e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 OR |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________ . |
Commission
file number: 1-14310
IMATION CORP.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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41-1838504
(I.R.S. Employer
Identification No.) |
1 Imation Place
Oakdale, Minnesota 55128
(Address of principal executive offices, including zip code)
(651) 704-4000
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ. No o.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Yes þ. No o.
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: 34,059,157 shares of Common Stock, par value
$0.01 per share, were outstanding at August 1, 2005.
IMATION CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except for per share amounts)
(Unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Net revenue |
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$ |
301.5 |
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$ |
272.3 |
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$ |
616.5 |
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$ |
598.6 |
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Cost of goods sold |
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226.3 |
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205.2 |
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459.0 |
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441.4 |
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Gross profit |
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75.2 |
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67.1 |
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157.5 |
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157.2 |
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Operating expenses: |
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Selling, general and administrative |
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38.0 |
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41.5 |
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76.4 |
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85.6 |
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Research and development |
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13.4 |
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14.5 |
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26.0 |
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29.6 |
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Restructuring and other |
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3.1 |
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3.1 |
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Total |
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51.4 |
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59.1 |
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102.4 |
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118.3 |
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Operating income |
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23.8 |
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8.0 |
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55.1 |
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38.9 |
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Other (income) and expense: |
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Interest income |
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(2.3 |
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(1.0 |
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(4.4 |
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(2.1 |
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Interest expense |
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0.2 |
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0.2 |
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0.3 |
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0.3 |
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Other, net |
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1.1 |
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1.1 |
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4.8 |
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2.1 |
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Total |
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(1.0 |
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0.3 |
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0.7 |
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0.3 |
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Income from continuing operations before taxes |
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24.8 |
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7.7 |
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54.4 |
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38.6 |
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Income tax provision |
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9.0 |
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1.8 |
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7.8 |
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12.6 |
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Income from continuing operations |
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15.8 |
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5.9 |
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46.6 |
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26.0 |
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Discontinued Operations: |
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Income from operations of discontinued business,
net of income taxes |
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0.9 |
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0.9 |
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1.5 |
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2.2 |
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Gain on disposal of discontinued business, net of income taxes |
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4.6 |
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4.6 |
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Income from discontinued operations, net of taxes |
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5.5 |
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0.9 |
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6.1 |
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2.2 |
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Net income |
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$ |
21.3 |
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$ |
6.8 |
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$ |
52.7 |
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$ |
28.2 |
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Earnings per common share basic: |
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Continuing operations |
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$ |
0.47 |
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$ |
0.17 |
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$ |
1.38 |
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$ |
0.73 |
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Discontinued operations |
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$ |
0.16 |
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$ |
0.03 |
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$ |
0.18 |
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$ |
0.07 |
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Net income |
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$ |
0.63 |
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$ |
0.20 |
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$ |
1.56 |
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$ |
0.80 |
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Earnings per common share diluted: |
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Continuing operations |
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$ |
0.46 |
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$ |
0.16 |
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$ |
1.36 |
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$ |
0.72 |
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Discontinued operations |
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$ |
0.16 |
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$ |
0.02 |
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$ |
0.18 |
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$ |
0.06 |
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Net income |
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$ |
0.62 |
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$ |
0.19 |
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$ |
1.54 |
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$ |
0.78 |
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Weighted average basic shares outstanding |
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33.7 |
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35.5 |
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33.7 |
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35.5 |
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Weighted average diluted shares outstanding |
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34.3 |
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36.4 |
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34.3 |
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36.3 |
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Cash dividends paid per common share |
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0.12 |
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0.10 |
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0.22 |
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0.18 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
1
IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
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June 30, |
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December 31, |
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2005 |
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2004 |
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ASSETS |
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Current assets |
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Cash and equivalents |
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$ |
410.5 |
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$ |
397.1 |
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Accounts receivable, net |
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172.6 |
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181.0 |
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Inventories |
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165.4 |
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131.3 |
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Other current assets |
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82.5 |
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76.6 |
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Total current assets |
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831.0 |
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786.0 |
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Property, plant and equipment, net |
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205.2 |
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214.4 |
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Other assets |
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76.8 |
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110.2 |
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Total assets |
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$ |
1,113.0 |
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$ |
1,110.6 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
139.5 |
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$ |
128.2 |
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Accrued payroll |
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19.3 |
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11.7 |
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Other current liabilities |
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88.7 |
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135.3 |
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Total current liabilities |
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247.5 |
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275.2 |
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Other liabilities |
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44.9 |
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48.6 |
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Shareholders equity |
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820.6 |
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786.8 |
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Total liabilities and shareholders equity |
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$ |
1,113.0 |
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$ |
1,110.6 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
2
IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
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Six months ended |
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June 30, |
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2005 |
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2004 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
52.7 |
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$ |
28.2 |
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Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of discontinued operations: |
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Depreciation and amortization |
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19.9 |
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25.2 |
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Deferred income taxes |
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14.9 |
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4.3 |
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Restructuring and other |
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3.1 |
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Gain on sale of Specialty Papers |
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(7.3 |
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Litigation settlement related to discontinued operations |
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(20.9 |
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Accounts receivable |
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(2.8 |
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31.4 |
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Inventories |
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(41.6 |
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(35.1 |
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Other current assets |
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0.9 |
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15.2 |
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Accounts payable |
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15.8 |
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(25.1 |
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Accrued payroll and other current liabilities |
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(5.6 |
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(8.0 |
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Income taxes payable |
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(0.4 |
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(12.8 |
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Other |
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0.4 |
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3.7 |
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Net cash provided by operating activities |
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26.0 |
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30.1 |
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Cash Flows from Investing Activities: |
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Capital expenditures |
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(9.5 |
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(20.3 |
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Purchase of investments |
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(14.1 |
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(26.2 |
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Proceeds from sale of investments |
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17.3 |
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6.1 |
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Proceeds from sale of Specialty Papers |
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16.0 |
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Other |
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(0.8 |
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Net cash provided by (used in) investing activities |
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9.7 |
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(41.2 |
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Cash Flows from Financing Activities: |
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Purchases of treasury stock |
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(15.9 |
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(14.0 |
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Dividend payments |
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(7.5 |
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(6.4 |
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Exercise of stock options and other |
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8.6 |
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12.9 |
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Net cash used in financing activities |
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(14.8 |
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(7.5 |
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Effect of exchange rate changes on cash |
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(7.5 |
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(0.8 |
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Net change in cash and equivalents |
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13.4 |
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(19.4 |
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Cash and equivalents beginning of period |
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397.1 |
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411.4 |
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Cash and equivalents end of period |
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$ |
410.5 |
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$ |
392.0 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
3
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited but, in the opinion of management,
reflect all adjustments necessary for a fair statement of financial position, results of operations
and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments
consist of normal, recurring items. The results of operations for any interim period are not
necessarily indicative of results for the full year. The consolidated financial statements and
notes are presented in accordance with the requirements for Form 10-Q and do not contain certain
information included in the Companys annual consolidated financial statements and notes. The
December 31, 2004 Condensed Consolidated Balance Sheet was derived from the audited financial
statements, but does not include all disclosures required by accounting principles generally
accepted in the United States of America. This Form 10-Q should be read in conjunction with the
Companys consolidated financial statements and notes included in its Annual Report on Form 10-K
for the year ended December 31, 2004.
2. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value approach under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly,
compensation cost for employee stock options is measured as the excess, if any, of the quoted
market price of the Companys common stock at the date of the grant over the amount an employee
must pay to acquire the stock.
The Company has adopted the disclosure only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation
expense has been recognized for stock options as all options granted had no intrinsic value at the
time of grant. Compensation expense has been recorded for restricted stock issued under the
Companys Stock Incentive Program. The table below illustrates the effect on net income and
earnings per share if the fair value of options previously granted had been recognized as
compensation expense on a straight-line basis over the vesting periods in accordance with the
provisions of SFAS No. 123. See Note 14 to the Consolidated Financial Statements included in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, for additional
information regarding Employee Stock Plans.
4
(In millions, except per share
amounts)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
|
Net income, as reported |
|
$ |
21.3 |
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$ |
6.8 |
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$ |
52.7 |
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$ |
28.2 |
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Add: Stock-based employee compensation expense
included in net income, net of related tax effects |
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0.2 |
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0.3 |
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Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects |
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(1.5 |
) |
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(1.6 |
) |
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(2.7 |
) |
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(2.9 |
) |
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Pro forma net income |
|
$ |
20.0 |
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$ |
5.2 |
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$ |
50.3 |
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$ |
25.3 |
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Earnings per share: |
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Basic as reported |
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$ |
0.63 |
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$ |
0.20 |
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$ |
1.56 |
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$ |
0.80 |
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Basic pro forma |
|
$ |
0.59 |
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$ |
0.15 |
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$ |
1.49 |
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$ |
0.71 |
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Diluted as reported |
|
$ |
0.62 |
|
|
$ |
0.19 |
|
|
$ |
1.54 |
|
|
$ |
0.78 |
|
Diluted pro forma |
|
$ |
0.58 |
|
|
$ |
0.14 |
|
|
$ |
1.45 |
|
|
$ |
0.70 |
|
3. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of shares outstanding
during the period. Diluted earnings per share is computed on the basis of the weighted average
basic shares outstanding plus the dilutive effect of the Companys stock-based compensation plans
using the treasury stock method. The following table sets forth the computation of the weighted
average basic and diluted shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Weighted average common shares outstanding |
|
|
33.7 |
|
|
|
35.5 |
|
|
|
33.7 |
|
|
|
35.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock-based compensation plans |
|
|
0.6 |
|
|
|
0.9 |
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
34.3 |
|
|
|
36.4 |
|
|
|
34.3 |
|
|
|
36.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 and 2004, certain options to purchase approximately 959,500 and 152,500
shares, respectively, of the Companys common stock were outstanding that were not considered in
the computation of potential common shares because the effect of the options would be antidilutive.
5
4.
SUPPLEMENTAL BALANCE SHEET INFORMATION
(In millions)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Accounts Receivable |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
184.9 |
|
|
$ |
193.8 |
|
Less allowances |
|
|
(12.3 |
) |
|
|
(12.8 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
172.6 |
|
|
$ |
181.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
|
|
Finished goods |
|
$ |
127.3 |
|
|
$ |
94.8 |
|
Work in process |
|
|
13.5 |
|
|
|
14.7 |
|
Raw materials and supplies |
|
|
24.6 |
|
|
|
21.8 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
165.4 |
|
|
$ |
131.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Assets |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
$ |
27.7 |
|
|
$ |
35.1 |
|
Short-term investments |
|
|
35.6 |
|
|
|
18.1 |
|
Receivables from insurance companies |
|
|
|
|
|
|
4.1 |
|
Restricted cash |
|
|
|
|
|
|
1.2 |
|
Other |
|
|
19.2 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
82.5 |
|
|
$ |
76.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
710.7 |
|
|
$ |
750.8 |
|
Less accumulated depreciation |
|
|
(505.5 |
) |
|
|
(536.4 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
205.2 |
|
|
$ |
214.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
$ |
28.5 |
|
|
$ |
37.0 |
|
Long-term investments |
|
|
8.3 |
|
|
|
31.2 |
|
Intangible assets |
|
|
20.2 |
|
|
|
23.1 |
|
Goodwill |
|
|
12.3 |
|
|
|
12.3 |
|
Other |
|
|
7.5 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
76.8 |
|
|
$ |
110.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Liabilities |
|
|
|
|
|
|
|
|
Employee separation costs |
|
$ |
3.7 |
|
|
$ |
15.9 |
|
Rebates |
|
|
25.8 |
|
|
|
32.9 |
|
Litigation settlement |
|
|
|
|
|
|
25.0 |
|
Income taxes |
|
|
6.5 |
|
|
|
9.6 |
|
Other |
|
|
52.7 |
|
|
|
51.9 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
88.7 |
|
|
$ |
135.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
|
|
|
|
|
|
Pension |
|
$ |
19.5 |
|
|
$ |
21.0 |
|
Other |
|
|
25.4 |
|
|
|
27.6 |
|
|
|
|
|
|
|
|
Total other liabilities |
|
$ |
44.9 |
|
|
$ |
48.6 |
|
|
|
|
|
|
|
|
6
5. LITIGATION, COMMITMENTS AND CONTINGENCIES
During the first quarter of 2005, the Company satisfied the net settlement of $20.9 million for the
Jazz Photo litigation, the expense for which was recorded in the fourth quarter of 2004 as a
component of the results of discontinued operations.
6. RESTRUCTURING
During the fourth quarter of 2004, the Company recorded severance and other charges of $16.6
million related to its Data Storage and Information Management reporting segment to lower overall
operating costs, simplify structure, and
improve decision making speed. The charge includes $15.3 million for estimated cash severance
payments and related benefits associated with the planned reduction in headcount of approximately
260 employees, the majority of which was completed by June 30, 2005. The other charges of $1.3
million include pension related costs associated with severed employees and lease termination
costs.
During the second quarter of 2004, the Company recorded severance and other charges of $3.1 million
related to its Data Storage and Information Management reporting segment. The charges related to a
plan to close the Companys production facility in Tucson, Arizona and international administrative
and sales employee reductions. The restructuring is impacting approximately 280 positions. It is
anticipated that the Tucson facility will be closed by December 31, 2005. Ongoing production
activities from this facility will be shifted to other facilities as the shutdown occurs. The
charges consist of estimated severance payments and related benefits.
The following tables summarize the activity related to the Companys 2004 restructuring programs.
Changes in the restructuring accruals during the first six months of 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of |
|
|
|
|
|
|
|
Employees |
|
(Dollars in millions) |
|
Amount |
|
|
Affected |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
$ |
15.9 |
|
|
|
250 |
|
Usage |
|
|
(12.2 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
Balance, June 30, 2005 |
|
$ |
3.7 |
|
|
|
108 |
|
|
|
|
|
|
|
|
7
On a cumulative basis through June 30, 2005, the status of the restructuring accruals was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program |
|
|
Cumulative |
|
|
Net |
|
|
Liability as of |
|
(Dollars in millions) |
|
Amounts |
|
|
Usage |
|
|
Adjustments |
|
|
June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
18.0 |
|
|
$ |
(14.4 |
) |
|
$ |
(0.2 |
) |
|
$ |
3.4 |
|
Pension and Lease Termination Costs |
|
|
1.7 |
|
|
|
(1.4 |
) |
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19.7 |
|
|
$ |
(15.8 |
) |
|
$ |
(0.2 |
) |
|
$ |
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
Program |
|
Cumulative Reductions and |
|
June 30, |
|
|
Amounts |
|
Adjustments |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
No. of employees affected |
|
|
540 |
|
|
(432) |
|
|
108 |
|
7. RETIREMENT PLANS
Employer Contributions
During the six months ended June 30, 2005, approximately $7.8 million of contributions have been
made to the Companys pension plans. The Company presently anticipates contributing an additional
$2 million to $7 million to fund its pension plans during the last six months of 2005.
