UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| R | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the fiscal year ended December 31, 20122013 |
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the transition period from to |
Commission file number: 1-14310
____________________________
IMATION CORP.
(Exact name of registrant as specified in its charter)
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| Delaware | | 41-1838504 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1 Imation Way Oakdale, Minnesota (Address of principal executive offices) | | 55128 (Zip Code) |
(651) 704-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
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| Common Stock, $.01 per share | | New York Stock Exchange, Inc.;
Chicago Stock Exchange, Incorporated
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Preferred Stock Purchase Rights | | New York Stock Exchange, Inc.; Chicago Stock Exchange, Incorporated |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No R
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
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| Large accelerated filer | o | Accelerated filer | R | Non-accelerated filer | o | Smaller reporting company | o |
| | | | | (Do not check if a smaller reporting company) | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
Aggregate market value of voting and non-voting stock of the registrant held by non-affiliates of the registrant, based on the closing price of $5.91$4.23 as reported on the New York Stock Exchange on June 29, 2012,28, 2013, was $220.0$159.4 million.
The number of shares outstanding of the registrant’s common stock on March 6, 20132014 was 41,508,767.41,993,542
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of registrant’s Proxy Statement for registrant’s 20132014 Annual Meeting are incorporated by reference into Part III.
IMATION CORP.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 20122013
TABLE OF CONTENTS
PART I
General
Imation Corp., a Delaware corporation, is a global scalabledata storage and data security company. Our portfolio includes commercialproducts and consumer datasolutions help organizations and individuals store, manage and protect their digital content. Imation’s storage and security portfolio includes Nexsan™ high-density, archive and solid-state optimized unified hybrid storage solutions; IronKey™ mobile security solutions that address the needs of professionals for secure data transport and mobile workspaces; and consumer storage solutions, audio products as well as products designed to manage audio and video information inaccessories sold under the home.Imation™, Memorex™ and TDK Life on Record™ brands. Imation reaches customers in more than 100 countries through aour global distribution network. As used herein, the terms “Imation,“Imation,” “Company,“the Company,” ‘‘‘‘we,” “us,“us,” or “our”“our” mean Imation Corp. and its subsidiaries and consolidated entities unless the context indicates otherwise.
In JulyImation Corp. was formed in 1996 Imation was established as a result of the spin-off of substantially all of the businesses which comprised substantially all of the data storage and imaging systems groups of 3M Company. We subsequentlySubsequent to the spin-off we divested all of theour non-data storage businesses and focused on data storage media, primarily as a manufacturer of magnetic tape products under the Imation brand, sold to commercial end users through multiple distribution channels. We then expanded our business into other removable data storage media such as optical media, flash and solid state drives, and removable and external hard disk drives. Indrives and consumer electronics, including audio and video products with business acquisitions in 2006 we acquired substantially all of the assets ofand 2007 that included our Memorex International Inc. (Memorex), followed by the acquisition of theand TDK Recording Media business (TDK Life on Record)Record brands. Also in 2007. In 2007 and in 2008, we also acquired certain assets of Memcorp, Inc. and Memcorp Asia Limited (together Memcorp) usedresulting in or relating to the sourcing and sale of consumer electronic products, principally under theour Memorex brand name. This acquisition established our foundation in audio and video consumer electronic products. In 2008, we expanded our presence in consumer electronic products with the acquisition of certain assets of Xtreme Accessories, LLC (XtremeMac), a maker of accessories for Apple consumer electronics products. business and XtremeMac™ business. Both of these businesses have recently been divested as a part of our strategic transformation discussed below.
In February 2011 we launchedannounced our transformation strategy, to growwhich included improving gross margins, exiting low margin products and introducing new products in the secure and scalable storage markets and createcreating a global leadership position in high-security data storage and device management with three acquisitions:management. In 2011, we purchased the secure data storage hardware business of IronKey Systems, Inc. (IronKey), and the portable security solutions and technologies of MXI Security (MXI) from Memory Experts International, Inc., the Encryptx security solutions for removable storage devices and removable storage media from BeCompliant Corporation.
On December 31, 2012, we acquired Nexsan Corporation (Nexsan), a provider of disk-based storage systems. The acquisition included the Nexsan technology platform and portfolio of disk-based and hybrid disk-and-solid-state storage systems. This acquisition helps buildwas a platform forstep toward our strategy of investing in growth platforms in data storage and data security solutions and was intended to significantly accelerate our long-term growth in high-growth datathe small and medium-sized business and distributed enterprise storage and security solutions markets.
OurToday, our global brand portfolio includes the Imation™Imation brand, the Memorex™Memorex brand, the XtremeMac™ brand, IronKey™IronKey brand and the Nexsan™Nexsan brand. Imation is also the exclusive licensee of the TDK Life on Record™Record brand, one of the world’sworld’s leading recording media brands.
Strategic Transformation
During the fourth quarter of 2012, we announced the acceleration of our strategic transformation, including the planned realignment of our global business into two new business units, a cost reduction program and our increased focus on data storage and data security including exploring strategic options for our consumer electronics brands and businesses. As our traditional media businesses decline,were declining, we are acceleratingdetermined that we needed to accelerate our business transformation to further focus on data storage and data security. Further, on February 13,transformation. During the first quarter of 2013 we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. We will continue our TDK Life on Record business on a more selective basis.
The realignmentdivestiture of our globalMemorex consumer electronics business into two new business units will better alignoccurred on October 15, 2013 and the Company with our key commercial and consumer channels. The two business units will consist of Tiered Storage and Security Solutions (TSS), which will focus on small and medium business, and enterprise and government customers; and Consumer Storage and Accessories (CSA), which will focus on retail channels. We continued to manage and evaluate results through December 31, 2012 under our historic regional segment presentation but will report segment information under the new structure beginning with the first quarter of 2013. See Note 14 - Business Segment Information and Geographical Data in our Notes to Consolidated Financial Statements for more information on our business segments.
In October 2012, the Board of Directors approved a restructuring program in order to realign our business structure and reduce operating expenses by more than 25 percent over time. This restructuring program addresses product line rationalization and infrastructure, and includes a reduction of approximately 20 percentdivestiture of our global workforce. These actions are being implemented beginning in 2013. We anticipate we will incur cash charges up to $40 million, with total charges between $50 million and $60 million (excluding charges associated with goodwill and
intangible asset impairments), the majority of which will occur in 2013.XtremeMac business occurred on January 31, 2014. See Note 7 - Restructuring and Other Expense in our Notes to Consolidated Financial Statements for more information on the restructuring program.
In conjunction with the acceleration of our strategic transformation in the fourth quarter of 2012, we evaluated our intangible assets, including goodwill, for impairment and recorded non-cash impairment charges of $283.8 million in the quarter. The intangible asset charges are primarily due to an accelerated secular optical market decline. See Management's Discussion and Analysis of Financial Condition and Results of Operations4 - Goodwill Impairment, Critical Accounting PoliciesAcquisitions and Estimates and Note 6 - Intangible Assets and GoodwillDivestitures in our Notes to Consolidated Financial Statements for further information on these divestitures. The consumer storage business under the impairment charges.Memorex and TDK Life on Record brands and the consumer electronics business under the TDK Life on Record brand are being retained.
The realignment of our global business into two new business units better aligns the Company with our key consumer and commercial channels. The two business units consist of Consumer Storage and Accessories (CSA), which focuses mainly on retail channels; and Tiered Storage and Security Solutions (TSS), which focuses on small and medium business, enterprise and government customers. See further discussion of our new business segments below.
In October 2012, the Board of Directors approved our Global Process Improvement Restructuring Program (GPI Program) in order to realign our business structure and reduce operating expenses in excess of 25 percent over time. This restructuring program addressed product line rationalization and infrastructure and included a planned
reduction in our global workforce. The majority of these actions were implemented during 2013. As of December 31, 2013 we have reduced operating expenses by approximately 30 percent, not considering the incremental operating expense from the acquisition of Nexsan, and we have reduced our global workforce by over 20 percent under the GPI Program.
See Note 7 - Restructuring and Other Expense in our Notes to Consolidated Financial Statements for more information on the GPI Program.
Our Products
We have threefour major product categories: traditional storage, secure and scalable storage, and audio and video information.
Traditional Storage
Traditional storage products include optical media products, magnetic tape media products and other traditionalConsumer storage media products.and Audio and accessories in our CSA business unit and Storage and security solutions and Commercial storage media in our TSS business unit.
Consumer Storage Media
Our consumer storage media includes optical mediaproducts, USB flash drives, flash cards and external hard disk drives. Our optical products consist of DVDs, CDs DVDs and Blu-ray™ recordable media. We have the leading global market share for recordable optical media,media; however, the overall market for CDs and DVDs is declining as digital streaming, hard disk and flash media replace optical media in some applications such as music and video recording. We sell high capacity Blu-ray discs which are used primarily for recording high-definition video content. Our recordable optical media products are sold through a variety of retail and commercial distribution channels and sourced from manufacturers in Taiwan and India. Optical storage capacities range from 700 megabyte (MB) CD-R (recordable) and CD-RW (rewritable) optical discs to 8.5 gigabyte (GB)GB dual layer DVD optical discs and Blu-ray™Blu-ray discs with 25 GB to 100 GB of capacity. Our optical media is sold throughout the world under brands we own or control, including Imation, Memorex and TDK Life on Record.
Our magnetic tape media products are used for back-up, business and operational continuity planning, disaster recovery, near-line data storage and retrieval and for cost-effective mass and archival storage. Capacity of our tape products range from less than 10 GB up to 6.25 terabytes (TB) per cartridge. The market for magnetic tape products has been in decline, but we continue to enjoy a leading market share. We have a significant intellectual property portfolio, a solid industry reputation, and strong relationships with key original equipment manufacturers (OEMs). Some of our legacy tape formats are proprietary or semi-proprietary and have higher gross profit margins than non-proprietary products. Our magnetic tape products are sold throughout the world under various brands.
Other traditional storage products primarily include optical drives and audio and video tape media.
Secure and Scalable Storage
Secure storage products and software include USB flash drives and external hard drives designed to meet the most stringent security standards to protect data at rest with Federal Information Processing Standard (FIPS) validation, password and biometric authentication, including biometric USB drives, encrypted and biometric hard disk drives, secure portable desktop solutions and software solutions. Flash media products with security features provide margins significantly higher than traditional flash media without data security. These products were sold throughout the world under various brands and as of the end of the 2012 we have consolidated the brands under the IronKey name. We also sell standard USB flash drives, flash cards and external hard disk drives throughout the world under our Imation, Memorex and TDK Life on Record brands. We source these products from manufacturers primarily in Asia and sell them through a variety of retail and commercial distribution channels around the world. USB flash drives have capacities ranging from 2 GB up to 128 GB and capacities continue to increase as new products are introduced. External hard disk drives have capacities ranging from 500 GB to 32 TB. Scalable
Audio and Accessories
Our audio and accessories products include headphones and speakers sold under the TDK Life on Record brand. The portfolio continues to evolve as we focus on higher-margin, differentiated accessories products and respond to customer demand. We design products to meet user needs and source these products from manufacturers throughout Asia.
Storage and Security Solutions
Our storage systems portfolio ranges from high volume, dense storage products to innovative unified hybrid storage solutions. This includes Nexsan E-Series™ disk arrays with industry-leading storage density, reliability and power management targeting the block-based storage market; the NST® line of hybrid storage combining solid state technology with spinning disk to offer high performance and capacity and the Assureon® secure archive systems for data offload, compliance and secure cloud deployments. This robust product family addresses the most important parts of the data storage market and is delivered globally.
The mobile security family delivers innovative secure data solutions for corporate employees who need to protect information on the go and targets organizations that require highly secure solutions in a Bring Your Own Device (BYOD) environment. Products and services include DataGuardsecure storage products, software and portable workspace solutions such as USB flash drives and external hard drives. These drives are designed to meet the most stringent security standards that protect data at rest with the U.S. Government Federal Information Processing Standard (FIPS) validation, which includes strong encryption protection applianceswith password and InfiniVault™biometric authentication. Flash media products with security features provide margins significantly higher than traditional flash media without data security. We consolidated the brands for these products under the IronKey name.
Commercial Storage Media
Our magnetic tape media products are used for business and operational continuity planning, disaster recovery, data back-up, near-line data storage appliancesand retrieval and for active archivingcost-effective mass and compliance.archival storage. Capacity of our tape products ranges from less than 10 GB up to 6.25 TB per cartridge. The market for magnetic tape products has been in decline, but we continue to enjoy a leading market share in this core data storage market. We have a significant portfolio of intellectual property, a solid industry reputation and strong relationships with key original equipment manufacturers (OEMs). Some of our legacy tape formats are proprietary or semi-proprietary and have higher gross profit margins than non-proprietary products. Our magnetic tape products are sold throughout the
world under various brands. Our portfolio also includes the Imation RDX® removable hard disk drives, which are high-capacity, rugged and removable 2.5-inch hard disk drive cartridges with 320 GBgigabyte (GB) to 1.5 TBterabyte (TB) capacities. Our storage appliances incorporate RDX technology and we provide RDX removable hard disk drives, single dock systems and multi-bay RDX storage libraries.
With the acquisition of Nexsan, we added additional storage systems to our portfolio including the Nexsan E-Series disk arrays with industry-leading storage density, reliability and power management offering high value block-based storage; the NST line of hybrid storage combining solid state technology with spinning disk to offer high performance and capacity and the Assureon secure archive systems for data offload, compliance and secure cloud
deployments.
Audio and Video Information
Our audio and video information products include Apple iPad®, iPod® and iPhone® accessories, headphones, CD players, alarm clocks, portable boom boxes, MP3 players and speakers sold under the Memorex, TDK Life on Record and XtremeMac brands. The portfolio continues to evolve as we focus on higher-margin, differentiated accessories products that respond to consumer demand. We design products to meet user needs and source these products from manufacturers throughout Asia. On February 13, 2013, we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. We will continue our TDK Life on Record business on a more focused basis.
The table below describes our revenue by product category:
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| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | Revenue | | % of Total | | Revenue | | % of Total | | Revenue | | % of Total |
| | (Dollars in millions) |
| Traditional storage | |
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| Optical products | $ | 426.8 |
| | 38.8 | % | | $ | 511.9 |
| | 39.6 | % | | $ | 619.3 |
| | 42.4 | % |
| Magnetic products | 286.2 |
| | 26.0 | % | | 327.4 |
| | 25.4 | % | | 347.8 |
| | 23.8 | % |
| Other traditional storage | 15.4 |
| | 1.4 | % | | 47.7 |
| | 3.7 | % | | 62.8 |
| | 4.3 | % |
| Total traditional storage | 728.4 |
| | 66.2 | % | | 887.0 |
| | 68.7 | % | | 1,029.9 |
| | 70.5 | % |
| Secure and scalable storage | 210.1 |
| | 19.1 | % | | 210.1 |
| | 16.3 | % | | 207.5 |
| | 14.2 | % |
| Audio and video information | 161.1 |
| | 14.7 | % | | 193.3 |
| | 15.0 | % | | 223.5 |
| | 15.3 | % |
| Total | $ | 1,099.6 |
| | |
| | $ | 1,290.4 |
| | |
| | $ | 1,460.9 |
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Our Brands
The Imation brand has been at the forefront of data storage and digital technology for many years. Imation brand products include magnetic tape media, recordable CDs, DVDs and Blu-ray discs, flash products and hard disk drives. The Imation brand includes the DataGuard Data Protection Appliances, InfiniVault™ Storage appliances and RDX® Removable hard disk storage systems. Defender products include secure storage flash drives and external hard drives. Imation brand products are sold throughout the world and target the commercial user and individual consumer.
The Memorex brand was acquired by Imation in 2006. Memorex brandbranded products include recordable CDs, DVDs and Blu-ray discs, optical drives alarm clocks, portable boom boxes,and optical storage accessories, headphones and speakers.accessories. Memorex brand products are sold primarily in North America. We previously sold consumer electronics products under the Memorex brand until October 15, 2013 when we divested our Memorex consumer electronics business.
The rights to the TDK Life on Record™Record brand were acquired by Imation in 2007 under an exclusive long-term license from TDK Corporation (TDK). TDK Life on Record brand products include recordable CDs, DVDs and Blu-ray discs, flash drives, tape cartridges, headphones and speakers which are sold to commercial customers and individual consumers. TDK Life on Record brand products are sold throughout the world.
The XtremeMac brand was acquired by Imation in 2008. XtremeMac brand products include cases, chargers, cables and audio solutions to protect, power and play Apple iPad®, iPod®, iPhone®, Macintosh computer and other devices. XtremeMac products are developed for Apple enthusiasts and are available worldwide.
The IronKey brand was purchased in 2012 (with the 2011 purchase of IronKey, we acquired a license for the use of the IronKey brand but not the brand itself) for its secure storage management software and service, as well as the IronKey brand for secure storage products. In 2012, we consolidated our mobile security portfolio around the IronKey brand. IronKey products include hardware encrypted USB drives, PC on a Stick™ IronKey Workspaces for Microsoft® Windows To Go® and cloud-based or on-premise centralized secure device management solutions. These products are sold through security-focused value-added resellers (VARs) around the world.
The Nexsan brand was acquired by Imation in 2012. Nexsan brand products include E-Series disk arrays, NST line of hybrid storage and Assureon™Assureon secure archive systems. Nexsan storage solutions are ideal for a broad
range of applications including Virtual Machine storage, cloud storage, database, surveillance, bulk storage, backup and recovery, disaster recovery and archive. The Nexsan products are sold to small and medium-size enterprise customers across a range of vertical markets exclusively through our worldwide network VARs.
Business Segments
ThroughIn the endfirst quarter of 2012,2013, we revised our segment reporting to reflect changes in how we manage our business, was organized, managedreview operating performance and internallyallocate resources. We now manage our business through two reporting segments, Consumer Storage and externally reported asAccessories (CSA) and Tiered Storage and Security Solutions (TSS). Our new reporting segments differentiatedare generally aligned with our key consumer and commercial channels. Historical segment results have been reclassified to reflect current reporting segments.
We have two major product categories under our CSA segment: Consumer storage media and Audio and accessories and two major product categories under our TSS segment: Commercial storage media and Storage and security solutions. See Note14 - Business Segment Information and Geographic Data in our Notes to Consolidated Financial Statements for further information regarding our business segments and further discussion of our products above.
The table below describes our revenue by the regional markets we serve: Americas, Europe, North Asia and South Asia. product category:
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| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | Revenue | | % of Total | | Revenue | | % of Total | | Revenue | | % of Total |
| | (Dollars in millions) |
| Consumer Storage and Accessories | |
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| Consumer storage media | $ | 435.7 |
| | 50.6 | % | | $ | 594.3 |
| | 59.0 | % | | $ | 740.2 |
| | 63.4 | % |
| Audio and accessories | 42.6 |
| | 4.9 | % | | 41.0 |
| | 4.1 | % | | 35.0 |
| | 3.0 | % |
| Total Consumer Storage and Accessories | 478.3 |
| | 55.6 | % | | 635.3 |
| | 63.1 | % | | 775.2 |
| | 66.4 | % |
| Tiered Storage and Security Solutions |
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| Commercial storage media | 251.0 |
| | 29.2 | % | | 311.6 |
| | 31.0 | % | | 378.8 |
| | 32.5 | % |
| Storage and security solutions | 131.5 |
| | 15.3 | % | | 59.8 |
| | 5.9 | % | | 12.6 |
| | 1.1 | % |
| Total Tiered Storage and Security Solutions | 382.5 |
| | 44.4 | % | | 371.4 |
| | 36.9 | % | | 391.4 |
| | 33.6 | % |
| Total Net Revenue | $ | 860.8 |
| | |
| | $ | 1,006.7 |
| | |
| | $ | 1,166.6 |
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Geographic Regions
Each of theseour two reporting segments serves its customers in all geographic segments has responsibility for selling generally all of our product lines.
The Americas segment, our largest segment by revenue, includes North America, Central America and South America.regions worldwide. The United States represents the largest current market for our products. It has a great variety and sophistication of distribution channels including VARs, OEMs and retail outlets, mass merchants and online resellers. The countries in South America and the Caribbean represent potential growth markets with increasing penetration of Information Technology (IT) in the commercial and consumer markets.
Theoutlets. In Europe, segment includes Europe and parts of Africa. Western Europe exhibits traits similar to North America in terms of overall breadth of product offerings, high penetration of end user markets and breadth andof sophistication of distribution channels. Emerging markets in Eastern Europe represent potential growth markets for our products as ITInformation Technology (IT) end user and consumer markets grow.
In North Asia, is our second largest segment by revenue, and includeswe serve Japan, China, Hong Kong, Korea and Taiwan. Japan is the single largest market in North Asia. We also serve Australia, Singapore, India, the segmentMiddle East and isparts of Africa. Markets in these countries as well as Japan are generally similar to North America and Western Europe in terms of overall penetration of IT into the market, though itstheir distribution channels are less developed than those of other regions.
The South Asia segment includes Australia, Singapore, India, the Middle East and parts of Africa. It is similar to North America and Western Europe in terms of overall penetration of IT into the market, though its distribution channels are less developed.
The chart below breaks out our 2012 revenue by segment:
During the fourth quarter of 2012, we announced the realignment of our global business into two new business units to better align the Company with our key commercial and consumer channels. The two business units will consist of Tiered Storage and Security Solutions (TSS), which will focus on small and medium business, enterprise and government customers; and Consumer Storage and Accessories (CSA), which will focus on retail channels. The Company continued to manage and evaluate results through December 31, 2012 under our historic regional segment presentation but will begin reporting segment information under the new structure beginning with the first quarter of 2013.
See Note 14 - Business Segment Information and Geographic Data in our Notes to Consolidated Financial Statements for further information regarding our business segments.
Customers, Marketing and Distribution
Our products are sold to businesses and individual consumers. No one customer accounted for 10percent or
more of our revenue in 2013, 2012, 2011 or 2010.2011.
Our products are sold through a combination of distributors, wholesalers, VARs, OEMs and retail outlets. Worldwide, approximately 39 66percent of our 20122013 revenue came from distributors 45 and VARs, 30percent came from the retail channel and 164 percent came from OEMs. We maintain a company sales force and a network of distributors and VARs to generate sales of our products around the world.
Market and Competition
The global market for our products is highly competitive and characterized by continuing changes in technology, frequent new product introductions and performance improvements, diverse distribution channels, aggressive marketing and pricing practices and ongoing variable price erosion. Competition is based on a multitude of factors, including product design, brand strength, distribution presence and capability, channel knowledge and expertise, geographic availability, breadth of product line, product cost, media capacity, access speed and performance, durability, reliability, scalability, intellectual property, compatibility and compatibility.global product support capability.
Our primary competitors in recordable optical media include Maxell, JVC, Sony and Verbatim brands. Our primary competitors in magnetic tape media include Fuji, Sony, Maxell and HP brands. Our primary competitors in mobile security products include Kingston, Spyrus, Apricorn and Rocstor. In standard flash media our primary competitors include Kingston, SanDisk, Lexar and PNY. Western Digital and Seagate are our primary competitors in standard external and removable hard drives. These companies generally compete with us in all our regional business segments. While the parent companies that own these brands compete in the removable data storage media market, they generally do not report financial results for these business lines on a stand-alone basis. Therefore, it is difficult for us to estimate our relative market share. However, we use a variety of industry sources to estimate market size and share and we estimate we held a leading market share in 20122013 in optical and magnetic products with more than one-third of those markets.
Our primary competitors for our Nexsan products include mid-range storage systems and products from Dell, EMC, NetApp Quantum and Dot HillNimble as well as a number of smaller, privately-held storage system companies. Our primary competitors in mobile security products include Kingston, Spyrus, Apricorn and Rocstor. In standard flash media our primary competitors include Kingston,
SanDisk, Lexar and PNY. Our primary competitors in standard external and removable hard drives are Western Digital and Seagate.
The demand for data storage capacity is expected to grow. The magnetic tape industry has consistently addressed the growth in demand for storage capacity with new non-proprietary storage formats with higher capacity cartridges resulting in a lower cost per gigabyte which results in a decline in actual number of units of media shipped. In addition, theseThese non-proprietary formats experience greater price competition than proprietary formats. The market for non-proprietary format tape continues to gain share against proprietary formats and is typically more competitive with lower gross margins than proprietary formats.margins. In addition, lower cost disk and storage optimization strategies such as virtual tape and de-duplication remain a factor in certain sectors of the market. As a result, we expect our tape revenue to continue to be under pressure as these factors contribute over timedecline.
Nexsan storage system products operate in a large and competitive data storage market. Demand for data storage capacity is expected to grow and flexible customer solutions are required that include data security and protection, performance and scalability. We believe we have a shiftdiverse and competitive portfolio of products that addresses a wide range of customer needs in the mix of total tape revenue toward lower margin open formats.this market.
The optical market is in secular decline as digital streaming, hard disk and flash media replace optical media in some applications such as music and video recording. While our different brands have varying strengths in different regions of the world, in aggregate we have the leading overall share for recording optical media globally.
The secure flash media market is growing as more companies and individuals become victims of cyber-attacks and as data becomes more mobile. This is generating a marketplace need for flash products with a security overlay. The traditional flash media market is competitive with highly variable price swings driven by NAND chip manufacturing volume and capacity as well as market demand in the much larger embedded flash market. Focused and efficient sourcing and distribution, as well as diligent management of portfolio size, inventories, channel placement and promotional activity are critical elements for success in this market.
Audio and video informationaccessories products are sold based on a variety of factors, including brand and reputation, product features and designs, distribution coverage, innovation and price. Our competitors in the audio and video informationaccessories products market consist of numerous manufacturers and brands. The global audio and video informationaccessories products market is a very large and highly diverse market in terms of competitors, channels and products. Our current product offerings focus on a subset of this market.
Product Sourcing
We contract for the manufacturing of all products we sell and distribute from a variety of third-party providers that manufacture predominately outside the United States. We seek to differentiate our products through unique designs, product positioning, packaging, merchandising and branding.
On July31, 2007, we acquired substantially all of the assets relating to the marketing, distribution, sales,
customer service and support of removable recording media products, accessory products and ancillary products being sold under the TDK Life on Record brand name (TDK Recording Media), from TDK, including the assets or capital stock of TDK’sTDK’s operating subsidiaries engaged in the TDK Recording Media business. In conjunction with our acquisition of the TDK Recording Media business we also entered into a supply agreement, dated July31, 2007, with TDK (Supply Agreement), which allowsallowed us to purchase a limited number of Linear Tape-Open, or LTO,(LTO), Tape media and Blu-ray removable recording media products and accessory products for resale under the TDK Life on Record brand name. TDK agreed to supply such products on competitive terms, and TDK agreed not to sell any such products to third parties for resale under the TDK Life on Record brand name during the term of the trademark license agreements. The Supply Agreement will be terminated on March 31, 2014. The trademark license agreements will continue unless terminated by TDK no earlier than 2032 (2017 in the case of headphones and speakers) or earlier in the event of a material breach of the trademark license agreement, specific change of control events or default by Imation. The Supply Agreement will continue for so long as TDK manufactures any of the products. TDK owned approximately 18 percent of outstanding Imation Corp. common stock on DecemberDecember 31, 2012.2013.
In 2011, we signed a strategic agreement with TDK to jointly develop and manufacture magnetic tape technologies and we discontinued tape coating operations at our Weatherford, Oklahoma facility. Under the agreement, we collaboratecollaborated on the research and development of future tape formats in both companies’companies’ research centers in the U.S.and Japan, and consolidated tape coating operations to the TDK Group Yamanashi manufacturing facility. At the end of 2013, TDK announced its intent to cease manufacturing of magnetic tape. Imation will transition to source our product from alternate magnetic tape suppliers during 2014.
We also make significant purchases of finished and semi-finished products, including optical media and USB flash drives, certain finished tape and tape cartridges and consumer electronic products, primarily from Asian suppliers. For our optical media, we procure our supply primarily from three companies. If supply were disrupted from any of our primary suppliers, our business could be negatively impacted. The loss of these certain suppliers could have a material adverse impact on the business. We view the sourcing and distribution of finished goods as a critical
success factor for these products. Therefore, we seek to establish and maintain strategic sourcing relationships with several key suppliers.
Research, Development and Engineering
Development and timely introduction of new products are important to our success. We maintain an advanced research facilityfacilities and invest resources in researching, developing and engineering potential new products and improving existing products. Our research and development expense was $22.8$18.4 million, $21.0$20.4 million and $16.4$18.3 million for 2013, 2012, 2011 and 2010,2011, respectively. We invest in research, development, engineering and capital equipment in order to remain competitive and successfully develop and source products that meet market requirements. We are also engaged bothBeginning in 2013 we have reduced our research and development efforts on our ownlegacy products and in collaboration with other organizations in certain research programs related to future generations of magnetic tape that do not yet have specific commercialized products in the market. We also investare focusing on our growth areas by investment in research related to our strategic focus on data protection and management, storage hardware, audio and video information products, removable hard drive systems, disk-based storage systems and related software. As noted above, we signed a strategic agreement with TDK to jointly develop and manufacture magnetic tape technologies. Under the agreement, we collaborate on the research and development of future tape formats in both companies’ research centers in the U.S. and Japan.
Intellectual Property
We rely on a combination of patent, trademark and copyright laws, trade secret protection and confidentiality and license agreements to protect the intellectual property rights related to our products. We register our patents and trademarks in the United States and in a number of other countries where we do business. United States patents are currently granted for a term of 20 years from the date a patent application is filed. United States trademark registrations are for a term of ten years and are renewable every ten years as long as the trademarks are used in the regular course of trade. Pursuant to trademark license agreements between TDK and Imation and its affiliates, TDK granted Imation and its affiliates a long-term exclusive license to use the TDK Life on Record brand for current and future recordable magnetic, optical, flash media and accessory products globally. The trademark license agreements will continue unless terminated by TDK no earlier than 2032 (2017 in the case of headphones and speakers) or earlier in the event of a material breach of the trademark license agreement, specific change of control events or default by Imation.
During 2012,2013, we were awarded 2521 United States patents and at the end of the year held over 316263 patents in the United States.
Employees
At December 31, 20122013, we employed approximately 1,230940 people worldwide, with approximately 540370 employed in the United States and approximately 690570 employed internationally. Included in our employee count are approximately 200 employees associated with the Nexsan acquisition.
Environmental Matters
Our operations are subject to a wide range of federal, state and local environmental laws. Environmental remediation costs are accrued when a probable liability has been determined and the amount of such liability has been reasonably estimated. These accruals are reviewed periodically as remediation and investigatory activities proceed and are adjusted accordingly. Compliance with environmental regulations has not had a material adverse effect on our financial results. As of December 31, 2012,2013, we had environmental-related accruals totaling $0.4$0.2 million and we hadhave minor remedial activities underway at one of our prior manufacturing facilities. We believe that our accruals are adequate, though there can be no assurance that the amount of expense relating to remedial actions and compliance with applicable environmental laws will not materially exceed the amounts reflected in our accruals.
International Operations
Approximately 59percent of our total 20122013 revenue came from sales outside the United States, primarily through subsidiaries, sales offices, distributors, VARs and relationships with OEMs throughout Europe, Asia, Latin America and Canada. We do not own any manufacturing facilities. See Note14 - Business Segment Information and Geographic Data in our Notes to Consolidated Financial Statements for further information by geographic region.on our international operations.
As discussed under Risk Factors in Item1A of this Form10-K, our international operations are subject to various risks and uncertainties that are not present in our domestic operations.
Executive Officers of the Registrant
Information regarding our executive officers, as defined under Section 16 of the Securities Exchange Act of 1934 (Exchange Act), as of March 13, 20132014 is set forth below:
Gregory J. Bosler, age 51,52, is Senior Vice President and Group President, Consumer Storage and Accessories. From October 2010 to December 2012, he was Senior Vice President of Global Business Management. From May 2010 to October 2010 he was Vice President, Americas, and from January 2009 to April 2010 he was Vice President, Americas Consumer. Prior to joining Imation in January 2009, he was with TTE Corporation, a global consumer electronics manufacturer, where he held the position of Executive Vice President, North America Business Center from August 2004 until February 2008. Prior to that, Mr. Bosler held a series of senior sales and general management positions at Thomson Inc., Pioneer Electronics (USA) and Duracell Inc.
