,330.2
    
    
    
    1,120.2Gross profit
    
    
    81.6
    
    
    
    85.7
    
    
    
    275.2
    
    
    
    240.0Selling, general and administrative expense
    
    
    70.4
    
    
    
    61.6
    
    
    
    215.0
    
    
    
    151.5Research and development expense
    
    
    5.6
    
    
    
    8.5
    
    
    
    18.2
    
    
    
    30.5Restructuring and other expense
    
    
    14.3
    
    
    
    (0.7
    )
    
    
    19.0
    
    
    
    20.7Total
    
    
    90.3
    
    
    
    69.4
    
    
    
    252.2
    
    
    
    202.7Operating (loss) income
    
    
    (8.7
    )
    
    
    16.3
    
    
    
    23.0
    
    
    
    37.3Other (income) and expenseInterest income
    
    
    (0.9
    )
    
    
    (1.5
    )
    
    
    (2.5
    )
    
    
    (6.5
    )Interest expense
    
    
    0.3
    
    
    
    0.8
    
    
    
    1.3
    
    
    
    1.4Other expense, net
    
    
    2.8
    
    
    
    1.5
    
    
    
    6.2
    
    
    
    3.7Total
    
    
    2.2
    
    
    
    0.8
    
    
    
    5.0
    
    
    
    (1.4
    )(Loss) income before income taxes
    
    
    (10.9
    )
    
    
    15.5
    
    
    
    18.0
    
    
    
    38.7Income tax (benefit) provision
    
    
    (5.0
    )
    
    
    6.1
    
    
    
    5.7
    
    
    
    15.0Net (loss) income
    
    $
    (5.9
    )
    
    $
    9.4
    
    
    $
    12.3
    
    
    $
    23.7(Loss) earnings per common shareBasic
    
    $
    (0.16
    )
    
    $
    0.24
    
    
    $
    0.33
    
    
    $
    0.65Diluted
    
    
    (0.16
    )
    
    
    0.24
    
    
    
    0.33
    
    
    
    0.64Weighted average shares outstandingBasic
    
    
    37.3
    
    
    
    39.4
    
    
    
    37.5
    
    
    
    36.4Diluted
    
    
    37.3
    
    
    
    39.7
    
    
    
    37.6
    
    
    
    36.8Cash dividend paid per common share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.48
    
    
    $
    0.46
  3




---



##### 



IMATION CORP.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    112.8
    
    
    $
    135.5Accounts receivable, net
    
    
    354.7
    
    
    
    507.1Inventories, net
    
    
    364.7
    
    
    
    366.1Other current assets
    
    
    141.3
    
    
    
    109.9Total current assets
    
    
    973.5
    
    
    
    1,118.6Property, plant and equipment, net
    
    
    137.9
    
    
    
    171.5Intangible assets, net
    
    
    359.4
    
    
    
    371.0Goodwill
    
    
    59.5
    
    
    
    55.5Other assets
    
    
    36.7
    
    
    
    34.4Total assets
    
    $
    1,567.0
    
    
    $
    1,751.0LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    296.6
    
    
    $
    350.1Accrued payroll
    
    
    15.3
    
    
    
    13.5Other current liabilities
    
    
    180.1
    
    
    
    257.3Current maturities of long-term debt
    
    
    
    
    
    
    10.0Total current liabilities
    
    
    492.0
    
    
    
    630.9Other liabilities
    
    
    56.1
    
    
    
    45.0Long-term debt, less current maturities
    
    
    
    
    
    
    21.3Commitments and contingenciesShareholders equity
    
    
    1,018.9
    
    
    
    1,053.8Total liabilities and shareholders equity
    
    $
    1,567.0
    
    
    $
    1,751.0
  4




---



##### 



IMATION CORP.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash Flows from Operating Activities:Net income
    
    $
    12.3
    
    
    $
    23.7Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    38.7
    
    
    
    33.4Stock-based compensation
    
    
    7.0
    
    
    
    7.6Excess tax benefits from exercise of stock options
    
    
    
    
    
    
    (0.2
    )Deferred income taxes
    
    
    5.0
    
    
    
    (2.0
    )Non-cash restructuring and other charges
    
    
    9.2
    
    
    
    2.8Other
    
    
    1.0
    
    
    
    2.9Changes in operating assets and liabilities:Accounts receivable
    
    
    148.5
    
    
    
    2.4Inventories
    
    
    0.4
    
    
    
    (11.6
    )Other assets
    
    
    (15.7
    )
    
    
    (9.8
    )Accounts payable
    
    
    (55.9
    )
    