Components of Net Periodic Pension Cost
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
U.S. Plan |
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
2.7 |
|
|
$ |
2.6 |
|
|
$ |
5.4 |
|
|
$ |
5.2 |
|
Interest cost |
|
|
1.8 |
|
|
|
1.8 |
|
|
|
3.6 |
|
|
|
3.5 |
|
Expected return on plan assets |
|
|
(2.2 |
) |
|
|
(2.1 |
) |
|
|
(4.4 |
) |
|
|
(4.3 |
) |
Amortization of prior service cost |
|
|
0.1 |
|
|
|
|
|
|
|
0.2 |
|
|
|
0.1 |
|
Amortization of net loss |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
Special termination benefits(1) |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
2.4 |
|
|
$ |
2.8 |
|
|
$ |
4.8 |
|
|
$ |
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the second quarter of 2004, $0.4 million was recognized for employee benefits associated with
the restructuring charges recorded during the quarter. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
International Plans |
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
Interest cost |
|
|
0.8 |
|
|
|
0.7 |
|
|
|
1.6 |
|
|
|
1.5 |
|
Expected return on plan assets |
|
|
(0.7 |
) |
|
|
(0.6 |
) |
|
|
(1.4 |
) |
|
|
(1.3 |
) |
Amortization of unrecognized items and other |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
0.3 |
|
|
$ |
0.4 |
|
|
$ |
0.6 |
|
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
8. COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) represents certain items which, according to the
respective accounting rules, are required to be recorded directly to equity accounts and consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
Accumulated |
|
|
|
Cumulative |
|
|
Cash Flow |
|
|
Liability |
|
|
Other |
|
|
|
Translation |
|
|
Hedging, net of |
|
|
Adjustment, net |
|
|
Comprehensive |
|
(In millions) |
|
Adjustment |
|
|
tax |
|
|
of tax |
|
|
(Loss) Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
$ |
(71.6 |
) |
|
$ |
(1.1 |
) |
|
$ |
(12.4 |
) |
|
$ |
(85.1 |
) |
First quarter 2005 change |
|
|
(3.5 |
) |
|
|
0.6 |
|
|
|
|
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2005 |
|
|
(75.1 |
) |
|
|
(0.5 |
) |
|
|
(12.4 |
) |
|
|
(88.0 |
) |
Second quarter 2005 change |
|
|
(6.7 |
) |
|
|
1.0 |
|
|
|
|
|
|
|
(5.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2005 |
|
$ |
(81.8 |
) |
|
$ |
0.5 |
|
|
$ |
(12.4 |
) |
|
$ |
(93.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the three and six months ended June 30, 2005 and 2004 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21.3 |
|
|
$ |
6.8 |
|
|
$ |
52.7 |
|
|
$ |
28.2 |
|
Cumulative translation adjustment |
|
|
(6.7 |
) |
|
|
(2.7 |
) |
|
|
(10.2 |
) |
|
|
(2.7 |
) |
Cash flow hedging and
adjustments for
available-for-sale securities |
|
|
1.0 |
|
|
|
1.7 |
|
|
|
1.6 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
15.6 |
|
|
$ |
5.8 |
|
|
$ |
44.1 |
|
|
$ |
28.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. DISCONTINUED OPERATIONS
On June 30, 2005, the Company closed on the sale of its Specialty Papers business to Nekoosa Coated
Products, LLC for $17.0 million, with the potential for up to an additional $4.0 million in
consideration over the next three years, contingent on performance of the business. Upon closing,
the Company received a cash payment of $16.0 million and a note receivable of $1.0 million due in
four years subject to certain post closing adjustments. A gain of $4.6 million, net of taxes of
$2.7 million, was recognized on the sale.
In connection with the sale, the Company will receive reimbursement for certain transition services
that the Company has agreed to provide to Nekoosa Coated Products, LLC while it integrates
accounting and information systems. These reimbursements are not expected to be significant and
will be treated as a reduction of general and administrative expenses in the Consolidated Statement
of Operations. Specialty Papers is reported as a discontinued operation as the operations and cash
flows of the Specialty Papers business have been eliminated from that of the Company and there will
not be significant continuing involvement in the Specialty Papers business in the future. As such,
the consolidated financial statements for all prior periods
have been adjusted to reflect this
presentation. As a result, the Companys remaining segment is Data Storage and Information
Management.
9
The results of the Specialty Papers business excluding general corporate overhead allocations were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
9.9 |
|
|
$ |
11.8 |
|
|
$ |
20.1 |
|
|
$ |
24.8 |
|
Income before taxes |
|
|
1.7 |
|
|
|
2.3 |
|
|
|
3.5 |
|
|
|
4.9 |
|
Income tax provision |
|
|
0.7 |
|
|
|
0.9 |
|
|
|
1.3 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes |
|
$ |
1.0 |
|
|
$ |
1.4 |
|
|
$ |
2.2 |
|
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first and second quarters of 2005, the Company recorded expenses of $0.6 million and
$0.1 million, net of tax, respectively, related to litigation costs from the Jazz Photo litigation,
the settlement of which was completed in the first quarter of 2005, as discussed in Note 5. Such
expenses were $0.3 million and $0.5 million, net of tax, for the first and second quarter of 2004,
respectively.
10. DERIVATIVES AND HEDGING ACTIVITIES
The Company maintains a foreign currency exposure management policy that allows for the use of
derivative instruments, principally foreign currency forward and option contracts, to manage risks
associated with foreign exchange rate volatility. Generally, these contracts are entered into to
fix the U.S. dollar amount of the eventual cash flows resulting from such transactions. As of June
30, the derivative instruments range in duration from less than one to six months. The Company does
not hold or issue derivative financial
instruments for speculative or trading purposes and is not a party to leveraged derivatives.
The Company is exposed to credit loss in the event of nonperformance by counter-parties in foreign
currency forward and option contracts, but does not anticipate nonperformance by any of these
counter-parties. The Company actively mitigates its exposure to credit risk through the use of
credit approvals and credit limits, and by selecting major international banks and financial
institutions as counter-parties.