John P. Breedlove, age 55,56, is Vice President, General Counsel and Corporate Secretary, a position he has held since May 2011. Prior to joining Imation, from July 1993 to May 2011, he served as Vice President of business law and various other positions at Supervalu Inc., a $40 billion food wholesale and retail company and logistics provider. Prior to that role, Mr. Breedlove was an attorney with the law offices of Dorsey & Whitney, Minneapolis, and Graham & James, San Francisco.
Mark E. Lucas, age 58,59, is President, Chief Executive Officer and a member of our Board of Directors, positions he has held since May 2010. He was President and Chief Operating Officer from March 2009 through May 2010. Prior to joining Imation, he served as Chairman and Chief Executive Officer of Geneva Watch Group, a privately held company that is a leading designer, manufacturer and distributor of watches under both its own brand and licensed brands, from November 2005 to August 2008. Prior to that role, Mr. Lucas served as President and Chief Executive Officer of Altec Lansing Technologies, a manufacturer of consumer audio equipment from June 2001 to August 2005. Mr. Lucas was a member of the Board of Directors of Imation from April 2007 to February 2009 and served as a member of the Company's Audit and Finance Committee and Compensation Committee. Mr. Lucas resigned from the Board of Directors of Imation in connection with his appointment as President and Chief Operating Officer. Mr. Lucas' resignation from the Board of Directors was a requirement of his employment.
Scott J. Robinson, age 46,47, is Vice President, Corporate Controller and Chief Accounting Officer. He was appointed Vice President in February 2010 and was appointed Corporate Controller and Chief Accounting Officer in August 2007. He joined Imation in March 2004 and held the position of Chief Accountant until August 2007. Prior to joining Imation, he was at Deluxe Corporation, where he held the position of Assistant Corporate Controller from August 2002 to March 2004 and held the position of Director of Internal Audit from June 1999 to August 2002.
R. Ian Williams, age 42,43, is Vice President and Group President, Tiered Storage and Security Solutions. He joined Imation in February 2011 as Vice President for Global Marketing and Product Management. Prior to joining Imation, from 2006 to January 2011, he was the executive director of near-line enterprise storage for Seagate Technology, plc, a provider of data storage products, a leader in hard disk drives and storage solutions. From 2004 to 2006, he served as directorDirector of RAID solutions and external storage for Adaptec Inc. From 2000 to 2004 and following Compaq's acquisition by Hewlett-Packard Company, a computer software and hardware and IT consulting and services company, Williams was group product managerGroup Product Manager for Hewlett-Packard's enterprise storage, server storage and infrastructure products.
Paul R. Zeller, age 52,53, is Senior Vice President and Chief Financial Officer, a position he has held since May 2009. He was Vice President and Chief Financial Officer from August 2004 to May 2009. He has been with Imation since spin-off and held the position of Corporate Controller from May 1998 until August 2004. Prior to joining Imation, he held several accounting management positions with 3M Company.
Availability of SEC Reports
The Securities and Exchange Commission (SEC) maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including Imation Corp., that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov. We file annual reports, quarterly reports, proxy statements and other documents with the SEC under the Exchange Act. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We also make available free of charge through our website (www.imation.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Our business faces many risks. Any of the risks discussed below, or elsewhere in this Form 10-K or our other SEC filings, could have a material impact on our business, financial condition or results of operations.
We must make strategic decisions from time to time as to the products and technologies in which we invest and if we focus on products or technologies that do not perform in line with our strategic expectations or if market conditions change, our financial results could be adversely impacted. In February 2011 we announced our transformation strategy, which includes improving gross margins, exiting low margin products, introducing new products in secure and scalable storage, and organic and inorganic growth. In October 2012 we announced the acceleration of our transformation by reorganizing our businesses into two channel-focused business units, and increasing our focus on data storage and security including exploring strategic options with our consumer electronic brands and businesses.data security. If we are not successful in implementing these strategies or if market conditions change adversely for our chosen products or technologies, our financial results could be negatively impacted.
If we do not successfully implement our global restructuring plan and realize the benefits expected from the restructuring, our financial results will be affected. We have initiated a restructuring program in order to realign our business structure and reduce operating expenses in excess of 25 percent. This restructuring program addresses product line rationalization and infrastructure, and includes a reduction of approximately 20 percent of our global workforce. We may not be able to realize the expected benefits and cost savings if we do not successfully realign our businesses and reduce costs. If we are unable to restructure our operations successfully, or on a timely basis, our expectations of future results of operations, including certain cost savings expected to result from the restructuring, may not be met. If difficulties are encountered or such cost savings are otherwise not realized, it could have a material adverse effect on our business, financial condition and results of operations.
The future revenue growth of our business depends in part on the development and performance of our new products. We have experienced revenue declines over prior year in 2013, 2012 and 2011 and 2010 of $190.8$145.9 million or 14.814.5 percent, $170.5$159.9 million or 11.713.7 percent and $188.6$135.7 million or 11.410.4 percent, respectively. Historically, magnetic and optical products have provided the majority of our revenues. Demand for optical media products is decreasing due to a shift in the use of data streaming and other media for storing data. The overall market has been impacted by industry wide dynamics, including competing formats as well as continuing improvements in compression and deduplication technologies. While demand for data capacity is expected to increase, removable magnetic media market size is expected to decrease in terms of
revenue. If we are not successful in growing new product revenues, including revenues related to our recent acquisition of Nexsan and revenues from our portable workspace solutions, our financial results could be negatively impacted.
Because of the rapid technology changes in our industry, we may not be able to compete if we cannot quickly develop, source, introduce and deliver differentiated and innovative products. We operate in a highly competitive environment against competitors who are both larger and smaller than us in terms of resources and market share. Our industry is characterized by rapid technological change and new product introductions. In these highly competitive and changing markets, our success will depend, to a significant extent, on our ability to continue to develop and introduce differentiated and innovative products cost-effectively and on a timely basis. The success of our offerings is dependent on several factors including our differentiation from competitive offerings, timing of new product introductions, effectiveness of marketing programs and maintaining low manufacturing, sourcing and supply chain costs. No assurance can be given with regard to our ability to anticipate and react to changes in market requirements, actions of competitors or the pace and direction of technology changes.
We may be dependent on third parties for new product introductions or technologies in order to introduce our own new products. We are dependent in some cases upon various third parties for the introduction and acceptance of new products, the timing of which is not entirely in our control. In addition, there can be no assurance that we will maintain existing relationships or forge new OEM relationships. There can also be no assurance that we will continue to have access to significant proprietary technologies through internal development and licensing arrangements with third parties, or that we will continue to have access to new competitive technologies that may be required to introduce new products. If we are not successful in maintaining and developing new relationships with OEMs or obtaining rights to use competitive technologies, we may become less competitive in certain markets.
If we do not successfully implement restructuring plans and realize the benefits expected from the restructuring, our financial results will be affected. From time to time we have initiated restructuring programs related to our business strategy to, among other things, reduce operating expenses and address product line rationalization and infrastructure. We may not be able to realize the expected benefits and cost savings if we do not successfully implement these plans. If we are unable to restructure our operations successfully as needed, or on a timely basis, our expectations of future results of operations, including certain cost savings expected to result from the restructuring, may not be met. If difficulties are encountered or such cost savings are otherwise not realized, it could have a material adverse effect on our business, financial condition and results of operations.
Our international operations subject us to economic risks including risk of foreign currency fluctuations and negative or uncertain global or regional economic conditions could adversely affect our business and operating results. We conduct our business on a global basis, with approximately 59 percent of our 2013 revenue derived from operations outside of the United States. Our international operations may be subject to various risks which are not present in domestic operations, including political and economic instability, terrorist activity, the possibility of expropriation, trade tariffs or embargoes, unfavorable tax laws, restrictions on royalties, dividend and currency remittances, changes in foreign laws and regulations, requirements for governmental approvals for new ventures and local participation in operations such as local equity ownership and workers'
councils. In addition, our business and financial results are affected by fluctuations in world financial markets. Changes in local and regional economic conditions, including fluctuations in exchange rates, may affect product demand in our non-U.S. operations and export markets. Additionally, some of our suppliers pay us quarterly or annual rebates based on the amount of purchases we make from them. If negative conditions in the global credit markets prevent our customers' access to credit, product orders in these channels may decrease, which could result in lower revenue. Likewise, our suppliers may face challenges in obtaining credit, in selling their products or otherwise in operating their businesses. Foreign currency fluctuations can also affect reported profits of our non-U.S. operations where transactions are generally denominated in local currencies. A recession in any of the regions we serve might affect product demand and cause fluctuations in exchange rates. In addition, currency fluctuations may affect the prices we pay suppliers for materials used in our products. Our financial statements are denominated in U.S. dollars. Accordingly, fluctuations in exchange rates, including exchange rate volatility in the Euro and the Japanese Yen, may give rise to translation gains or losses when financial statements of non-U.S. operating units are translated into U.S. dollars. Given that the majority of our revenues are non-U.S. based, a strengthening of the U.S. dollar against other major foreign currencies could adversely affect our results of operations. While these factors or the impact of these factors are difficult to predict, any one or more of them could adversely affect our business, financial condition or operating results.
We use third-party contract manufacturing services and supplier-provided parts, components, and sub-systems in our businesses and significant shortages, supplier capacity constraints, supplier production disruptions or price increases could increase our operating costs and adversely impact the competitive positions of our products. Our reliance on suppliers and third-party contract manufacturing to secure raw materials, parts and components used in our products exposes us to volatility in the price and availability of these materials. In some instances, we depend upon a single source of supply, manufacturing or assembly or participate in commodity markets that may be subject to allocations by suppliers. A disruption in deliveries from our suppliers or third-party contract manufacturers, supplier capacity constraints, supplier and third-party contract manufacturer production disruptions, price increases or decreased availability of raw materials or commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. Additionally, we may experience changes in the supply and cost of raw materials and key components of our products resulting from the effects of natural disasters. We believe that our supply management and production practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. No assurances can be given that acceptable cost levels will continue in the future. In addition, some critical raw materials and key components have a limited number of suppliers. If we cannot obtain those raw materials or critical components from the suppliers, we will not be able to produce certain products.
Negative or uncertain global regional economic conditions could result in a decrease in our sales and revenue and an increase in our operating costs, which could adversely affect our business and operating results. Negative or uncertain global or regional economic conditions, including adverse effects of the ongoing sovereign debt crisis in Europe, increased Euro currency exchange rate volatility, and related austerity measures and their potential impact on European economic growth, as well as increased currency exchange rate volatility in the Japanese Yen, could cause many of our direct and indirect customers to delay or reduce their purchases of our products. Further, many of our customers in OEM, distribution and retail channels rely on credit financing in order to purchase our products. Additionally, some of our suppliers pay us quarterly or annual rebates based on the amount of purchases we make from them. If negative conditions in the global credit markets prevent our customers' access to credit, product orders in these channels may decrease, which could result in lower revenue. Likewise, our suppliers may face challenges in obtaining credit, in selling their products or otherwise in operating their businesses. These actions could result in reductions in our revenue, increased price competition and increased operating costs, which could adversely affect our business, results of operations and financial condition.
We may engage in business combinations that are dilutive to existing shareholders, result in unanticipated accounting charges or otherwise harm our results of operations, and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale of assets. Acquisitions made entirely or partially for cash would reduce our cash reserves. We use
financial assumptions and forecasts to determine the negotiated price we are willing to pay for an acquisition. If those financial assumptions and/or forecasts are not accurate, the price we pay may be too high, resulting in an inefficient use of cash and future goodwill impairment.
No assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Even when an acquired company has already developed and marketed products, there can be no assurance that such products will be successful after the closing and will not cannibalize sales of our existing products, that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such company. Failed business combinations, or the efforts to create a business combination, can also result in litigation.
Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies. We may experience delays in the timing and successful integration of acquired technologies and product development, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also result in our entering into a business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation, subject us to an increased risk of intellectual property and other litigation and increase our expenses. These challenges are magnified as the size of the acquisition increases, and we cannot assureensure that we will realize the intended benefits of any acquisition. Acquisitions may require large one-time charges and can result in
contingent liabilities, adverse tax consequences, substantial depreciation or deferred compensation charges, amortization of identifiable purchased intangible assets or impairment of goodwill, or revaluation of contingent consideration, any of which could have a material adverse effect on our business, financial condition or results of operations. If we acquire a business while our market value remains lower than our book value, accounting rules may require us to expense any goodwill associated with a new acquisition.
We have incurredmay incur asset impairment charges for intangible assets and goodwill as of December 31, 2012, and may incur more such charges in the future. We evaluate assets on our balance sheet, including such intangible assets and goodwill, annually as of November 30th or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries that would require an impairment test. The test for impairment of intangible assets requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value. In conjunctionThe test for impairment of goodwill requires a comparison of the carrying value of the reporting unit for which goodwill is assigned with the accelerationfair value of our strategic transformation in the fourth quarterreporting unit calculated based on discounted future cash flows. If the carrying value of 2012, we evaluated our intangible assets, including goodwill, for impairment and recorded non-cash impairment charges of $283.8 million in the quarter. The intangible asset charges are primarily duereporting unit is greater than the fair value a second step is performed to an accelerated secular optical market decline.calculate any impairment.
Our security products must provide appropriate levels of security to adequately store and protect our customers' data. Many of our secure storage products include software and hardware security such as user authentication, data encryption, and portable digital identities which are designed to prevent digital security breaches. Third parties may attempt to hack into our products in order to, among other things, compromise the integrity of those products or obtain confidential information. If our products do not provide adequate security and that security is compromised, our customers could be negatively impacted and subject to declining product sales and we could also belose existing customers, have difficulty attracting new customers, experience increases in operating expenses, become subject to litigation and loss of reputation. As an outcomereputation or suffer other adverse consequences. There can be no assurance that our efforts to upgrade the security of our products or develop new products to keep pace with continuing changes in technology will be successful or that product issues will not arise in the future. Any significant breakdown, intrusion, interruption, corruption or destruction of our secure storage products could have a material adverse effect on our financial results could be negatively impacted.results.
VolatilityChanges in European law or practice related to the imposition or collectability of optical levies. Many European countries impose levies on imports of optical products and other products to compensate copyright owners for legal private copying. Imation is involved in litigation in several of those countries related to its obligation to pay levies on sales of our products to commercial channel customers. Based on current European law, we no longer pay levies on commercial channel sales. Because we have previously paid levies on such sales, we have offset certain levies payable on sales in the consumer channel with amounts previously overpaid with respect to commercial channel sales. If a court were to rule against us on this issue, we may be required to pay all, or a portion of, our unpaid levies to the collecting societies. In addition, any reduction in the current levy rates applicable to consumer channel sales could reduce our ability to offset for past overpayments on commercial channel sales. Other changes in levy rates or structures could impact our ability to compete in certain markets or otherwise reduce our profitability.
In a volatile global economic environment, demand and seasonality may result in our inability to accurately forecast our product purchase requirements. Sales of some of our products are subject to seasonality. For example, sales have typically increased in the fourth quarter of each fiscal year, sometimes followed by significant declines in the first quarter of the following fiscal year. This seasonality makes it more difficult for us to forecast our business, especially in the volatile current global economic environment and its corresponding change in consumer confidence, which may impact typical seasonal trends. If our forecasts are inaccurate, we may lose market share due to product shortages or procure excess inventory or inappropriately increase or decrease our operating expenses, any of which could harm our business, financial condition and results of operations. This seasonality also may lead to the need for significant working capital investments in receivables and inventory and our need to build inventory levels in advance of our most active selling seasons. The seasonality of our products could change as a result of our acquisitions and divestitures
Our international operations subject us to economic risk as our results of operations may be adversely affected by changes in political, economic and other conditions and foreign currency fluctuations. We conduct our business on a global basis, with approximately 59 percent of our 2012 revenue derived from operations outside of the United States. Our international operations may be subject to various risks which are not present in domestic operations, including political and economic instability, terrorist activity, the possibility of expropriation, trade tariffs or embargoes, unfavorable tax laws, restrictions on royalties, dividend and currency remittances, changes in foreign laws and regulations, requirements for governmental approvals for new ventures and local participation in operations such as local equity ownership and workers' councils. In addition, our business and financial results are affected by fluctuations in world financial markets. Changes in local and regional economic conditions, including fluctuations in exchange rates, may affect product demand in our non-U.S. operations and export markets. Foreign currency fluctuations can also affect reported profits of our non-U.S. operations where transactions are generally denominated in local currencies. A recession in any of the regions we serve might affect product demand and cause fluctuations in exchange rates. In addition, currency fluctuations may affect the prices we pay suppliers for materials used in our products. Our financial statements are denominated in U.S. dollars. Accordingly, fluctuations in exchange rates may give rise to translation gains or losses when financial statements of non-U.S. operating units are translated into U.S. dollars. Given that the majority of our revenues are non-U.S. based, a strengthening of the U.S. dollar against other major foreign currencies could adversely affect our results of operations. While these factors or the impact of these factors are difficult to predict, any one or more of them could adversely affect our business, financial condition or operating results. Additionally, changes in European law or practice related to the imposition or collectability of optical levies could impact our operating results.divestitures.
Significant changes in discount rates, rates of return on pension assets, mortality tables and other factors could affect our future earnings, equity and pension funding requirements. Pension obligations and related costs are determined using actual investment results as well as actuarial valuations that involve several assumptions. Our funding requirements are based on these assumptions in addition to the performance of assets in the pension plans. The most critical assumptions are the discount rate, the long-term expected return on assets and mortality. Some of these assumptions, such as the discount rate, are largely outside of our control. Changes in these assumptions could affect our future earnings, equity and funding requirements.
Our results of operations include our determinations of the amount of taxes owed in the various tax jurisdictions in which we operate and are subject to changes in tax laws and regulations, and to inspection by various tax authorities. Changes in tax guidance and related interpretations and other tax guidance as well as inspections by tax authorities could materially impact our tax receivables and payables and our deferred tax assets and deferred tax liabilities. Additionally, in the ordinary course of business we are subject to examinations by tax authorities in multiple jurisdictions. In addition to ongoing investigations, there could be additional investigations launched in the future by governmental authorities in various jurisdictions and existing investigations could be expanded. While we believe we have adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of our operations means that these risks will continue to exist and additional issues will arise from time to time. Our results may be affected by the outcome of such proceedings and other contingencies that cannot be predicted with certainty.
Our success depends in part on our ability to obtain and protect our intellectual property rights and to defend ourselves against intellectual property infringement claims of others. Claims may arise from time to time alleging that we infringe on the intellectual property rights of others. If we are not successful in defending ourselves against those claims, we could incur substantial costs in implementing remediation actions, such as redesigning our products or processes, paying for license rights or paying to settle disputes. The related costs or the disruption to our operations could have a material adverse effect on our results.
In addition, we utilize valuable non-patented technical know-how and trade secrets in our product development and manufacturing operations. There can be no assurance that confidentiality agreements and other measures we utilize to protect such proprietary information will be effective, that these agreements will not be breached or that our competitors will not acquire the information as a result of or through independent development. We enforce our intellectual property rights against others who infringe those rights.
Additionally, our audio and video information and data storage product categories are subject to allegations of patent infringement by our competitors as well as by non-practicing entities (NPEs), sometimes referred to as “patent trolls,” who may seek monetary settlements from us.
Significant litigation matters could result in large costs. We are subject to various pending or threatened legal actions in the ordinary course of our business, especially regarding patents related to our data storage and audio and video information products. We are often indemnified by our suppliers; litigation, however, is always subject to many uncertainties and outcomes that are not predictable. We use legal and appropriate means
to contest litigation threatened or filed against us, but we have found there is a strong tendency toward litigation in the patent area in our industry and this litigation environment poses a significant business risk. We cannot ascertain the ultimate aggregate amount of any monetary liability or financial impact that may be incurred by us in litigation.
Changes in the capital and credit markets may negatively affect our ability to access financing. Without such financing we may be unable to achieve our objectives for strategic acquisitions and internal growth. Disruption of the global financial and credit markets may have an effect on our long-term liquidity and financial condition. While we have been able to achieve our current acquisition strategy through operating cash flows and without permanently borrowing on our outstanding credit facility, the need may arise to obtain additional funding. In addition, we used approximately $104.6 million of cash on hand to acquire Nexsan on December 31, 2012.
Based on our current plan of operations, including acquisitions, we believe our cash, when combined with our revolving line of credit available under our outstanding credit facility, will be sufficient to fund our strategy and to meet our anticipated operating expenses, capital expenditures and debt service obligations for at least the next twelve months.
The agreement governing our credit facilityfacilities contains, and future debt agreements may contain, various covenants that limit our discretion in the operation of our business. The agreement and instruments governing our outstanding credit facility, and the agreements and instruments governing future debt agreements, may contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios that may restrict our ability to:
incur more debt;
redeem or repurchase stock, pay dividends or make other distributions;
make certain investments;
enter into transactions with affiliates;
make unapproved acquisitions;
transfer or sell assets; and
make fundamental changes in our corporate existence and principal business.
In addition, events beyond our control could affect our ability to comply with and maintain these financial tests and ratios. Any failure by us to comply with or maintain all applicable financial tests and ratios and to comply with all applicable covenants could result in an event of default with respect to our credit facility or any other future debt agreements. An event of default could lead to the acceleration of the maturity of any outstanding loans and the termination of the commitments to make further extensions of credit. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business at our sole discretion could harm our business by, among other things, limiting our ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.
If we are unable to attract and retain employees and key talent our business and financial results may be materially impacted. We operate in a highly competitive market for employees with specialized skill, experience and industry knowledge. No assurance can be given that we will be able to attract and retain employees and key talent. A failure to attract and retain key personnel could also have a material adverse impact on our business.
Changing laws and regulations have resulted in increased compliance costs for us, which could affect our operating results. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulations regarding conflict minerals and newly enacted SEC regulations have created additional compliance requirements. We are committed to maintaining high standards of internal controls over financial reporting, corporate governance and public disclosure. As a result, we intend to continue to invest appropriate resources as necessary to comply with evolving standards which may result in increased expenses. Laws enacted that directly or indirectly affect ourthe production, distribution, packaging, cost of raw materials fuel, ingredients, and waterfuel could impact our business and financial results.
We rely on our information systems to conduct our business, and failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed. The efficient operation of our business is dependent on computer hardware and software systems. Information systems are vulnerable to security breach by computer hackers and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent security breaches. In addition, the unavailability of the information systems or failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased overhead costs,
causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and results of operations.
The market price of our common stock is volatile. The market price of our common stock has been, and may continue to be, volatile. Factors such as the following may significantly affect the market price of our common stock:
actual or anticipated fluctuations in our operating results;
announcements of technological innovations by us or our competitors which may decrease the volume and profitability of sales of our existing products and increase the risk of inventory obsolescence;
new products introduced by us or our competitors;
periods of severe pricing pressures due to oversupply or price erosion resulting from competitive pressures or industry consolidation;
developments with respect to patents or proprietary rights;
conditions and trends in the consumer electronics and data storage industries;
contraction in our operating results or growth rates;
changes in financial estimates by securities analysts relating specifically to us or the industries in which we participate in general; and
macroeconomic conditions that affect the market generally.
In addition, general economic conditions may cause the stock market to experience extreme price and volume fluctuations from time to time that particularly affect the stock prices of many high technology companies. These fluctuations often appear to be unrelated to the operating performance of the companies.
If our stock price falls below $1.00 for thirty consecutive days, our common stock could be delisted from the New York Stock Exchange (NYSE). Our stock price has been and is likely to continue to be volatile, and an investment in our common stock could decline in value. If our common stock price closes below $1.00 per share for thirty consecutive days, we may receive notification from the NYSE that our common stock will be delisted from the NYSE unless the stock closes at or above $1.00 per share for at least ten consecutive days during the 180-day period following such notification. In the future, our common stock price may fall below the NYSE listing requirements, with the result being that our common stock might be delisted, which could adversely affect the liquidity and price of our common stock and which could have a long-term impact on our ability to raise future capital through the sale of our common stock.
| |
| Item 1B. | Unresolved Staff Comments. |
None.
Our worldwide headquarters is located in Oakdale, Minnesota, in the United States of America. Our principal facilities, and the functions at such facilities, are listed below for each reporting segment. Our facilities are in good operating condition suitable for their respective uses and are adequate for our current needs.
|
| | |
| Facility | Function | FunctionSegment(s) Using Space |
| | | |
Americas | | |
Oakdale, Minnesota (owned) | (1) | Sales/Administrative/Laboratory facility/Corporate headquarters | Both |
| Thousand Oaks, California (leased) | Sales/Assembly | Sales/AssemblyTSS |
| Campbell, California (leased) | | Sales/Distribution Center |
Europe | | TSS |
| Hoofddorp, Netherlands (leased) | | Sales/Administrative/European regional headquarters |
North Asia | | Both |
| Tokyo, Japan (leased) | | Sales/Administrative/North Asia regional headquarters |
South Asia | | Both |
| Kings Park, Australia (leased) | | Sales/Administrative/Distribution Center |
Singapore (leased) | | Center/South Asia regional headquarters | Both |
| Montreal, Canada (leased) | Sales/Research & Development | TSS |
| Panama City, Panama (leased) | Sales/Administrative/Latin America regional headquarters | Both |
| Derby, United Kingdom (leased) | Sales/Assembly | TSS |
(1) Subject to a mortgage to secure the obligations under our Credit Facility. See Note 11 - Debt in our Notes to Consolidated Financial Statements for further information on our Credit Facility.
| |
| Item 3. | Legal Proceedings. |
In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. Performance under these indemnities would generally be triggered by a breach of terms of the contract or by a supportable third-party claim. There have historically been no material losses related to such indemnifications. In accordance with accounting principles generally accepted in the United States of America, we record a liability in our Consolidated Financial Statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated.
We are the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Additionally, our businesses are subject to allegations of patent infringement by our competitors as well as by non-practicing entities (NPEs), sometimes referred to as “patent trolls,” who may seek monetary settlements from us, our competitors, suppliers and resellers.resellers including the One-Blue litigation described below. Consequently, as of December 31, 20122013, we are unable to reasonably estimate the ultimate aggregate amount of any monetary liability or financial impact that we may incur with respect to these matters. It is reasonably possible that the ultimate resolution of these matters could materially affect our operating results.financial condition, results of operations and cash flows.
On May 22, 2013, Imation was sued in U.S. District Court for the District of Delaware by five entities: One-Blue, LLC (One-Blue), which is an entity with licensing authority for a pool of patents relating to Blu-ray discs, and four members of One-Blue, Koninklijke Philips N.V., Panasonic Corporation, Pioneer Corporation and Sony Corporation.The plaintiffs allege that Imation's sales of certain Blu-ray discs infringe six patents and seek unspecified damages, treble damages, and attorney's fees.On June 13, 2013, Imation filed an Answer, Affirmative Defenses, and Counterclaims, naming various defenses including that plaintiffs are barred, in whole or in part, from any recovery or relief by their refusal to license the patents-in-suit under fair, reasonable, and nondiscriminatory terms.Imationintends to vigorously defend the case. This matter is now in the discovery phase for issues relating to determination of a fair, reasonable, and nondiscriminatory royalty rate.In addition, Imation has a dispute with One-Blue regarding One-Blue's refusal to license its Japanese Blu-ray patents under fair, reasonable, and
nondiscriminatory terms in Japan, where Imation’s sales of Blu-ray discs are substantially greater than in the U.S. Imation Corporation Japan, Imation's Japanese subsidiary, has sued One-Blue in Japan regarding its unlawful interference with certain of our customer relationships. Imation has notified its manufacturers of their indemnity obligations that it believes cover a portion of its liability, if any, to One-Blue and the other plaintiffs.
Copyright Levies
In 2009many European Union (EU) member countries, the sale of recordable optical media is subject to a private copyright levy. The levies are intended to compensate copyright holders with "fair compensation" for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (Directive). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which, in turn, are expected to distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law making activities. On October 21, 2010, the European Court of Justice (ECJ) ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The ECJ stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The ECJ also stated that the indiscriminate application of the private copying levy to devices not made available to private users and clearly reserved for uses other than private copying is incompatible with the Directive. The ECJ ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons presumed to be making private copies. Within this disclosure, we entered into a confidential settlement agreement ending all legal disputes with Philips Electronics N.V., U.S. Philips Corporationuse the term "commercial channel sales" when referring to products intended for uses other than private copying and North American Philips Corporation (collectively, Philips). We had been involved"consumer channel sales" when referring to products intended for uses including private copying.
Since the Directive was implemented in a complex series2002, we estimate that we have paid in excess of disputes$100 million in multiple jurisdictions regarding cross-licensing and patent infringementlevies to various ongoing collecting societies related to recordable optical media. The settlement provided resolution of all claims and counterclaims filed by the parties without any finding or admission of liability or wrongdoing by any party. As a term of the settlement, we agreed to pay Philips $53.0 million over a period of three years.commercial channel sales. Based on the present valueECJ's October 2010 ruling and subsequent litigation and law making activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various collecting societies. Accordingly, subsequent to the October 21, 2010 ECJ ruling, we began withholding levy payments to the various collecting societies and, in 2011, we reversed our existing accruals (totaling $7.8 million) for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions except Italy and France due to recent court rulings that are discussed below. As of these settlementDecember 31, 2013 and 2012, we had accrued liabilities of $10.0 million and $27.7 million, respectively, associated with levies related to consumer channel sales for which we are withholding payment.
Since the October 2010 ECJ ruling, we evaluate quarterly on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) accrued, but unpaid, copyright levies on prior period consumer channel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law making activities within each jurisdiction as well as throughout the EU. Cost of goods sold for the year ended December 31, 2011 was reduced by $7.8 million due to reversal of prior year obligations that were determined to be remote. We did not reverse any amounts into cost of goods sold for prior year obligations in 2012. See following for discussion of reversals of copyright levies in 2013.
Italy. During the second quarter of 2013, an Italian court rendered a decision associated with a copyright levy matter to which Imation was not a party. This decision (i) confirmed and provided further specificity to the October 21, 2010 ruling of the ECJ that levies should not be paid on commercial channel sales and (ii) evaluated, via audit, the plaintiff's documentation and evidence for distinguishing between levies paid on commercial and consumer channel sales. Based on the ruling of this Italian court, in combination with other applicable levy and law-making activities within the EU, including Italy, we believed there was sufficient evidence that we may offset with the Italian collecting society the estimated $39 million we have overpaid for copyright levies in Italy (due to us paying levies on commercial channel sales prior to the October 21, 2010 ECJ ruling) against the amounts owed to the Italian collecting society for unpaid levies on consumer channel sales. As such, our liability for Italian copyright levies in the amount of $13.6 million (existing at the time of the of the second quarter 2013 Italian court decision) that arose from consumer channel sales that had been accrued but not paid was reversed and recorded as a reduction of cost of sales during the second quarter of 2013. We did not record a receivable for the remaining estimated $25.4 million that we believed was owed to us by the Italian collection society for our historical over payment on levies associated with commercial channel sales as we are not assured of its collectability. Rather, going forward, such amount began to be realized as a reduction to cost of goods sold upon the incurrence of (and for the same amount of) valid levies
for consumer channel sales. During the remainder of 2013 we have off-set an additional $2.6 million (within cost of sales) against a similar amount of consumer channel levies incurred and, accordingly, we have an estimated $22.8 million of historical over payments of levies on commercial channel sales remaining to set-off in future periods.
The Italian court required sufficient documentation and evidence to support the determination of levies between those paid on commercial versus consumer channel sales. We believe that we recordedhave utilized a chargemethodology, and have sufficient documentation and evidence, to fully support our estimates that we have overpaid $39 million to the Italian collection society of $49.0levies on commercial channel sales and that we have incurred (but not paid) $13.6 million of levies on consumer channel sales in Italy. However, such amounts could be subject to challenge in court and there is no certainty that our estimates would be upheld and supported. Additionally, due to the expected continued decline in our sales associated with optical media products, we cannot be assured that we will ever be able to fully realize the estimated amounts owed to us by the Italian collection society through offsetting such amounts against levies incurred on future consumer channel sales or other measures.