    
    (33.1
    )Accrued payroll and other liabilities
    
    
    (64.0
    )
    
    
    (2.7
    )Net cash provided by operating activities
    
    
    86.5
    
    
    
    13.4Cash Flows from Investing Activities:Acquisitions, net of cash acquired
    
    
    (15.0
    )
    
    
    (33.0
    )Acquisition of minority interest
    
    
    (8.0
    )
    
    
    Capital expenditures
    
    
    (9.7
    )
    
    
    (11.8
    )Other, net
    
    
    0.1
    
    
    
    (0.1
    )Net cash used in investing activities
    
    
    (32.6
    )
    
    
    (44.9
    )Cash Flows from Financing Activities:Debt repayment
    
    
    (31.3
    )
    
    
    (3.8
    )Purchase of treasury stock
    
    
    (26.4
    )
    
    
    (79.6
    )Dividend payments
    
    
    (17.9
    )
    
    
    (16.9
    )Exercise of stock options
    
    
    0.6
    
    
    
    7.5Excess tax benefits from exercise of stock options
    
    
    
    
    
    
    0.2Net cash used in financing activities
    
    
    (75.0
    )
    
    
    (92.6
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1.6
    )
    
    
    4.7Net change in cash and cash equivalents
    
    
    (22.7
    )
    
    
    (119.4
    )Cash and cash equivalents  beginning of period
    
    
    135.5
    
    
    
    252.5Cash and cash equivalents  end of period
    
    $
    112.8
    
    
    $
    133.1
  5




---



##### 



IMATION CORP.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1  Basis of Presentation
    Note 2  Weighted Average Basic and Diluted Shares Outstanding
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average number of shares outstanding during the period
    
    
    37.3
    
    
    
    39.4
    
    
    
    37.5
    
    
    
    36.4Dilutive effect of stock-based compensation plans
    
    
    
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.4Weighted average number of diluted shares outstanding during the period
    
    
    37.3
    
    
    
    39.7
    
    
    
    37.6
    
    
    
    36.8
  Note 3  Fair Value Measurements
 Fair Value Measurements
 6




---



##### 



Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13 Effective Date of FASB Statement No. 157 Accounting for Leases
    Quoted prices inactive markets
    
    
    Significant otherfor identical
    
    
    observable
    
    
    UnobservableSeptember 30,
    
    
    assets
    
    
    inputs
    
    
    inputs(In millions)
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Derivative assets
    
    $
    1.3
    
    
    $
    1.3
    
    
    $
    
    
    
    $
    Derivative liabilities
    
    
    (0.3
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    Total
    
    $
    1.0
    
    
    $
    1.0
    
    
    $
    
    
    
    $
    
  Note 4  Business Combinations
 Xtreme Accessories, LLC
   (In millions)
    
    AmountInventory
    
    $
    1.4Accounts receivable
    
    
    0.1Fixed assets
    
    
    0.2Intangibles
    
    
    4.6Goodwill
    
    
    5.0Accounts payable
    
    
    (4.0
    )$
    7.3
 7




---



##### 



WeightedAverage(In millions)
    
    Amount
    
    
    LifeTrade names
    
    $
    2.1
    
    

    10 yearsIntellectual property
    
    
    1.3
    
    

    6 yearsCustomer relationships
    
    
    0.9
    
    

    7 yearsNon-compete
    
    
    0.3
    
    

    3 years$
    4.6
  Imation Corporation Japan
 Consolidated Financial Statements
  (In millions)
    
    AmountCash consideration
    
    $
    8.0Interest acquired in historical book value of ICJ
    
    
    (7.1
    )Excess purchase price over historical book value
    
    $
    0.9
  (In millions)
    
    AmountCustomer relationships
    
    $
    0.8Inventory
    
    
    0.1Goodwill
    
    
    0.4Deferred tax liability
    
    
    (0.4
    )Excess purchase price over historical book value
    
    $
    0.9
  TDK Recording Media
   8




---



##### 



Memcorp
    Pro Forma Disclosure
  Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,(In millions, except per share amounts)
    
    2007
    
    2007Net revenue
    
    $
    581.4
    
    
    $
    1,790.7Net income
    
    
    7.6
    
    
    
    15.8Earnings per common shareBasic
    
    $
    0.19
    
    
    $
    0.39Diluted
    
    $
    0.19
    
    
    $
    0.38
  Memorex International Inc.
  9




---



##### 



Note 5  Supplemental Balance Sheet Information
 September 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007(Unaudited)Accounts ReceivableAccounts receivable
    