Cash Flow Hedges. The Company attempts to mitigate the risk that forecasted cash flows denominated
in foreign currencies may be adversely affected by changes in foreign currency exchange rates
through the use of foreign currency option and forward contracts. The Company formally documents
all relationships between hedging instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge items. This process includes linking all
derivatives to forecasted transactions. The Company also formally assesses, both at the hedges
inception and on an ongoing basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in cash flows of hedged items. Gains and losses related
to cash flow hedges are deferred in accumulated other comprehensive income (loss) with a
corresponding asset or liability. When the hedged transaction occurs, the gains and losses in
accumulated other comprehensive income (loss) are reclassified into earnings in the same category
as the item being hedged. If at any time it is determined that a derivative is not highly effective
as a hedge, the Company discontinues hedge accounting prospectively, with gains and losses that
were deferred in other accumulated comprehensive income (loss) being recognized in current period
operations. As of June 30, 2005, cash flow hedges ranged in duration from one to six months and had
a total notional amount of $72.9 million. Hedge costs, representing the premiums paid on expired
options net of hedge gains and losses of $0.3 million, were reclassified into operations during the
quarter ended June 30, 2005. The amount of net deferred gains on foreign currency cash flow hedges
included in other comprehensive income (loss) in shareholders equity as of June 30, 2005 was $0.9
million, pre-tax, which depending on market factors is expected to reverse or be reclassified into
operations in 2005.
10
Other Hedges. The Company enters into foreign currency forward contracts, generally with durations
of less than two months, to manage foreign currency exposure of its monetary assets and liabilities
denominated in foreign currencies. The Company records the estimated fair value of these forwards
within other current assets or other current liabilities in the Condensed Consolidated Balance
Sheets, and all changes in their fair value are immediately recognized in earnings. As of June 30,
2005, the Company had a notional amount of forward contracts of $40.1 million to hedge the
Companys recorded balance sheet exposures.
Fair Value Disclosure. As of June 30, 2005, the fair value of the Companys foreign currency
forward and option contracts outstanding was an asset balance of $2.3 million. The estimated fair
market values were determined using available market information or other appropriate valuation
methodologies.
11. INCOME TAXES
The Company recognized a one-time tax benefit of $12.0 million, or $0.35 per diluted share, in the
first quarter of 2005 related to the favorable resolution of a U.S. tax matter. The matter involved
the U.S. treatment of tax benefits associated with changes to the Companys European structure
initiated
in 2000 that were approved in the first quarter of 2005 by U.S. tax authorities.
12. NEW ACCOUNTING STANDARDS
In December, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R),
Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
No. 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be valued at fair value on the date of grant, and to be expensed over the applicable
vesting period. Pro forma disclosure of the income statement effects of share-based payments will
no longer be an alternative. On April 14, 2005, the U.S. Securities and Exchange Commission
announced a deferral of the effective date of SFAS No. 123(R) for calendar year companies until the
beginning of 2006. The Company is currently evaluating its transition alternatives. The impact of
stock-based compensation accounted for under SFAS No. 123 is shown in Note 2.
11
13. REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, the Companys independent registered public accounting firm, has
performed a review of the unaudited interim consolidated financial statements included herein and
their report thereon accompanies this filing. This report is not a report within the meaning of
Sections 7 and 11 of the 1933 Act and the independent registered public accounting firms liability
under Section 11 does not extend to it.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Imation Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of Imation Corp. and its
subsidiaries as of June 30, 2005, and the related consolidated statements of operations for each
of the three-month and six-month periods ended June 30, 2005 and 2004 and the condensed
consolidated statements of cash flows for the six-month periods ended June 30, 2005 and 2004.
These interim financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the
related consolidated statements of operations, shareholders equity and comprehensive income, and
of cash flows for the year then ended, managements assessment of the effectiveness of the
Companys internal control over financial reporting as of December 31, 2004 and the effectiveness
of the Companys internal control over financial reporting as of December 31, 2004; and in our
report dated March 10, 2005, we expressed unqualified opinions thereon. The consolidated financial
statements and managements assessment of the effectiveness of internal control over financial
reporting referred to above are not presented herein. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of June 30, 2005, is fairly stated in
all material respects in relation to the consolidated balance sheet from which it has been
derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 4, 2005
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General Overview
Imations business is developing, manufacturing, sourcing, marketing and distributing removable
magnetic, optical and solid-state flash memory storage media products for users of digital
information technology. These products range from floppy diskettes, recordable CDs and DVDs, solid
state removable flash memory, micro hard drives and tape cartridges used in small and medium
businesses to high capacity tape cartridges used in large automated tape silos. These products are
sold in the U.S. and in approximately 100 other countries. Approximately 63 percent of the
Companys second quarter 2005 revenues came from outside the U.S.
The data storage market presents growth opportunities as well as challenges. The market is highly
competitive, characterized by continuing changes in technology, ongoing and variable price erosion,
diverse distribution channels, and a large variety of formats for tape, optical, flash and
removable products. Last year, during the second quarter, price competition for removable optical
products was unusually strong. This resulted from increased product supply as significant
additional manufacturing capacity in Asia came on-line, coupled with softer than expected demand
for the Companys products principally in the U.S. and Europe. Price reductions in optical products
moderated somewhat during the second half of 2004 and the first half of 2005.
The Company delivers a broad portfolio of products across diverse distribution channels and
geographies. Success in this market is dependent on being early to market with new formats, having
efficient sourcing, manufacturing and supply chain operations, maintaining competitive total
delivered cost, working closely with leading OEMs (Original Equipment Manufacturers) to develop
new formats or enhancements to existing formats, offering a broad assortment of products across
multiple competing technology platforms, and having broad geographic and market coverage across
diverse distribution channels.
While the demand for data storage media continues to grow at a modest rate, the highest revenue
growth opportunities include newer tape formats in open system environments, recordable optical
discs, which currently are more consumer oriented products, and removable flash memory. These
higher growth opportunities provide revenue streams that are typically at lower gross profit
margins than the Companys historical gross margins on magnetic media products.
The Companys strategy is to take advantage of these growth opportunities by establishing strategic
sourcing, brand distribution, and licensing arrangements and by implementing a relatively flat and
efficient operating structure. For example, while the Company has manufacturing operations,
intellectual property, patents and know-how across a broad range of storage related media
technologies, it also sources some products from third party manufacturers. As a result, the
Companys business is a combination of a manufacturer and a brand distributor. This strategy can
support higher revenue without the need to add substantial infrastructure or overhead costs, thus
delivering increased gross margin dollars and operating profit growth on increased revenues.
Further, the Company launched various restructuring activities in 2004 to lower overall operating
costs, simplify structure, and improve decision making speed. In addition, the Company is
implementing lean enterprise principles throughout the Company, starting in manufacturing and
critical business processes. The emphasis of lean enterprise principles is speed, quality and
competitive cost across all key functions and processes.
14
Sale of Specialty Papers
On June 30, 2005, the Company closed on the sale of its Specialty Papers business to Nekoosa Coated
Products, LLC for $17.0 million, with the potential for up to an additional $4.0 million in
consideration over the next three years, contingent on performance of the business. Upon closing,
the Company received a cash payment of $16.0 million and a note receivable of $1.0 million due in
four years subject to certain post closing adjustments. In accordance with applicable accounting
rules, the results of this segment for the current and prior periods have been reported as
discontinued operations as the operations and cash flows of the Specialty Papers business have been
eliminated from the ongoing operations of the Company and there will not be significant continuing
involvement in the Specialty Papers operations in the future. As such, the consolidated financial
statements for all prior periods have been adjusted to reflect this presentation. General corporate
overhead costs previously allocated to the Specialty Papers segment have not been allocated to
discontinued operations.