France. During the fourth quarter of 2013, a French court issued a favorable ruling to Imation in a case brought against Imation in the fourth quarter of 2011 by the French levy society, Societie Pour la Perception de la Remuneration de la Copie Privee Audiovisuelle et Sonore (Copie France). Copie France had sought a judicial order in summary proceedings to compel Imation to pay to Copie France $3.6 million in 2009.withheld copyright levies. Imation had withheld levies otherwise due on consumer channel sales against previous levies paid on commercial channel sales. Imation argued that there was a serious legal dispute as to whether the demanded sums were owed, in light of what Imation believed to be the inconsistency between the French levy system and the Directive, as interpreted by ECJ case law. In June 2012, the Paris Court of First Instance had rejected Copie France’s claims, ruling that Imation had raised serious issues about the validity of the French levy scheme. Copie France appealed that order, and on November 19, 2013, the French appeals court rejected Copie France’s appeal.Based on the rulings of the French courts, in combination with other applicable levy and law-making activities within the EU, including France, we believe there is sufficient evidence that we may offset with Copie France the estimated $55.1 million we have overpaid for copyright levies in France (due to us paying levies on commercial channel sales prior to the October 21, 2010 ECJ ruling) against the amounts owed to Copie France for unpaid levies on consumer channel sales. As such, our liability for French copyright levies in the amount of $9.5 million (existing at the time of the of the fourth quarter 2013 French court decision) that arose from consumer channel sales that had been accrued but not paid was reversed and recorded as a reduction of cost of sales during the fourth quarter of 2013. We made paymentsdid not record a receivable for the remaining estimated $45.6 million that we believe is owed to us by Copie France for our historical over payment on levies associated with commercial channel sales as we are not assured of $16.5its collectability. Rather, going forward, such amount will be realized as a reduction to cost of sales upon the incurrence of (and for the same amount of) valid levies for consumer channel sales.
We believe that we have utilized a methodology, and have sufficient documentation and evidence, to fully support our estimates that we have overpaid $55.1 million $8.3to the French collection society of levies on commercial channel sales and that we have incurred (but not paid) $9.5 million $8.2 million of levies on consumer channel sales in France. However, such amounts could be subject to challenge in court and $20.0 millionthere is no certainty that our estimates would be upheld and supported. Additionally, due to the expected continued decline in 2012, 2011, 2010our sales associated with optical media products, we cannot be assured that we will ever be able to fully realize the estimated amounts owed to us by the French collection society through offsetting such amounts against levies incurred on future consumer channel sales or other measures.
Other Jurisdictions. At December 31, 2013, the recovery of some or all of the copyright levies previously paid on commercial sales in EU jurisdictions other than Italy and 2009, respectively,France represents a gain contingency that has not yet met the required criteria for recognition in full satisfactionour financial statements. There is no assurance that we will realize any of this settlement. Interest accretiongain contingency. We also have an estimated $9.4 million of $0.5 million, $1.2 millionaccrued but unpaid levies associated with consumer sales in EU jurisdictions other than Italy and $1.5 million was recorded in 2012, 2011 and 2010, respectively. The interest accretion is included in the interest expenseFrance that we continue to carry on our Consolidated Statements of Operations.books.
We are also subject to several pending or threatened legal actionactions by the individual European national levy collecting societies in relation to private copyright levies under the European Copyright Directive. See Note 15 - Litigation, Commitments and Contingencies in our Notes to Consolidated Financial Statements for further discussion of this directive. Those actions generally seek payment of the commercial and consumer optical levies withheld by Imation. Imation has corresponding claims in those actions seeking reimbursement of levies improperly collected by those collecting societies. We are subject to threatened actions by certain customers of Imation seeking reimbursement of funds they allege relate to commercial levies that they claim they should not have paid. Although these actions are subject to the uncertainties inherent in the litigation process, based on the information presently available to us, management does not expect that the ultimate resolution of these actions will have a material adverse effect on theour financial condition, results of operations or cash flows. We anticipate that additional court decisions may be rendered in 20132014 that may directly or
indirectly impact our levy exposure in specific European countries which could trigger a review of our levy exposure in those countries.
| |
| Item 4. | Mine Safety Disclosures. |
Not Applicable.
PART II
| |
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
(a) — (b)
As of March 6, 2013,2014, there were 41,508,76741,993,542 shares of our common stock, $0.01 par value (common stock), outstanding and held by 20,00919,369 shareholders of record. Our common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange under the symbol “IMN.” No dividends were declared or paid during 20122013 or 2011.2012. Future dividend payments will depend on our earnings, capital requirements, financial condition limitations as defined in our credit agreements and other factors considered relevant by our Board of Directors.
Unregistered Sales of Equity Securities
On December 31, 2012, Imation Corp. entered into an agreement to purchase Nexsan. A portion of the consideration paid to Nexsan consisted of 3,319,324 shares of our common stock. The issuance of such shares was exempt from registration under the Securities Act of 1933, as amended (Securities Act), pursuant to Section 4 (2) of the Securities Act. The Company filed a registration statement on Form S-3 under the Securities Act for the resale of such shares.
The following table sets forth, for the periods indicated, the high and low sales prices of common stock as reported on the New York Stock Exchange.
| | | | 2012 Sales Prices | | 2011 Sales Prices | 2013 Sales Prices | | 2012 Sales Prices |
| | High | | Low | | High | | Low | High | | Low | | High | | Low |
| First quarter | $ | 6.42 |
| | $ | 5.67 |
| | $ | 12.36 |
| | $ | 9.81 |
| $ | 4.24 |
| | $ | 3.41 |
| | $ | 6.42 |
| | $ | 5.67 |
|
| Second quarter | $ | 6.30 |
| | $ | 5.54 |
| | $ | 11.97 |
| | $ | 8.50 |
| $ | 4.40 |
| | $ | 3.56 |
| | $ | 6.30 |
| | $ | 5.54 |
|
| Third quarter | $ | 5.98 |
| | $ | 5.40 |
| | $ | 9.98 |
| | $ | 6.64 |
| $ | 5.05 |
| | $ | 3.99 |
| | $ | 5.98 |
| | $ | 5.40 |
|
| Fourth quarter | $ | 5.69 |
| | $ | 3.95 |
| | $ | 8.00 |
| | $ | 5.40 |
| $ | 4.85 |
| | $ | 3.95 |
| | $ | 5.69 |
| | $ | 3.95 |
|
(c)
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | |
| | | | | | | | | (c) |
| | | | | | | Total Number of | | Maximum Number |
| | | (a) | | (b) | | Shares Purchased | | of Shares that May |
| | | Total Number | | Average | | as Part of Publicly | | Yet Be Purchased |
| | | of Shares | | Price Paid | | Announced Plans | | Under the Plan or |
| Period | | Purchased | | per Share | | or Programs | | Programs |
| October 1, 2012 - October 31, 2012 | | — |
| | $ | — |
| | — |
| | 4,159,830 |
|
| November 1, 2012 - November 30, 2012 | | 295,242 |
| | 4.12 |
| | 291,506 |
| | 3,868,324 |
|
| December 1, 2012 - December 31, 2012 | | 106,124 |
| | 4.37 |
| | 104,485 |
| | 3,763,839 |
|
| Total | | 401,366 |
| | $ | 4.19 |
| | 395,991 |
| | 3,763,839 |
|
|
| | | | | | | | | | | | | |
| | | | | | | | | (c) |
| | | | | | | Total Number of | | Maximum Number |
| | | (a) | | (b) | | Shares Purchased | | of Shares that May |
| | | Total Number | | Average | | as Part of Publicly | | Yet Be Purchased |
| | | of Shares | | Price Paid | | Announced Plans | | Under the Plan or |
| Period | | Purchased | | per Share | | or Programs | | Programs |
| October 1, 2013 - October 31, 2013 | | — |
| | $ | — |
| | — |
| | 3,147,258 |
|
| November 1, 2013 - November 30, 2013 | | 917 |
| | 4.19 |
| | — |
| | 3,147,258 |
|
| December 1, 2013 - December 31, 2013 | | 2,282 |
| | 4.68 |
| | — |
| | 3,147,258 |
|
| Total | | 3,199 |
| | $ | 4.54 |
| | — |
| | 3,147,258 |
|
(a) The purchases in this column include shares repurchased as part of our publicly announced programs and include 5,375were shares that were surrendered to Imation by participants in our stock-based compensation plans (the Plans) to satisfy the tax obligations related to the vesting of restricted stock awards.
(b) The average price paid in this column includes shares repurchased as part of our publicly announced programs andrelated to shares that were surrendered to Imation by participants in the Plans to satisfy the tax obligations related to the vesting of restricted stock awards.
(c) On May 3, 2012, the Company announced that on May 2, 2012 our Board of Directors authorized a share repurchase program of 5 million shares of common stock. The authorization has no expiration date. The Company's
Stock Performance Graph
previous authorization, which had 1.2 million shares remaining for purchase, was canceled with the new authorization.
Stock Performance Graph
The graph and table below compare the cumulative total shareholder return on our common stock for the last five fiscal years with the cumulative total return of the S&P MidCap 400 Index and ArcaEx Tech 100 Index, formerly known as the Pacific Stock Exchange High Technology Index, over the same period. The graph and table assume the investment of $100 on December 31, 20072008 in each of our common stock, the S&P MidCap 400 Index and the ArcaEx Tech 100 Index and reinvestment of all dividends.
| | | (Total Return Index) | 12/31/2007 | | 12/31/2008 | | 12/31/2009 | | 12/31/2010 | | 12/31/2011 | | 12/31/2012 | 12/31/2008 | | 12/31/2009 | | 12/31/2010 | | 12/31/2011 | | 12/31/2012 | | 12/31/2013 |
| Imation Corp. | $ | 100.00 |
| | 65.00 |
| | 41.77 |
| | 49.38 |
| | 27.44 |
| | 22.37 |
| $ | 100.00 |
| | 64.26 |
| | 75.98 |
| | 42.23 |
| | 34.41 |
| | 35.89 |
|
| S&P Midcap 400 Index | $ | 100.00 |
| | 62.72 |
| | 84.67 |
| | 105.72 |
| | 102.44 |
| | 118.90 |
| $ | 100.00 |
| | 135.00 |
| | 168.55 |
| | 163.33 |
| | 189.57 |
| | 249.41 |
|
| ArcaEx Tech 100 Index | $ | 100.00 |
| | 65.01 |
| | 93.01 |
| | 115.52 |
| | 114.66 |
| | 137.47 |
| $ | 100.00 |
| | 143.08 |
| | 177.70 |
| | 176.37 |
| | 211.46 |
| | 283.87 |
|
The stock performance graph shall not be deemed soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, nor shall it be incorporated by reference into any past or future filing under the Securities Act or the Exchange Act, except to the extent we specifically request that it be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
| |
| Item 6. | Selected Financial Data.* |
| | | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| | (Dollars in millions, except per share data) | (Dollars in millions, except per share data) |
| Statement of Operations Data: | | | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
|
| Net revenue | $ | 1,099.6 |
| | $ | 1,290.4 |
| | $ | 1,460.9 |
| | $ | 1,649.5 |
| | $ | 1,981.0 |
| $ | 860.8 |
| | $ | 1,006.7 |
| | $ | 1,166.6 |
| | $ | 1,302.3 |
| | $ | 1,457.1 |
|
| Gross profit | 202.3 |
| | 216.7 |
| | 226.4 |
| | 264.0 |
| | 338.8 |
| 188.7 |
| | 189.3 |
| | 205.4 |
| | 212.2 |
| | 250.1 |
|
| Selling, general and administrative | 210.7 |
| | 203.7 |
| | 202.5 |
| | 229.7 |
| | 287.6 |
| 181.6 |
| | 191.1 |
| | 182.4 |
| | 181.1 |
| | 201.6 |
|
| Research and development | 22.8 |
| | 21.0 |
| | 16.4 |
| | 20.4 |
| | 23.6 |
| 18.4 |
| | 20.4 |
| | 18.3 |
| | 13.2 |
| | 17.8 |
|
| Litigation settlement | — |
| | 2.0 |
| | 2.6 |
| | 49.0 |
| | — |
| |
| Litigation (gain) settlement | | (2.5 | ) | | — |
| | 2.0 |
| | 2.6 |
| | 49.0 |
|
| Goodwill impairment | 23.3 |
| | 1.6 |
| | 23.5 |
| | — |
| | 32.4 |
| — |
| | 23.3 |
| | 1.6 |
| | 23.5 |
| | — |
|
| Intangible impairments | 260.5 |
| | — |
| | — |
| | — |
| | — |
| — |
| | 251.8 |
| | — |
| | — |
| | — |
|
| Restructuring and other | 21.1 |
| | 21.5 |
| | 51.1 |
| | 26.6 |
| | 28.9 |
| 11.3 |
| | 21.1 |
| | 21.5 |
| | 51.1 |
| | 26.6 |
|
| Operating loss | (336.1 | ) | | (33.1 | ) | | (69.7 | ) | | (61.7 | ) | | (33.7 | ) | (20.1 | ) | | (318.4 | ) | | (20.4 | ) | | (59.3 | ) | | (44.9 | ) |
| Loss from continuing operations | (340.7 | ) | | (46.7 | ) | | (158.3 | ) | | (44.0 | ) | | (37.8 | ) | (24.4 | ) | | (324.8 | ) | | (35.2 | ) | | (147.1 | ) | | (27.9 | ) |
| Loss from discontinued operations | | (20.0 | ) | | (15.9 | ) | | (11.5 | ) | | (11.4 | ) | | (14.3 | ) |
| Net loss | (340.7 | ) | | (46.7 | ) | | (158.5 | ) | | (42.2 | ) | | (33.3 | ) | (44.4 | ) | | (340.7 | ) | | (46.7 | ) | | (158.5 | ) | | (42.2 | ) |
| Loss per common share from continuing operations: | | | |
| | |
| | |
| | |
| | | | | |
| | | | |
| Basic | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | | (1.17 | ) | | (1.01 | ) | (0.60 | ) | | (8.67 | ) | | (0.93 | ) | | (3.89 | ) | | (0.74 | ) |
| Diluted | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | | (1.17 | ) | | (1.01 | ) | (0.60 | ) | | (8.67 | ) | | (0.93 | ) | | (3.89 | ) | | (0.74 | ) |
| Net loss per common share: | | | |
| | |
| | |
| | |
| | | | | |
| | |
| | |
|
| Basic | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | | (1.13 | ) | | (0.89 | ) | (1.10 | ) | | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | | (1.13 | ) |
| Diluted | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | | (1.13 | ) | | (0.89 | ) | (1.10 | ) | | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | | (1.13 | ) |
| Balance Sheet Data: | | | |
| | |
| | |
| | |
| | | | | |
| | |
| | |
|
| Cash and cash equivalents | $ | 108.7 |
| | $ | 223.1 |
| | $ | 304.9 |
| | $ | 163.4 |
| | $ | 96.6 |
| $ | 132.6 |
| | $ | 108.7 |
| | $ | 223.1 |
| | $ | 304.9 |
| | $ | 163.4 |
|
| Accounts receivable, net | 220.8 |
| | 234.9 |
| | 258.8 |
| | 314.9 |
| | 378.3 |
| 163.3 |
| | 220.8 |
| | 234.9 |
| | 258.8 |
| | 314.9 |
|
| Inventories | 166.0 |
| | 208.8 |
| | 203.3 |
| | 235.7 |
| | 363.2 |
| 84.3 |
| | 166.0 |
| | 208.8 |
| | 203.3 |
| | 235.7 |
|
| Property, plant and equipment, net | 58.9 |
| | 55.4 |
| | 66.9 |
| | 109.8 |
| | 122.4 |
| 51.6 |
| | 58.9 |
| | 55.4 |
| | 66.9 |
| | 109.8 |
|
| Intangible assets, net | 81.9 |
| | 321.7 |
| | 320.4 |
| | 337.3 |
| | 357.0 |
| 68.6 |
| | 81.9 |
| | 321.7 |
| | 320.4 |
| | 337.3 |
|
| Total assets | 793.5 |
| | 1,149.3 |
| | 1,251.0 |
| | 1,393.8 |
| | 1,540.0 |
| 641.8 |
| | 793.5 |
| | 1,149.3 |
| | 1,251.0 |
| | 1,393.8 |
|
| Accounts payable | 162.7 |
| | 205.2 |
| | 219.2 |
| | 201.4 |
| | 296.1 |
| 94.7 |
| | 162.7 |
| | 205.2 |
| | 219.2 |
| | 201.4 |
|
| Long-term debt | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
| Total liabilities | 393.1 |
| | 425.6 |
| | 469.3 |
| | 466.6 |
| | 595.4 |
| 268.6 |
| | 393.1 |
| | 425.6 |
| | 469.3 |
| | 466.6 |
|
| Total shareholders’ equity | 400.4 |
| | 723.7 |
| | 781.7 |
| | 927.2 |
| | 944.6 |
| 373.2 |
| | 400.4 |
| | 723.7 |
| | 781.7 |
| | 927.2 |
|
| Other Information: | | | |
| | |
| | |
| | |
| | | | | |
| | |
| | |
|
| Current ratio | 1.6 |
| | 2.0 |
| | 2.1 |
| | 2.4 |
| | 2.0 |
| 1.9 |
| | 1.6 |
| | 2.0 |
| | 2.1 |
| | 2.4 |
|
| Days sales outstanding(1) | 59 |
| | 58 |
| | 57 |
| | 60 |
| | 63 |
| 56 |
| | 59 |
| | 58 |
| | 57 |
| | 60 |
|
| Days of inventory supply(1) | 89 |
| | 85 |
| | 69 |
| | 75 |
| | 112 |
| 61 |
| | 89 |
| | 85 |
| | 69 |
| | 75 |
|
| Return on average assets(2) | (35.5 | )% | | (3.9 | )% | | (11.8 | )% | | (3.1 | )% | | (2.4 | )% | (2.8 | )% | | (32.8 | )% | | (1.7 | )% | | (4.5 | )% | | (1.9 | )% |
| Return on average equity(2) | (60.6 | )% | | (6.2 | )% | | (18.0 | )% | | (4.8 | )% | | (3.7 | )% | (5.2 | )% | | (56.6 | )% | | (2.7 | )% | | (6.9 | )% | | (2.9 | )% |
| Dividends per common share | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.56 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Capital expenditures | $ | 10.2 |
| | $ | 7.3 |
| | $ | 8.3 |
| | $ | 11.0 |
| | $ | 13.6 |
| $ | 7.0 |
| | $ | 10.2 |
| | $ | 7.3 |
| | $ | 8.3 |
| | $ | 11.0 |
|
| Number of employees | 1,230 |
| | 1,130 |
| | 1,115 |
| | 1,210 |
| | 1,570 |
| 940 |
| | 1,230 |
| | 1,130 |
| | 1,115 |
| | 1,210 |
|
* See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information regarding the financial information presented in this table.
| |
| (1) | These operational measures, which we regularly use, are provided to assist in the investor’s further understanding of our operations. Days sales outstanding is calculated using the count-back method, which calculates the number of days of most recent revenue that are reflected in the net accounts receivable balance. Days of inventory supply is calculated using the current period inventory balance divided by an estimate of the inventoriable portion of cost of goods sold expressed in days. |
| |
| (2) | Return percentages are calculated using (loss) incomeloss from continuing operations. |
| |
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Imation is a global scalabledata storage and data security company. Our portfolio includes commercialproducts and consumer datasolutions help organizations and individuals store, manage and protect their digital content. Imation's storage and security portfolio includes Nexsan™ high-density, archive and solid-state optimized unified hybrid storage solutions; IronKey™ mobile security solutions that address the needs of professionals for secure data transport and mobile workspaces; and consumer storage solutions, audio products as well as products designed to manage audio and video information inaccessories sold under the home.Imation™, Memorex™ and TDK Life on Record™ brands. Imation reaches customers in more than 100 countries through aour global distribution network operating through two business segments, Consumer Storage and well recognized brands.Accessories (CSA) and Tiered Storage and Security Solutions (TSS).
The following discussion is intended to be read in conjunction with Item 1. Business and our Consolidated Financial Statements and related Notes that appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Imation's actual results could differ materially from those anticipated due to various factors discussed below under “Cautionary Statements Regarding Forward-Looking Statements” in Item 1A. Risk Factors of this Annual Report on Form 10-K.
Basis of Presentation
The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and our subsidiaries. See Note 2 - Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for further information regarding consolidation. References to “Imation,” the “Company,” “we,” “us” and “our” are to Imation Corp, and its subsidiaries and consolidated entities.entities unless the context indicates otherwise. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP).
The results of operations for our XtremeMac™ and Memorex consumer electronics businesses are presented in our Consolidated Statements of Operations as discontinued operations for all periods presented.
Overview
Following is a summary of significant items impacting the Company during the year that impacted our operating results, liquidity and capital structure in 2012:2013:
Strategic Transformation
During the fourth quarter of 2012, we announced the acceleration of our strategic transformation, including the planned realignment of our global business into two new business units, a cost reduction program and our increased focus on data storage and data security including exploring strategic options for our consumer electronics brands and businesses. As our traditional media businesses decline,were declining, we are acceleratingdetermined that we needed to accelerate our business transformation to further focus on data storage and data security. Further, on February 13,transformation. During the first quarter of 2013 we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. We will continueThe divestiture of our Memorex consumer electronics business occurred on October 15, 2013 and the divestiture of our XtremeMac business occurred on January 31, 2014. The total expected proceeds from the sale of these two businesses is estimated to be approximately $15 million over time. See Note 4 - Acquisitions and Divestitures in ourNotes to Consolidated Financial Statements for further information on these divestitures. The consumer storage business under the Memorex and TDK Life on Record brands and the consumer electronics business under the TDK Life on a more selective basis.Record brand are being retained.
The realignment of our global business into two new business units will better alignaligns the Company with our key commercialconsumer and consumercommercial channels. The two business units will consist of Tiered StorageCSA, which focuses mainly on retail channels; and Security Solutions (TSS),TSS, which will focusfocuses on small and medium business, and enterprise and government customers; and Consumer Storage and Accessories (CSA), which will focus on retail channels. We continued to manage and evaluate results through December 31, 2012 under our historic regional segment presentation but will report segment information under the new structure beginning withcustomers. In the first quarter of 2013.2013, we revised our segment reporting to reflect these changes into these two new reporting segments. See Note 14 - Business Segment Information and Geographical Datain ourNotes to Consolidated Financial Statements for more information on our business segments.
In October 2012, the Board of Directors approved a restructuring programour Global Process Improvement Restructuring Program (GPI Program) in order to realign our business structure and reduce operating expenses by more thanin excess of 25 percent over time. This restructuring program addressesaddressed product line rationalization and infrastructure and includesincluded a planned reduction of approximately 20 percent ofin our global workforce. These actions are being implemented beginning in 2013. We anticipate we will incur cash charges up to $40 million, with total charges between $50 million and $60 million (excluding charges associated with goodwill and intangible asset impairments), theThe majority of which will occur inthese actions were implemented during 2013. As of December 31, 2013 we have reduced operating expenses by approximately 30 percent, not considering the incremental operating expense from the acquisition of Nexsan, and we have reduced our global workforce by over 20 percent under the GPI Program. See Note 7 - - Restructuring and Other Expensein our Notes to Consolidated Financial Statements for more information on thethis restructuring program.
In conjunction with the acceleration of our strategic transformation in the fourth quarter of 2012, we evaluated our intangible assets, including goodwill, for impairment and recorded non-cash impairment charges of $283.8 million in the quarter. The intangible asset charges are primarily due to an accelerated secular optical market decline. See Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements for further information on the impairment charges.
Product Overview
Optical media product revenue comprised 38.8 percent, 39.6 percent and 42.4 percent of our total
consolidated revenueIn 2013, we made progress in 2012, 2011our strategic transformation toward becoming a key global player in data storage and 2010, respectively. Thedata security as we continue to move away from legacy media businesses to focus on growing consumer and commercial storage solutions. In 2013 we reduced legacy operating expenses and headcount under our restructuring program and have taken steps to capitalize on our investment in Nexsan while completing the divestiture of two legacy businesses.
Segment Overview
Consumer Storage and Accessories
Our CSA business continues to be impacted by lower revenues from the secular declines in optical media products as the optical market continues to contractprogress through its life cycle. Despite these declines, our gross margins remained solid for this segment, and such contractions acceleratedour cash generation was strong in 20122013 as consumers continued to adopt alternatives such as digital streaming, hard disk and flash media, resultinga result of improvements in decreasing revenues. We believe we are generally maintaining our worldwide market share. During 2011 and 2010 we saw significant price increases for the raw materials required to produce optical media, particularly polycarbonate which is made out of oil and silver. These raw materials price increases were passed on to us in 2011 by our suppliers and although they were subsequently mitigated in part by successfully negotiated price increases with our customers, they resulted in gross margin pressures. The contracting optical media market size and increasing raw materials prices impacted all of our segments resulting in decreasing revenues and gross margins. During 2011,working capital. In addition, during 2013, we reversed $7.8$23.1 million of accruals related to prior yearassociated with European optical media copyright levies payable for which we considered payment remote due to the European Courtas a result of Justice (ECJ) ruling on the European Copyright Directive, which became effectivefavorable court rulings in 2002.Italy and France. See Note 15 - Litigation, Commitments and Contingencies in our Notes to Consolidated Financial Statements for further information regarding levies. CSA is expected to continue to be an important contributor of earnings and cash flow in the future. The divestitures of our XtremeMac and Memorex consumer electronics businesses were both completed.
MagneticTiered Storage and Security Solutions
Our TSS business showed overall revenue and gross margin growth reflecting revenues from the Nexsan acquisition. We are concentrating on our investment in Nexsan with aggressive hiring of technical support and sales talent, introducing new products and promoting Nexsan. Our magnetic tape revenues continue to decrease consistent with the overall market, but the steep decline rates that we saw through the middle of 2013 leveled off in the fourth quarter and we have been able to maintain our market share through 2013. Ongoing emphasis on working capital and cost management will be a key focus for our magnetic tape business. Within our storage and security solutions portfolio, revenues were constrained by uncertainty in government spending during the last half of 2013. Our gross margins increased as our product mix moves to higher margin storage and security solutions products and we expect to continue this shift in product mix with our focus on higher margin products. Long term we expect growth from our storage and security solutions portfolio products as we continue our investment in this business.
Product Overview
Consumer Storage Media
Consumer storage media revenue comprised 26.050.6 percent, 25.459.0 percent and 23.863.4 percent of our total consolidated revenue in 2013, 2012 and 2011, respectively. Our consumer storage media includes optical products, USB flash drives, flash cards and 2010,external hard disk drives. Our optical products consist of DVDs, CDs and Blu-ray™ recordable media. We have the leading global market share for recordable optical media; however, the overall market for CDs and DVDs is declining as digital streaming, hard disk and flash media replace optical media in some applications such as music and video recording. We believe we are generally maintaining our worldwide market share. We also sell high capacity Blu-ray discs which are used primarily for recording high-definition video content. Our optical media products are sold throughout the world under brands we own or control, including Imation, Memorex and TDK Life on Record through a variety of distribution channels. Our media products are sourced from manufacturers in Taiwan and India. We also sell standard USB flash drives, flash cards and external hard disk drives throughout the world under our Imation, Memorex and TDK Life on Record brands. We source these products from manufacturers primarily in Asia and sell them through a variety of distribution channels around the world.
Audio and Accessories
Audio and accessories revenue comprised 4.9 percent, 4.1 percent and 3.0 percent of our total consolidated revenue in 2013, 2012 and 2011, respectively. WhileOur audio and accessories include headphones and speakers sold under the TDK Life on Record brand. The portfolio continues to evolve as we focus on higher-margin, differentiated accessories products and respond to customer demand. We design products to meet user needs and source these products from manufacturers throughout Asia.The divestiture of our Memorex consumer electronics business closed on October 15, 2013 and the divestiture of our XtremeMac business closed on January 31, 2014.
Commercial Storage Media
Commercial storage media revenue comprised 29.2 percent, 31.0 percent and 32.5 percent of our total consolidated revenue in 2013, 2012 and 2011, respectively. Our magnetic tape media products are used for back-
up, business and operational continuity planning, disaster recovery, near-line data storage and retrieval and for cost-effective mass and archival storage. The market for magnetic tape cartridges has been in decline and we expect the demand for data storage capacitydeclines to increase, advances in technology allow increasingly more datacontinue into 2014, but we continue to be stored onmaintain a single unit ofleading market share. Our magnetic tape and thus, overproducts are sold throughout the recent past, the market has declined each year. While the market is getting smaller,world under various brands. In 2011, we believe we are maintainingconsolidated our market share in all of our regional business segments. We discontinued tape coating operations at our Weatherford, Oklahomato the TDK group Yamanashi manufacturing facility in 2011 in order to gain efficiencies and reduce manufacturing costs. We signedunder a strategic agreement with TDK Corporation to jointly develop and manufacture magnetic tape technologies. Under the agreement, we are collaboratingcollaborate on the research and development of future tape formats in both companies' research centers in the United States and Japanjointly develop and we consolidated tape coating operations to the TDK Yamanashi manufacturing facility. The contractingmanufacture magnetic tape market size impacted alltechnologies. At the end of our segments resulting in decreasing revenues,2013, TDK announced their intent to cease manufacturing of magnetic tape and therefore we expect these trends to continue into 2013.will transition product sourced from alternate magnetic tape suppliers during 2014.
Other traditional storage productStorage and Security Solutions
Storage and security solutions revenue comprised 1.415.3 percent, 3.75.9 percent and 4.31.1 percent of our total consolidated revenue in 2013, 2012 and 2011, respectively. Our storage systems include the Nexsan E-Series™ disk arrays with industry-leading storage density, reliability and 2010, respectively.power management offering high value block-based storage; the NST™ line of hybrid storage combining solid state technology with spinning disk to offer high performance and capacity and the Assureon™ secure archive systems for data offload, compliance and secure cloud deployments. We expect the demand for audio video tape and optical drives, the products which comprise the majority of theto continue to grow revenue in this category, to decrease over time.our storage systems products with the Nexsan acquisition of 2012.
SecureMobile security products and scalable storage product revenue comprised 19.1 percent, 16.3 percent and 14.2 percent of our total consolidated revenue in 2012, 2011 and 2010, respectively. The increase as a percent of total revenue for this component reflects our investment inservices include secure and scalable storage products, through our acquisitions in 2011. We continued our strategysoftware and portable workspace solutions. Many of investing in growth platforms inthese products are designed to meet the most stringent security standards that protect data storage and security solutionsat rest with the acquisition of Nexsan Corporation (Nexsan) on December 31, 2012. The acquisition of Nexsan brings us a proven technology platformU.S. Government Federal Information Processing Standard (FIPS) validation, which includes strong encryption protection with password and a robust portfolio of disk-based and hybrid disk-and-solid-state storage systems and is expected tobiometric authentication. Flash media products with security features provide margins significantly accelerate our growth inhigher than traditional flash media without data security. We have consolidated the small and medium-sized business and distributed enterprise storage markets. Imation will provide the Nexsan business with global scale and a well-known storage brandbrands for global expansion. We expect growth in these secure and scalable products as a result of the businesses we acquired in 2011 and 2012.
Audio and video information product revenue comprised 14.7 percent, 15.0 percent and 15.3 percent of our total consolidated revenue in 2012, 2011 and 2010, respectively. Declines in these products were driven by decreased revenue inunder the United States as we continued to experience a very difficult retail environment for the products we sell. As a part of the acceleration of our strategic transformation and our increased focus on data storage and security, on February 13, 2013, we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses, which represent a significant portion of this product group. We will continue our TDK Life on Record business on a more focused basis.IronKey name.
Executive Summary
Consolidated Results of Operations for the Twelve Months Ended December 31, 20122013
Revenue of $1,099.6860.8 million in 20122013 was down 14.814.5 percent compared with revenue of $1,290.41,006.7 million in 20112012. driven by secular declines in our optical and tape products. Revenue for 2013 compared to 2012 was negatively impacted by foreign currency translation of four percent.
Gross margin of 18.4%21.9 percent in 2013 was up from 18.8 percent in 2012 was up from 16.8%and included a benefit of $23.1 million of accrual reversals associated with European copyright levies as a result of favorable court rulings in Italy and France. The levy accrual reversals had a 2.7 percent positive impact on gross margin in 2011.2013.
Selling, general and administrative expense was $210.7181.6 million in 2013, down $9.5 million compared with $191.1 million in 2012, up $7.0 million, compared with $203.7 million. The addition of SG&A expense from the acquisition of Nexsan was offset by lower SG&A expense due to cost reduction efforts and lower amortization expense as a result of intangible write-offs in 2011.2012.
Research and development expense was $22.818.4 million in 20122013, up $1.8down $2.0 million, compared with $21.0 million in 2011.
We recorded non-cash goodwill impairment charges of $23.3 million in 2012 and $1.6 million in 2011 and recorded non-cash intangible impairment charges of $260.520.4 million in 2012.