    $
    388.1
    
    
    $
    535.4Less allowances
    
    
    (33.4
    )
    
    
    (28.3
    )Accounts receivable, net
    
    $
    354.7
    
    
    $
    507.1InventoriesFinished goods
    
    $
    329.1
    
    
    $
    308.7Work in process
    
    
    20.8
    
    
    
    34.7Raw materials and supplies
    
    
    14.8
    
    
    
    22.7Total inventories, net
    
    $
    364.7
    
    
    $
    366.1Other Current AssetsDeferred income taxes
    
    $
    55.7
    
    
    $
    53.1Assets held for sale (1)
    
    
    14.5
    
    
    
    Other
    
    
    71.1
    
    
    
    56.8Total other current assets
    
    $
    141.3
    
    
    $
    109.9Property, Plant and EquipmentProperty, plant and equipment
    
    $
    486.8
    
    
    $
    542.6Less accumulated depreciation
    
    
    (348.9
    )
    
    
    (371.1
    )Property, plant and equipment, net (1)
    
    $
    137.9
    
    
    $
    171.5Other AssetsDeferred income taxes
    
    $
    18.2
    
    
    $
    14.9Other
    
    
    18.5
    
    
    
    19.5Total other assets
    
    $
    36.7
    
    
    $
    34.4Other Current LiabilitiesRebates
    
    $
    79.0
    
    
    $
    104.0Employee separation costs
    
    
    12.3
    
    
    
    23.9Income taxes
    
    
    7.1
    
    
    
    18.2Other
    
    
    81.7
    
    
    
    111.2Total other current liabilities
    
    $
    180.1
    
    
    $
    257.3Other LiabilitiesPension
    
    $
    22.1
    
    
    $
    7.7Deferred income taxes
    
    
    6.3
    
    
    
    2.5Other
    
    
    27.7
    
    
    
    34.8Total other liabilities
    
    $
    56.1
    
    
    $
    45.0
 
 (1)
    
    As part of a previously announced restructuring program, we ended operations and exited our
Anaheim California distribution center during the third quarter of 2008, which is being actively
marketed for sale. During the quarter we determined that we met the plan of sale criteria in SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the book
value of the building and property, which approximates estimated net realizable value, was
transferred into other current assets, and is no longer being depreciated. 10




---



##### 



Note 6  Intangible Assets and Goodwill
  Customer(In millions)
    
    Trade Names
    
    
    Software
    
    
    Relationships
    
    
    Other
    
    
    TotalSeptember 30, 2008Cost
    
    $
    333.2
    
    
    $
    55.9
    
    
    $
    62.6
    
    
    $
    12.0
    
    
    $
    463.7Accumulated amortization
    
    
    (20.4
    )
    
    
    (53.4
    )
    
    
    (20.7
    )
    
    
    (9.8
    )
    
    
    (104.3
    )Net
    
    $
    312.8
    
    
    $
    2.5
    
    
    $
    41.9
    
    
    $
    2.2
    
    
    $
    359.4December 31, 2007Cost
    
    $
    330.0
    
    
    $
    54.6
    
    
    $
    60.9
    
    
    $
    8.8
    
    
    $
    454.3Accumulated amortization
    
    
    (12.2
    )
    
    
    (52.7
    )
    
    
    (12.8
    )
    
    
    (5.6
    )
    
    
    (83.3
    )Net
    
    $
    317.8
    
    
    $
    1.9
    
    
    $
    48.1
    
    
    $
    3.2
    
    
    $
    371.0
  Electronic(In millions)
    
    Americas
    
    
    Asia Pacific
    
    
    Products
    
    
    TotalBalance as of December 31, 2007
    
    $
    9.5
    
    
    $
    12.4
    
    
    $
    33.6
    
    
    $
    55.5TDK post-closing purchase
price adjustment
    
    
    (0.1
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.2
    )Purchase of ICJ minority interest
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.4Purchase of XtremeMac
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    5.0Foreign exchange impact
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.2
    )Balance as of September 30, 2008
    
    $
    9.4
    
    
    $
    11.5
    
    
    $
    38.6
    
    
    $
    59.5
 Accounting for the Impairment or Disposal of
Long-Lived Assets Goodwill
and Other Intangible Assets.
   11




---



##### 



Excess of fairvalue over(In millions)
    
    Goodwill
    
    carrying valueAmericas-Commercial
    
    $
    9.5
    
    
    $
    12.5Asia Pacific
    
    
    11.5
    
    
    
    12.0Electronic Products
    
    
    38.6
    
    
    