Results of Operations
Comparison of Three Months Ended June 30, 2005 and 2004
Net revenue of $301.5 million increased 10.7 percent from last years second quarter revenue of
$272.3 million (adjusted to reflect the sale of Specialty Papers with its results reported in
discontinued operations). U.S. revenue totaled $111.4 million, or 37 percent of worldwide revenue,
compared with $105.1 million, or 39 percent, from a year ago. Non-U.S. revenue totaled $190.1
million, or 63 percent of worldwide revenue, compared with $167.2 million, or 61 percent, from a
year ago. The revenue improvement in the second quarter of 2005 was caused by volume increases of
approximately 23 percent and the effect of a positive currency exchange rate translation of
approximately two percent partially offset by price declines of approximately 14 percent. As
discussed under Impact of Changes in Foreign Currency Rates below, pricing changes can be
impacted by changes in foreign currency exchange rates. Revenue growth was driven by optical media
products as the Company benefited from growth in its Global Data Media joint venture and DVD
products. Also contributing to the growth were flash media products and LTO mid-range tape
products.
Gross profit in second quarter 2005 was $75.2 million or 25.0 percent of revenue, compared to $67.1
million, or 24.6 percent of revenue in the second quarter of 2004. The prior year period included
inventory related charges of $9.0 million associated with competitive market pricing of optical
media products. The year over year improvement in gross margin was primarily due to these charges
in 2004, higher optical gross margins and better factory utilization, offset in part by product
mix.
Selling, general and administrative (SG&A) expenses in the second quarter of 2005 were $38.0
million, or 12.6 percent of revenue, compared to $41.5 million, or 15.2 percent of revenue in the
second quarter of 2004. The decrease in SG&A as a percent of revenue was primarily due to the
Companys cost reduction efforts taken during 2004.
15
Research and development (R&D) costs were $13.4 million, or 4.5 percent of revenue in the second
quarter of 2005, as compared to $14.5 million, or 5.3 percent of revenue in the second quarter of
2004. The decrease is due to the Companys cost reduction efforts taken during 2004 as the Company
focused resources on higher priority projects within the R&D organization.
The second quarter of 2004 included restructuring and other charges of $3.1 million. The charges
related to a plan to close the Companys production facility in Tucson, Arizona, as well as
international administrative and sales employee reductions.
Based on the above factors, operating income in the second quarter of 2005 was $23.8 million, or
7.9 percent of revenue, compared with operating income of $8.0 million, or 2.9 percent of revenue
for the same period last year.
The Company recognized income of $1.0 million and expense of $0.3 million for the quarters ended
June 30, 2005 and 2004, respectively, in other income and expense. The improvement reflects
increased interest income from higher invested cash balances and higher interest rates.
The tax rate for the second quarter of 2005 was approximately 36 percent compared to 23 percent in
the second quarter of 2004. The lower rate in the prior year was due to lower pre-tax income and
one-time tax benefits associated with the better than expected results related to the taxation of
certain foreign income on the U.S. Federal tax return.
Income from continuing operations in the second quarter of 2005 was $15.8 million, or $0.47 per
basic share and $0.46 per diluted share, compared with income from continuing operations of $5.9
million, or $0.17 per basic share and $0.16 per diluted share, in the second quarter of 2004.
Discontinued operations during the second quarter of 2005 included a gain of $4.6 million, net of
tax, related to the sale of the Specialty Papers business. In addition, the after tax income from
the operations of the Specialty Papers business was $1.0 million and $1.4 million for the second
quarter of 2005 and 2004, respectively. These results exclude corporate overhead costs previously
allocated to this business. Discontinued operations also included a loss of $0.1 million and $0.5
million, net of taxes, in the second quarter of 2005 and 2004, respectively, related to the Jazz
Photo litigation costs.
Net income in the second quarter of 2005 was $21.3 million, or $0.63 per basic share and $0.62 per
diluted share, compared with net income of $6.8 million, or $0.20 per basic share and $0.19 per
diluted share, in the second quarter of 2004.
Comparison of Six Months Ended June 30, 2005 and 2004
On a year to date basis, net revenue of $616.5 million increased 3.0 percent from last years
revenues of $598.6 million (adjusted to reflect the sale of Specialty Papers with its results
reported in discontinued operations). For the year to date period, U.S. revenue totaled $219.2
million, or 36 percent of worldwide revenue, compared with $227.0 million, or 38 percent, from a
year ago. Non-U.S. revenue totaled $397.3 million, or 64 percent of worldwide revenue, compared
with $371.6 million, or 62 percent, from a year ago. The revenue improvement in the first half of
2005 was caused by volume increases of approximately 16 percent and the effect of a positive
currency exchange rate translation of approximately two percent partially offset by price declines
of approximately 15 percent. As discussed under Impact of Changes in Foreign Currency Rates
below, pricing changes can be impacted by changes in foreign currency exchange rates. Revenue
growth was driven by optical media products as the Company benefited from growth in its Global Data
Media joint venture and DVD products. Also contributing to the growth were flash media
products. These increases were partially offset by a decline in diskette sales.
16
Gross profit on a year to date basis was $157.5 million or 25.6 percent of revenue, compared to
$157.2 million, or 26.3 percent of revenue in the first half of 2004. The second quarter of 2004
included inventory related charges of $9.0 million associated with competitive market pricing of
optical media products. The decrease in gross profit percentage was primarily due to a higher
proportion of lower gross margin products in the overall sales mix, offset partially by the
inventory related charges in the second quarter of last year.
Selling, general and administrative expenses for the first six months of 2005 were $76.4 million,
or 12.4 percent of revenue, compared to $85.6 million, or 14.3 percent of revenue, in the first
half of 2004. The decrease in SG&A as a percent of revenue was primarily due to the Companys cost
reduction efforts taken during 2004.
Research and development costs were $26.0 million, or 4.2 percent of revenue on a year to date
basis, as compared to $29.6 million, or 4.9 percent of revenue in the first six months of 2004. The
decrease is due to the Companys cost reduction efforts taken during 2004 as the Company focused on
higher priority projects within the R&D organization.
The second quarter of 2004 included restructuring and other charges of $3.1 million. The charges
related to a plan to close the Companys production facility in Tucson, Arizona, as well as
international administrative and sales employee reductions.
Based on the above factors, operating income in the first half of 2005 was $55.1 million, or 8.9
percent of revenues, compared with operating income of $38.9 million, or 6.5 percent of revenues,
for the same period last year.
Other income and expense was a cost of $0.7 million and $0.3 million for the year to date periods
ended June 30, 2005 and 2004, respectively. The increase was due to several factors including the
$1.9 million impairment recorded in the first quarter of 2005 on an investment that had an
other-than-temporary decline in value and an increase in the expense related to minority interests
of $1.3 million, partially offset by an increase in interest income of $2.3 million from higher
invested cash balances and higher rates.
The tax provision on a year to date basis was $7.8 million resulting in a rate of 14 percent
compared to a tax provision of $12.6 million resulting in a rate of 33 percent in the first six
months of 2004. The reduction in the current year related to the favorable resolution of a U.S. tax
matter that resulted in a one-time tax benefit of $12.0 million, or $0.35 per diluted share, in the
first quarter of 2005. The matter involved the U.S. treatment of tax benefits associated with
changes to the Companys European structure initiated in 2000 that were approved by U.S. tax
authorities in the first quarter of 2005, resulting in the reversal of an income tax accrual.