Restructuring and other expense was $11.3 million in 2013 compared to $21.1 million in 2012. Restructuring expense in 2013 included $5.2 million of costs related to our 2012 GPI Program. Other expense in 2013 included a $10.6 million loss related to the settlement of our UK pension plan offset by a $9.8 million gain on the sale of land at a previously closed facility. Restructuring expense in 2012 included $19.7 million of costs primarily related to our 2012 GPI Program.
Operating loss from continuing operations was $20.1 million in 2013 compared to $318.4 million in 2012 which included intangible asset impairment charges of $251.8 million and a goodwill impairment charge of $23.3 million.
Other expense (income) was $21.52.9 million in 20112013, from previously announced restructuring programs.
Other (income) expense wasdown $2.1 million, compared with $5.0 million in 2012, down $4.8 million, compared with $9.8 million in 2011.
Operating loss was $336.1 million in 2012 compared with an operating loss of $33.1 million in 2011.
The income tax benefitprovision was $0.41.4 million in both 2013 and in 2012.
Diluted loss per share from continuing operations was $0.60 for 2013 compared with an income tax provision of $3.8 million in 2011.
$8.67 for 2012.
Cash Flow/Financial Condition for the Twelve Months Ended December 31, 20122013
Cash and cash equivalents totaled $108.7132.6 million as of December 31, 20122013, up $23.9 million compared with $223.1108.7 million at December 31, 20112012. The reduction was due mainly to the Nexsan acquisition.
Cash used inprovided by operating activities was $8.522.1 million for the twelve months ended December 31, 20122013 compared with cash used in operating activities of $16.3$8.5 million for the twelve months ended December 31, 2011.2012.
Results of Operations
Net Revenue
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 |
| | | (In millions) | | | | |
| Net revenue | | $ | 1,099.6 |
| | $ | 1,290.4 |
| | $ | 1,460.9 |
| | (14.8 | )% | | (11.7 | )% |
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | |
| Net revenue | | $ | 860.8 |
| | $ | 1,006.7 |
| | $ | 1,166.6 |
| | (14.5 | )% | | (13.7 | )% |
Our worldwide revenue in 2013 decreased compared with 2012, driven primarily by a $158.6 million or 26.7 percent decline in our consumer storage media products in our CSA segment from 2012. Revenue in our TSS segment increased 3.0 percent in 2013 compared with 2012 as revenue from our storage and security solutions products increased $71.7 million driven by the addition of revenue from the acquisition of Nexsan Corporation (Nexsan), which was acquired on December 31, 2012. This was partially offset by a $60.6 million decline in our commercial storage media products due to revenue declines in tape media products. The accelerated revenue declines we saw in magnetic tape through the middle of 2013 leveled off in the fourth quarter. We believe we are holding our market share in tape media, but it has been impacted by industry wide dynamics including competing formats, as well as continuing improvements in compression and deduplication technologies. See Segment Results for further discussion of our reporting segments, including the revision of our segments as of January 1, 2013. Revenue for 2013 compared to 2012 was negatively impacted by foreign currency translation of four percent.
Our worldwide revenue in 2012 decreased compared with 2011, driven by declines in our maturing traditionalconsumer and commercial storage products and our audio and video informationmedia products. Several continuing macro-economic factors, including the broad-based European economic downturn, a soft global IT environment and a weak U.S. retail environment for the products we sell, had an impact on our revenue in 2012. From a product perspective, the decrease in revenue included declines in traditional storageoptical media products of $158.6 million comprising $85.1 million from optical products, $41.2 million fromand magnetic products and $32.3 million from other traditional storage products, as well as decreased revenue from audio and video informationtape products of $32.2$41.2 million. Secure and scalable products remained flat in 2012 comparedIn addition to 2011 as a $20.4 million declinethese declines, revenue in commodity flash products declined $20.4 million, driven by continued market place price degradation but was offset by a $14.3 million increase in our mobile security products as well as increases in our other secure and scalable products. Revenue for 2012 compared to 2011 was negatively impacted by foreign currency translation of one percent.
Our worldwide revenue in 2011 decreased compared with 2010 due to declines in traditional storage products of $142.9 million, including $107.4 million from optical products and $20.4 million from magnetic products, as well as $30.2 million from audio and video information products, driven by planned rationalization of our video products, offset partially by increases in secure and scalable storage products of $2.6 million. Revenue was positively impacted by foreign currency translation of four percent.
Gross Profit
| | | | | Years Ended December 31, | | Percent Change | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | | | (In millions) | | | | |
| Gross profit | | $ | 202.3 |
| | $ | 216.7 |
| | $ | 226.4 |
| | (6.6 | )% | | (4.3 | )% | | $ | 188.7 |
| | $ | 189.3 |
| | $ | 205.4 |
| | (0.3 | )% | | (7.8 | )% |
| Gross margin | | 18.4 | % | | 16.8 | % | | 15.5 | % | | | | | | 21.9 | % | | 18.8 | % | | 17.6 | % | | | | |
Gross profit decreased slightly in 2013 compared with 2012 as a $12.4 million decrease in gross profit in the CSA segment was mostly offset by a $12.2 million increase in gross profit in the TSS segment. The decline in gross profit was primarily due to lower overall revenue mostly offset by the reversal of $23.1 million of accruals for Italian and French copyright levies in our CSA reporting segment in the second and fourth quarters of 2013. See Note 15 - Litigation, Commitments and Contingencies in our Notes to Consolidated Financial Statements for more information on the levy reversal. From a product perspective, lower gross profit in our consumer and commercial storage media products was partially offset by the levy reversals and higher gross profit in storage and security solutions products driven primarily by the addition of products from the Nexsan acquisition. Gross profit during 2013 and 2012 included inventory write-offs of $2.7 million and $2.3 million, respectively, related to our restructuring programs, which was driven by the rationalization of certain product lines.
Gross profit decreased in 2012 compared with 2011 due primarily to lower revenue from all major product categories, as well as lower gross margins on traditionalconsumer and commercial storage media products, partially offset by higher gross margins on secure and scalable storagemobile security products. Gross profit in 2012 benefited from lower inventory write-offs compared to 2011 with write-offs of $2.3 million and $9.1 million recorded in 2012 and 2011, respectively. Gross profit during
2011 benefited from $7.8 million related to the reversal of European levies accrued in prior years for which we considered payment remote.
Total gross margin increased 3.1 percentage points in 20112013 compared with 2010 due primarily2012. Gross margin in the CSA reporting segment increased 4.0 points to lower revenues from optical products and magnetic products,23.8 percent as well as inventory write-offs of $9.1 million which were part of our restructuring programs, offset partially by higher gross margins on all product categories. Optical gross profit benefited from the $7.8 million reversal of Europeanthe accruals for Italian and French copyright levies and price increases which were partially offset by optical supplier price increaseslower gross margin on our consumer storage media products. Gross margin in the TSS reporting segment increased 2.6 points to 20.3 percent as higher revenue and gross margin in our storage and security solutions products from the acquisition of $12.8 million.Nexsan were partially offset by lower gross margin on our commercial storage media products.
Total gross margins increased in 2012 compared with 2011 due primarily to a shift in product mix to higher gross margin products along with improved gross margins in secure and scalable storage and audio and video information. Gross margins for traditional storage products were flat at 19.0 percent compared with 2011. Gross margins for secure and scalable storage products rose 3.7 points to 18.8 percent compared with 2011 due to favorable changes in product mix as a result of revenue growth in our mobile security products. Gross margins for audioconsumer and video informationcommercial storage media products were flat compared with 2011. Gross margins in our mobile security products rose 3.4 pointsin 2012 compared to 16.4 percent compared with 2011 due to favorable changes in product mix as a result of revenue growth in higher margin headphones, cases and other accessories.
Total gross margins increased in 2011 compared with 2010 due primarily to the reversal of European levies accrued as well as price increases, offset partially by optical supplier cost increases along with changes in product mix.
Selling, General and Administrative (SG&A)
| | | | | Years Ended December 31, | | Percent Change | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | | | (In millions) | | | | |
| Selling, general and administrative | | $ | 210.7 |
| | $ | 203.7 |
| | $ | 202.5 |
| | 3.4 | % | | 0.6 | % | | $ | 181.6 |
| | $ | 191.1 |
| | $ | 182.4 |
| | (5.0 | )% | | 4.8 | % |
| As a percent of revenue | | 19.2 | % | | 15.8 | % | | 13.9 | % | | | | | | 21.1 | % | | 19.0 | % | | 15.6 | % | | | | |
SG&A expense decreased in 2013 compared with 2012 due primarily to our cost reduction efforts. SG&A costs were reduced by approximately $44.6 million as a result of Imation’s cost reduction efforts and lower amortization expense due to intangible write-offs in 2012. Incremental SG&A from the Nexsan acquisition partially offset these reductions in 2013.
SG&A expense increased in 2012 compared with 2011 due primarily to the additional ongoing SG&A expense of $12.2 million and intangible amortization of $2.3 million related to our acquired businesses partially offset by cost reductions achieved.
SG&A expense was essentially flat in 2011 compared with 2010 and was impacted by lower compensation expense, the reversal of a bad debt reserve of $2.7 million and cost control actions, offset by additional ongoing SG&A expenses related to our acquired businesses. This resulted in an increase in our SG&A expense as a percent of revenue in 2011 compared to 2010.
Research and Development (R&D)
| | | | | Years Ended December 31, | | Percent Change | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | | | (In millions) | | | | |
| Research and development | | $ | 22.8 |
| | $ | 21.0 |
| | $ | 16.4 |
| | 8.6 | % | | 28.0 | % | | $ | 18.4 |
| | $ | 20.4 |
| | $ | 18.3 |
| | (9.8 | )% | | 11.5 | % |
| As a percent of revenue | | 2.1 | % | | 1.6 | % | | 1.1 | % | | | | | | 2.1 | % | | 2.0 | % | | 1.6 | % | | | | |
R&D expense decreased in 2013 compared with 2012 as we reduced legacy R&D spending and have channeled our investments into higher margin projects in TSS, primarily through the Nexsan acquisition.
R&D expense increased in 2012 compared with 2011 due to our acquisitions and investment to support growth initiatives in secure and scalable storagesecurity solutions products.
R&D expense increased in 2011 compared with 2010 due to our investment to support growth initiatives in secure and scalable storage products. During 2011 we refocused our R&D effort to invest in four core product technology areas: secure storage, scalable storage, wireless/connectivity and magnetic tape. This resulted in an increase in our R&D expense as a percent of revenue in 2011 compared with 2010.
Goodwill Impairment
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | (In millions) |
| Goodwill impairment | $ | 23.3 |
| | $ | 1.6 |
| | $ | 23.5 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Goodwill impairment | $ | — |
| | $ | 23.3 |
| | $ | 1.6 |
|
We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. Our reporting units for goodwill are the Mobile Security reporting unit and the Storage Solutions reporting unit, which are one level below our TSS reporting segment. We do not have any goodwill in our CSA reporting segment. Goodwill resulting from the acquisition of the Memory Experts International, Inc. (MXI Security) and IronKey Systems Inc. (IronKey) businesses is allocated to the Mobile Security reporting unit. Goodwill resulting from the acquisition of Nexsan is allocated to the Storage Solutions reporting unit. See Note 6 - Intangible Assets
and Goodwill in ourNotes to Consolidated Financial Statements for more information on goodwill including our valuation approach and assumptions.
2013 Goodwill Analysis
During the fourth quarter of 2013, we performed our annual impairment testing of goodwill for our Mobile Security and Storage Solutions reporting units. In performing Step 1 of these tests, we compared the estimated fair value of these reporting units to their carrying value. These impairment tests resulted in no impairment of goodwill as the estimated fair value of each reporting unit exceeded the carrying value in Step 1 of the impairment tests by 25.7 percent and 34.2 percent, for the Storage Solutions and Mobile Security reporting units, respectively. There were no triggering events that occurred during 2013 that warranted an interim goodwill impairment test to be performed.
Mobile Security Reporting Unit - For the 2013 impairment test for the Mobile Security reporting unit, the estimated fair value of the reporting unit exceeded the carrying value in Step 1 of the impairment test by 34.2 percent. We used forecasted cash flows over a ten year period, a terminal growth rate of 3.0 percent and a discount rate of 15.5 percent. The discount rate reflects the relative risk of achieving cash flows as well as any other specific risks or factors related to the Mobile Security reporting unit. We calculated the impact of a potential change in our assumptions to determine the impact on the results of the impairment test. Holding all other assumptions constant, an unfavorable change in various components of our projected cash flows, including revenue growth, of less than 5.0 percent would potentially result in an indication of impairment. Additionally, a decrease in the residual growth rate and an increase in the discount rate of less than 5.0 basis points would potentially result in an indication of impairment.
During the fourth quarter of 2013, our internal business plan and estimated cash flows associated with our Mobile Security business was updated. Although there were some downward adjustments to the near-term projections as compared to our previous forecast utilized during our fourth quarter 2012 impairment test, our longer-term projections and estimated fair value of this reporting unit have not been adversely impacted. Based on our updated business plan and strategy for Mobile Security, our projected cash flows and associated estimated fair value of this reporting unit are heavily dependent on achieving significant revenue growth of our data solution products developed for our IronKey Workspaces for Microsoft®Windows To Go® which is a new market in which we do not presently generate significant revenue and for which limited external market data exists. Our projections for this market include significant revenue growth expectations and gross margins generally consistent with our existing Mobile Security business. While the current projections in our Mobile Security reporting unit support no impairment of this reporting unit in 2013, it is reasonably possible that an impairment could be incurred in the future given several factors, including its value being heavily dependent on significant growth in a new market in which we are not generating significant revenue and the generally small sensitivities to various assumptions that could cause an impairment to potentially be necessary. We will continue to closely monitor our results and expected cash flows in the future to assess whether a goodwill impairment in our Mobile Security reporting unit may be necessary.
Storage Solutions Reporting Unit - For the 2013 impairment test for the Storage Solutions reporting unit, the estimated fair value of the reporting unit exceeded the carrying value in Step 1 of the impairment test by 25.7 percent. We used forecasted cash flows over a ten year period, a terminal growth rate of 3.0 percent and a discount rate of 13.5 percent. The discount rate reflects the relative risk of achieving cash flows as well as any other specific risks or factors related to the Storage Solutions reporting unit. We calculated the impact of a potential change in our assumptions to determine the impact on the results or the impairment test. Holding all other assumptions constant, an unfavorable change in various components of our projected cash flows, including revenue growth, of less than 5.0 percent would potentially result in an indication of impairment. Additionally, a decrease in the residual growth rate and an increase in the discount rate of less than 5.0 basis points would potentially result in an indication of impairment.
During 2011,2013 our Storage Solutions reporting unit achieved slower growth than was anticipated at the time of its acquisition, due to what we believe to be temporary factors, including the impact of the government shut-down. Despite these lower than anticipated results, our longer-term projections and estimated fair value of this reporting unit have not been adversely impacted as compared to our expectations at the time of acquisition. Given the relatively short time since the date we acquired Nexsan (December 31, 2012), we have not yet had an opportunity to sufficiently execute our planned strategy to achieve the results and associated cash flows that we had anticipated. We are investing in this business aggressively and have seen that market participants show this type of business can be valued at extremely high multiples. However, while our current projections support no impairment of this reporting unit for 2013, given that our 2013 results fell below expectations and the generally small sensitivities to various assumptions that could cause an impairment to potentially be necessary, it is reasonably
possible that an impairment could be incurred in the future. We will continue to closely monitor our results and expected cash flows in the future to assess whether a goodwill impairment in our Storage Solutions reporting unit may be necessary.
2012 Goodwill Analysis
We acquired the assets of MXI Security from Memory Experts International Inc., (MXI) and the secure data storage hardware business of IronKey Systems Inc. (IronKey)during 2011 which resulted in goodwill of $21.9 million and $9.4 million, respectively. These businesses along with our Imation Defender brand, makemade up our Americas-Mobile Security reporting unit. The carrying value of our Mobile Security reporting unit includedas of December 31, 2012 with a carrying value of $31.3 million of goodwill prior to our 2012 impairment testing.testing described below.
During the second and third quarters of 2012, we adjusted our internal financial forecast for our Mobile Security reporting unit (referred to as our Americas-Mobile Security reporting unit in 2012) due to changes in timing of expected cash flows and lower expected short-term revenues and lower gross margins. As we considered these factors to be an event that warranted an interim test as to whether the goodwill was impaired, we performed an impairmenttest as of each of these periods. These impairment tests resulted in no impairment of goodwill as the estimated fair value of the reporting units exceeded the carrying value in stepStep 1 of the impairment tests by 43.3 percent and 17.7 percent, during the second and third quarter of 2012, respectively. During the fourth quarter of 2012, our internal financial forecast for our Americas-MobileMobile Security reporting unit was again adjusted with further declines in our revenue and gross margin projections resulting from lower expectations in the high-security market segment. In accordance with our policy, we performed our annual assessment of goodwill in the Americas-MobileMobile Security reporting unit during the fourth quarter of 2012 and, as a result of this assessment, it was determined that the fair value of our Mobile Security reporting unit was impaired. We recorded an impairment charge of $23.3 million to the Americas reporting segment in theour Consolidated Statements of Operations.
In determining the estimated fair value of the reporting unit, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue and gross margin expectations and terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The significant assumptions used includeincluded a discount rate of 16.0 percent to reflect the relevant risks of the higher growth assumed for the Americas-MobileMobile Security reporting unit, revenue growth rates, which were forecasted to be significant, and a terminal growth rate of 2.5 percent.
An increase in the discount rate of one percent would have decreased the reporting unit's fair value by approximately 4.0 percent while a decrease in the discount rate by one percent would have increased the reporting unit's fair value by 4.7 percent. The revenue growth rates in 2013 through 2015 are significant assumptions within the projections.
2011 Goodwill Analysis
During 2011, we acquired substantially all of the assets of BeCompliant Corporation, doing business as Encryptx (Encryptx) which resulted in goodwill of $1.6 million. The goodwill was allocated to our existing Americas-CommercialMobile Security reporting unit. Based on an interim goodwill impairment test performed at March 31, 2011, we determined that the goodwill in the Americas-Commercial reporting unit, including the assets of Encryptx, exceeded the implied fair value and, therefore, thethis goodwill was fully impaired. Asimpaired and as a result, a $1.6 million charge was recorded in 2011 in restructuring and other in theour Consolidated Statements of Operations.
During 2010, we made certain changes to our business segments. As a result of the segment change in 2010, the $23.5 million of goodwill which was previously allocated to the Electronics Products segment was merged into the Americas-Consumer reporting unit. The Americas-Consumer reporting unit had a fair value that was significantly less than its carrying amount prior to the combination, which is a triggering event for an interim goodwill impairment test. A two-step impairment test was performed to identify a potential impairment and measure an impairment loss to be recognized. Based on the goodwill test performed in the second quarter of 2010, we determined that the carrying amount of the reporting unit significantly exceeded its fair value and that the $23.5 million of goodwill was fully impaired.
See Note 2 - Summary of Significant Accounting Policies and Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements as well as Critical Accounting Policies and Estimates for further background and information on goodwill impairments.
Intangible Impairments
2013 Intangible Asset Analysis
As a part of our annual goodwill impairment test for our Storage Solutions and Mobile Security reporting units (as discussed above), we also tested for impairment the long-lived assets, including intangible assets, within the asset groups included in our Mobile Security and Storage Solutions reporting units. In performing these tests, we compared the carrying values of these asset groups with their estimated undiscounted future cash flows and determined that the undiscounted cash flows expected to be generated by the asset groups exceeded their carrying values resulting in no impairment. There were no interim triggering events that occurred during 2013 that warranted an impairment test to be performed on our long-lived assets (including intangible assets) other than goodwill. See Note 6 - Intangible Assets and Goodwill in ourNotes to Consolidated Financial Statements for more information on intangible assets including our valuation approach and assumptions.
2012 Intangible Asset Analysis
During the second and third quarters of 2012, as noted below under our 2012 goodwill analysis discussion, we performed interim goodwill impairment testing for our Mobile Security business (referred to as our Americas-Mobile Security business in 2012) due to changes in the timing of expected cash flows and lower than expected short-term revenues and gross margins. We also determined these factors to be an event that warranted interim tests as to
whether our intangible assets associated with the Mobile Security business were impaired. Based on our impairment analysis performed in the second and third quarters of 2012, we concluded that we did not have an impairment of our intangible assets in the Mobile Security asset group at those times.
During the fourth quarter of 2012, we determined that the results of our revised internal financial forecast, which was finalized during the quarter and took into account the expected actions and outcomes associated with the
acceleration of our strategic transformation (as further described in above)Note 1 - Basis of Presentation in our Notes to Consolidated Financial Statements), qualified as a triggering event for impairment testing. This required the assessment of the recoverability of the long-lived assets (including definite-lived intangible assets) included in all of our asset groups with the exception of the recent acquisition of Nexsan. As a result of this event, we
We compared the carrying value of our asset groups with their estimated undiscounted future cash flows and determined that the carrying value of certain intangible asset groups exceeded their fair value. We generally determined ourthe undiscounted cash flows expected to be generated by the asset group. For those asset groups, we then compared the carrying value of the asset group to be associated withits estimated fair value to determine the amount by which our various brands as that islong-lived assets (primarily intangible assets) within the lowest level for which identifiable cash flows are largely independent of one another. We then calculated the impairmentasset group were impaired. As a result of these asset groups as the excess of their carrying value over their discounted fair value and as a resultanalyses, we recorded an impairment loss of $260.5 million which was recorded in the Consolidated Statements of Operations.
In calculating the discounted fair value of the asset groups, we used the income approach, a valuation technique under which we estimate future cash flows using our financial forecasts associated with the asset groups. Our expected cash flows are affected by various significant assumptions, including projected sales, gross margin and expense expectations as well as a discount rate. Our analysis utilized forecasted cash flows ranging from a four year to a 10 year period depending on the asset group, and our business plans served as the basis for these cash flow assumptions. The analysis utilized discount rates ranging from 15.0 percent to 15.5 percent depending on the asset group. An increase in the discount rate of one percent would have decreased the intangible asset fair value by approximately 3.0 percent while a decrease in the discount rate by one percent would have increased the intangible asset fair value by 3.0 percent.
Litigation Settlements
A litigation settlement charge of $2.0$260.5 million was recognized in 2011. We entered into a settlement with Advanced Research Corp. (ARC) under which we agreed to pay ARC $2.0 million to settle a dispute relating to a supply agreement under which we purchased magnetic heads to write servo patterns on magnetic tape.
A litigation settlement charge of $2.6 million was recognized in 2010. On January 11, 2011, we signed a patent cross-license agreement with SanDisk Corporation (SanDisk) to settle two patent cases filed by SanDisk in Federal District Court against our flash memory products, including USB drives and solid state disk drives. Under the terms of the cross-license, we will pay SanDisk royalties on certain flash memory products that were previously not licensed. The specific terms of the cross-license are confidential. The cross-license agreement required us to make a one-time payment of $2.6 million in 2011, which was included in litigation settlement expense in the Consolidated Statements of Operations during 2010.
for the year ended December 31, 2012. During 2013, the impairment charge of $8.7 million that related to our Memcorp Asset Group was reclassified to discontinued operations and thus the 2012 impairment charge from continuing operations in our Consolidated Statement of Operations as of December 31, 2013 is reported as $251.8 million. See Note 154 - Litigation, CommitmentsAcquisitions and ContingenciesDivestitures in our Notes to Consolidated Financial Statements for further information.more information on our discontinued operations.
See Note 6 - Intangible Assets and Goodwill in our Notes to Consolidated Financial Statements for more information on our 2012 impairment of intangible assets.
Litigation Settlement
A $2.5 million gain from a litigation settlement from a long-standing case in Brazil was recognized in 2013. In 2011, we recognized a $2.0 million charge related to a litigation settlement with Advanced Research Corp.
Restructuring and Other
The components of our restructuring and other expense included in the Consolidated Statements of Operations were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | (In millions) |
| Restructuring | | | | | |
| Severance and related | $ | 16.9 |
| | $ | 7.0 |
| | $ | 13.0 |
|
| Lease termination costs | 0.6 |
| | 3.3 |
| | 1.7 |
|
| Other | 2.2 |
| | 1.1 |
| | — |
|
| Gain on sale of fixed assets held for sale | (0.7 | ) | | — |
| | — |
|
| Total restructuring | $ | 19.0 |
| | $ | 11.4 |
| | $ | 14.7 |
|
| Other | | | | | |
| Contingent consideration fair value adjustment (Note 4) | (8.6 | ) | | — |
| | — |
|
| Intangible asset abandonment (Note 6) | 1.9 |
| | — |
| | — |
|
| Acquisition and integration related costs | 3.7 |
| | 2.6 |
| | — |
|
| Pension settlement/curtailment (Note 9) | 2.4 |
| | 2.5 |
| | 2.8 |
|
| Asset disposals | — |
| | 7.0 |
| | — |
|
| Asset impairments | — |
| | — |
| | 31.2 |
|
| Other | 2.7 |
| | (2.0 | ) | | 2.4 |
|
| Total | $ | 21.1 |
| | $ | 21.5 |
| | $ | 51.1 |
|
2012 Global ProcessingProcess Improvement Restructuring Program
On October 22, 2012, the Board of Directors approved the Global Processing Improvement Restructuringour GPI Program (GPI Program) relatingin order to the realignment ofrealign our business structure and reduction of ourreduce operating expenses in excess of 25 percent over time. This restructuring program addressesaddressed product line rationalization and infrastructure and is anticipated to includeincluded a planned reduction of approximately 20 percent ofin our global workforce. As it pertains to this restructuring program, we anticipate we will incur cash payments up to $40 million, with total charges to our Statement of Operations between $50 million and $60 million (excluding charges associated with goodwill and intangible asset impairments), theThe majority of which will occurthese actions were implemented during 2013. As of December 31, 2013 we have reduced operating expenses by approximately 30 percent, not considering the incremental operating expense from the acquisition of Nexsan, and we have reduced our global workforce by over 20 percent under the GPI Program.
Other Prior Programs Substantially Complete
We have two additional programs, as described further below, that were initiated in 2013. This restructuring action is anticipated to include between $15 millionprior years and $25 million for severance and one-time termination benefits, between $5 million and $15 million for asset impairments, excluding goodwill and intangible asset impairments recorded in 2012, and between $20 million and $25 million for other charges. This program was required due to current and future expected revenue declines. These actions are being implemented beginning in 2013.now substantially complete.
During 2012, we recorded restructuring charges of $14.9 million associated with this program. These charges were primarily associated with severance related activity and were included in restructuring and other in our Consolidated Statements of Operations.
The 2011 Corporate Strategy Restructuring Program
On January 31, 2011, was initiated during the Boardfirst quarter of Directors approved the 2011 Corporate Strategy Restructuring Program (2011 Corporate Program) to rationalize certain product lines, increase efficiency and gain greater focus in support of our go-forward strategy. Major components of the program included charges associated with certain benefit plans, improvements to our global sourcing and distribution network, costs associated with further rationalization of our product lines and evolution of our skill sets to align with our announced strategy. Since the inception of this program, we have recorded a total of $13.4 million of severance and related expenses, $3.5 million of lease termination and modification costs, $1.6 million of inventory write-offs, $0.3 million related to a pension curtailment charge and $0.9 million of other charges. Inventory write-offs are included in cost of goods sold in our Consolidated Statements of Operations. At December 31, 2012, we had approximately $15 million of authorized spending amounts remaining related to this program. At December 31, 2012, this remaining authorization was transferred and added to the GPI programProgram and any future charges, as well as the remaining spend relating to the 2011 Corporate Program, will be accounted for under the 2012 GPI Program.
During 2012, we recorded restructuring charges of $4.2 million associated with this program. These charges were primarily associated with severance and were included in restructuring and other in our Consolidated Statements of Operations.
During 2011, we recorded restructuring charges of $10.2 million primarily related to severance and lease
termination costs. In addition, we also recorded inventory write-offs of $1.6 million related to the planned rationalization of certain product lines as part of this program, which are included in cost of goods sold in our Consolidated Statements of Operations.
During 2010, we recorded restructuring charges of $3.4 million for severance and related expenses.
Other Prior Programs Substantially Complete
We have had activity related to two programs, as described further below, that were initiated in prior years and are now substantially complete. The 2011 Manufacturing Redesign Restructuring Program (2011 Manufacturing Program) was initiated during the first quarter of 2011 to rationalize certain product lines and discontinue tape coating operations at our Weatherford, Oklahoma facility and subsequently close the facility.
The 2008 Corporate Redesign Restructuring Program (2008 Corporate Program) was initiated during the fourth quartercomponents of 2008 and aligned our cost structure by reducing SG&A expenses. We reduced costs by rationalizing key accounts and products and by simplifying our corporate structure globally.
During 2012, we recorded a gain on the sale of assets from the Weatherford facility of $0.7 million and charges of $0.6 million related to our 2011 Manufacturing Program. These costs were included in restructuring and other expense included in our Consolidated Statements of Operations.Operations were as follows:
During |
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Restructuring | | | | | |
| Severance and related | $ | 2.1 |
| | $ | 16.9 |
| | $ | 7.0 |
|
| Lease termination costs | 0.7 |
| | 0.6 |
| | 3.3 |
|
| Other | 2.4 |
| | 2.2 |
| | 1.1 |
|
| Total restructuring | $ | 5.2 |
| | $ | 19.7 |
| | $ | 11.4 |
|
| Other | | | | | |
| Settlement of UK pension plan (Note 9) | 10.6 |
| | — |
| | — |
|
| Gain on sale of fixed assets held for sale | (9.8 | ) | | (0.7 | ) | | — |
|
| Acquisition and integration related costs | 2.8 |
| | 3.7 |
| | 2.6 |
|
| Pension settlement/curtailment (Note 9) | 2.1 |
| | 2.4 |
| | 2.5 |
|
| Contingent consideration fair value adjustment (Note 4) | (0.6 | ) | | (8.6 | ) | | — |
|
| Intangible asset abandonment (Note 6) | — |
| | 1.9 |
| | — |
|
| Asset disposals | — |
| | — |
| | 7.0 |
|
| Other | 1.0 |
| | 2.7 |
| | (2.0 | ) |
| Total | $ | 11.3 |
| | $ | 21.1 |
| | $ | 21.5 |
|
Total restructuring charges of $5.2 million recorded for the year ended December 31, 2013 were all related to the GPI Program.
For the year ended December 31, 2012, we recorded restructuring charges of $14.9 million, primarily related to severance, under the GPI Program. Also during 2012, we recorded restructuring charges of $4.2 million under the 2011 Corporate Program primarily related to severance and $0.6 million of other restructuring charges under the 2011 Manufacturing Program.
For the year ended December 31, 2011, we recorded restructuring charges of $0.3$10.2 million, primarily related to severance and lease termination costs under the 2011 Corporate Program. Also during 2011, we recorded restructuring charges of $0.3 million for lease termination and modification costs and $0.9$0.9 million of site clean-up expenses related to ourcosts under the 2011 Manufacturing Program. These costs were included
In addition to the restructuring charges recorded in restructuring and other, in our Consolidated Statements of Operations. We alsowe recorded non-cash inventory write-offs of $7.5$2.7 million relating, $2.3 million and $9.1 million related to the planned rationalization of certain product lines as part of our restructuring programs, for the years ended December 31, 2013, 2012 and 2011, Manufacturing Program,respectively, which were included in cost of goods sold in our Consolidated Statements of Operations.
During 2010, we recorded restructuring charges of $3.2 million for severance and related expenses and non-cash inventory write-offs of $14.2 million in connection with our 2011 Manufacturing Program. The inventory write-offs are included in cost of goods sold in our Consolidated Statements of Operations. During 2010,
Since the inception of the GPI Program, we have recorded $6.4a total of $17.6 million of severance and related expenses, and $1.7$5.0 million of inventory write-offs, $0.8 million of lease termination and modification costs, and $3.3 million of other charges.
Since the inception of the 2011 Corporate Program, we have recorded a total of $13.4 million of severance and related expenses, $3.5 million of lease termination and modification costs, $1.6 million of inventory write-offs, $0.3 million related to a pension curtailment charge and $0.9 million of other charges.
During the year endedDecember 31, 2013, severance expense of $1.6 million related to employees directly associated with XtremeMac and Memorex consumer electronics businesses was recorded in discontinued operations. See Note 4 - Acquisitions and Divestitures in our 2008 Corporate Program.Notes to Consolidated Financial Statements for more information on our discontinued operations.