    3.9
  Note 7  Stock-Based Compensation
    12




---



##### 



Stock Options
  WeightedStock
    
    
    AverageOptions
    
    
    Exercise PriceOutstanding December 31, 2007
    
    
    3,149,761
    
    
    $
    35.16Granted
    
    
    1,231,513
    
    
    
    24.41Exercised
    
    
    (46,330
    )
    
    
    18.33Forfeited
    
    
    (188,975
    )
    
    
    36.48Outstanding September 30, 2008
    
    
    4,145,969
    
    
    $
    32.11Exercisable as of September 30, 2008
    
    
    2,281,224
    
    
    $
    34.47
  Note 8  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)
 , Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits
  13




---



##### 



Components of Net Periodic Pension Cost
 United States
    
    
    International
    
    
    United States
    
    
    InternationalThree Months Ended September 30,
    
    
    Nine Months Ended September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    1.1
    
    
    $
    1.6
    
    
    $
    0.2
    
    
    $
    0.1
    
    
    $
    4.3
    
    
    $
    5.1
    
    
    $
    0.6
    
    
    $
    0.3Interest cost
    
    
    1.3
    
    
    
    1.9
    
    
    
    0.9
    
    
    
    0.9
    
    
    
    4.9
    
    
    
    5.6
    
    
    
    2.8
    
    
    
    2.6Expected return on plan assets
    
    
    (1.6
    )
    
    
    (2.5
    )
    
    
    (1.2
    )
    
    
    (1.0
    )
    
    
    (6.0
    )
    
    
    (7.4
    )
    
    
    (3.3
    )
    
    
    (2.9
    )Amortization of unrecognized items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Net periodic pension cost
    
    $
    0.8
    
    
    $
    1.0
    
    
    $
    (0.1
    )
    
    $
    0.1
    
    
    $
    3.3
    
    
    $
    3.4
    
    
    $
    0.2
    
    
    $
    0.2Settlement
    
    
    2.5
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    2.5
    
    
    
    1.4
    
    
    
    
    
    
    
    Curtailment
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    
    
    
    
    Total pension costs
    
    $
    4.0
    
    
    $
    1.7
    
    
    $
    (0.1
    )
    
    $
    0.1
    
    
    $
    6.5
    
    
    $
    5.5
    
    
    $
    0.2
    
    
    $
    0.2
 Note 9  Restructuring and Other Expense
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2008RestructuringSeverance and severance-related expense
    
    $
    5.7
    
    
    $
    9.3Lease termination costs
    
    
    0.1
    
    
    
    3.6Total restructuring
    
    
    5.8
    
    
    
    12.9OtherTDK post-closing purchase price adjustment
    
    
    
    
    
    
    (2.3
    )Pension settlement/curtailment (Note 8)
    
    
    3.2
    
    
    
    3.2Asset impairments
    
    
    5.3
    
    
    
    5.2Total other
    
    
    8.5
    
    
    
    6.1Total
    
    $
    14.3
    
    
    $
    19.0
    2008 Cost Reduction Restructuring Program
  14




---



##### 



Initial
    
    
    
    
    
    Balance as ofProgram
    
    Cumulative
    
    September 30,(In millions)
    
    Amounts
    
    Usage
    
    2008Severance and other liability
    
    $
    5.2
    
    
    $
    (0.1
    )
    
    $
    5.1
 Initial
    
    
    
    
    
    Balance as ofHeadcount
    
    Cumulative
    
    September 30,Amounts
    
    Reductions
    
    2008Total employees affected
    
    
    169
    
    
    
    (13
    )
    
    
    156
 2007 Cost Reduction Restructuring Program
   Balance as of
    
    
    
    
    
    
    
    
    
    Balance as ofDecember 31,
    
    Additional
    
    
    
    
    
    September 30,(In millions)
    
    2007
    
    Charges
    
    Usage
    
    2008Severance and other
liability
    
    $
    13.6
    
    
    $
    1.1
    
    
    $
    (10.4
    )
    
    $
    4.3
  Initial
    
    
    
    
    
    
    
    
    
    Balance as ofProgram
    
    Additional
    
    Cumulative
    
    September 30,(In millions)
    
    Amounts
    
    Charges
    
    Usage
    
    2008Severance and other liability
    
    $
    15.1
    
    
    $
    7.3
    
    
    $
    (18.1
    )
    
    $
    4.3
 Initial
    
    
    
    
    
    
    
    
    
    Balance as ofHeadcount
    
    
    
    
    
    Cumulative
    
    September 30,Amounts
    
    Additions
    
    Reductions
    
    2008Total employees affected
    
    
    675
    
    
    