17
Income from continuing operations in the first six months of 2005 was $46.6 million, or $1.38 per
basic share and $1.36 per diluted share, compared with income from continuing operations of $26.0
million, or $0.73 per basic share and $0.72 per diluted share, in the first half of 2004. The
one-time tax benefit of $12.0 million discussed above resulted in an additional $0.35 per diluted
share in the first quarter of 2005.
Discontinued operations during the first six months of 2005 included a gain of $4.6 million, net of
tax, related to the sale of the Specialty Papers business. In addition, the after tax income from
the operations of the Specialty Papers business was $2.2 million and $3.0 million for the first six
months of 2005 and 2004, respectively. These results exclude corporate overhead costs previously
allocated to this business. Discontinued operations also included a loss of $0.7 million and $0.8
million, net of taxes, in the first six months of 2005 and 2004, respectively, related to the Jazz
Photo litigation costs.
Year to date net income was $52.7 million, or $1.56 per basic share and $1.54 per diluted share,
compared with net income of $28.2 million, or $0.80 per basic share and $0.78 per diluted share, in
the first half of 2004.
Impact of Changes in Foreign Currency Rates
The Company has a market presence in more than 100 countries and sells products on a local
currency basis through a variety of distribution channels. While the Company sources some finished
goods, primarily optical products, from outside the U.S., the majority of the Companys revenues
are from products produced in its own manufacturing facilities, all of which are located in the
U.S. Comparisons of revenues and income from outside the U.S. are subject to fluctuations due to
the impact of translating results at differing exchange rates in different periods.
Changes in foreign currency exchange rates in the first six months of 2005 positively impacted
worldwide revenues by approximately two percent due to favorable translation. The impact on
profits is more difficult to determine due to the influence of other factors that we believe are
also impacted by currency rate changes, including the translation impact on local offsetting
expenses and pricing declines that over time work to offset translation benefits. For example, the
Company has generally experienced increased price erosion internationally as the dollar has
weakened. In addition, the weak dollar negatively impacts some regional business activity. The
Companys objective is to hedge a portion of the Euro operating income exposure through a
combination of currency forwards and options, which protects a portion of operating income against
downside risk but enables the Company to capture upside benefits from favorable translation (see
Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Form 10-Q).
Financial Position
As of June 30, 2005, the Companys cash and equivalents balance was $410.5 million, an increase of
$13.4 million from $397.1 million as of December 31, 2004. This increase is due to several factors
including the proceeds of $16.0 million from the sale of the Specialty Papers business and
operating cash
flows of $26.0 million, partially offset by share repurchases of $15.9 million and
the payment of dividends of $7.5 million. The Company also has other investments, which totaled
$35.6 million and $42.5 million as of June 30, 2005 and December 31, 2004, respectively, related to
investment grade interest bearing securities with original maturities greater than three months
that are classified as other current assets or other assets depending on the time remaining to
maturity.
18
Accounts receivable days sales outstanding was 46 as of June 30, 2005, up one day from December 31,
2004. Days sales outstanding is calculated using the count-back method, which calculates the number
of days of most recent revenues that are reflected in the net accounts receivable balance. Days of
inventory supply was 68 as of June 30, 2005 compared to 53 days as of December 31, 2004.
Days of inventory supply is calculated using the current period inventory balance divided by the
average of the inventoriable portion of cost of goods sold for the previous 12 months, expressed in
days. The increase in days of inventory supply was due primarily to two factors. The Company
increased inventory levels in anticipation of future demand for a new large retail customer, who
will be coming on stream with a full product offering in the second half of 2005. In addition, as
the Company prepares to close the Tucson manufacturing facility, it is building inventory of some
legacy chrome-based tape products which it anticipates selling over time. The result was an
increase in the inventory balance of $34.1 million to $165.4 million as of June 30, 2005 from
$131.3 million as of December 31, 2004.
Other current assets were $82.5 million as of June 30, 2005 compared to $76.6 million as of
December 31, 2004. The increase was caused by the maturation of certain of the Companys cash
investments which caused them to move from long-term to short-term assets, partially offset by a
reduction in current deferred taxes and the settlement of the insurance receivable related to the
Jazz Photo litigation.
Other assets were $76.8 million as of June 30, 2005 compared to $110.2 million as of December 31,
2004. The decrease was caused by the maturation of certain of the Companys cash investments which
caused them to move from long term to short-term assets, as well as a decrease in long-term
deferred taxes.
Other current liabilities were $88.7 million as of June 30, 2005 compared to $135.3 million as of
December 31, 2004. The decrease during the period was caused mainly by reductions of $12.2 million
paid for employee separation costs as well as the payment of the settlement of the Jazz Photo
litigation recorded in the fourth quarter, which decreased other current liabilities by $25.0
million and other current assets by $4.1 million.
Liquidity and Capital Resources
Cash provided by operating activities of $26.0 million in the first six months of 2005 was driven
by net income of $52.7 million. The $26.0 million of cash generated from operations includes cash
outflows for the increase in inventory balance the Company experienced during the period and was
after payment of the net settlement of $20.9 million for the Jazz Photo litigation, the expense for
which was recorded in the fourth quarter of 2004, and included $12.2 million paid for severance
costs related to the Companys 2004 restructuring programs. Cash provided by operating activities
of $30.1 million in the first six months of 2004 was driven by net income of $28.2 million.
19
Cash provided by investing activities was $9.7 million in the first six months of 2005 and cash
used in investing activities was $41.2 million in the first six months of 2004. Investing
activities primarily relate to capital spending of $9.5 million and proceeds of $16.0 million from
the sale of Specialty Papers in the first six months of 2005. Investing activities primarily
related to capital spending of $20.3 million and net purchases of investments of $20.1 million in
the first six months of 2004. The investments relate to investment grade interest bearing
securities with maturities greater than three months and are classified as other current assets or
other assets, depending on the time remaining to maturity.
Cash used in financing activities was $14.8 million in the first six months of 2005 and $7.5
million in the first six months of 2004. Cash usages in 2005 were driven by share repurchases of
$15.9 million and dividend payments of $7.5 million, offset partially by cash inflows of $8.6
million related to the exercise of stock options. Cash usages for the same period in 2004 were
driven by share repurchases of $14.0 million and dividend payments of $6.4 million, offset by cash
inflows of $12.9 million related to the exercise of stock options.
As of June 30, 2005, the Company does not have any debt outstanding. The Company maintains a Credit
Agreement with a group of banks that expires December 15, 2006. The Credit Agreement provides for
revolving credit, including letters of credit, with borrowing availability of $100 million. The
Credit Agreement provides for, at the option of the Company, borrowings at either a floating
interest rate based on a defined prime rate or a fixed rate related to the Eurodollar rate, plus a
margin based on the Companys consolidated leverage ratio. The margins over a defined prime rate
and Eurodollar rate range from zero to 0.4 percent and 1.1 to 1.6 percent, respectively. Letter of
credit fees are equal to the Eurodollar margins. A facility fee ranging from 0.2 to 0.4 percent per
annum based on the Companys consolidated leverage ratio is payable on the line of credit. In
addition, a utilization fee ranging from zero to 0.25 percent per annum based on the Companys
consolidated leverage ratio is payable on the line of credit. In conjunction with the Credit
Agreement, the Company has pledged 65 percent of the stock of certain of the Companys foreign
subsidiaries. Covenants include maintenance of a minimum consolidated tangible net worth, a
required EBITDA, and a maximum leverage ratio. The Company does not expect these covenants to
materially restrict its ability to borrow funds in the future. No borrowings were outstanding under
the Credit Agreement as of June 30, 2005 and the Company was in compliance with all covenants under
the Credit Agreement.