Other
Certain amounts recorded in Other are discussed elsewhere in our Notes to Consolidated Financial Statements. See note references in table above.
During 2012, we recorded acquisition and integration related costs of $3.7 million and other costs of $2.7 million. These costs were recorded in restructuring and other expense in the Consolidated Statements of Operations. In addition, we recorded inventory write-offs of $2.3 million related to the planned rationalization of certain product lines, which are included in cost of goods sold in our Consolidated Statements of Operations.
During 2011, we recorded acquisition and integration related costs as a result of our acquisition activities of $2.6 million. Additionally, we amended a long-term disability benefit plan, resulting in a $2.0 million gain. These items were recorded in restructuring and other expense in our Consolidated Statements of Operations.
Our Camarillo, California manufacturing facility ceased operations on December 31, 2008 and the facility, comprised of a building and property, was classified as held for sale. During 2011, in an effort to increase the salability of the property, we demolished the building which resulted in a $7.0$7.0 million loss on disposal during the period. The land related to the facility continues to meet the criteria for held for sale accounting and, therefore, remains classified in other current assets on the Consolidated Balance Sheet as of December 31, 2012 at a book value of $0.2 million. On October 7, 2011 we entered into an agreement to sell the land for $10.5$10.5 million, contingent upon the
change of certain zoning requirements for the land as well as other standard conditions. If these conditions are met, the sale is expected to close in 2013.
During 2010 we recorded $0.2 million of other chargesThe land related to the 2008 Corporate Program. Additionally during 2010, other expenses included costs associated with the announced retirement of our former Vice Chairman and Chief Executive Officer, including a severance related charge of $1.4 million and a charge of $0.8 million relatedfacility continued to the accelerated vesting of his unvested options and restricted stock.
In 2010, certain assets held primarily at our Weatherford, Oklahoma facility were determined to be impaired in accordance with the provisions of impairment of long-lived assets. These long-lived assets held and used include the property, building and equipment primarily related to the manufacturing of magnetic tape which was consolidated to the TDK Group Yamanashi manufacturing facility in 2011 as a part of our 2011 Manufacturing Program. The land and building had a carrying amount of $17.0 million and were written down to their fair value of
$2.3 million, resulting in an impairment charge of $14.7 million during 2010. The fair value of the equipment was assessed based upon sales proceeds from similar equipment sold as part of the closing of our Camarillo, California facility. The Weatherford equipment had a carrying amount of $17.4 million and was written down to its fair value of $0.9 million resulting in an impairment charge of $16.5 million during 2010. The impairments were recorded as part of restructuring and other charges in our Consolidated Statements of Operations in 2010. As of June 30, 2011, our Weatherford facility metmeet the criteria for classification as held for sale outlinedaccounting and, therefore, was classified in the accounting guidance for the sale of a long-lived asset. Accordingly, the book values of the building and property of $2.3 million were transferred into other current assets on our Consolidated Balance Sheets as of December 31, 2012 at a book value of $0.2 million. The sale was completed in December 2013, and are no longer being depreciated.the related gain of $9.8 million was recorded in restructuring and other expense during the fourth quarter.
Operating Loss From Continuing Operations
| | | | | Years Ended December 31, | | Percent Change | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | | | (In millions) | | | | |
| Operating loss | | $ | (336.1 | ) | | $ | (33.1 | ) | | $ | (69.7 | ) | | NM | | (52.5 | )% | | $ | (20.1 | ) | | $ | (318.4 | ) | | $ | (20.4 | ) | | NM | | NM |
| As a percent of revenue | | (30.6 | )% | | (2.6 | )% | | (4.8 | )% | | | | (2.3 | )% | | (31.6 | )% | | (1.7 | )% | |
NM - Not meaningful
Operating loss from continuing operations decreased in 2013 compared with 2012 and increased in 2012 compared with 2011 due primarily to intangible asset impairment lossescharges of $260.5$251.8 million and a goodwill impairment charge of $23.3 million.
million recorded in 2012. See discussion above for further information on our 2012 impairment losses. Operating loss decreased in 2011 compared with 2010 due primarily2013 included the reversal of an accrual of $23.1 million for copyright levies as a result of Italian and French court rulings, a $10.6 million loss related to lower restructuringthe settlement of our UK pension plan, a $9.8 million gain on the sale of land at a previously closed facility and other charges of $29.6a $2.5 million gain from a litigation settlement.
See Note 9 - Retirement Plans in our Notes to Consolidated Financial Statements for further information on the pension plan settlement and lower goodwill impairment charges of $21.9 million, partially offset by lower revenue resultingNote 15 - Litigation, Commitments and Contingencies in lower gross profit of $9.7 million as well as higher R&D expense of $4.6 million, each as discussed above.
our Notes to Consolidated Financial Statements for more information on the levy reversal.
Other (Income) and Expense
| | | | | Years Ended December 31, | | Percent Change | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | | | (In millions) | | | | |
| Interest income | | $ | (0.5 | ) | | $ | (0.9 | ) | | $ | (0.8 | ) | | (44.4 | )% | | 12.5 | % | | $ | (0.2 | ) | | $ | (0.5 | ) | | $ | (0.9 | ) | | (60.0 | )% | | (44.4 | )% |
| Interest expense | | 2.9 |
| | 3.7 |
| | 4.2 |
| | (21.6 | )% | | (11.9 | )% | | 2.5 |
| | 2.9 |
| | 3.7 |
| | (13.8 | )% | | (21.6 | )% |
| Other, net | | 2.6 |
| | 7.0 |
| | 3.3 |
| | (62.9 | )% | | 112.1 | % | | 0.6 |
| | 2.6 |
| | 7.0 |
| | (76.9 | )% | | (62.9 | )% |
| Total | | $ | 5.0 |
| | $ | 9.8 |
| | $ | 6.7 |
| | (49.0 | )% | | 46.3 | % | | $ | 2.9 |
| | $ | 5.0 |
| | $ | 9.8 |
| | (42.0 | )% | | (49.0 | )% |
| As a percent of revenue | | 0.5 | % | | 0.8 | % | | 0.5 | % | | | | | | 0.3 | % | | 0.5 | % | | 0.8 | % | | | | |
Other expense decreased in 2013 compared with 2012. Interest expense decreased compared with 2012 due to lower amortization of capitalized fees related to our credit facility. Other, net expense includes foreign currency (gains) losses from changes in foreign exchange rates on foreign denominated assets and liabilities. Foreign currency gains of $0.5 million and losses of $1.6 million and $4.6 million were recorded for 2013, 2012 and 2011, respectively, and are net of gains (losses) from the related foreign currency forward contracts for each year. We attempt to mitigate the exposure to foreign currency volatility through our hedging program; however, our program is not designed to fully hedge our risk and, as a result, we experience some volatility in other income, especially in periods of significant foreign currency fluctuation.
Other expense decreased in 2012 compared with 2011. Interest expense decreased compared with 2011 due to lower amortization of capitalized fees related to securing our credit facility and decreased imputed interest related to our liability for the Philipsa prior litigation settlement, while interest income decreased slightly compared with 2011.settlement. Other, net includes foreign currency losses and gains or losses from investments. Other expense decreased in 2012 compared with 2011 due to decreases in foreign currency losses of $3.0 million. We attempt to mitigate the exposure to foreign currency volatility through our hedging program; however, our program is not designed to fully hedge our risk, and as a result, we experience some volatility, especially in periods of significant foreign currency fluctuation. Other, net in 2012 also includes an investment recovery of $0.9 million.
Other expense increased in 2011 compared with 2010. Interest income remained relatively constant in 2011 compared with 2010. Our interest expense decreased in 2011 compared with 2010 due to decreased amortization of capitalized fees related to securing our credit facility and decreased imputed interest related to our liability for the Philips litigation settlement. Other expense increased in 2011 compared with 2010 due to increases in foreign currency losses of $2.4 million. Other expense in 2010 benefited $2.0 million from a recovery of a note receivable from a commercial partner.
Income Tax Provision (Benefit)
| | | | | Years Ended December 31, | | Years Ended December 31, |
| | | 2012 | | 2011 | | 2010 | | 2013 | | 2012 | | 2011 |
| | | (In millions) | | (In millions) |
| Income tax provision (benefit) | | $ | (0.4 | ) | | $ | 3.8 |
| | $ | 81.9 |
| |
| Income tax provision | | | $ | 1.4 |
| | $ | 1.4 |
| | $ | 5.0 |
|
| Effective tax rate | | NM |
| | NM |
| | NM |
| | NM |
| | NM |
| | NM |
|
NM - Not meaningful
TheIn comparing our 2013 tax provision of $1.4 million to our 2012 income tax benefit primarily representsprovision of $1.4 million, the amounts were impacted by unrecognized tax expense related to operations outside the United States, offset by tax benefit frombenefits recorded during 2013, settlements with taxing authorities concluded during 2012 and the impact of activity in other comprehensive income. We maintain a valuation allowanceincome during 2012 offset by the tax benefit related to the settlement of our U.S. deferredUK pension plan during 2013 and the mix of taxable income (loss) by country.
In comparing our 2012 tax assets and certain foreign net operating losses. Becauseprovision of the valuation allowances, the effective tax rates for 2012, 2011 and 2010 are not meaningful.
The change in our income tax benefit for 2012, as compared$1.4 million to our 2011 tax provision was primarilyof $5.0 million, the primary change is due to lower withholding tax expense incurred during 2012, settlements with taxing authorities concluded during 2012, the impact of activity in other comprehensive income and the mix of taxable income (loss) by country.
The change in our income2011 tax provision for 2011, as compared to 2010, was primarily due to the establishment of a valuation allowance in 2010 on our U.S. deferred tax assets,also included a $5.0 million benefit for the reversal of a foreign net operating loss valuation allowance in 2011 and changes in the mix of income/loss by jurisdiction.
Other items that had an impact on the 2010 effective tax rate included a change in the state tax effective rate, reserves for uncertain tax positions, foreign earnings subject to U.S. taxation, and changes in the mix of income (loss) by jurisdiction. See Note 10 - Income Taxes in
We maintain a valuation allowance related to our Notesto Consolidated Financial StatementsU.S. deferred tax assets and certain foreign net operating losses. Because of the valuation allowances, the effective tax rates for further information.2013, 2012 and 2011 are not meaningful.
As of December 31, 20122013 and 2011,2012, we had valuation allowances of $239.1$239.4 million and $141.1$239.1 million, respectively, to account for deferred tax assets we have concluded are not considered to be more-likely-than-not to be realized in the future due to our cumulative losses in recent years. The deferred tax assets subject to valuation allowance include certain U.S. and foreign operating loss carryforwards, certain U.S. deferred tax deductions and certain tax credit carryforwards.
Loss from discontinued operations
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (In millions) |
| Net revenue | | $ | 40.7 |
| | $ | 92.9 |
| | $ | 123.8 |
|
| | | | | | | |
| Gain on sale of discontinued businesses, net of income taxes | | 0.9 |
| | — |
| | — |
|
| Loss from operations of discontinued businesses, before income taxes | | (14.2 | ) | | (17.7 | ) | | (12.7 | ) |
| Adjustment to carrying value of disposal group | | (6.7 | ) | | — |
| | — |
|
| Income tax benefit | | — |
| | (1.8 | ) | | (1.2 | ) |
| Loss from discontinued businesses, net of income taxes | | $ | (20.0 | ) | | $ | (15.9 | ) | | $ | (11.5 | ) |
Loss from discontinued businesses represents the results of operations from our XtremeMac and Memorex consumer electronics businesses as well as a $6.7 million write-down of the carrying value of the XtremeMac disposal group to its estimated fair value based on the anticipated sales transaction which occurred on January 31, 2014. This was partially offset by a $0.9 million gain on the sale of the Memorex consumer electronics business which occurred on October 15, 2013. The increase in operating loss for 2013 compared with 2012 reflects the write-down of the carrying value discussed above, lower revenues and lower gross margins in these businesses in addition to severance expense of $1.6 million recorded in 2013. The increase in operating loss for 2012 compared with 2011 reflects lower revenues and lower gross margins in these businesses. See Note 4 - Acquisitions and Divestitures in our Notes to Consolidated Financial Statements for more information on the divestitures of these two businesses.
Segment Results
In the first quarter of 2013, we revised our segment reporting to reflect changes in how we manage our business, review operating performance and allocate resources. We now manage our business through two reporting segments, Consumer Storage and Accessories (CSA) and Tiered Storage and Security Solutions (TSS). Our business is organized, managednew reporting segments are generally aligned with our key consumer and internallycommercial channels.
We have two major product categories under our CSA segment: Consumer storage media and externally reportedAudio and accessories. Consumer storage media products include primarily optical products such as segments differentiated by the regional markets we serve: Americas, Europe, North AsiaDVDs, CDs and South Asia. EachBlu-ray disc recordable media as well as flash media. Audio and accessories include primarily headphones, audio electronics and accessories. We have two major product categories under our TSS segment: Commercial storage media and Storage and security solutions. Commercial storage media products consist mainly of these geographic segments has responsibilitymagnetic data storage tape media and RDX® media. Storage and security solutions includes storage hardware products, services and software for selling all of our product lines.
Our Americas segment includes North America, Central Americabackup and South America.
Our Europe segment includes Europearchiving as well as primary storage; encrypted and parts of Africa.
Our North Asia segment includes Japan, China, Hong Kong, Koreabiometric flash drives and Taiwan.
Our South Asia segment includes Australia, Singapore, India, the Middle Easthard disk drives; secure portable desktop solutions; and parts of Africasoftware solutions, including products which contain various security features such as password authentication, encryption and remote manageability.
We evaluate segment performance based on revenue and operating income (loss). Revenue for each segment is generally based on customer location where the product is shipped. The operating income (loss) reported in our segments excludes corporate and other unallocated amounts. Although such amounts are excluded from the business segment results, they are included in reported consolidated results. Corporate and unallocated amounts include depreciation and amortization, litigation settlement expense, goodwill impairment, intangible impairments, intangible asset impairments, research and development expense,abandonment, corporate expense, stock-based compensation expense,contingent consideration adjustments, inventory write-offs related to our restructuring programs and restructuring and other expenses which are not allocated to the segments.
In 2012, all of our segments were impacted by several macro-economic factors including the broad-based European economic downturn and its effect on the rest of the world, a soft global IT environment as well as a weak U.S. retail environment related to the products we sell.
Information related to our segments is as follows:
Consumer Storage and Accessories
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | |
| Net revenue | | $ | 478.3 |
| | $ | 635.3 |
| | $ | 775.2 |
| | (24.7 | )% | | (18.0 | )% |
| Operating income | | 52.3 |
| | 61.5 |
| | 57.1 |
| | (15.0 | )% | | 7.7 | % |
| As a percent of revenue | | 10.9 | % |
| 9.7 | % | | 7.4 | % | | | | |
The decrease in CSA segment revenue in 2013 compared with 2012 was driven primarily by a 26.7 percent revenue decline in consumer storage media products. From a product perspective, revenue declines were primarily due to expected secular declines of $131.4 million in optical media products. Partially offsetting the decrease in revenue from consumer storage media was an increase in audio and accessories products as we saw revenue increase in consumer electronic accessories and TDK Life on Record consumer electronic products.
Operating income decreased in 2013 compared with 2012 driven primarily by lower gross profit in consumer storage media products partially offset by lower R&D expense and slightly lower SG&A expense. Operating income in 2013 also reflects the reversal of $23.1 million of accruals for Italian and French copyright levies in the second and fourth quarters of 2013. We plan to continue our operating expense reduction efforts in this segment.
The decrease in CSA segment revenue in 2012 compared to 2011 was driven primarily by a 19.7 percent revenue decline in consumer storage media products primarily due to expected secular declines of $90.0 million in optical media products. Partially offsetting the decrease in consumer storage media was an increase in audio and accessories products as we saw revenue increase in consumer electronic accessories and TDK Life on Record consumer electronic products. Operating income increased in 2012 compared with 2011 driven primarily by lower SG&A expense and R&D expense partially offset by lower gross profit in consumer storage media products.
Tiered Storage and Security Solutions
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | |
| Net revenue | | $ | 382.5 |
| | $ | 371.4 |
| | $ | 391.4 |
| | 3.0 | % | | (5.1 | )% |
| Operating (loss) income | | (16.1 | ) | | (26.7 | ) | | 9.2 |
| | (39.7 | )% | | NM |
|
| As a percent of revenue | | (4.2 | )% | | (7.2 | )% | | 2.4 | % | |
| |
|
|
NM - Not meaningful
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 |
| | | (In millions) | | | | |
| Net revenue | | $ | 504.7 |
| | $ | 595.9 |
| | $ | 712.9 |
| | (15.3 | )% | | (16.4 | )% |
| Operating income | | 2.9 |
| | 8.4 |
| | 36.8 |
| | (65.5 | )% | | (77.2 | )% |
| As a percent of revenue | | 0.6 | % |
| 1.4 | % | | 5.2 | % | | | | |
The Americas segment is our largest segment comprising 45.9 percent, 46.2 percent and 48.8 percent of our total consolidated revenueincrease in 2012, 2011 and 2010, respectively. The decrease in the AmericasTSS segment revenue in 20122013 compared with 20112012 was primarily due to declinesdriven by the addition of revenue from Nexsan, which was acquired on December 31, 2012. Lower revenue in our maturing traditionalcommercial storage media products and our audio and video information products.partially offset the incremental revenue from Nexsan for 2013. Commercial storage media product revenue decreased $60.6 million in 2013 compared with 2012. From a product perspective, the decrease in commercial storage media product revenue was primarily comprisedcomposed of lower revenue from audio and video informationmagnetic tape products of $41.1$55.2 million and optical productscompared with 2012. The accelerated revenue declines we saw in magnetic tape through the middle of $38.4 million2013 leveled off in the fourth quarter. We believe we are holding our market share in tape media, but it has been impacted by industry wide dynamics including competing formats, as well as lower revenuecontinuing improvements in compression and deduplication technologies. For our storage solutions products, we continue to invest in our Nexsan business by hiring sales personnel, introducing new products and promoting the brand globally; however, during the last half of 2013 we did see some effect from magneticthe disruption in U.S. government spending. Additionally, during the last half of 2013 our Nexsan business as well as some other storage solution providers saw weakness in revenues due to some marketplace sluggishness with certain customers delaying orders. Revenue in our mobile security products showed a decrease from 2012 as they were also constrained by the disruption in U.S. government spending.
Operating loss decreased in 2013 compared with 2012 due to an increase in gross profit driven by the acquisition of $17.5 million. These declines wereNexsan that was partially offset by lower gross profit on commercial storage media products and slightly higher R&D expense and SG&A expense. We expect gross margins to continue increasing as the mix shifts to higher margin Nexsan and IronKey products.
The decrease in TSS segment revenue from secure and scalablein 2012 compared to 2011 was driven primarily by a 10.0 percent revenue decline in commercial storage media products primarily due to expected secular declines of $12.5 million.
$41.4 million in magnetic tape products. Partially offsetting this decrease was an increase in mobile security products. Operating income decreased in 2012 compared with 2011 driven primarily by lower gross profit due to lower revenues in our traditionalcommercial storage products and audio and video informationmedia products and higher SG&A expense and R&D expenses, partially offset by higher gross profit due to higher gross margins on optical mediaexpense.
Corporate and secure and scalable storage products.
The Americas segment revenue decreased in 2011 compared with 2010 driven primarily by the decreases in revenue from optical products of $57.3 million, audio and video information products of $41.1 million due to planned rationalization of certain product lines and magnetic products of $25.7 million. Operating income decreased in 2011 compared with 2010 driven primarily by decreases in revenue and lower gross margins on optical and magnetic products and decreases in revenue on audio and video information products, partially offset by higher gross margins on secure and scalable storage products.
EuropeUnallocated
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 |
| | | (In millions) | | | | |
| Net revenue | | $ | 208.8 |
| | $ | 248.0 |
| | $ | 289.8 |
| | (15.8 | )% | | (14.4 | )% |
| Operating (loss) income | | (3.9 | ) | | 10.3 |
| | (0.6 | ) | | (137.9 | )% | | NM |
|
| As a percent of revenue | | (1.9 | )% | | 4.2 | % | | (0.2 | )% | |
| |
|
|
|
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | (In millions) | | | | |
| Operating loss | | $ | (56.3 | ) | | $ | (353.2 | ) | | $ | (86.7 | ) | | NM | | NM |
NM - Not meaningful
The Europe segment revenue comprised 19.0 percent, 19.2 percent and 19.8 percent of our total consolidated revenue in 2012, 2011 and 2010, respectively. The decrease in the Europe segment revenue in 2012 compared with 2011 was driven primarily by declines in our maturing traditional storage products of $37.8 million. From a product perspective, the decrease in revenue in our traditional storage products was composed primarily of lower revenue from optical products of $20.2 million and magnetic products of $12.2 million. Secure and scalable storage products declined $4.3 million, driven principally by commodity flash products. These revenue declines were offset by an increase in audio and video information products revenues of $3.1 million from 2011. Revenue was impacted by unfavorable foreign currency of approximately six percent.
Operating loss in 2012 compared with operating income in 2011 was driven primarily by lower gross profit due to lower revenue. Operating income during 2011 benefited from levy accrual reversals of $7.8 million
The Europe segment revenue decreased in 2011 compared with 2010 driven primarily by decreases in revenue from optical products of $31.4 million. Operating income increased in 2011 compared with 2010 driven primarily by the higher gross margins on optical products mainly due to the reversal of prior year European optical media copyright levy payables of $7.8 million for which we considered payment remote. Revenue was benefited by foreign currency impacts of approximately six percent.
North Asia
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 |
| | | (In millions) | | | | |
| Net revenue | | $ | 272.5 |
| | $ | 307.2 |
| | $ | 315.2 |
| | (11.3 | )% | | (2.5 | )% |
| Operating income | | 5.9 |
| | 12.5 |
| | 14.9 |
| | (52.8 | )% | | (16.1 | )% |
| As a percent of revenue | | 2.2 | % | | 4.1 | % | | 4.7 | % | | | | |
The North Asia segment revenue comprised 24.8 percent, 23.8 percent and 21.6 percent of our total consolidated revenue in 2012, 2011 and 2010, respectively. North Asia segment revenue decreased in 2012 compared with 2011 driven primarily by declines in our maturing traditional storage products. From a product perspective, the decrease in revenue was composed primarily of lower revenue from optical products of $21.4 million and magnetic products of $8.5 million and was partially offset by a $7.3 million increase in audio and video information products. Revenue was not impacted by foreign currency.
Operating income decreased in 2012 compared to 2011 driven primarily by lower gross profit due to lower revenues from traditional data storage products as well as higher SG&A expense.
The North Asia segment revenue decreased in 2011 compared with 2010 driven primarily by declines in revenue from optical products of $14.4 million, partially offset by higher revenue from audio and video information products of $5.3 million. Operating income decreased in 2011 compared with 2010 driven primarily by decreases in revenue and lower gross margins on optical products and higher SG&A expense, partially offset by the reversal of a bad debt reserve of $2.7 million and higher gross margins on secure and scalable products. Revenue was benefited by foreign currency impacts of approximately eight percent.
South Asia
|
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 |
| | | (In millions) | | | | |
| Net revenue | | $ | 113.6 |
| | $ | 139.3 |
| | $ | 143.0 |
| | (18.4 | )% | | (2.6 | )% |
| Operating income | | 0.6 |
| | 4.0 |
| | 4.0 |
| | (85.0 | )% | | — | % |
| As a percent of revenue | | 0.5 | % | | 2.9 | % | | 2.8 | % | | | | |
The South Asia segment revenue comprised 10.3 percent, 10.8 percent and 9.8 percent of our total consolidated revenue in 2012, 2011 and 2010, respectively. The South Asia segment revenue decreased in 2012 compared with 2011 driven primarily by declines in our maturing traditional storage products. From a product perspective, the decrease in revenue was composed primarily of lower revenue from traditional data storage products of $18.6 million, primarily consisting of declines in optical media of $10.7 million and audio video tape of $4.7 million. Secure and scalable products, principally commodity flash products, declined $5.2 million. Revenue was not impacted by foreign currency.
Operating income decreased in 2012 compared with 2011 driven by lower gross profit due to lower revenues from all major product categories and lower gross margins from traditional storage products.
The South Asia segment revenue decreased in 2011 compared with 2010 driven primarily by decreases in revenue from optical products of $4.6 million and other traditional storage products of $2.8 million, partially offset by higher revenue from audio and video information of $4.4 million. Operating income remained unchanged in 2011 compared with 2010, impacted by higher gross margins on audio and video information products offset by higher SG&A costs. Revenue was benefited by foreign currency impacts of approximately six percent.
Corporate and Unallocated
|
| | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | Percent Change |
| | | 2012 | | 2011 | | 2010 | | 2012 vs. 2011 | | 2011 vs. 2010 |
| | | (In millions) | | | | |
| Operating loss | | $ | (341.6 | ) | | $ | (68.3 | ) | | $ | (124.8 | ) | | NM | | (45.3 | )% |
NM - Not meaningful
The corporate and unallocated operating loss includes costs which are not allocated to the business segments in management’s evaluation of segment performance such as depreciation and amortization, litigation settlement expense, goodwill impairment, intangible impairments, intangible asset impairments, goodwill impairment, research and development expense,abandonment, corporate expense, stock-based compensation expensecontingent consideration adjustments, inventory write-offs related to our restructuring programs and restructuring and other expense.expenses.
The 2013 operating loss in Corporate and Unallocated also included a $10.6 million loss related to the settlement of our UK pension plan, a $9.8 million gain on the sale of land at a previously closed facility and a $2.5 million litigation settlement gain. The 2012 operating loss in Corporate and Unallocated also included intangible asset impairment losses of $260.5$251.8 million and a goodwill impairment loss of $23.3 million as discussed above.
The 2011 operating loss decreased in 2011 compared with 2010 driven primarily by an asset impairment charge during 2010 of $31.2 millionCorporate and Unallocated also included a goodwill impairment charge during 2010 of $23.5 million, offset partially by increased restructuring and other expense related to our previously announced programs and the $7.0 million charge relating to the demolition of our Camarillo, Californiaa previously closed facility during 2011.
Financial Position
Our cash and cash equivalents balance as of December 31, 20122013 was $108.7132.6 million, a decreasean increase of $114.4$23.9 million from $223.1108.7 million as of December 31, 20112012. The decreaseincrease was primarily attributable to $103.8driven by working capital and also included $10.1 million received on the sale of cash paid in the acquisitionland at a previously closed facility and a litigation settlement receipt of Nexsan, net$2.5 million, partially offset by restructuring payments of cash acquired,$19.4 million, capital expenditures of $10.2 million, restructuring payments of $8.0 million, pension contributions of $5.1$7.0 million, share repurchases of $6.5 million, litigation settlement payments of $18.5 million, contingent consideration payments related to acquisitions of $1.2$2.5 million and other changes in working capital, partially offset by net borrowings on our credit facilitypension contributions of $20.0 million and proceeds of $1.4 million from the sale of some of our assets held for sale.$1.5 million.
Our accounts receivable balance as of December 31, 20122013 was $220.8163.3 million, a decrease of $14.1$57.5 million from $234.9$220.8 million as of December 31, 20112012 as a result of lower sales during the period. Days sales outstanding was 5956 days as of December 31, 20122013, up 1 daydown 3 days from December 31, 20112012. Days sales outstanding is calculated
using the count-back method, which calculates the number of days of most recent revenue that is reflected in the net accounts receivable balance.
Our inventory balance as of December 31, 20122013 was $166.0$84.3 million, a decrease of $42.8$81.7 million from $208.8$166.0 million as of December 31, 20112012. Days of inventory supply was 8961 days as of December 31, 20122013, up 4down 28 days from December 31, 20112012. primarily due to our overall focus on reducing inventory levels, but particularly in our consumer electronics and accessories inventory, as well as the sale of our consumer electronics businesses. Days of inventory supply is calculated using the current period inventory balance divided by an estimate of the inventoriable portion of cost of goods sold expressed in days.
Our accounts payable balance as of December 31, 20122013 was $162.7$94.7 million, a decrease of $42.5$68.0 million from $205.2$162.7 million as of December 31, 20112012. The decrease in accounts payable was mainly due to reduced purchases compared to the previous year, as well as the timing of payments.
Liquidity and Capital Resources
We have various resources available to us for purposes of managing liquidity and capital needs, including our credit facilityfacilities and letters of credit. Our primary sources of liquidity include cash flows generated by the sale of our products, our cash and cash equivalents and credit capacity under our credit facility.facilities. Our primary operating liquidity needs relate to our costs of goods soldworking capital and general operating expenses.funding our operations.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. Restricted cash that is related to contractual obligations or restricted by management is included in other assets on our Consolidated Balance Sheets. No restricted cash was held at December 31, 2013. At December 31, 2012 restricted cash primarily includes cash acquired from Nexsan that was previously restricted to specifically fulfill certain obligations of Nexsan.
Analysis of Cash Flows
Cash Flows Used InProvided by (Used In) Operating Activities:
| | | | | Years Ended December 31, | | Years Ended December 31, |
| | | 2012 | | 2011 | | 2010 | | 2013 | | 2012 | | 2011 |
| | | (In millions) | | (In millions) |
| Net loss | | $ | (340.7 | ) | | $ | (46.7 | ) | | $ | (158.5 | ) | | $ | (44.4 | ) | | $ | (340.7 | ) | | $ | (46.7 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities | | 333.5 |
| | 73.9 |
| | 185.4 |
| | 31.1 |
| | 333.5 |
| | 73.9 |
|
| Changes in operating assets and liabilities | | (1.3 | ) | | (43.5 | ) | | 124.5 |
| | 35.4 |
| | (1.3 | ) | | (43.5 | ) |
| Net cash used in operating activities | | $ | (8.5 | ) | | $ | (16.3 | ) | | $ | 151.4 |
| |
| Net cash provided by (used in) operating activities | | | $ | 22.1 |
| | $ | (8.5 | ) | | $ | (16.3 | ) |
Cash flows from operating activities can fluctuate significantly from period to period as many items can significantly impact cash flows. In 2012, 2011 and 2010 we contributedCash provided by operating activities in 2013 was driven primarily by cash from working capital. $5.1 million, $14.2 million and $9.9 million to our pensions worldwide, respectively. Operating cash outflows included restructuring payments of $19.4 million, $8.0 million and $16.9 million in 2013, 2012 and $9.5 million in 2012, 2011, and 2010, respectively, and litigation settlement payments of $18.5 million $10.9 million and $8.2$10.9 million in 2012 and 2011, respectively. Also, we contributed $1.5 million, $5.1 million and 2010, respectively.$14.2 million in 2013, 2012 and 2011, respectively, to our pension plans worldwide.
During 2012 we recorded a non-cash goodwill impairment charge of $23.3 million and intangible asset impairment charges of $260.5 million.
Cash Flows Provided by (Used in) Investing Activities:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (In millions) |
| Capital expenditures | | $ | (7.0 | ) | | $ | (10.2 | ) | | $ | (7.3 | ) |
| Proceeds from sale of assets and business | | 11.0 |
| | 1.4 |
| | — |
|
| Recovery of investments | | 0.2 |
| | 0.9 |
| | — |
|
| Acquisitions, net of cash acquired | | 1.6 |
| | (103.8 | ) | | (47.0 | ) |
| Purchase of tradename | | — |
| | (4.0 | ) | | — |
|
| Net cash provided by (used in) investing activities | | $ | 5.8 |
| | $ | (115.7 | ) | | $ | (54.3 | ) |
In 2013,we received $10.1 million for land classified as held for sale and $0.9 million related to the sale of our Memorex consumer electronics business. Cash provided by operatinginvesting activities in 2010 was primarily a resultalso included $7.0 million of initiatives to improve working capital by lowering levels of inventory and changing payable and receivable terms.expenditures.During 2010 we recorded a non-cash goodwill impairment charge of $23.5 million, asset impairment charges of $31.2 million, inventory impairment charges of $14.2 million and a valuation allowance against our U.S. deferred tax assets of $105.6 million.
Cash Flows Used in Investing Activities:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2012 | | 2011 | | 2010 |
| | | (In millions) |
| Capital expenditures | | $ | (10.2 | ) | | $ | (7.3 | ) | | $ | (8.3 | ) |
| Acquisitions, net of cash acquired | | (103.8 | ) | | (47.0 | ) | | — |
|
| Proceeds from sale of assets | | 1.4 |
| | — |
| | 0.2 |
|
| Purchase of tradename | | (4.0 | ) | | — |
| | — |
|
| Recovery of investments | | 0.9 |
| | — |
| | — |
|
| License agreement | | — |
| | — |
| | (5.0 | ) |
| Net cash used in investing activities | | $ | (115.7 | ) | | $ | (54.3 | ) | | $ | (13.1 | ) |
In 2012, we paid $104.6 million related to the acquisition of Nexsan. Cash used in investing activities was also impacted byincluded $10.2 million of capital expenditures and $4.0 million for the acquisition of the IronKey brand.tradename.