    160
    
    
    
    (719
    )
    
    
    116
 TDK Recording Media Restructuring Costs
  15




---



##### 



Balance as of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as ofDecember 31,
    
    Additional
    
    Currency
    
    
    
    
    
    September 30,(In millions)
    
    2007
    
    Charges
    
    Impacts
    
    Usage
    
    2008Severance and other liability
    
    $
    9.4
    
    
    $
    2.8
    
    
    $
    0.2
    
    
    $
    (9.5
    )
    
    $
    2.9Lease termination costs
    
    
    
    
    
    
    1.3
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    $
    1.1
  Initial
    
    
    
    
    
    
    
    
    
    
    
    
    
    Liability as ofProgram
    
    Additional
    
    Currency
    
    Cumulative
    
    September 30,(In millions)
    
    Amounts
    
    Charges
    
    Impacts
    
    Usage
    
    2008Severance and other liability
    
    $
    11.7
    
    
    $
    2.8
    
    
    $
    0.2
    
    
    $
    (11.8
    )
    
    $
    2.9Lease termination costs
    
    
    
    
    
    
    1.3
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    1.1
 Initial
    
    
    
    
    
    
    
    
    
    Balance as ofHeadcount
    
    
    
    
    
    Cumulative
    
    September 30,Amounts
    
    Additions
    
    Reductions
    
    2008Total employees affected
    
    
    172
    
    
    
    46
    
    
    
    (178
    )
    
    
    40
 Note 10  Taxes
      16




---



##### 



Note 11  Comprehensive (Loss) Income
  September 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007Cumulative currency translation adjustment
    
    $
    (45.4
    )
    
    $
    (40.0
    )Pension adjustments, net of income tax
    
    
    (11.8
    )
    
    
    (4.4
    )Cash flow hedging and other, net of income tax
    
    
    1.0
    
    
    
    0.3Total accumulated
other comprehensive
loss
    
    $
    (56.2
    )
    
    $
    (44.1
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (5.9
    )
    
    $
    9.4
    
    
    $
    12.3
    
    
    $
    23.7Currency translation adjustment
    
    
    (19.5
    )
    
    
    11.0
    
    
    
    (5.4
    )
    
    
    25.9Pension liability adjustments, net of income taxPrior service (cost)/ benefit
    
    
    
    
    
    
    (2.1
    )
    
    
    
    
    
    
    0.3Net actuarial (loss)/ gain
    
    
    (7.5
    )
    
    
    
    
    
    
    (7.4
    )
    
    
    4.3Less: amortization of costs included in net periodic
pension cost
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    (0.2
    )Cash flow hedging and other, net of income tax
    
    
    2.3
    
    
    
    0.2
    
    
    
    0.7
    
    
    
    (0.5
    )Total comprehensive (loss) income
    
    $
    (30.6
    )
    
    $
    18.5
    
    
    $
    0.3
    
    
    $
    53.5
 Note 12  Segment Information
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net RevenueAmericas
    
    $
    198.9
    
    
    $
    246.3
    
    
    $
    603.8
    
    
    $
    690.8Europe
    
    
    167.3
    
    
    
    152.4
    
    
    
    528.7
    
    
    
    421.8Asia Pacific
    
    
    99.4
    
    
    
    84.6
    
    
    
    327.0
    
    
    
    205.4Electronic Products
    
    
    61.9
    
    
    
    42.2
    
    
    
    145.9
    
    
    
    42.2Total
    
    $
    527.5
    
    
    $
    525.5
    
    
    $
    1,605.4
    
    
    $
    1,360.2
 17




---



##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Operating Income (Loss)Americas
    
    $
    15.9
    
    
    $
    12.4
    
    
    $
    57.2
    
    
    $
    59.0Europe
    
    
    4.2
    
    
    
    10.8
    
    
    
    17.1
    
    
    
    29.8Asia Pacific
    
    
    7.8
    
    
    
    4.4
    
    
    
    23.5
    
    
    
    14.8Electronic Products
    
    
    (4.4
    )
    
    
    2.2
    
    
    
    (6.5
    )
    
    
    2.2Corporate and unallocated
    
    
    (32.2
    )
    
    
    (13.5
    )
    
    
    (68.3
    )
    
    
    (68.5
    )Total
    
    $
    (8.7
    )
    
    $
    16.3
    
    
    $
    23.0
    
    
    $
    37.3
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net RevenueOptical products
    
    $
    255.1
    
    
    $
    234.3
    
    
    $
    781.0
    
    
    $
    619.6Magnetic products
    
    
    154.2
    
    
    