In addition, certain international subsidiaries have arranged borrowings locally outside of the
Credit Agreement discussed above. As of June 30, 2005, there were no borrowings outstanding under
such arrangements.
In 1997, the Companys Board of Directors authorized the repurchase of up to six million shares of
the Companys common stock and in 1999 increased the authorization to a total of 10 million shares.
On August 4, 2004, the Companys Board of Directors increased the authorization for repurchase of
common stock, expanding the remaining share repurchase authorization of 1.8 million shares as of
June 30, 2004, to a total of six million shares. During the first six months of 2005, the Company
repurchased 0.5 million shares. As of June 30, 2005, the Company had repurchased 2.7 million shares
under this authorization and held, in total, 9.1 million shares of treasury stock acquired at an
average price of $24.61 per share.
20
The Company paid a cash dividend of $0.10 per share, or $3.4 million, during the first quarter of
2005 and paid a cash dividend of $0.12 per share, or $4.1 million, during the second quarter of
2005. On August 3, 2005, the Company announced that its Board of Directors declared a quarterly
cash dividend of $0.12 per share, payable September 30, 2005, to shareholders of record at the
close of business on September 15, 2005. Any future dividends are at the discretion of and subject
to the approval of the Companys Board of Directors.
As previously disclosed, the Company expects to contribute $10 million to $15 million to its
pension plans in 2005. As of June 30, 2005, approximately $7.8 million of contributions have been
made.
The Companys current liquidity needs for 2005 include the following: capital expenditures targeted
to be approximately $15 to $20 million; pension funding of $2 million to $7 million; operating
lease payments of approximately $7 million; severance payments related to restructuring of
approximately $3 million; any amounts associated with the repurchase of common stock under the
authorizations discussed above or any dividends that may be paid upon approval
of the Board of Directors; and normal requirements to fund operating activities. The Company
expects that cash and equivalents plus long term cash investments, together with cash flow from
operations and availability of borrowings under its current and future sources of financing,
provides liquidity sufficient to meet these needs and operate the Company.
Other than operating lease commitments, the Company is not using off-balance sheet arrangements,
including special purpose entities. The Company does not have any contractual obligations or
commercial commitments with terms greater than one year that would significantly impact its
liquidity.
Contractual Obligations
A table of the Companys contractual obligations was provided in Item 7 in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004. There were no significant changes to the
Companys contractual obligations during the first six months of 2005.
Critical Accounting Policies and Estimates
A discussion of the Companys critical accounting policies was provided in Item 7 in the Companys
Annual Report on Form 10-K for the year ended December 31, 2004. There were no significant changes
to these accounting policies during the first six months of 2005.
New Accounting Standards
In December, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123
and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be valued at fair value on the date of grant, and to
be expensed over the applicable vesting period. Pro forma disclosure of the income statement
effects of share-based payments will no longer be an alternative. On April 14, 2005, the U.S.
Securities and Exchange Commission announced a deferral of the effective date of SFAS No. 123(R)
for calendar year companies until the beginning of 2006. The Company is currently evaluating its
transition alternatives.
21
Forward-Looking Statements and Risk Factors
The following section contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on the Companys current
outlook for fiscal year 2005, and are subject to the risks and uncertainties described below.
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Total Company revenue for the full year 2005 is targeted to grow between 3 and 5 percent
or to a range of $1.21 billion and $1.23 billion. |
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Full year 2005 operating income is targeted between $93 million and $98
million. The Companys previous guidance was $87 million to $92 million which included
approximately $7 million of operating income associated with the Specialty Papers business.
Excluding any contribution from Specialty Papers, this represents an increase of
approximately $13 million in the Companys operating income outlook over previous guidance.
In 2004, the Companys operating income (adjusted to reflect the reporting of Specialty
Papers as discontinued operations) of $44.6 million included charges of $25.2 million from
restructuring and other items. Thus, full year 2005 operating income is estimated to grow
between 33 and 40 percent over the $69.8 million as adjusted to reflect the sale of Specialty
Papers and to eliminate the 2004 restructuring and other items. |
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Fully diluted earnings per share from continuing operations is targeted
between $2.10 and $2.17 for the full year 2005 which includes the $0.35 per share benefit
from a favorable tax ruling recorded in the first quarter. |
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Capital spending for 2005 is targeted in the range of $25 million to $30
million, down from previous guidance of $35 million. |
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Depreciation and amortization for 2005 is targeted at $40 million, down from
previous guidance between $40 million and $45 million. |
The impact of restructuring and other charges, as described above, is provided solely to assist an
investors understanding of the impact of these items on the comparability of the Companys
operations. This information should not be construed as an alternative to the reported results
determined in accordance with accounting principles generally accepted in the United States of
America.
Certain information contained in this report which does not relate to historical financial
information, including the 2005 targeted projections, may be deemed to constitute forward-looking
statements. The words or phrases is targeting, will likely result, are expected to, will
continue, is anticipated, estimate, project, believe or similar expressions identify
forward looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are subject to certain risks and uncertainties, which could cause actual
results to differ materially from historical results, and those presently anticipated or
projected.
22
The Company wishes to caution investors not to place undue reliance on any such forward-looking
statements. Any forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update such statement to reflect events or
circumstances arising after such date. Among the factors that could cause the Companys actual
results in the future to differ materially from any opinion or statements expressed with respect
to future periods are continuing uncertainty in global economic and other conditions that make it
particularly difficult to predict product demand, the Companys ability to meet its cost reduction
and revenue growth targets, its ability to introduce new offerings in a timely manner either
independently or in association with OEMs or other third parties, its ability to achieve the
expected benefits in a timely manner from the Moser Baer relationships, in particular the Global
Data Media joint venture, the competitive pricing environment which could significantly impact the
Companys profit margins and valuation of inventory, foreign currency fluctuations, the outcome of
litigation, its ability to secure adequate supply of certain high demand products, the ready
availability and price of energy, the availability and price of key raw materials or critical
components, including polycarbonate raw materials, the market acceptance of newly introduced
product and service offerings, the rate of decline for certain existing products as well as
various factors set forth under the caption Risk Factors in Item 7 of the Companys Annual
Report on Form 10-K for the year ended December 31, 2004, and in the Companys other filings with
the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except for the paragraph noted below, there has been no material change since the Companys Annual
Report Form 10-K for the year ended December 31, 2004. For further information, see Item 7A.
Quantitative and Qualitative Disclosures About Market Risk included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004. Also, see information on derivatives and
hedging activities in Note 10 to the Consolidated Financial Statements of this Form 10-Q.
As of June 30, 2005, the Company had $113.0 million notional amount of foreign currency forward and
option contracts of which $40.1 million hedged recorded balance sheet exposures. This compares to
$176.2 million notional amount of foreign currency forward and option contracts as of December 31,
2004, of which $51.4 million hedged recorded balance sheet exposures. An immediate adverse change
of 10 percent in quarter-end foreign currency exchange rates with all other variables (including
interest rates) held constant would reduce the fair value of foreign currency contracts outstanding
as of June 30, 2005 by $8.0 million.