In 2011, we paid $47.0 million related to the acquisitions of certain assets of MXI Security for $24.5 million, IronKey for $19.0 million, Nine Technology for $2.0 million, Encryptx for $1.0 million and ProStor Systems for $0.5 million. Cash used in investing activities was also impacted byincluded $7.3 million of capital expenditures.
See Note 4 - Acquisitions in our Notes to Consolidated Financial Statements for further information regarding our acquisitions.
In 2010, we paid $5.0 million to extend our license agreement with ProStor Systems related to RDX removable hard disk systems. The acquisition of certain ProStor assets in 2011 excluded the portion of the business to which this license relates.
Cash Flows Used in(Used in) Provided by Financing Activities:
| | | | | Years Ended December 31, | | Years Ended December 31, |
| | | 2012 | | 2011 | | 2010 | | 2013 | | 2012 | | 2011 |
| | | (In millions) | | (In millions) |
| Purchase of treasury stock | | $ | (6.5 | ) | | $ | (9.7 | ) | | $ | — |
| | $ | (2.5 | ) | | $ | (6.5 | ) | | $ | (9.7 | ) |
| Debt issuance costs | | (2.4 | ) | | — |
| | (1.0 | ) | | (0.4 | ) | | (2.4 | ) | | — |
|
| Debt borrowings | | 25.0 |
| | — |
| | — |
| | 4.9 |
| | 25.0 |
| | — |
|
| Debt repayments | | (5.0 | ) | | — |
| | — |
| | (4.9 | ) | | (5.0 | ) | | — |
|
| Contingent consideration payments | | (1.2 | ) | | — |
| | — |
| | (0.5 | ) | | (1.2 | ) | | — |
|
| Exercise of stock options | | — |
| | 0.6 |
| | — |
| | — |
| | — |
| | 0.6 |
|
| Net cash used in financing activities | | $ | 9.9 |
| | $ | (9.1 | ) | | $ | (1.0 | ) | |
| Net cash (used in) provided by financing activities | | | $ | (3.4 | ) | | $ | 9.9 |
| | $ | (9.1 | ) |
On May, 2, 2012 our Board of Directors authorized a share repurchase program that allowed for the repurchase of 5.0 million shares of common stock. The Company's previous authorization, which had 1.2 million shares remaining for purchase, was canceled with the new authorization. Since the inception of this authorization, we have repurchased 1.21.8 million shares of common stock at an average price of $5.30$4.82 per share and as of December 31, 20122013 we had remaining authorization to repurchase up to 3.83.2 million shares. We repurchased 0.6 million, 1.2 million and 1.1 million shares in 2011. We did not repurchase shares during 2010.2013, 2012 and 2011, respectively.
No dividends were declared or paid during 2013, 2012 2011 or 2010.2011. Any future dividends are at the discretion of and subject to the approval of our Board of Directors.
Cash used in financing activities during 2012 included borrowings of $4.9 million and $25.0 million and repayments of $4.9 million and $5.0 million during 2013 and 2012, respectively on our credit facilityfacilities primarily for the use in financing our working capital seasonal needs. Debt issuance costs of $0.4 million and $2.4 million during 2013 and $1.0 million during 2012, and 2010, respectively, were due tofor cash payments made to amend and extend our line of credit. These issuance costs were capitalized in our Consolidated Balance Sheets.
Credit FacilityFacilities
On March 30, 2006, we entered into a credit agreement with a group of banks (the Credit Agreement). Subsequently, we entered into various amendments which, among other things, added Imation Europe B.V. as a borrower (European Borrower).
On May 18, 2012, we entered into an amendment (the Amendment) to the Credit Agreement (as amended to date, the Amended Credit Agreement). The Amendment modified the Credit Agreement by extending the expiration date of the borrowing arrangement to May 18, 2017, requiring that the equity interests of material foreign subsidiaries be pledged to support the obligations, if any, of the European Borrower, lowered the applicable margin on interest, lowered the Company's minimum required Consolidated Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be maintained as well as provided for certain other less significant changes.
The Amended Credit Agreement includes a senior revolving credit facility that allows for the borrowing of amounts up to a maximum of $200170 million, including sublimits of $150140 million in the United States and $5030 million in Europe. Borrowings in both the United States and Europe are limited to the lesser of the sublimit(s) and the borrowing base as defined in the Amended Credit Agreement and are payable upon expiration of the Amended Credit Agreement or immediately, but only to the extent the applicable sublimit(s) are reduced to an amount less than the amount borrowed at that time. Our borrowing base is calculated each quarter unless our outstanding loan amount is greater than $5.0$5.0 million in which our borrowing base is calculated monthly. Our borrowing base is based on our amounts of receivables, inventories and other factors that influence the borrowing base and, to the extent any outstanding borrowing exceedexceeds the borrowing base, any such excess is due and payable immediately.
As of December 31, 2012,2013, we had $20.0 million of borrowings outstanding under the Amended Credit Agreement, all of which was borrowed in the United States and bore interest at a rate of 2.24 percent as of December 31, 2013. As of December 31, 2013, our total remaining borrowing capacity under this arrangementthe Amended Credit Agreement was $30.1 million, consisting of $76.419.0 million in the United States and $13.911.1 million in Europe.
Prior to August 15, 2012, borrowings bore interest at an interest rate equal to (1) the Eurodollar Rate (as defined in the Amended Credit Agreement) plus 2.00 percent or (2) the Base Rate (as defined in the Amended Credit Agreement) plus 1.00 percent. After August 15, 2012, the applicable margins for the Eurodollar Rate and the Base Rate are subject to adjustments based on average daily availability (as defined in the Amended Credit Agreement).
Our U.S. obligations under the Amended Credit Agreement are guaranteed by the material domestic subsidiaries of Imation Corp. (the Guarantors) and are secured by a first priority lien (subject to customary exceptions) on the real property comprising Imation Corp.’s corporate headquarters and all of the personal property
of Imation Corp., its subsidiary Imation Enterprises Corp., which is also an obligor under the Amended Credit Agreement, and the Guarantors. Borrowings under the U.S. portion of the Credit Facilitycredit facility are limited to the lesser of (a) $150140 million and (b) the “U.S. borrowing base.” The U.S. borrowing base is equal to the following:
up to 85 percent of eligible accounts receivable; plus
up to the lesser of 65 percent of eligible inventory or 85 percent of the appraised net orderly liquidation value of eligible inventory; plus
up to 60 percent of the appraised fair market value of eligible real estate (the Original Real Estate Value), such Original Real Estate Value to be reduced each calendar month by 1/120th, provided, that the Original Real Estate Value shall not exceed $40 million; plus
such other classes of collateral as may be mutually agreed upon and at advance rates as may be determined by the Agent; minus
such reserves as the Agent may establish in good faith.
Our European obligations under the Credit Agreement are secured by a first priority lien on substantially all of the material personal property of the European Borrower. Borrowings under the European portion of the Credit Facility are limited to the lesser of (a) $5030 million and (b) the “European borrowing base.” The European borrowing base calculation is fundamentally the same as the U.S. borrowing base, subject to certain differences to account for European law and other similar issues.
As of December 31, 2012, we had $20 million of borrowings outstanding under the Amended Credit Agreement, all of which was borrowed in the United States. Outstanding borrowings in the United States bear interest of 2.25 percent as of December 31, 2012. As of December 31, 2012, our total remaining borrowing capacity under the Credit Facility was $90.3 million.
The Amended Credit Agreement contains covenants which are customary for similar credit agreements, including covenants related to financial reporting and notification, payment of indebtedness, taxes and other obligations; compliance with applicable laws; and limitations regarding additional liens, indebtedness, certain acquisitions, investments and dispositions of assets. The Amended Credit Agreement contains a conditional financial covenant that requires Imation Corp. to have a Consolidated Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) of not less than 1.00 or a liquidity requirement of $30.0 million of domestic borrowing availability. We were in compliance with the liquidity requirement as of December 31, 2012.2013 and our U.S. availability discussed above considers the $30 million liquidity requirement.
On July 16, 2013, we entered into an additional credit agreement for a revolving credit facility with a lender in Japan with Imation Corporation Japan as the borrower and Imation Corp. as the guarantor. We intend to use the credit facility for general operating purposes. The credit agreement is a three year asset-based revolving credit facility with a borrowing base consistent with our existing Credit Agreement that allows for the borrowing of amounts up to 3.0 billion Japanese Yen, or approximately $30.0 million. Borrowings under the credit facility will bear interest at an interest rate equal to the base rate based on LIBOR or TIBOR plus the applicable margins provided for in the credit agreement. The credit agreement contains financial covenants applicable to Imation Corporation Japan including a fixed charge coverage ratio requirement. As of December 31, 2013, our borrowing capacity under this arrangement was $12.4 million and we did not have any borrowings outstanding under this credit facility. Imation Corporation Japan is in compliance with all covenant requirements as of December 31, 2013.
As of December 31, 20122013 and 20112012 we had outstanding standby letters of credit of $0.40.7 million and $0.60.4 million, respectively. The outstanding standby letters of credit are required by our insurance companies to cover potential deductibles and reduce our allowed borrowing capacity under the Amended Credit Agreement. Additionally, as of December 31, 2013 we had a $6.0 million overdraft line of credit available in Japan.
We had $62$64 million of cash outside the U.S. at December 31, 2012.2013. We also have significant net operating loss carryforwards offset by a full valuation allowance in the U.S. The calculation of a deferred tax liability on the repatriation of the cash outside the U.S. is impractical. However, because of the valuation allowance in the U.S., we do not believe there would be anya significant impact to earnings if we were to remit this foreign held cash.
Our liquidity needs for 20132014 include the following: restructuring payments of approximately $35$5 million to $40$10 million, up to $20 million repayment on our credit facility, capital expenditures of approximately $8$5 million to $12$10 million, pension funding of approximately $2 million to $4 million, operating lease payments of approximately $8$7 million, any amounts associated with strategic acquisitions, any amounts associated with organic investment opportunities and any amounts associated with the repurchase of common stock under the authorization discussed above.
We expect that our cash positions in the U.S. and outside the U.S., together with cash flow from operations and availability of borrowings under our Amended Credit Agreement, will provide liquidity sufficient to meet our needs for our operations and our obligations in the countries in which we operate.
Off-Balance Sheet Arrangements
Other than the operating lease commitments discussed in Note 15 - Litigation, Commitments and Contingencies in our Notes to the Consolidated Financial Statements, we are not using off-balance sheet arrangements, including special purpose entities.
Summary of Contractual Obligations
| | | | Payments Due by Period | Payments Due by Period |
| | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| | (In millions) | (In millions) |
| Operating lease obligations | $ | 18.8 |
| | $ | 8.0 |
| | $ | 7.0 |
| | $ | 2.2 |
| | $ | 1.6 |
| $ | 18.1 |
| | $ | 6.9 |
| | $ | 7.6 |
| | $ | 2.1 |
| | $ | 1.5 |
|
| Purchase obligations(1) | 168.8 |
| | 162.8 |
| | 6.0 |
| | — |
| | — |
| |
| Purchase obligations (1) | | 164.7 |
| | 161.8 |
| | 2.9 |
| | — |
| | — |
|
| Short-term debt | 20.0 |
| | 20.0 |
| | — |
| | — |
| | — |
| 20.0 |
| | 20.0 |
| | — |
| | — |
| | — |
|
| Other liabilities(2) | 23.8 |
| | — |
| | — |
| | — |
| | 23.8 |
| |
| Other liabilities (2) | | 23.8 |
| | — |
| | — |
| | — |
| | 23.8 |
|
| Total | $ | 231.4 |
|
| $ | 190.8 |
| | $ | 13.0 |
| | $ | 2.2 |
| | $ | 25.4 |
| $ | 226.6 |
|
| $ | 188.7 |
| | $ | 10.5 |
| | $ | 2.1 |
| | $ | 25.3 |
|
| |
| (1) | The majority of the purchase obligations consist of 90-day rolling estimates. In most cases, we provide suppliers with a three to six month rolling forecast of our demand. The forecasted amounts are generally not binding on us. However, it may take up60 to 6090 days from the purchase order issuance to receipt, depending on supplier and inbound lead time. Effective December 8, 2009, we began an agreement with a third party to outsource certain aspects of our information technology support. While the agreement is cancelable at any time with certain cash penalties, our obligation through the expected termination date of December 20162015 is included above. |
| |
| (2) | Timing of payments for the vast majority of other liabilities cannot be reasonably determined and, as such, have been included in the “More Than 5 Years” category. This amount includes $4.1$5.8 million of reserves for uncertain tax positions including accrued interest and penalties. |
The table above does not include payments for non-contributory defined benefit pension plans. It is our general practice, at a minimum, to fund amounts sufficient to meet the requirements set forth in applicable benefits laws and local tax laws. From time to time, we contribute additional amounts, as we deem appropriate. We expect to contribute approximately $2 million to $4 million to our pension plans in 20132014 and have $28.1$12.8 million recorded in other liabilities related to pension plans as of December 31, 20122013.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates to ensure they are consistent with historical experience and the various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and could materially impact our results of operations.
We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
IncomeUncertain Tax Accruals and Valuation Allowances.Positions. We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax obligations based on expected taxable income, statutory tax rates and tax credits allowed in the various jurisdictions in which we operate. Tax laws require certain items to be included in our tax returns at different times than the items are reflected in our results of operations. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some are temporary differences that will reverse over time. Temporary differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We must assess the likelihood that our deferred tax assets will be realized and establish a valuation allowance to the extent necessary. Significant judgment is required in evaluating our tax positions, and in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
We record income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We measure deferred tax assets and liabilities using the enacted statutory tax rates that are expected to apply in the years in which the temporary differences are expected to be recovered or paid.
We regularly assess the likelihood that our deferred tax assets will be recovered in the future. A valuation
allowance is recorded to the extent we conclude a deferred tax asset is not considered to be more-likely-than-not to be realized. We consider all positive and negative evidence related to the realization of the deferred tax assets in assessing the need for a valuation allowance. If we determine we will not realize all or part of our deferred tax assets, an adjustment to the deferred tax asset will be charged to earnings in the period such determination is made.
During the fourth quarter of 2010, we recognized significant restructuring charges related to our U.S. operations. Due to these charges and cumulative losses incurred in recent years, we were no longer able to conclude that it was more-likely-than-not that our U.S. deferred tax assets would be fully realized. Therefore, during 2010, we recorded a charge to establish a valuation allowance of $105.6 million related to our U.S. deferred tax assets. The valuation allowance charge in 2010 is included in income tax provision on our Consolidated Statement of Operations. In 2012 and 2011 we have concluded that it is necessary to maintain a valuation allowance on our U.S. deferred tax assets.
The accounting estimate for valuation allowances against deferred tax assets is a critical accounting estimate because judgment is required in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. Our accounting for deferred tax consequences represents our best estimate of future events. A valuation allowance established or revised as a result of our assessment is recorded through income tax provision (benefit) in our Consolidated Statements of Operations. Changes in our current estimates due to unanticipated events, or other factors, could have a material effect on our financial condition and results of operations.
At December 31, 2012, our net deferred tax asset, net of valuation allowances of $239.1 million, was $11.6 million. The valuation allowance primarily relates to our U.S. deferred tax assets not expected to be utilized in the future.
Our income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we record accruals for items that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position in the financial statements is that the position must be more-likely-than-not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized.
The total amount of unrecognized tax benefits as of December 31, 20122013 was $4.4$5.3 million, excluding accrued interest and penalties described below. If the unrecognized tax benefits were recognized in our Consolidated Financial Statements, $4.4$5.3 million would affect income tax expense and our related effective tax rate.
Interest and penalties recorded for uncertain tax positions are included in our income tax provision. As of December 31, 2012, $0.32013, $1.1 million of interest and penalties was accrued, excluding the tax benefit of deductible interest. The reversal of accrued interest and penalties would affect income tax expense and our related effective tax rate.
Our U.S. federal income tax returns for 2010 and 2011through 2012 are subject to examination by the Internal Revenue Service. With few exceptions, we are no longer subject to examination by foreign tax jurisdictions, or state and city tax jurisdictions for years before 2006. In the event that we have determined not to file tax returns with a particular state or city, all years remain subject to examination by the tax jurisdiction.
The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular issue may require the use of cash and could result in increased income tax expense. Favorable resolution could result in reduced income tax expense. It is reasonably possible that our unrecognized tax benefits could increase or decrease significantly during the next twelve months due to the resolution of certain U.S. and international tax uncertainties; however it is not possible to estimate the potential change at this time.
Litigation. We record a liability when a loss from litigation is known or considered probable and the amount can be reasonably estimated. Our current estimated range of liability related to pending litigation is based on claims for which we can estimate the amount or range of loss. Based upon information presently available, we believe that accruals for these claims are adequate. Due to uncertainties related to both the amount and range of loss on the remaining pending litigation, we are unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. While these matters could materially affect operating results in future periods depending on the final resolution, it is our opinion that after final disposition, any monetary liability to us beyond that provided in the Consolidated Balance Sheet as of December 31, 2012, would not be material to our financial position. As additional information becomes available, the potential liability related to pending litigation will be assessed and estimates will be revised as necessary.
Intangibles. We record all assets and liabilities acquired in purchase acquisitions, including intangibles, at estimated fair value. Intangible assets with a definite life are amortized based on a pattern in which the economic benefits of the assets are consumed, typically with useful lives ranging from one to 30 years. The initial recognition of intangible assets, the determination of useful lives and, if necessary, subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using certain valuation methods including discounted cash flow analysis. We evaluate assets on our balance sheet, including such intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries may indicate a possible impairment that would require an impairment test. While we believe that the current carrying value of these assets is not impaired, materially different assumptions regarding future performance of our businesses, which in many cases require
subjective judgments concerning estimates, could result in significant impairment losses. The test for impairment requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value.
In conjunction with the acceleration of our strategic transformation in the fourth quarter of 2012, we evaluated our intangible assets for impairment and recorded non-cash impairment charges of $260.5 million in the quarter. The intangible asset charges are primarily due to an accelerated secular optical market decline. See Note 6 - Intangible Impairments Assets and Goodwillfor further discussion of the impairment test performed. After this impairment loss,information on our 2013 and our acquisition of Nexsan, as of December 31, 2012 we had had $80.2 million of definite-lived intangible assets subject to amortization. While we believe that the current carrying value of these assets is not impaired, materially different assumptions regarding future performance of our businesses could result in significant impairment losses.assets.
Goodwill. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, at fair value. The initial recognition of goodwill and subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods including discounted cash flow analysis. Goodwill is the excess of the cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year (as of November 30) or if an event occurs or circumstances change that would warrant impairment testing during an interim period.
Goodwill is considered impaired when its carrying amount exceeds its implied fair value. The first step of the impairment test involves comparing the fair value of the reporting unit to which goodwill was assigned to its carrying amount. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of the reporting unit’s goodwill an impairment loss must be recognized for the excess. This involves measuring the fair value of the reporting unit’s assets and liabilities (both recognized and unrecognized) at the time of the impairment test. The difference between the reporting unit’s fair value and the fair values assigned to the reporting unit’s individual assets and liabilities is the implied fair value of the reporting unit’s goodwill.
Our reporting units for goodwill are our operating segments (Americas, Europe, North Asia and South Asia) with the exception of the Americas segment which is further divided between the Americas-Consumer, Americas-Commercial and Mobile Security reporting units as determined by sales channel.
During 2011, we acquired the assets of MXI Security, from Memory Experts International Inc., (MXI) and the secure data storage hardware business of IronKey Systems Inc. (IronKey) which resulted in goodwill of $21.9 million and $9.4 million, respectively. These businesses, along with our Imation Defender brand, make up our Americas-Mobile Security reporting unit. The carrying value of our Mobile Security reporting unit included $31.3 million of goodwill prior to our 2012 impairment testing.
Duringand the second and third quarters of 2012, we adjusted our internal financial forecast for our Americas-Mobile SecurityStorage Solutions reporting unit duewhich are each one level below our TSS reporting segment and for which goodwill of $8.0 million and $64.1 million, respectively, was recorded as of December 31, 2013. We do not have any goodwill within any reporting units associated with our CSA operating segment. See Note 6 - Intangible Assets and Goodwill for information on our 2013 and 2012 goodwill.
In determining the estimated fair value of the reporting units, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts and the market approach, a valuation technique that provides an estimate of the value of the reporting unit based on a comparison to changes in timing ofother similar businesses. Our expected cash flows are affected by various significant assumptions, including projected revenue, gross margin and lower expected short-term revenuesexpense expectations, terminal growth rate and lower gross margins. As we considereda discount rate. Our analyses utilize discounted forecasted cash flows over a multi-year period depending on the reporting unit with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for these factors to be an event that warranted an interim test as to whether the goodwill was impaired, we performed an impairment test as of each of these periods. Thecash flow assumptions. Our 2013 impairment test resulted in no goodwill impairment for either of goodwill as there was an excess inour Mobile Security or our Storage Solutions reporting units. Following is a discussion of the results of the 2013 impairment test for each of these reporting units.
Mobile Security Reporting Unit - For the 2013 impairment test for the Mobile Security reporting unit, the estimated fair value overof the reporting unit exceeded the carrying value in stepStep 1 of the impairment test performed for the second and third quartersby 34.2 percent. We used forecasted cash flows over a ten year period, a terminal growth rate of 2012 of 43.33.0 percent and 17.7a discount rate of 15.5 percent. The discount rate reflects the relative risk of achieving cash flows as well as any other specific risks or factors related to the Mobile Security reporting unit. We calculated the impact of a potential change in our assumptions to determine the impact on the results of the impairment test. Holding all other assumptions constant, an unfavorable change in various components of our projected cash flows, including revenue growth, of less than 5.0 percent respectively. would potentially result in an indication of impairment. Additionally, a decrease in the residual growth rate and an increase in the discount rate of less than 5.0 basis points would potentially result in an indication of impairment.
During the fourth quarter of 20122013 our internal financialbusiness plan and estimated cash flows associated with our Mobile Security business was updated. Although there were some downward adjustments to the near-term projections as compared to our previous forecast utilized during our fourth quarter 2012 impairment test, our longer-term projections and estimated fair value of this reporting unit have not been adversely impacted. Based on our updated business plan and strategy for Mobile security, our projected cash flows and associated estimated fair value of this reporting unit are heavily dependent on achieving significant revenue growth of our data solution products developed for our Americas-Mobile Security reporting unit was again adjusted with further changesIronKey Workspaces for Microsoft®Windows To Go® which is a new market in ourwhich we do not presently generate significant revenue and for which limited external market data exists. Our projections for this market include significant revenue growth expectations and gross margin resulting from lowermargins generally consistent with our existing
expectationsMobile Security business. While the current projections in the high-security market segment. In accordance with our policy, we performed an annual assessment of goodwill in the Americas-Mobile Security reporting unit during the fourth quarter of 2012 and as a result of the annual assessment, it was determined that the fair value of our Mobile Security reporting unit was impaired. We recordedsupport no impairment of this reporting unit in 2013, it is reasonably possible that an impairment charge of $23.3 million to the Americas reporting segment in restructuring and othercould be incurred in the Consolidated Statementsfuture given several factors, including its value being heavily dependent on significant growth in a new market in which we are not generating significant revenue and the generally small sensitivities to various assumptions that could cause an impairment to potentially be necessary. We will continue to closely monitor our results and expected cash flows in the future to assess whether a goodwill impairment in our Mobile Security reporting unit may be necessary.
Storage Solutions Reporting Unit - For the 2013 impairment test for the Storage Solutions reporting unit, the estimated fair value of Operations. See Goodwill for further discussionthe reporting unit exceeded the carrying value in Step 1 of the impairment test performed.
Excess Inventoryby 25.7 percent. We used forecasted cash flows over a ten year period, a terminal growth rate of 3.0 percent and Obsolescence. We write down our inventory for excess, slow moving and obsolescencea discount rate of 13.5 percent. The discount rate reflects the relative risk of achieving cash flows as well as any other specific risks or factors related to the net realizableStorage Solutions reporting unit. We calculated the impact of a potential change in our assumptions to determine the impact on the results or the impairment test. Holding all other assumptions constant an unfavorable change in various components of our projected cash flows, including revenue growth, of less than 5.0 percent would potentially result in an indication of impairment. Additionally, a decrease in the residual growth rate and an increase in the discount rate of less than 5.0 basis points would potentially result in an indication of impairment.
During 2013 our Storage Solutions reporting unit achieved slower growth than was anticipated at the time of its acquisition, due to what we believe to be temporary factors, including the impact of the government shut-down. Despite these lower than anticipated results, our longer-term projections and estimated fair value based uponof this reporting unit have not been adversely impacted as compared to our expectations at the time of acquisition. Given the relatively short time since the date we acquired Nexsan (December 31, 2012), we have not yet had an opportunity to sufficiently execute our planned strategy to achieve the results and associated cash flows that we had anticipated. We are investing in this business aggressively and have seen that market participants show this type of business can be valued at extremely high multiples. However, while our current projections support no impairment of this reporting unit for 2013, given that our 2013 results fell below expectations and the generally small sensitivities to various assumptions aboutthat could cause an impairment to potentially be necessary it is reasonably possible that an impairment could be incurred in the future. We will continue to closely monitor our results and expected cash flows in the future demand and market conditions. If actual market conditions are less favorable than those we project, additional write-downsto assess whether a goodwill impairment in our Storage Solutions reporting unit may be required. As of December 31, 2012, the estimated inventory write-downs for excess inventory and obsolescence for inventory on hand was $35.9 million.
Rebates. We maintain an accrual for customer rebates that totaled $44.8 million as of December 31, 2012 included in other current liabilities. This accrual requires a program-by-program estimation of outcomes based on a variety of factors including customer unit sell-through volumes and end user redemption rates. In the event that actual volumes and redemption rates differ from the estimates used in the accrual calculation, adjustments to the accrual, upward or downward, may be necessary.
Restructuring Reserves. Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans. Generally, these charges are reflected in the quarter in which the Board approves the associated actions, the actions are probable and the amounts are estimable. In the event that the Board approves the associated actions post the balance sheet date, but ultimately confirms the existence of a probable liability as of the balance sheet date, a reasonable estimate of these charges are recorded in the period in which the probable liability existed. This estimate takes into account all information available as of the date the financial statements are issued. Severance amounts for which affected employees were required to render service in order to receive benefits at their termination dates were measured at the date such benefits were communicated to the applicable employees and recognized as expense over the employees’ remaining service periods.
Copyright Levies. In many European Union (EU) member countries, the sale of recordable optical media is subject to a private copyright levy. The levies are intended to compensate copyright holders forwith "fair compensation" for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (Directive). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which, in turn, are intendedexpected to distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law making activities. On October 21, 2010, the European Court of Justice (ECJ) ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The ECJ stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The ECJ also stated that the indiscriminate application of the private copying levy to devices not made available to private users and clearly reserved for uses other than private copying is incompatible with the Directive. The ECJ ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons intendingpresumed to makebe making private copies. Within this disclosure, we use the term "commercial channel sales" when referring to products intended for uses other than private copying and "consumer channel sales" when referring to products intended for uses including private copying.
Since the Directive was implemented in 2002, we estimate that we have paid approximatelyin excess of $100 million in levies to various ongoing collecting societies related to professional and commercial channel sales. Based on the ECJ's October 2010 ruling and subsequent litigation and law making activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various collecting societies. Accordingly, insubsequent to the October 21, 2010 ECJ ruling, we began withholding levy payments on consumer product sales to the various collecting societies.societies and, in 2011, we reversed our existing accruals (totaling $7.8 million) for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer product sales.channel sales, in all applicable jurisdictions except Italy and France due to recent court rulings. See Note 15 - Commitments and Contingencies in our Notes to Consolidated Financial Statements for discussion of these court rulings. As of
December 31, 20122013 and 2011,2012, we had recorded a liabilityaccrued liabilities of $27.7$10.0 million and $19.7$27.7 million, respectively, associated with levies related to consumer productchannel sales for which we are withholding payment. At December 31, 2012, the recovery of some or all of the approximately $100 million of copyright levies previously paid on professional and commercial sales represents gain contingency that has not yet met the required criteria for recognition in our financial statements. There is no assurance that we will realize any of this gain contingency.
Since the October 2010 ECJ ruling, we evaluate quarterly evaluate on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) accrued, but unpaid, copyright levies on prior period consumer productchannel sales should be reversed. Our evaluation is made on a
jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law making activities within each jurisdiction as well as throughout the EU. Cost of goods sold for the year ended December 31, 2011 was reduced by $7.8 million due to reversal of prior year obligations that were determined to be remote.
Other Accrued Liabilities. We also have other accrued liabilities, including uninsured claims and pensions. These accruals are based on a varietydid not reverse any amounts into cost of factors including past experience and various actuarial assumptions and,goods sold for prior year obligations in many cases, require estimates of events not yet reported to us. If future experience differs from these estimates, operating results in future periods would be impacted.
Defined Benefit Pension Plans. We sponsor defined benefit pension plans in both U.S. and foreign entities. Expenses and liabilities for the pension plans are actuarially calculated. These calculations are based on our assumptions related to the discount rate, expected return on plan assets and mortality rates. The annual measurement date for these assumptions is December 31.2012. See Note 915 - Retirement Plans in our Notes to Consolidated Financial Statements includes disclosures of these assumptions for both the U.S.Commitments and international plans. The discount rate assumptions are tied to portfolios of long-term high quality bonds and are, therefore, subject to annual fluctuations. A lower discount rate increases the present value of the pension obligations, which results in higher pension expense. The discount rate used in calculating the benefit obligation in the United States was 3.50 percent at December 31, 2012, as compared with 3.75 percent at December 31, 2011. A discount rate reduction of 0.25 percent increases U.S. pension plan expense (pre-tax) by approximately $0.1 million.
The expected return on assets assumptions on the investment portfolios for the pension plans are based on the long-term expected returns for the investment mix of assets currently in the respective portfolio. Because the rate of return is a long-term assumption, it generally does not change each year. We use historic return trends of the asset portfolio combined with recent market conditions to estimate the future rate of return. The rate of return used in calculating the U.S. pension plan expense for 2012, 2011 and 2010 was 8.0 percent. A reduction of 0.25 percent for the expected return on plan assets assumption will increase United States net pension plan expense (pre-tax) by $0.2 million. Expected returns on asset assumptions for non-U.S. plans are determined in a manner consistent with the United States plan. The projected salary increase assumption is based on historic trends and comparisons to the external market. Higher rates of increase result in higher pension expenses. In the United States, we used the rate of 4.75 percent for 2010. Beginning in 2011, the projected salary increase assumption was not applicable in the United States due to the elimination of benefit accruals as of January 1, 2011. See Note 9 - Retirement PlansContingencies in our Notes to Consolidated Financial Statements for furtherdiscussion of reversals of copyright levies in 2013.
Litigation. We record a liability when a loss from litigation is known or considered probable and the amount can be reasonably estimated. Our current estimated range of liability related to pending litigation is based on claims for which we can estimate the amount or range of loss. Based upon information regarding this changepresently available, we believe that accruals for these claims are adequate. Due to uncertainties related to both the amount and range of loss on the remaining pending litigation, we are unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. While these matters could materially affect our financial condition, results of operations and cash flows in benefits. Mortality assumptions were obtained fromfuture periods depending on the IRS 2012 Static Mortality Table.final resolution, it is our opinion that after final disposition, any monetary liability to us beyond that provided in our Consolidated Balance Sheet as of December 31, 2013, would not be material to our financial condition, results of operations and cash flows. As additional information becomes available, the potential liability related to pending litigation will be assessed and estimates will be revised as necessary.
Recently Issued Accounting Standards
See Note 2 — Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for disclosure related to recently issued accounting standards.
Cautionary Statements Regarding Forward-Looking Statements
We may from time to time make written or oral forward-looking statements with respect to our future goals, including statements contained in this Form 10-K, in our other filings with the SEC and in our reports to shareholders.