    177.6
    
    
    
    498.7
    
    
    
    490.4Flash media products
    
    
    22.8
    
    
    
    39.2
    
    
    
    76.7
    
    
    
    117.7Electronic products, accessories and other
    
    
    95.4
    
    
    
    74.4
    
    
    
    249.0
    
    
    
    132.5Total
    
    $
    527.5
    
    
    $
    525.5
    
    
    $
    1,605.4
    
    
    $
    1,360.2
 Note 13  Litigation, Commitments and Contingencies
 Litigation
 Accounting for
Contingencies
   18




---



##### 



Philips
     SanDisk
    19




---



##### 



Note 14  Recent Accounting Pronouncements
 Determination of the Useful Life of
Intangible Assets Goodwill and Other Intangible Assets
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133 .
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51 (
  Note 15  Subsequent Events
   20




---



##### 



Note 16  Review Report of Independent Registered Public Accounting Firm
  21




---



##### 



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

     PricewaterhouseCoopers LLP
 
 22




---



##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
      23




---



##### 




    
    Optimize our magnetic tape business.Recognizing the factors cited above which are
pressuring the overall tape market, we have set out to optimize our magnetic tape business
and reduce our manufacturing costs. In May 2007 and July 2008 we announced major
restructuring actions which involved the planned exit of two manufacturing plants in
Wahpeton, North Dakota and Camarillo, California and a plan to focus our tape coating
operations in our Weatherford, Oklahoma plant. We are concentrating our direct
manufacturing investments on coating operations and outsourcing other parts of
manufacturing operations for magnetic tape. We continue to invest in the most current tape
formats and seek to maintain and strengthen our relationships with key OEMs.
    
    Grow the data storage media business across the four pillars of storage offering
products under multiple brands.Over the years, we have brought to market recordable media
products beyond magnetic tape, including recordable optical media, removable USB flash
drives and flash cards, and external and removable hard disk products. We have also
acquired additional brands, beyond the Imation brand, and established distribution
agreements for other brands. In addition, with 59 percent of our revenue coming from
outside the United States for the nine months ended September 30, 2008, we seek to leverage
our global marketing and distribution capability in bringing products to market across
multiple geographies.
    
    Extend certain brands selectively across multiple product categories.We sell
accessories and certain consumer electronic products, selectively, under multiple brands in
various regions of the world. With the acquisition of the Memcorp business in the third
quarter of 2007, we entered into the consumer electronics market to sell consumer
electronic products primarily in North America, which we did not offer previously. Our
product portfolio includes flat panel displays and televisions, iPod accessories, and MP3
players, clock radios, CD and DVD players, karaoke machines, digital picture frames and
digital cameras. This acquisition also included a brand licensing agreement with MTV
Networks, a division of Viacom International, to design and distribute consumer electronic
items under certain Nickelodeon character-based properties and the NPower brands. With the
acquisition of XtremeMac in June 2008, we acquired a portfolio of iPod, iPhone and Apple TV
accessories and brands, which had been marketed in Apple stores and certain other channels,
primarily in North America.
 Factors Affecting Comparability of our Financial Results
    24




---



##### 



Executive Summary
   Consolidated Results of Operations for the Nine Months Ended September 30, 2008
 
    
    Revenue of $1,605.4 million in the nine months ended September 30, 2008 was up 18.0
percent compared with $1,360.2 million in same period last year.
    
    Operating income of $23.0 million in the nine months ended September 30, 2008 was down
38.3 percent compared with $37.3 million in the same period last year.
    
    Diluted earnings per share was $0.33 for the nine months ended September 30, 2008
compared with $0.64 for the same period last year.
 Cash Flow/Financial Condition for the Nine Months Ended September 30, 2008
 
    
    Cash flow from operations totaled $86.5 million in the nine months ended September 30,
2008 compared with $13.4 million during the same period last year.
    
    Total cash and cash equivalents were $112.8 million as of September 30, 2008, compared
with $135.5 million at year-end 2007.
    