Item 4. Controls and Procedures
Based on an evaluation of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of June 30, 2005, the
end of the period covered by this report, the Chairman of the Board and Chief Executive Officer,
Bruce A. Henderson, and the Vice President, Chief Financial Officer, Paul R. Zeller, have
concluded that the disclosure controls and procedures were effective.
During the quarter ended June 30, 2005, there was no change in the Companys internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 1 Legal Proceedings included in the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2005.
The Company is the subject of various pending or threatened legal actions in the ordinary course of
its business. All such matters are subject to many uncertainties and outcomes that are not
predictable with assurance. Consequently, as of June 30, 2005, the Company is unable to ascertain
the ultimate aggregate amount of any monetary liability or financial impact that may be incurred by
the Company with respect to these matters. While these matters could materially affect operating
results when resolved in future periods, it is managements opinion that after final disposition,
any monetary liability to the Company beyond that provided in the Condensed Consolidated Balance
Sheet as of June 30, 2005 would not be material to the Companys financial position.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) (b)
Not applicable
(c) Registrant Purchases of Equity Securities
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(c) Total |
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(d) Maximum |
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Number of |
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Number (or |
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Shares (or |
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Approximate |
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(a) |
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(b) |
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Units) |
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Dollar Value) of |
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Total |
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Average |
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Purchased as |
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Shares (or Units) |
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Number of |
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Price |
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Part of |
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that May Yet Be |
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Shares (or |
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Paid per |
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Publicly |
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Purchased Under |
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Units) |
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Share (or |
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Announced Plans |
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the Plans or |
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Period |
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Purchased |
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Unit) |
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or Programs |
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Programs |
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April 1,
2005
April 30 2005 |
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3,288,300 |
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May 1,
2005
May 31, 2005 |
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25,200 |
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$ |
37.10 |
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25,200 |
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3,263,100 |
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June 1,
2005
June 30, 2005 |
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3,263,100 |
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Total |
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25,200 |
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$ |
37.10 |
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25,200 |
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3,263,100 |
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The Company currently has a share repurchase program authorized by the Board of Directors. The
program was originally authorized by the Board in 1997 for the repurchase of up to six million
shares of the Companys common stock and that authorization was increased to 10 million shares in
1999. The program was announced on February 4, 1997 and the increased authorization was announced
on January 26, 1999. On August 4, 2004, the Companys Board of Directors increased the
authorization for repurchase of common stock, by expanding the remaining authorization (1.8 million
shares as of June 30, 2004), to a total of six million shares. This increased authorization was
announced on August 4, 2004 and has no expiration date.
24
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the Companys 2005 Annual Meeting of Shareholders held on May 4, 2005, the shareholders
approved the following:
(a) A proposal to elect three Class III directors of the Company to serve for three-year terms
ending in 2008, as follows:
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Directors |
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Votes For |
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Votes Withheld |
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Linda W. Hart |
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27,208,371 |
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2,281,318 |
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Bruce A. Henderson |
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28,608,083 |
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861,606 |
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Charles Reich |
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28,168,489 |
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1,321,200 |
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There were no broker non-votes. In addition, the terms of the following directors continued after
the meeting: Class II directors for a term ending in 2007- Glen A. Taylor, Daryl J. White and
Charles A. Haggerty; and Class I directors for a term ending in 2006- Michael S. Fields, L. White
Matthews, III and Ronald T. LeMay. |
(b) A proposal to ratify the appointment of PricewaterhouseCoopers LLP to serve as independent
registered public accounting firm for the Company for the year ending December 31, 2005. The
proposal received 29,199,410 votes for, and 135,485 against, ratification. There were 154,794
abstentions and no broker non-votes. |
(c) A proposal to approve the 2005 Stock Incentive Plan. The proposal received 17,352,400 votes
for, and 8,340,856 against, approval. There were 317,188 abstentions and 3,479,245 broker
non-votes.
Item 5. Other Information
Not Applicable
Item 6. Exhibits
The following documents are filed as exhibits to this Report.
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10.1 |
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2005 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on May 9,
2005) |
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10.2 |
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Form of 2005 Stock Incentive Plan Stock Option Agreement
for employees (incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed on May 9, 2005) |
25
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10.3 |
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Form of 2005 Stock Incentive Plan Stock Option Agreement
for executive officers (incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K filed on May 9, 2005) |
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10.4 |
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Form of 2005 Stock Incentive Plan Stock Option Agreement
for directors (incorporated by reference to Exhibit 10.4 to the Companys
Current Report on Form 8-K filed on May 9, 2005) |
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10.5 |
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Form of 2005 Stock Incentive Plan Restricted Stock Award
Agreement for employees (incorporated by reference to Exhibit 10.5 to the
Companys Current Report on Form 8-K filed on May 9, 2005) |
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10.6 |
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Form of 2005 Stock Incentive Plan Restricted Stock Award
Agreement for executive officers (incorporated by reference to Exhibit 10.6
to the Companys Current Report on Form 8-K filed on May 9, 2005) |
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10.7 |
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Form of 2005 Stock Incentive Plan Restricted Stock Award
Agreement for directors (incorporated by reference to Exhibit 10.7 to the
Companys Current Report on Form 8-K filed on May 9, 2005) |
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10.8 |
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Amendment to 2000 Stock Incentive Plan Restricted Stock
Award Agreement for executive officers (incorporated by reference to
Exhibit 10.8 to the Companys Current Report on Form 8-K filed on May 9,
2005) |
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10.9 |
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Form of 2000 Stock Incentive Plan Restricted Stock Award
Agreement for executive officers (incorporated by reference to Exhibit 10.9
to the Companys Current Report on Form 8-K filed on May 9, 2005) |
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10.10 |
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Form of 2000 Stock Incentive Plan Stock Option
Agreements for employees (incorporated by reference to Exhibit 10.10 to the
Companys Current Report on Form 8-K filed on May 9, 2005) |
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10.11 |
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Form of 2000 Stock Incentive Plan Stock Option
Agreements for executive officers (incorporated by reference to Exhibit
10.11 to the Companys Current Report on Form 8-K filed on May 9, 2005) |
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10.12 |
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Form of Restricted Stock Award Agreement between the
Company and Frank Russomanno (incorporated by reference to Exhibit 10.12 to
the Companys Current Report on Form 8-K filed on May 9, 2005) |
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10.13 |
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Director Compensation Program (incorporated by reference
to Exhibit 10.13 to the Companys Current Report on Form 8-K filed on May
9, 2005) |
26
|
15.1 |
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Awareness Letter from the Companys Independent
Registered Public Accounting Firm regarding Unaudited Interim Financial
Statements |
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31.1 |
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Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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Imation Corp.
(REGISTRANT) |
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Date: August 4, 2005
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By:
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/s/ Paul R. Zeller |
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Paul R. Zeller
Vice President,
Chief Financial Officer
(duly authorized officer and
principal financial officer) |
27
EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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15.1
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Awareness Letter from the Companys Independent Registered Public Accounting Firm regarding
Unaudited Interim Financial Statements |
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31.1
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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|
32.2
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
28