Certain information which does not relate to historical financial information may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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." Such statements are subject to certain risks and uncertainties that could cause our actual results in the future to differ materially from our historical results and those presently anticipated or projected. We wish to caution investors not to place undue reliance on any such forward-looking statements. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements to reflect events or circumstances arising after such date. Risk factors include our ability to successfully implement our strategy including our global restructuring plan;strategy; our ability to grow our business in new products with profitable margins and the rate of revenue decline for certain existing products; our ability to meet future revenue growth, gross margin and earnings targets; the ability to quickly develop, source, introduce and deliver differentiated and innovative products; our potential dependence on third parties for new product introductions or technologies in order to introduce our own new products; our ability to successfully implement restructuring plans; foreign currency fluctuations; the ready availability and price of energy and key raw materials or critical components including the effects of natural disasters and our ability to pass along raw materials price increases to our customers; continuing uncertainty in global and regional economic conditions including adverse effects of the
ongoing sovereign debt crisis in Europe, increased Euro currency exchange rate volatility, and related austerity measures and their potential impact on European economic growth;conditions; our ability to identify, value, integrate and realize the expected benefits from any acquisition which has occurred or may occur in connection with our strategy; the possibility that our goodwill and intangible assets or any goodwill or intangible assets that we acquire may become impaired; the ability of our security products to withstand cyber-attacks; the seasonality and volatility of the markets in which we operate; foreign currency fluctuations; changes in European law or practice related to the imposition or collectability of optical levies; the seasonality and volatility of the markets in which we operate; significant changes in discount rates and other assumptions used in the valuation of our pension plans; changes in tax laws, regulations and results of inspections by various tax authorities; our ability to successfully defend our intellectual property rights and the ability or willingness of our suppliers to provide adequate protection against third party intellectual property or product liability claims; the outcome of any pending or future litigation;litigation and patent disputes; ability to access financing to achieve strategic
objectives and growth due to changes in the capital and credit markets; limitations in our operations that could arise from compliance with the debt covenants in our credit facility;facilities; our ability to retain key employees; increased compliance with changing laws and regulations potentially affecting our operating results; failure to adequately protect our information systems from cyber-attacks; our ability to meet our revenue growth, gross margin and earnings targetscyber-attacks and the volatility of our stock price due to our results or market trends, as well as various factors set forth from time to time in Item 1A of this Form 10-K and from time to time in our filings with the SEC.
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to various market risks including volatility in foreign currency exchange rates and credit risk. International operations, which comprised approximately 59 percent of our revenue in 20122013, may be subject to various risks that are not present in domestic operations. The additional risks include political and economic instability, terrorist activity, the possibility of expropriation, trade tariffs or embargoes, unfavorable tax laws, restrictions on royalties, dividends and currency remittances, requirements for governmental approvals for new ventures and local participation in operations such as local equity ownership and workers’ councils.
Our foreign currency hedging policy attempts to manage some of the foreign currency risks over near term periods; however, we cannot ensure that these risk management activities will offset more than a portion of the adverse financial impact resulting from unfavorable movements in foreign exchange rates or that medium and longer term effects of exchange rates will not be significant. Although we attempt to utilize hedging to manage the impact of changes in currency exchange rates, our revenue or costs are adversely impacted when the U.S. dollar sustains a strengthening position against currencies in which we sell products or a weakening exchange rate against currencies in which we incur costs.
In accordance with established policies and procedures, we may utilize derivative financial instruments, including forward exchange contracts, options, combination option strategies and swap agreements to manage certain of these exposures. Factors that could impact the effectiveness of our hedging include the accuracy of our forecasts, the volatility of the currency markets and the availability of hedging instruments. We do not hold or issue derivative financial instruments for trading or speculative purposes and we are not a party to leveraged derivative transactions. The utilization of derivatives and hedging activities is described more fully in Note 12 - Fair Value Measurements and Derivative Financial Instruments in our Notes to the Consolidated Financial Statements.
As of December 31, 20122013, we had $295.1$163.2 million notional amount of foreign currency forward and option contracts of which $46.5$29.4 million hedged recorded balance sheet exposures. This compares to $241.1$295.5 million notional amount of foreign currency forward and option contracts as of December 31, 20112012, of which $32.9$46.5 million hedged recorded balance sheet exposures. An immediate adverse change of 10 percent in year-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 December 31, 20122013 by $5.2$6.4 million.
We are exposed to credit risk associated with cash investments and foreign currency derivatives. We do not believe that our cash investments and foreign currency derivatives present significant credit risks because the counterparties to the instruments consist of major financial institutions and we monitor and manage the notional amount of contracts entered into with each counterparty.
| |
| Item 8. | Financial Statements and Supplementary Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Imation Corp.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statementsstatement of operations, of comprehensive loss, of shareholders'shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Imation Corp. and its subsidiaries (the “Company”) at at December 31, 2012 2013and 2011,2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20122013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2013, based on criteria established in Internal Control - Integrated Framework - version 1992issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A, management has excluded Nexsan from its assessment of internal control over financial reporting as of December 31, 2012 because it was acquired by the Company in a purchase business combination on December 31, 2012. We have also excluded Nexsan from our audit of internal control over financial reporting. Nexsan is a wholly-owned subsidiary whose total assets represent 18 percent of the consolidated total assets of the Company as of December 31, 2012. There were no results of operations associated with Nexsan included in the consolidated statements of operations for the year ended December 31, 2012 as the acquisition occurred on December 31, 2012.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 13, 20132014
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | Years Ended December 31, | | Years Ended December 31, |
| | | 2012 | | 2011 | | 2010 | | 2013 | | 2012 | | 2011 |
| | | (In millions, except per share amounts) | | (In millions, except per share amounts) |
| Net revenue | | $ | 1,099.6 |
| | $ | 1,290.4 |
| | $ | 1,460.9 |
| | $ | 860.8 |
| | $ | 1,006.7 |
| | $ | 1,166.6 |
|
| Cost of goods sold | | 897.3 |
| | 1,073.7 |
| | 1,234.5 |
| | 672.1 |
| | 817.4 |
| | 961.2 |
|
| Gross profit | | 202.3 |
| | 216.7 |
| | 226.4 |
| | 188.7 |
| | 189.3 |
| | 205.4 |
|
| Operating expenses: | | | | | | | | | | | | |
| Selling, general and administrative | | 210.7 |
| | 203.7 |
| | 202.5 |
| | 181.6 |
| | 191.1 |
| | 182.4 |
|
| Research and development | | 22.8 |
| | 21.0 |
| | 16.4 |
| | 18.4 |
| | 20.4 |
| | 18.3 |
|
| Intangible impairments | | 260.5 |
| | — |
| | — |
| | — |
| | 251.8 |
| | — |
|
| Litigation settlement | | — |
| | 2.0 |
| | 2.6 |
| | (2.5 | ) | | — |
| | 2.0 |
|
| Goodwill impairment | | 23.3 |
| | 1.6 |
| | 23.5 |
| | — |
| | 23.3 |
| | 1.6 |
|
| Restructuring and other | | 21.1 |
| | 21.5 |
| | 51.1 |
| | 11.3 |
| | 21.1 |
| | 21.5 |
|
| Total | | 538.4 |
| | 249.8 |
| | 296.1 |
| | 208.8 |
| | 507.7 |
| | 225.8 |
|
| Operating loss | | (336.1 | ) | | (33.1 | ) | | (69.7 | ) | | (20.1 | ) | | (318.4 | ) | | (20.4 | ) |
| Other (income) expense | | | | | | | | | | | | |
| Interest income | | (0.5 | ) | | (0.9 | ) | | (0.8 | ) | | (0.2 | ) | | (0.5 | ) | | (0.9 | ) |
| Interest expense | | 2.9 |
| | 3.7 |
| | 4.2 |
| | 2.5 |
| | 2.9 |
| | 3.7 |
|
| Other expense, net | | 2.6 |
| | 7.0 |
| | 3.3 |
| | 0.6 |
| | 2.6 |
| | 7.0 |
|
| Total | | 5.0 |
| | 9.8 |
| | 6.7 |
| | 2.9 |
| | 5.0 |
| | 9.8 |
|
| Loss from continuing operations before income taxes | | (341.1 | ) | | (42.9 | ) | | (76.4 | ) | | (23.0 | ) | | (323.4 | ) | | (30.2 | ) |
| Income tax (benefit) provision | | (0.4 | ) | | 3.8 |
| | 81.9 |
| |
| Income tax provision | | | 1.4 |
| | 1.4 |
| | 5.0 |
|
| Loss from continuing operations | | (340.7 | ) |
| (46.7 | ) | | (158.3 | ) | | (24.4 | ) |
| (324.8 | ) | | (35.2 | ) |
| Discontinued operations: | | | | | | | | | | | | |
| Gain on sale of discontinued businesses, net of income taxes | | | 0.9 |
| | — |
| | — |
|
| Loss from discontinued operations, net of income taxes | | — |
| | — |
| | (0.2 | ) | | (20.9 | ) | | (15.9 | ) | | (11.5 | ) |
| Loss from discontinued operations | | | (20.0 | ) | | (15.9 | ) | | (11.5 | ) |
| Net loss | | $ | (340.7 | ) | | $ | (46.7 | ) | | $ | (158.5 | ) | | $ | (44.4 | ) | | $ | (340.7 | ) | | $ | (46.7 | ) |
| Loss per common share — basic: | | | | | | | | | | | | |
| Continuing operations | | $ | (9.09 | ) | | $ | (1.24 | ) | | $ | (4.19 | ) | | $ | (0.60 | ) | | $ | (8.67 | ) | | $ | (0.93 | ) |
| Discontinued operations | | — |
| | — |
| | (0.01 | ) | | (0.49 | ) | | (0.42 | ) | | (0.31 | ) |
| Net loss | | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | | (1.10 | ) | | (9.09 | ) | | (1.24 | ) |
| Loss per common share — diluted: | | | | | | | | | | | | |
| Continuing operations | | $ | (9.09 | ) | | $ | (1.24 | ) | | $ | (4.19 | ) | | $ | (0.60 | ) | | $ | (8.67 | ) | | $ | (0.93 | ) |
| Discontinued operations | | — |
| | — |
| | (0.01 | ) | | (0.49 | ) | | (0.42 | ) | | (0.31 | ) |
| Net loss | | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | | (1.10 | ) | | (9.09 | ) | | (1.24 | ) |
| Weighted average shares outstanding: | | | | | | | | | | | | |
| Basic | | 37.5 |
| | 37.7 |
| | 37.8 |
| | 40.5 |
| | 37.5 |
| | 37.7 |
|
| Diluted | | 37.5 |
| | 37.7 |
| | 37.8 |
| | 40.5 |
| | 37.5 |
| | 37.7 |
|
| Cash dividend paid per common share | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IMATION CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2012 | | 2011 | | 2010 |
| | | (In millions) |
| Net loss | | $ | (340.7 | ) | | $ | (46.7 | ) | | $ | (158.5 | ) |
| | | | | | | |
| Other comprehensive (loss) income, net of tax: | | | | | | |
| Net unrealized gains on derivative financial instruments: | | | | | | |
| Net holding (losses) gains arising during the period | | 3.1 |
| | 0.2 |
| | 0.6 |
|
| Reclassification adjustment for net realized (gains) losses included in net loss | | (2.0 | ) | | 0.6 |
| | — |
|
| Total net unrealized gains on derivative financial instruments | | 1.1 |
| | 0.8 |
| | 0.6 |
|
| | | | | | | |
| Net pension adjustments: | | | | | | |
| Reclassification of adjustments for defined benefit plans recorded in net loss | | (1.0 | ) | | (12.7 | ) | | 4.6 |
|
| | | | | | | |
| Unrealized foreign currency translation (losses) gains | | (1.7 | ) | | — |
| | 3.0 |
|
| | | | | | | |
| Total other comprehensive (loss) income, net of tax | | (1.6 | ) | | (11.9 | ) | | 8.2 |
|
| | | | | | | |
| Comprehensive loss | | $ | (342.3 | ) | | $ | (58.6 | ) | | $ | (150.3 | ) |
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (In millions) |
| Net loss | | $ | (44.4 | ) | | $ | (340.7 | ) | | $ | (46.7 | ) |
| | | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Net unrealized (losses) gains on derivative financial instruments: | | | | | | |
| Net holding gains arising during the period | | 7.0 |
| | 3.1 |
| | 0.2 |
|
| Reclassification adjustment for net realized (gains) losses recorded in net loss | | (7.3 | ) | | (2.0 | ) | | 0.6 |
|
| Total net unrealized (losses) gains on derivative financial instruments | | (0.3 | ) | | 1.1 |
| | 0.8 |
|
| | | | | | | |
| Net pension adjustments, net of tax: | | | | | | |
| Liability adjustments for defined benefit pension plans | | 10.7 |
| | (4.9 | ) | | (16.7 | ) |
| Reclassification of adjustments for defined benefit plans recorded in net loss | | 5.5 |
| | 3.9 |
| | 4.0 |
|
| Total net pension adjustments | | 16.2 |
| | (1.0 | ) | | (12.7 | ) |
| | | | | | | |
| Unrealized foreign currency translation losses | | (4.5 | ) | | (1.7 | ) | | — |
|
| | | | | | | |
| Total other comprehensive income (loss), net of tax | | 11.4 |
| | (1.6 | ) | | (11.9 | ) |
| | | | | | | |
| Comprehensive loss | | $ | (33.0 | ) | | $ | (342.3 | ) | | $ | (58.6 | ) |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
| | | | | As of December 31, | | As of December 31, |
| | | 2012 | | 2011 | | 2013 | | 2012 |
| | | (In millions, except per | | (In millions, except per |
| | | share amounts) | | share amounts) |
ASSETS | | Current assets | | | | | | | | |
| Cash and cash equivalents | | $ | 108.7 |
| | $ | 223.1 |
| | $ | 132.6 |
| | $ | 108.7 |
|
| Accounts receivable, net | | 220.8 |
| | 234.9 |
| | 163.3 |
| | 220.8 |
|
| Inventories | | 166.0 |
| | 208.8 |
| | 84.3 |
| | 166.0 |
|
| Other current assets | | 61.6 |
| | 49.7 |
| | 48.8 |
| | 61.6 |
|
| Total current assets | | 557.1 |
| | 716.5 |
| | 429.0 |
| | 557.1 |
|
| Property, plant and equipment, net | | 58.9 |
| | 55.4 |
| | 51.6 |
| | 58.9 |
|
| Intangible assets, net | | 81.9 |
| | 321.7 |
| | 68.6 |
| | 81.9 |
|
| Goodwill | | 73.5 |
| | 31.3 |
| | 72.1 |
| | 73.5 |
|
| Other assets | | 22.1 |
| | 24.4 |
| | 20.5 |
| | 22.1 |
|
| Total assets | | $ | 793.5 |
| | $ | 1,149.3 |
| | $ | 641.8 |
| | $ | 793.5 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | | Current liabilities | | | | | | | | |
| Accounts payable | | $ | 162.7 |
| | $ | 205.2 |
| | $ | 94.7 |
| | $ | 162.7 |
|
| Short-term debt | | 20.0 |
| | — |
| | 20.0 |
| | 20.0 |
|
| Other current liabilities | | 158.4 |
| | 151.2 |
| | 116.4 |
| | 158.4 |
|
| Total current liabilities | | 341.1 |
| | 356.4 |
| | 231.1 |
| | 341.1 |
|
| Other liabilities | | 52.0 |
| | 69.2 |
| | 37.5 |
| | 52.0 |
|
| Total liabilities | | 393.1 |
| | 425.6 |
| | 268.6 |
| | 393.1 |
|
| Commitments and contingencies (Note 15) | |
|
| |
|
| |
|
| |
|
|
| Shareholders’ equity | | | | | | | | |
| Preferred stock, $.01 par value, authorized 25 million shares, none issued and outstanding | | — |
| | — |
| | — |
| | — |
|
| Common stock, $.01 par value, authorized 100 million shares, 42.9 million issued | | 0.4 |
| | 0.4 |
| | 0.4 |
| | 0.4 |
|
| Additional paid-in capital | | 1,052.6 |
| | 1,107.8 |
| | 1,047.7 |
| | 1,052.6 |
|
| Retained deficit | | (540.8 | ) | | (200.1 | ) | | (585.2 | ) | | (540.8 | ) |
| Accumulated other comprehensive loss | | (74.2 | ) | | (72.6 | ) | | (62.8 | ) | | (74.2 | ) |
| Treasury stock, at cost | | (37.6 | ) | | (111.8 | ) | | (26.9 | ) | | (37.6 | ) |
| Total shareholders’ equity | | 400.4 |
| | 723.7 |
| | 373.2 |
| | 400.4 |
|
| Total liabilities and shareholders’ equity | | $ | 793.5 |
| | $ | 1,149.3 |
| | $ | 641.8 |
| | $ | 793.5 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IMATION CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | | Common Stock | | Additional Paid-in Capital | | Retained (Deficit) Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity | Common Stock | | Additional Paid-in Capital | | Retained Deficit | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Shareholders’ Equity |
| | (In millions, except per share amounts) | (In millions, except per share amounts) |
| Balance as of December 31, 2009 | $ | 0.4 |
| | $ | 1,112.3 |
| | $ | 5.1 |
| | $ | (68.9 | ) | | $ | (121.7 | ) | | $ | 927.2 |
| |
| Net loss | |
| | |
| | (158.5 | ) | | |
| | |
| | (158.5 | ) | |
| Restricted stock grants and other | |
| | (7.3 | ) | | |
| | |
| | 9.9 |
| | 2.6 |
| |
| 401(k) matching contribution | |
| | (1.9 | ) | | |
| | |
| | 3.6 |
| | 1.7 |
| |
| Stock-based compensation related to options | |
| | 3.8 |
| | |
| | |
| | |
| | 3.8 |
| |
| Share-based payment modification | | | 0.8 |
| | | | | | | | 0.8 |
| |
| Tax impact of stock-based compensation | | | (4.1 | ) | | | | | | | | (4.1 | ) | |
| Net change in cumulative translation adjustment | |
| | |
| | |
| | 3.0 |
| | |
| | 3.0 |
| |
| Pension adjustments, net of tax | |
| | |
| | |
| | 4.6 |
| | |
| | 4.6 |
| |
| Cash flow hedging, net of tax | |
| | |
| | |
| | 0.6 |
| | |
| | 0.6 |
| |
| Balance as of December 31, 2010 | $ | 0.4 |
| | $ | 1,103.6 |
| | $ | (153.4 | ) | | $ | (60.7 | ) | | $ | (108.2 | ) | | $ | 781.7 |
| $ | 0.4 |
| | $ | 1,103.6 |
| | $ | (153.4 | ) | | $ | (60.7 | ) | | $ | (108.2 | ) | | $ | 781.7 |
|
| Net loss | |
| | |
| | (46.7 | ) | | |
| | |
| | (46.7 | ) | |
| | |
| | (46.7 | ) | | |
| | |
| | (46.7 | ) |
| Purchase of treasury stock | | | | | | | | | (9.7 | ) | | (9.7 | ) | | | | | | | | | (9.7 | ) | | (9.7 | ) |
| Restricted stock grants and other | |
| | 0.7 |
| | |
| | |
| | 3.4 |
| | 4.1 |
| |
| | 0.7 |
| | |
| | |
| | 3.4 |
| | 4.1 |
|
| 401(k) matching contribution | |
| | (0.6 | ) | | |
| | |
| | 2.7 |
| | 2.1 |
| |
| | (0.6 | ) | | |
| | |
| | 2.7 |
| | 2.1 |
|
| Stock-based compensation related to options | |
| | 4.1 |
| | |
| | |
| | |
| | 4.1 |
| |
| | 4.1 |
| | |
| | |
| | |
| | 4.1 |
|
| Pension adjustments, net of tax | |
| | |
| | |
| | (12.7 | ) | | |
| | (12.7 | ) | |
| | |
| | |
| | (12.7 | ) | | |
| | (12.7 | ) |
| Cash flow hedging, net of tax | |
| | |
| | |
| | 0.8 |
| | |
| | 0.8 |
| |
| | |
| | |
| | 0.8 |
| | |
| | 0.8 |
|
| Balance as of December 31, 2011 | $ | 0.4 |
| | $ | 1,107.8 |
| | $ | (200.1 | ) | | $ | (72.6 | ) | | $ | (111.8 | ) | | $ | 723.7 |
| $ | 0.4 |
| | $ | 1,107.8 |
| | $ | (200.1 | ) | | $ | (72.6 | ) | | $ | (111.8 | ) | | $ | 723.7 |
|
| Net loss | | | | | (340.7 | ) | | | | | | (340.7 | ) | |
| | |
| | (340.7 | ) | | |
| | |
| | (340.7 | ) |
| Purchase of treasury stock | | | | | | | | | (6.5 | ) | | (6.5 | ) | | | | | | | | | (6.5 | ) | | (6.5 | ) |
| Restricted stock grants and other | | | (1.0 | ) | | | | | | 4.4 |
| | 3.4 |
| |
| | (1.0 | ) | | |
| | |
| | 4.4 |
| | 3.4 |
|
| 401(k) matching contribution | | | (1.0 | ) | | | | | | 4.0 |
| | 3.0 |
| |
| | (1.0 | ) | | |
| | |
| | 4.0 |
| | 3.0 |
|
| Stock-based compensation related to options | | | 3.6 |
| | | | | | | | 3.6 |
| |
| | 3.6 |
| | |
| | |
| | |
| | 3.6 |
|
| Net change in cumulative translation adjustment | | | | | | | (1.7 | ) | | | | (1.7 | ) | | | | | | | (1.7 | ) | | | | (1.7 | ) |
| Pension adjustments, net of tax | | | | | | | (1.0 | ) | | | | (1.0 | ) | |
| | |
| | |
| | (1.0 | ) | | |
| | (1.0 | ) |
| Cash flow hedging, net of tax | | | | | | | 1.1 |
| | | | 1.1 |
| |
| | |
| | |
| | 1.1 |
| | |
| | 1.1 |
|
| Issuance of treasury stock for acquisition | | | (56.8 | ) | | | | | | 72.3 |
| | 15.5 |
| | | (56.8 | ) | | | | | | 72.3 |
| | 15.5 |
|
| Balance as of December 31, 2012 | $ | 0.4 |
| | $ | 1,052.6 |
| | $ | (540.8 | ) | | $ | (74.2 | ) | | $ | (37.6 | ) | | $ | 400.4 |
| $ | 0.4 |
| | $ | 1,052.6 |
| | $ | (540.8 | ) | | $ | (74.2 | ) | | $ | (37.6 | ) | | $ | 400.4 |
|
| Net loss | | | | | | (44.4 | ) | | | | | | (44.4 | ) |
| Purchase of treasury stock | | | | | | | | | | (2.5 | ) | | (2.5 | ) |
| Restricted stock grants and other | | | | (4.2 | ) | | | | | | 7.9 |
| | 3.7 |
|
| 401(k) matching contribution | | | | (3.6 | ) | | | | | | 5.3 |
| | 1.7 |
|
| Stock-based compensation related to options | | | | 2.9 |
| | | | | | | | 2.9 |
|
| Net change in cumulative translation adjustment | | | | | | | | (4.5 | ) | | | | (4.5 | ) |
| Pension adjustments, net of tax | | | | | | | | 16.2 |
| | | | 16.2 |
|
| Cash flow hedging, net of tax | | | | | | | | (0.3 | ) | | | | (0.3 | ) |
| Balance as of December 31, 2013 | | $ | 0.4 |
| | $ | 1,047.7 |
| | $ | (585.2 | ) | | $ | (62.8 | ) | | $ | (26.9 | ) | | $ | 373.2 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | Years Ended December 31, | | Years Ended December 31, |
| | | 2012 | | 2011 | | 2010 | | 2013 | | 2012 | | 2011 |
| | | (In millions)
| | (In millions)
|
| Cash Flows from Operating Activities: | | | | | | | | | | | | |
| Net loss | | $ | (340.7 | ) | | $ | (46.7 | ) | | $ | (158.5 | ) | | $ | (44.4 | ) | | $ | (340.7 | ) | | $ | (46.7 | ) |
| Adjustments to reconcile net income to net cash used in operating activities: | Adjustments to reconcile net income to net cash used in operating activities: | | | | | Adjustments to reconcile net income to net cash used in operating activities: | | | | |
| Depreciation and amortization | | 35.8 |
| | 36.7 |
| | 41.8 |
| | 23.7 |
| | 35.8 |
| | 36.7 |
|
| Stock-based compensation | | 7.3 |
| | 7.5 |
| | 6.9 |
| | 6.9 |
| | 7.3 |
| | 7.5 |
|
| Deferred income taxes and valuation allowance | | 5.7 |
| | (2.9 | ) | | 57.0 |
| | (4.7 | ) | | 5.7 |
| | (2.9 | ) |
| Goodwill, intangible and other asset impairments | | 285.7 |
| | 8.6 |
| | 54.7 |
| | 7.1 |
| | 285.7 |
| | 8.6 |
|
| Inventory write-offs | | 2.3 |
| | 9.1 |
| | 14.2 |
| | 2.7 |
| | 2.3 |
| | 9.1 |
|
| Pension settlement | | 2.4 |
| | 3.1 |
| | 2.8 |
| | 2.1 |
| | 2.4 |
| | 3.1 |
|
| Changes in fair value of contingent consideration | | (8.6 | ) | | — |
| | — |
| | (0.6 | ) | | (8.6 | ) | | — |
|
| Loss on UK pension settlement | | | 10.6 |
| | — |
| | — |
|
| Gain on sale of land | | | (9.8 | ) | | — |
| | — |
|
| Other, net | | 2.9 |
| | 11.8 |
| | 8.0 |
| | (6.9 | ) | | 2.9 |
| | 11.8 |
|
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | 23.7 |
| | 28.0 |
| | 59.7 |
| | 48.8 |
| | 23.7 |
| | 28.0 |
|
| Inventories | | 45.8 |
| | (12.2 | ) | | 16.1 |
| | 64.2 |
| | 45.8 |
| | (12.2 | ) |
| Other assets | | (9.1 | ) | | 1.3 |
| | 53.7 |
| | 7.8 |
| | (9.1 | ) | | 1.3 |
|
| Accounts payable | | (44.0 | ) | | (17.7 | ) | | 13.6 |
| | (63.3 | ) | | (44.0 | ) | | (17.7 | ) |
| Accrued payroll and other liabilities | | (17.7 | ) | | (47.1 | ) | | (19.8 | ) | | (29.6 | ) | | (17.7 | ) | | (47.1 | ) |
| Restricted cash | | — |
| | 4.2 |
| | 1.2 |
| | 7.5 |
| | — |
| | 4.2 |
|
| Net cash used in operating activities | | (8.5 | ) | | (16.3 | ) | | 151.4 |
| | 22.1 |
| | (8.5 | ) | | (16.3 | ) |
| Cash Flows from Investing Activities: | | | | | | | | | | | | |
| Capital expenditures | | (10.2 | ) | | (7.3 | ) | | (8.3 | ) | | (7.0 | ) | | (10.2 | ) | | (7.3 | ) |
| Proceeds from sale of assets and business | | | 11.0 |
| | 1.4 |
| | — |
|
| Recovery of investments | | | 0.2 |
| | 0.9 |
| | — |
|
| Acquisitions, net of cash acquired | | (103.8 | ) | | (47.0 | ) | | — |
| | 1.6 |
| | (103.8 | ) | | (47.0 | ) |
| Proceeds from sale of assets | | 1.4 |
| | — |
| | 0.2 |
| |
| Purchase of tradename | | (4.0 | ) | | — |
| | — |
| | — |
| | (4.0 | ) | | — |
|
| Recovery of investments | | 0.9 |
| | — |
| | — |
| |
| License agreement | | — |
| | — |
| | (5.0 | ) | |
| Net cash used in investing activities | | (115.7 | ) | | (54.3 | ) | | (13.1 | ) | | 5.8 |
| | (115.7 | ) | | (54.3 | ) |
| Cash Flows from Financing Activities: | | | | | | | | | | | | |
| Purchase of treasury stock | | (6.5 | ) | | (9.7 | ) | | — |
| | (2.5 | ) | | (6.5 | ) | | (9.7 | ) |
| Debt issuance costs | | (2.4 | ) | | — |
| | (1.0 | ) | | (0.4 | ) | | (2.4 | ) | | — |
|
| Debt borrowings | | 25.0 |
| | — |
| | — |
| | 4.9 |
| | 25.0 |
| | — |
|
| Debt repayments | | (5.0 | ) | | — |
| | — |
| | (4.9 | ) | | (5.0 | ) | | — |
|
| Contingent consideration payments | | (1.2 | ) | | — |
| | — |
| | (0.5 | ) | | (1.2 | ) | | — |
|
| Exercise of stock options | | — |
| | 0.6 |
| | — |
| | — |
| | — |
| | 0.6 |
|
| Net cash provided by (used in) financing activities | | 9.9 |
| | (9.1 | ) | | (1.0 | ) | | (3.4 | ) | | 9.9 |
| | (9.1 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | (0.1 | ) | | (2.1 | ) | | 4.2 |
| | (0.6 | ) | | (0.1 | ) | | (2.1 | ) |
| Net change in cash and cash equivalents | | (114.4 | ) | | (81.8 | ) | | 141.5 |
| | 23.9 |
| | (114.4 | ) | | (81.8 | ) |
| Cash and cash equivalents — beginning of period | | 223.1 |
| | 304.9 |
| | 163.4 |
| | 108.7 |
| | 223.1 |
| | 304.9 |
|
| Cash and cash equivalents — end of period | | $ | 108.7 |
| | $ | 223.1 |
| | $ | 304.9 |
| | $ | 132.6 |
| | $ | 108.7 |
| | $ | 223.1 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Background and Basis of Presentation
Background
Imation Corp., a Delaware corporation, was formed in 1996 as a result of the spin-off of substantially all of the businesses which comprised the data storage and imaging systems groups of 3M Company. As used herein, the terms “Imation,” “Company,“the Company,” ‘‘we,” “us,” or “our” mean Imation Corp. and its subsidiaries and consolidated entities unless the context indicates otherwise. We areImation is a global scalabledata storage and data security company. Our portfolio includes tieredproducts and solutions help organizations and individuals store, manage and protect their digital content. Imation's storage and security offeringsportfolio includes NexsanTM high-density, archive and solid-state optimized unified hybrid storage solutions; IronKeyTMmobile security solutions that address the needs of professionals for businesses as well assecure data transport and mobile workspaces; and consumer storage solutions, audio products designed to manage audio and video information inaccessories sold under the home.ImationTM, MemorexTM and TDK Life on RecordTM brands. Imation reaches customers in more than 100 countries through a powerful global distribution network and well recognized brands.network.
Basis of Presentation
The financial statements are presented on a consolidated basis and include the accounts of the Company and our wholly-owned subsidiaries. See Note 2 —- Summary of Significant Accounting Policies for further information regarding consolidation. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant inter-company transactions have been eliminated.
DiscontinuedThe results of operations for our XtremeMac™ and Memorex™ consumer electronics businesses are presented in 2010 reflectour Consolidated Statements of Operations as discontinued operations for all periods presented. See further discussion of these divestitures in the wind downdiscussion of our Global Data Media joint venture.
Strategic Transformation below.
During the fourth quarter of 2012, we announced the acceleration of our strategic transformation, including the planned realignment of our global business into two new business units, a cost reduction program and our increased focus on data storage and data security including exploring strategic options for our consumer electronics brands and businesses. As our traditional media businesses declinewere declining, we are acceleratingdetermined that we needed to accelerate our business transformation to further focus on data storage and data security. Further, on February 13,transformation. During the first quarter of 2013 we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. We have reviewedThe divestiture of our Memorex consumer electronics business occurred on October 15, 2013 and the requirementsdivestiture of our XtremeMac business occurred on January 31, 2014. See Note 4 - Acquisitions and Divestitures for held-for-salefurther information on these divestitures. The consumer storage business under the Memorex and discontinued operations presentation and have determined that these businesses did not qualify for this presentation at December 31, 2012. We will continue our TDK Life on Record brands and the consumer electronics business under the TDK Life on a more selective basis.Record brand are being retained.
The realignment of our global business into two new business units will better alignaligns the Company with our key commercialconsumer and consumercommercial channels. The two business units will consist of Consumer Storage and Accessories (CSA), which focuses mainly on retail channels; and Tiered Storage and Security Solutions (TSS), which will focusfocuses on small and medium business, enterprise and government customers; and Consumer Storage and Accessories (CSA), which will focus on retail channels. We continued to manage and evaluate results through December 31, 2012 under our historic regional segment presentation but will report segment information under the new structure beginning withcustomers. In the first quarter of 2013.2013, we revised our segment reporting to reflect these changes into these two new reporting segments. See Note 14 - Business Segment Information and Geographical Data for more information on our business segments.