    Dividends of $0.16 per share were paid in March, in June and in September 2008.
 Results of Operations
 Net Revenue
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    527.5
    
    
    $
    525.5
    
    
    
    0.4
    %
    
    $
    1,605.4
    
    
    $
    1,360.2
    
    
    
    18.0
    %
  25




---



##### 



Gross Profit
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeGross profit
    
    $
    81.6
    
    
    $
    85.7
    
    
    
    -4.8
    %
    
    $
    275.2
    
    
    $
    240.0
    
    
    
    14.7
    %Gross margin
    
    
    15.5
    %
    
    
    16.3
    %
    
    
    
    
    
    
    17.1
    %
    
    
    17.6
    %
  Selling, General and Administrative (SG&A)
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeSelling, general and
administrative
    
    $
    70.4
    
    
    $
    61.6
    
    
    
    14.3
    %
    
    $
    215.0
    
    
    $
    151.5
    
    
    
    41.9
    %As a percent of revenue
    
    
    13.3
    %
    
    
    11.7
    %
    
    
    
    
    
    
    13.4
    %
    
    
    11.1
    %
   Research and Development (R&D)
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeResearch and development
    
    $
    5.6
    
    
    $
    8.5
    
    
    
    -34.1
    %
    
    $
    18.2
    
    
    $
    30.5
    
    
    
    -40.3
    %As a percent of revenue
    
    
    1.1
    %
    
    
    1.6
    %
    
    
    
    
    
    
    1.1
    %
    
    
    2.2
    %
  Restructuring and Other
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeRestructuring and other
    
    $
    14.3
    
    
    $
    (0.7
    )
    
    NM
    
    $
    19.0
    
    
    $
    20.7
    
    
    
    -8.2
    %As a percent of revenue
    
    
    2.7
    %
    
    
    (0.1
    )%
    
    
    
    
    
    
    1.2
    %
    
    
    1.5
    %
 
 NM
    
    Not Meaningful   26




---



##### 



Operating (Loss) Income
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeOperating (loss) income
    
    $
    (8.7
    )
    
    $
    16.3
    
    
    NM
    
    $
    23.0
    
    
    $
    37.3
    
    
    
    -38.3
    %As a percentage of revenue
    
    
    (1.6
    )%
    
    
    3.1
    %
    
    
    
    
    
    
    1.4
    %
    
    
    2.7
    %
 
 NM
    
    Not Meaningful   Income Tax (Benefit) Provision
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeIncome tax (benefit) provision
    
    $
    (5.0
    )
    
    $
    6.1
    
    
    NM
    
    $
    5.7
    
    
    $
    15.0
    
    
    
    -62.0
    %Effective tax rate
    
    
    45.9
    %
    
    
    39.4
    %
    
    
    
    
    
    
    31.7
    %
    
    
    38.8
    %
 
 NM
    
    Not Meaningful   27




---



##### 



Segment Results
    Americas
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    198.9
    
    
    $
    246.3
    
    
    
    -19.2
    %
    
    $
    603.8
    
    
    $
    690.8
    
    
    
    -12.6
    %Operating income
    
    
    15.9
    
    
    
    12.4
    
    
    
    28.2
    %
    
    
    57.2
    
    
    
    59.0
    
    
    
    -3.1
    %As a percent of revenue
    
    
    8.0
    %
    
    
    5.0
    %
    
    
    
    
    
    
    9.5
    %
    
    
    8.5
    %
   Europe
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    167.3
    
    
    $
    152.4
    
    
    
    9.8
    %
    
    $
    528.7
    
    
    $
    421.8
    
    
    
    25.3
    %Operating income
    
    
    4.2
    
    
    
    10.8
    
    
    
    -61.1
    %
    
    
    17.1
    
    
    
    29.8
    
    
    
    -42.6
    %As a percent of revenue
    
    
    2.5
    %
    
    
    7.1
    %
    
    
    
    
    
    
    3.2
    %
    
    
    7.1
    %
   28




---



##### 



Asia Pacific
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    99.4
    
    
    $
    84.6
    
    
    
    17.5
    %
    
    $
    327.0
    
    
    $
    205.4
    
    
    
    59.2
    %Operating income
    
    
    7.8
    
    
    
    4.4
    
    
    
    77.3
    %
    
    
    23.5
    
    
    
    14.8
    
    
    
    58.8
    %As a percent of revenue
    
    
    7.8
    %
    
    
    5.2
    %
    
    
    
    
    
    
    7.2
    %
    
    
    7.2
    %
   Electronic Products
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    61.9
    
    
    $
    42.2
    
    
    
    46.7
    %
    
    $
    145.9
    
    
    $
    42.2
    
    
    
    245.7
    %Operating (loss) income
    
    
    (4.4
    )
    
    
    2.2
    
    
    NM
    
    
    (6.5
    )
    
    
    2.2
    
    
    NMAs a percent of revenue
    
    
    (7.1)
    %
    
    
    5.2
    %
    
    
    
    
    
    
    (4.5)
    %
    
    
    5.2
    %NM Not Meaningful
  Corporate and Unallocated
 Three Months Ended
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    Percent
    
    September 30,
    
    Percent(In millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeOperating costs
    
    $
    32.2
    
    
    $
    13.5
    
    
    
    138.5
    %
    
    $
    68.3
    
    
    $
    68.5
    
    
    
    -0.3
    %
  29




---



##### 



Impact of Changes in Foreign Currency Rates
    Financial Position
      Employers;
Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB
Statements No. 87, 88, 106, and 132(R)
 30




---



##### 



Accounting
for the Impairment or Disposal of Long-Lived Assets Goodwill and Other Intangible Assets.
 Liquidity and Capital Resources
       31




---



##### 



Contractual Obligations
  Fair Value Measurements
 Fair Value Measurements
 32




---



##### 



Critical Accounting Policies and Estimates
  Accounting for the
Impairment or Disposal of Long-Lived Assets Goodwill and Other Intangible Assets.
     Excess of fairvalue over(In millions)
    
    Goodwill
    
    carrying valueAmericas-Commercial
    
    $
    9.5
    
    
    $
    12.5Asia Pacific
    
    
    11.5
    
    
    
    12.0Electronic Products
    
    
    38.6
    
    
    
    3.9
  33




---



##### 



Recently Issued Accounting Standards
 Determination of the Useful Life of Intangible Assets Goodwill and Other Intangible
Assets
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133 .
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51 (
  Subsequent Events
   Forward-Looking Statements and Risk Factors
  34




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
    
    Revenue for 2008 is targeted at approximately $2.165 billion to $2.185 billion. We
anticipate fourth quarter revenue in the range of $560 million to $580 million, unchanged
from our most recent outlook.
    
    Operating loss for fourth quarter of 2008 is targeted to be in the range of $11 million
to $18 million. This includes restructuring and related charges of approximately $25
million. Previously, fourth quarter operating income was targeted in the range of $7
million to $14 million.
    
    Diluted loss per share for fourth quarter of 2008 is targeted between $0.21 and $0.34 which
includes the negative impact of approximately $0.44 from restructuring and related charges.
Previously, fourth quarter diluted earnings per share was targeted between $0.11 to $0.23.
    
    Operating income for 2008 is targeted to be in the range of $5 million to $12 million.
This includes restructuring and related charges incurred in the first three quarters and
anticipated in the fourth quarter which combined total $46 million. Previously, 2008
operating income was targeted in the range of $30 million to $37 million including
restructuring and related charges of $21 million incurred through the first three quarters
of 2008.
    
    Diluted earnings per share for 2008 is targeted between $0.00 and $0.12 which includes
the negative impact of $0.83 from restructuring and related charges incurred in the first
three quarters and anticipated in the fourth quarter. Previously, 2008 diluted earnings per
share was targeted between $0.44 and $0.56 which includes the negative impact of
approximately $0.39 from restructuring and other charges incurred through the first three
quarters.
    
    Capital spending is targeted to be approximately $15 million, unchanged from our most
recent outlook.
    
    The tax rate for 2008 is anticipated to be in the range of 33 percent to 35 percent,
absent any one-time tax items that may occur in the future. This is unchanged from our most
recent outlook.
    
    Depreciation and amortization expense is targeted to be approximately $50 million,
unchanged from our most recent outlook.
  35




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Quantitative and Qualitative Disclosures about Market Risk
   
 Controls and Procedures.
   
 PART II. OTHER INFORMATION
 
 Legal Proceedings
 Accounting for
Contingencies
   Philips
  36




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##### 



SanDisk
    
 Risk Factors
  37




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##### 



Our global growth is subject to a number of economic risks.
 Our international operations subject us to economic risk as our results of operations may be
adversely affected by changes in economic conditions and foreign currency fluctuations.
 We use a variety of raw materials, supplier-provided parts, components, sub-systems and third party
contract manufacturing services in our businesses, and significant shortages, supplier capacity
constraints, supplier production disruptions or price increases could increase our operating costs
and adversely impact the competitive positions of our products.
 An impairment in the carrying value of goodwill or other assets could negatively affect our
consolidated results of operations and net worth.
  38




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##### 



Unregistered Sales of Equity Securities and Use of Proceeds.
     
 Defaults Upon Senior Securities.
  
 Submission of Matters to a Vote of Security Holders
  
 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
 39




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##### 



SIGNATURE
  Imation Corp.Date:
November 10, 2008
    
    /s/ Paul R. ZellerPaul R. ZellerVice President and Chief Financial Officer(duly authorized officer and principal
financial officer)
 40




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##### 



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
 41