In October 2012, the Board of Directors approved a restructuring programour Global Process Improvement Restructuring Program (GPI Program) in order to realign our business structure and reduce operating expenses by more than in excess of 25 percent over time. This restructuring program addressesaddressed product line rationalization and infrastructure and includesincluded a planned reduction of approximately 20 percent ofin our global workforce. TheseThe majority of these actions are beingwere implemented beginning induring 2013. See Note 7 - - Restructuring and Other Expensefor more information on thethis restructuring program.
In conjunction with the acceleration of our strategic transformation in the fourth quarter of 2012 we evaluated our intangible assets, including goodwill, for impairment and recorded non-cash impairment charges of $283.8 million in the quarter. See Note 6 - Intangible Assets and Goodwill for further information on the impairment charges.
Note 2 — Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported asset and liability amounts, and the contingent asset and liability disclosures at the date of the financial statements, as well as the revenue and expense amounts reported during the period. Actual results could differ from those estimates.
Foreign Currency. For our international operations where the local currency has been determined to be the
functional currency, assets and liabilities are translated at year-end exchange rates with cumulative translation
adjustments included as a component of shareholders’ equity. Income and expense items are translated at average foreign exchange rates prevailing during the year. Gains and losses from foreign currency transactions are included in theour Consolidated Statements of Operations.
Cash Equivalents. Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the time of purchase. The carrying amounts reported in theour Consolidated Balance Sheets for cash equivalents approximate fair value.
Restricted cash isCash. Cash related to contractual obligations or has been restricted by management for specific use is classified as restricted and is included in other assets on our Consolidated Balance Sheets. We did not have any restricted cash as of December 31, 2013 and had $7.5 million of restricted cash as of December 31, 2012.
Trade Accounts Receivable and Allowances. Trade accounts receivable are stated net of estimated allowances, which primarily represent estimated amounts associated with customer returns, discounts on payment terms and the inability of certain customers to make the required payments. When determining the allowances, we take several factors into consideration, including prior history of accounts receivable credit activity and write-offs, the overall composition of accounts receivable aging, the types of customers and our day-to-day knowledge of specific customers. Changes in the allowances are recorded as reductions of net revenue or as bad debt expense (included in selling, general and administrative expense), as appropriate, in theour Consolidated Statements of Operations. In general, accounts which have entered into an insolvency action, have been returned by a collection agency as uncollectible or whose existence can no longer be confirmed are written off in full and both the receivable and the associated allowance are removed from theour Consolidated Balance Sheet. If, subsequent to the write-off, a portion of the account is recovered, it is recorded as a reduction of bad debt expense in theour Consolidated Statements of Operations at the time cash is received.
Inventories. Inventories are valued at the lower of cost or market, with cost generally determined on a first-in, first-out basis. We provide estimated inventory write-downs for excess, slow-moving and obsolete inventory as well as inventory with a carrying value in excess of estimated net realizable value.
Derivative Financial Instruments. We recognize all derivatives including foreign currency exchange contracts on the balance sheet at their estimated fair value. Fair value of our derivative contracts with durations of twelve months or less are classified as current and durations of greater than twelve months as non-current. Changes in the estimated fair value of derivatives that are not designated as, and qualify for, hedge accounting are recorded in our results of operations. We do not hold or issue derivative financial instruments for speculative or trading purposes and we are not a party to leveraged derivatives. If a derivative is designated as, and qualifies for hedge accounting, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the underlying assets or liabilities through operations or recognized in accumulated other comprehensive loss in shareholders’ equity until the underlying hedged item is recognized in operations. These gains and losses are generally recognized as an adjustment to cost of goods sold for inventory-related hedge transactions, or as adjustments to foreign currency transaction gains or losses included in non-operating expenses for foreign denominated payables and receivables-related hedge transactions. Cash flows attributable to these derivatives are included with cash flows of the associated hedged items. The ineffective portion of a derivative’s change in fair value is immediately recognized in our Consolidated Statements of Operations. See Note 12 - Fair Value Measurements for more information on our derivative financial instruments.
Property, Plant and Equipment. Property, plant and equipment, including leasehold and other improvements that extend an asset’s useful life or productive capabilities, are recorded at cost. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed are removed from the related accounts and the gains or losses are reflected in the results of operations.
Property, plant and equipment are generally depreciated on a straight-line basis over their estimated useful lives. The estimated depreciable lives range from 10 to 20 years for buildings and 5 to 10 years for machinery and equipment. Leasehold and other improvements are amortized over the lesser of the remaining life of the lease or the estimated useful life of the improvement, whichever is shorter. Depreciation expense from continuing operations was $8.39.4 million, $10.77.5 million and $18.29.6 million for 2013, 2012 2011 and 2010,2011, respectively.
Intangible Assets. Intangible assets include principally trade names and customer relationships and are amortized using methods that approximate the benefit provided by utilization of the assets, which may be on a straight-line or accelerated basis depending on the intangible asset.
We record all assets and liabilities acquired in purchase acquisitions, including intangibles, at estimated fair value. The initial recognition of intangible assets, the determination of useful lives and, if necessary, subsequent
impairment analyses require management to make subjective estimates of how the acquired assets will perform in the future using certain valuation methods. See Note 6 - Intangible Assets and Goodwill for further information on
our intangible assets and impairment testing.
We capitalize costs of software developed or obtained for internal use, once the preliminary project stage has been completed, management commits to funding the project and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use software project and (3) interest costs incurred, when material, while developing internal-use software. Capitalization of costs ceases when the project is substantially complete and ready for its intended use.
Goodwill. Goodwill is the excess of the cost of an acquired entity over the estimated fair value of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually as of November 30, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is considered impaired when its carrying amount exceeds its implied fair value. The first stepCompany may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If we determine in this assessment that the fair value of the reporting unit is more than its carrying amount we may conclude that there is no need to perform the Step 1 of the impairment test. We have an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing Step 1 of the goodwill impairment test.
Step 1 of the impairment test involves comparing the fair value of the reporting unit to which goodwill was assigned to its carrying amount. If fair value is deemed to be less than carrying value, the second stepStep 2 of the impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of the reporting unit's goodwill. If the carrying amount of the reporting unit's goodwill is greater than the implied fair value of the reporting unit's goodwill an impairment loss must be recognized for the excess. This involves measuring the fair value of the reporting unit's assets and liabilities (both recognized and unrecognized) at the time of the impairment test. The difference between the reporting unit's fair value and the fair values assigned to the reporting unit's individual assets and liabilities is the implied fair value of the reporting unit's goodwill. See Note 6 - Intangible Assets and Goodwill for further information on our goodwill and impairment testing.
Impairment of Long-Lived Assets. We periodically review the carrying value of our property and equipment and our intangible assets to test whether current events or circumstances indicate that such carrying value may not be recoverable. For the testing of long-lived assets that are "held for use," if the tests indicate that the carrying value of the asset group that contains the long-lived asset being evaluated is greater than the expected undiscounted cash flows to be generated by such asset or asset group, an impairment loss would be recognized. The impairment loss is determined by the amount by which the carrying value of such asset group exceeds its estimated fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. See Note 6 - Intangible Assets and Goodwill for further information on impairment testing.
Assets to be disposed of and qualify as being "held for sale" are carried at the lower of their carrying value or fair value less costs to sell. Considerable managementManagement judgment is necessary to estimate the fair value of assets and, accordingly, actual results could vary significantly from such estimates.
Revenue Recognition. We sell a wide range of removable data storage, mediamobile security and consumer storage solutions audio products as well as certain consumer electronic products.and accessories. Net revenue consists primarily of data storage, mobile security, magnetic, optical, flash media, consumer electronics and accessories sales. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, installation has been completed (if applicable) or services have been rendered, fees are fixed or determinable and collectability is reasonably assured. For product sales, delivery is considered to have occurred when the risks and rewards of ownership transfer to the customer. For inventory maintained at the customer site, revenue is recognized at the time these products are sold by the customer. We base our estimates for returns on historical experience and have not experienced significant fluctuations between estimated and actual return activity. Non-income based taxes collected from customers and remitted to governmental authorities are also recorded as revenue and include levies and various excise taxes, mainly in non-U.S. jurisdictions. These taxes included in revenue in 2013, 2012, and 2011 and 2010 were$10.3 million, $13.8 million, and $20.3 million, and $28.3 million, respectively.
WeThe majority of the Company’s storage and security solutions products have both software and non-software components that together deliver the products’ essential functionality. The software is embedded within the hardware and sold together as a single storage solution to the customer. Accordingly, the software and non-
software components do not utilizequalify as separate units of accounting as prescribed in Accounting Standards Codification (ASC) 605-25 and are combined as a significant amountsingle unit of multiple-elementaccounting. There are no situations where revenue arrangements. Asis recognized separately for software.
We also offer services in conjunction with our storage and security solutions products which may include installation, training, hardware maintenance and software support. For such services that are determined to be essential to the functionality of December 31, 2012,the product, such as certain installation services, the product and services do not qualify as separate units of accounting as prescribed in ASC 605-25 and are combined as a single unit of accounting. In situations where the sale of our storage and security solutions products and associated services qualify as multiple element arrangements, we had an immaterial amountallocate arrangement consideration to each unit of deferredaccounting based on its relative selling price and revenue is recognized for each element when all of the criteria for revenue recognition for such elements have been met.
Revenue associated with suchstand-alone service arrangements (excluding amounts acquired(such as a part ofmaintenance arrangements) that are sold separately is recorded ratably over the Nexsan acquisition).service period.
Rebates that are provided to our customers are accounted for as a reduction of revenue at the time of sale based on an estimate of the cost to honor the related rebate programs. The rebate programs that we offer vary across our businesses as we serve numerous markets. The most common incentives relate to amounts paid or credited to customers that are volume-based and rebates to support promotional activities.
Concentrations of Credit Risk. We sell a wide range of products and services to a diversified base of customers around the world and perform ongoing credit evaluations of our customers’ financial condition. Therefore, we believe there is no material concentration of credit risk. No single customer represented more than 10 percent of
total net revenue or accounts receivable in 2013, 2012, 2011, or 2010.2011.
Inventory Related Shipping and Handling Costs. Costs related to shipping and handling are included in cost of goods sold.
Research and Development Costs. Research and development costs are charged to expense as incurred. Research and development costs include salaries, stock compensation, payroll taxes, employee benefit costs, supplies, depreciation and maintenance of research equipment as well as the allocable portion of facility costs such as rent, utilities, insurance, repairs, maintenance and general support services.
Advertising Costs. Advertising and other promotional costs are expensed as incurred and were approximately $6 million, $2 million and $4 million in 2012, 2011 and 2010, respectively.
Rebates Received. We receive rebates from some of our inventory vendors if we achieve pre-determined purchasing thresholds. These rebates are accounted for as a reduction of the price of the vendor's products and are included as a reduction of our cost of goods sold in the period in which the purchased inventory is sold.
Income Taxes. We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax obligations based on expected taxable income, statutory tax rates and tax credits allowed in the various jurisdictions in which we operate. Tax laws require certain items to be included in our tax returns at different times than the items are reflected in our results of operations. Some of these differences are permanent, such as expenses that are not deductible in our tax returns, and some are temporary differences that will reverse over time. Temporary differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We must assess the likelihood that our deferred tax assets will be realized and establish a valuation allowance to the extent necessary.
We record income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We measure deferred tax assets and liabilities using the enacted statutory tax rates that are expected to apply in the years in which the temporary differences are expected to be recovered or paid.
We regularly assess the likelihood that our deferred tax assets will be recovered in the future. In accordance with accounting rules, a valuation allowance is recorded to the extent we conclude a deferred tax asset is not considered to be more-likely-than-not to be realized. We consider all positive and negative evidence related to the realization of the deferred tax assets in assessing the need for a valuation allowance. If we determine it is more-likely-than-not that we will not realize all or part of our deferred tax assets, an adjustment to the deferred tax asset will be charged to earnings in the period such determination is made.
Our income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we record accruals for items that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position in the financial statements is that the position must be more-likely-than-not to be
sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized. Interest and penalties recorded for uncertain tax positions are included in our income tax provision.
Treasury Stock. Our repurchases of shares of common stock are recorded at cost as treasury stock and are presented as a reduction of shareholders’ equity. When treasury shares are reissued, we use a last-in, first-out method and the difference between repurchase cost and fair value at reissuance is treated as an adjustment to equity.
Stock-Based Compensation. Stock-based compensation awards classified as equity awards are measured at fair value at the date of grant and expensed over their vesting or service periods. We also have stock appreciation rights outstanding which are considered liability awards as the settlement of these awards, if they were to vest, would be in cash. If these awards were determined to be probable, we would record the estimated fair value of such awards as a liability and remeasure their estimated value each reporting period.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions used in the valuation model are supported primarily by historical indicators and current market conditions. Expected volatilities are based on historical volatility of our stock and are calculated using the historical weekly close rate for a period of time equal to the expected term. The risk-free rate for the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. We use historical data to estimate option exercise and employee termination activity within the valuation model. The expected term of stock options granted is based on historical data and represents the period of time that stock options granted are expected to be outstanding. It is calculated on an aggregated basis and estimated based on an analysis of options
already exercised and any foreseeable trends or changes in recipients’ behavior. In determining the expected term, we consider the vesting period of the awards, the contractual term of the awards, historical average holding periods, stock price history, impacts from recent restructuring initiatives and the relative weight for each of these factors. The dividend yield, if applicable, is based on the latest dividend payments made on or announced by the date of the grant. Forfeitures are estimated based on historical experience and current demographics. See Note 8 - Stock-Based Compensation for further information regarding stock-based compensation.
Weighted Average Basic and Diluted Shares Outstanding. Basic (loss) earnings per common share is calculated using the weighted average number of shares outstanding during the year. Diluted (loss) earnings per common share is computed on the basis of the weighted average basic shares outstanding plus the dilutive effect of our stock-based compensation plans using the “treasury stock” method. Unvested restricted stock and treasury shares are excluded from the calculation of weighted average number of common shares outstanding. Once restricted stock vests, it is included in our common shares outstanding.
Potential common shares are excluded from the computation of diluted (loss) earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss available to common shareholders. Stock options are also anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company's common stock for the period. See Note 3 - (Loss) Earnings per Common Share for our calculation of weighted average basic and diluted shares outstanding.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued amendments to allow the Federal Funds Effective Swap Rate (which is the Overnight Index Swap rate, or OIS rate, in the U.S.) to be designated as a benchmark interest rate for hedge accounting purposes under the derivatives and hedging guidance. The amendments also allow for the use of different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. This amended guidance did not have a material impact on our condensed consolidated financial position and results of operations.
In July 2013, the FASB issued amendments to guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments require entities to present an unrecognized tax benefit netted against certain deferred tax assets when specific requirements are met. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. The amendments only affect gross versus net presentation and do not impact the calculation of the unrecognized tax benefit. The impact of the amended guidance will not have an impact on our consolidated financial position.
Management has assessed the potential impact of accounting standards that have been issued but are not yet effective and has determinedwe do not believe that noany other such standards are expected towill have a material impact to our Consolidated Financial Statements.
Note 3 — (Loss) Earnings per Common Share
The following table sets forth the computation of the weighted average basic and diluted (loss) earnings per share:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions, except per share amounts) |
| Numerator: | | | | | | | | | | |
| Loss from continuing operations | $ | (340.7 | ) | | $ | (46.7 | ) | | $ | (158.3 | ) | $ | (24.4 | ) | | $ | (324.8 | ) | | $ | (35.2 | ) |
| Loss from discontinued operations | — |
| | — |
| | (0.2 | ) | (20.0 | ) | | (15.9 | ) | | (11.5 | ) |
| Net loss | $ | (340.7 | ) | | $ | (46.7 | ) | | $ | (158.5 | ) | $ | (44.4 | ) | | $ | (340.7 | ) | | $ | (46.7 | ) |
| Denominator: | | | | | | | | | | |
| Weighted average number of common shares outstanding during the period | 37.5 |
| | 37.7 |
| | 37.8 |
| 40.5 |
| | 37.5 |
| | 37.7 |
|
| Dilutive effect of stock-based compensation plans | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| Weighted average number of diluted shares outstanding during the period | 37.5 |
| | 37.7 |
| | 37.8 |
| 40.5 |
| | 37.5 |
| | 37.7 |
|
| | | | | | | | | | | |
| Basic loss per common share: | | | | | | | | | | |
| Continuing operations | $ | (9.09 | ) | | $ | (1.24 | ) | | $ | (4.19 | ) | $ | (0.60 | ) | | $ | (8.67 | ) | | $ | (0.93 | ) |
| Discontinued operations | — |
| | — |
| | (0.01 | ) | (0.49 | ) | | (0.42 | ) | | (0.31 | ) |
| Net loss | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | (1.10 | ) | | (9.09 | ) | | (1.24 | ) |
| Diluted loss per common share: | | | | | | | | | | |
| Continuing operations | $ | (9.09 | ) | | $ | (1.24 | ) | | $ | (4.19 | ) | $ | (0.60 | ) | | $ | (8.67 | ) | | $ | (0.93 | ) |
| Discontinued operations | — |
| | — |
| | (0.01 | ) | (0.49 | ) | | (0.42 | ) | | (0.31 | ) |
| Net loss | (9.09 | ) | | (1.24 | ) | | (4.19 | ) | (1.10 | ) | | (9.09 | ) | | (1.24 | ) |
| Anti-dilutive shares excluded from calculation | 6.3 |
| | 5.4 |
| | 4.9 |
| 6.1 |
| | 6.3 |
| | 5.4 |
|
Note 4 — Acquisitions and Divestitures
2012 AcquisitionAcquisitions
Nexsan Corporation
On December 31, 2012, we acquired Nexsan Corporation (Nexsan) which is a provider of disk-based storage systems and has a portfolio of disk-based and hybrid disk-and-solid-state storage systems with existing customers worldwide. This acquisition is intended to significantly accelerate our growth in the small and medium-sized business and distributed enterprise storage markets. The purchase price consisted of a cash payment of $104.6 million (subject to adjustment based primarily on working capital received) and 3,319,324 shares of our common stock which was the equivalent of $15.5 million based on the fair value of our stock on the date of acquisition. Nexsan is a part of our TSS reporting segment.
The preliminary purchase price allocation during the fourth quarter of 2012 resulted in goodwill of $65.5 million, which is primarily attributable to strategic synergies and intangible assets that do not qualify for separate recognition and is not deductible for tax purposes. We have determined thatDuring 2013, we recorded an adjustment to the goodwill is under its own reporting unit as it operates with discrete financial information which will be regularly reviewed. As of December 31, 2012, our purchase price allocation is preliminary pending final evaluationrelated to working capital in the amount of all information received$1.6 million. This adjustment resulted in a decrease to goodwill and a cash receipt for this amount. Goodwill associated with the assets and liabilities acquired.acquisition of Nexsan is included in our Storage Solutions reporting unit, which consists primarily of the Nexsan business, for the purposes of goodwill impairment testing. See Note 6 - Intangible Assets and Goodwill for more information regarding goodwill and intangible assets.
goodwill. The purchase accounting for this acquisition was final as of December 31, 2013. The purchase price remained preliminary prior to December 31, 2013 pending final evaluation of income tax balances of which there were no further adjustments upon finalization of these balances. The following table illustrates our allocation of the purchase price to the assets acquired and liabilities assumed:assumed as of December 31, 2013:
| | | | Amount | Amount |
| | (In millions) | (In millions) |
| Cash | $ | 0.8 |
| $ | 0.8 |
|
| Accounts receivable | 14.6 |
| 14.6 |
|
| Inventory | 6.9 |
| 6.9 |
|
| Prepaid and other | 9.0 |
| 9.0 |
|
| Property, plant and equipment | 5.2 |
| 5.2 |
|
| Intangible assets | 42.6 |
| 42.6 |
|
| Goodwill | 65.5 |
| 63.9 |
|
| Other assets | 0.6 |
| 0.6 |
|
| Accounts payable | (5.3 | ) | (5.3 | ) |
| Accrued expenses | (10.0 | ) | (10.0 | ) |
| Deferred revenue - current | (4.3 | ) | (4.3 | ) |
| Deferred revenue - non-current | (2.5 | ) | (2.5 | ) |
| Other long-term liabilities | (3.0 | ) | (3.0 | ) |
| | $ | 120.1 |
| $ | 118.5 |
|
Of the $120.1 million of consideration paid in 2012, approximately $11.9 million was paid directly to creditors of Nexsan in full satisfaction of Nexsan obligations that were required to be repaid at the time of closing based on the merger agreement.
Our allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:
|
| | | | | |
| | | | Weighted |
| | | | Average |
| | Amount | | Life |
| | (In millions) | | |
| Trade names | $ | 3.1 |
| | 5 years |
| Other - developed technology | 19.4 |
| | 3-7 years |
| Other - research and development technology | 1.7 |
| | NA |
| Customer relationships | 18.4 |
| | 12 years |
| | $ | 42.6 |
| | |
Nexsan did not contribute to the revenue or earnings of Imation for the year ended December 31, 2012, as it was acquired on December 31, 2012. The following unaudited supplemental pro forma information is provided for illustrative purposes only, giving effect to the combination as if the acquisition of Nexsan had occurred on January 1, 2011 Acquisitionsand should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had actually occurred on that date, nor of the results that may be obtained in the future.
|
| | | | | | | | |
| | | Pro Forma Year End |
| | | December 31 |
| | | (Unaudited) |
| | | 2012 | | 2011 |
| | | (In millions) |
| Net revenue | | $ | 1,088.7 |
| | $ | 1,247.2 |
|
| Loss from continuing operations | | $ | (328.5 | ) | | $ | (44.7 | ) |
The unaudited pro forma amounts have been calculated as if the acquisition had occurred on January 1, 2011 and include the following adjustments: (i) additional amortization expense of $5.1 million for each of the years ended December 31, 2012 and 2011 that would have been recorded for the intangible assets recognized as part of the acquisition, (ii) adjustment of $0.6 million and $1.1 million and for the years ended December 31, 2012 and 2011, respectively, associated with the deferred revenue recorded as part of the purchase accounting for the
acquisition, (iii) the elimination of transaction related variable compensation expense of $15.4 million for the year ended December 31, 2012, recognized as a result of the acquisition, (iv) the elimination of interest expense of $0.9 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively, related to Nexsan debt obligations that were repaid upon closing of the acquisition and (v) the elimination of transaction costs incurred of $4.3 million for the year ended December 31, 2012 directly associated with the acquisition of Nexsan. Pro forma loss from continuing operations has also been calculated to reflect estimated adjustments to Imation’s income tax provision as if the acquisition had occurred on January 1, 2011. There were no material pro forma adjustments necessary as a result of conforming Nexsan’s accounting policies to those utilized by Imation.
IronKey Systems, Inc.
On October 4, 2011, we acquired the secure data storage hardware business of IronKey Systems Inc. (IronKey) for a cash payment of $19.0 million. During 2012, we purchased the IronKey license for its secure storage management software and service as well asand the IronKey brand for secure storage products for $4.0 million (we held a license for brand use in 2011 with the acquisition of IronKey). IronKey is a part of our TSS reporting segment.
The purchase price allocation associated with the 2011 acquisition, resulted in goodwill of $9.4 million, which was primarily attributable to expected strategic synergies and intangible assets that do not qualify for separate recognition.recognition and is deductible for tax purposes. Goodwill associated with the acquisition of IronKey is included in our Americas segment and in our Americas-MobileMobile Security reporting unit for the purposes of goodwill impairment testing. This goodwill is deductible for tax purposes. See Note 6 - Intangible Assets and Goodwill for more information regarding goodwill. The comparability of our results with this acquisition was not impacted and therefore, pro forma disclosures were not presented.
During 2012, we recorded an adjustment to the purchase price related to working capital in the amount of $0.6 million. As the purchase accounting for this acquisition was finalized in 2011, the adjustment was recorded as a charge to restructuring and other in theour Consolidated Statements of Operations. The comparability of our results with this acquisition was not materially impacted and therefore, pro forma disclosures have not been presented.
The following table illustrates our allocation of the purchase price to the assets acquired and liabilities assumed:
|
| | | |
| | Amount |
| | (In millions) |
| Accounts receivable and other assets | $ | 3.5 |
|
| Inventories | 2.1 |
|
| Intangible assets | 7.8 |
|
| Goodwill | 9.4 |
|
| Accounts payable and other liabilities | (3.8 | ) |
| | $ | 19.0 |
|
Our allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:
|
| | | | | |
| | | | Weighted |
| | | | Average |
| | Amount | | Life |
| | (In millions) | | |
| Tradename | $ | 0.8 |
| | 2 years |
| License | 1.9 |
| | 7 years |
| Customer relationships | 0.4 |
| | 7 years |
| Distributor relationships | 0.9 |
| | 9 years |
| Proprietary technology | 3.8 |
| | 4 years |
| | $ | 7.8 |
| | |
These intangible assets were not impaired as a part of the impairment recorded during the fourth quarter of 2012 as discussed further in Note 6 - Intangible Assets and Goodwill.
Memory Experts International, Inc. (MXI Security)
On June 4, 2011, we acquired the assets of MXI Security, a leader in high-security and privacy technologies, from Memory Experts International Inc., (MXI). MXI sells encrypted and biometric USB drives, encrypted and biometric hard disk drives, secure portable desktop solutions, and software solutions. MXI products contain various security features such as password authentication, encryption and remote manageability. The purchase price consisted of a cash payment of $24.5 million and future contingent consideration totalingfor potential additional future payments of up to $45.0 million (considered to have an estimated fair value of $9.2 million at the time of the acquisition) for a total purchase price of $33.7 million. MXI is a part of our TSS reporting segment.
The purchase price allocation resulted in goodwill of $21.9 million, primarily attributable to expected strategic synergies and intangible assets that do not qualify for separate recognition.recognition and is deductible for tax purposes. Goodwill associated with MXI is included in our Americas segment and in our Americas-MobileMobile Security reporting unit for the purposes of goodwill impairment testing. This goodwill is deductible for tax purposes. See Note 6 - Intangible
Assets and Goodwill for more information regarding goodwill. The comparability of our results with this acquisition was not materially impacted and therefore, pro forma disclosures have not been presented.
The following table illustrates our allocation of the purchase price to the assets acquired and liabilities assumed:
|
| | | |
| | Amount |
| | (In millions) |
| Accounts receivable and other assets | $ | 0.8 |
|
| Inventories | 1.1 |
|
| Intangible assets | 10.6 |
|
| Goodwill | 21.9 |
|
| Accounts payable and other liabilities | (0.7 | ) |
| | $ | 33.7 |
|
Our allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:
|
| | | | | |
| | | | Weighted |
| | | | Average |
| | Amount | | Life |
| | (In millions) | | |
| Trademark | $ | 0.7 |
| | 10 years |
| Supply agreement | 1.4 |
| | 3 years |
| Customer relationships | 1.0 |
| | 8 years |
| Proprietary technology | 7.5 |
| | 6 years |
| | $ | 10.6 |
| | |
During 2012, the MXI trademark was abandoned due to consolidatingconsolidation of our brands and we recorded a charge of $0.6 million in our Consolidated Statement of Operations. The other intangible assets acquired with MXI were not impaired as a part of the impairment recorded during the fourth quarter of 2012 as discussed further in Note 6 - Intangible Assets and Goodwill.
The amount of contingent consideration was to be based on incremental revenue and gross margin percent from MXI and MXI-based Defender branded products. During the second quarter of 2012, the MXI Security contingent consideration agreement was amended in light of the IronKeyfor this acquisition that occurred late in 2011. Under the amended agreement, the amount of contingent consideration will continue to allow for up to $45.0 million of additional payments, and will bewas based on incremental gross profit (revenue less cost of goods sold) and gross margin percent from MXI branded products, IronKey products and all other DefenderMobile Security branded products, as well as future Imation mobile security products. The contingent consideration arrangement included the potential for three separate payments based on defined criteria for whether the individual payments would be made
During 2012 and if so, for how much. The first contingent consideration payment was not achieved. The second contingent consideration payment allows for up to $25.0 million of additional payments with the sum of the first and second payments being up to a maximum of $25.0 million. The second contingent consideration payment is based on gross profit and gross margin percent achieved from July 1, 2012 through June 30, 2013. The third contingent consideration payment allows for up to $20.0 million of additional payments and is based on gross profit and gross margin percent achieved from January 1, 2013, through December 31, 2013.
We remeasurewe remeasured the estimated fair value of the remainingany contingent consideration each reporting period. At December 31, 2012, our estimated fair value of this contingent consideration obligation was determined to be $0.6 million. The decrease in the fair value of this contingent consideration obligation from December 31, 2011 was $8.6 million which was recorded as a benefit in restructuring and other in our Consolidated Statements of Operations. During 2013, the contingent consideration agreement expired and the criteria for the contingent consideration payments were not achieved. Therefore, the associated liability was adjusted to zero and we recorded a benefit of $0.6 million in restructuring and other in our Consolidated Statements of Operations.
We useused the income approach in calculating the fair value of our contingent consideration. Our expected cash flows are affected by various significant assumptions, includingconsideration during the discount rate and cash flow projections. Our valuationperiod in which this arrangement was outstanding.
BeCompliant Corporation (doing business as of December 31, 2012 utilized our business plans and projections as the basis for expected future cash flows and a discount rate of 16.0 percent. See Note 12 - Fair Value Measurements for further discussion of our valuation technique.Encryptx)
BeCompliant Corporation (doing business as Encryptx)
On February 28, 2011 we acquired substantially all of the assets of BeCompliant Corporation, doing business as Encryptx (Encryptx), a technology leader in encryption and security solutions for removable storage devices and removable storage media. The purchase price was $2.3 million, consisting of a cash payment of $1.0 million and the estimated fair value of future contingent consideration of $1.3 million. Encryptx is a part of our TSS reporting segment.
The purchase price allocation resulted in goodwill of $1.6 million, primarily attributable to expected strategic synergies and intangible assets that do not qualify for separate recognition. This goodwillrecognition and is deductible for tax purposes. Goodwill associated with MXI is included in our Mobile Security reporting unit for the purposes of goodwill impairment testing. See Note 6 - Intangible Assets and Goodwill for further discussion of thismore information regarding goodwill. During 2013 and 2012 we paid contingent consideration payments of $0.8 million and $0.7 million of the contingent consideration. The final contingent consideration payment of $0.7 million was determined, respectively, based on certain milestones. The contingent consideration arrangement expired in 2013 and, as a result, the contingent consideration liability is zero as of December 31, 2013.
Discontinued Operations
On February 13, 2013, we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. The consumer storage business under the Memorex and TDK Life on Record brands and the consumer electronics business under the TDK Life on Record brand are being retained. These divestitures are part of the acceleration of our strategic transformation that we announced during the fourth quarter of 2012 milestonesin conjunction with our plan to increase focus on data storage and was paid duringdata security and were included in our CSA reporting segment. As a part of exiting these disposal groups, we are selling the assets directly associated with these businesses, which primarily include inventory, tooling and intangible assets. As a result of this decision, beginning in the first quarter of 2013, andwe classified these assets as held-for-sale which is included in other current assets on our Consolidated Balance Sheets.
On October 15, 2013 we completed the valuesale of the contingentMemorex consumer electronics business for $9.3 million of total consideration consisting of two separate receivables from the purchaser. The first is a $3.8 million note receivable that is recordedrequired a $0.9 million payment in December 2013 with the remainder to be paid by March 31, 2014. We received the required $0.9 million cash payment during the fourth quarter of 2013, leaving a $2.9 million note receivable balance as of December 31, 2012.
Note 5 — Supplemental2013 which is recorded in other assets on our Consolidated Balance Sheet Information
|
| | | | | | | |
| | As of December 31, |
| | 2012 | | 2011 |
| | (In millions) |
| Inventories | | | |
| Finished goods | $ | 146.9 |
| | $ | 186.7 |
|
| Work in process | 6.4 |
| | 13.5 |
|
| Raw materials and supplies | 12.7 |
| | 8.6 |
|
| Total inventories | $ | 166.0 |
| | $ | 208.8 |
|
| Other Current Assets | | | |
| Non-trade receivables | $ | 15.1 |
| | $ | 4.3 |
|
| Deferred income taxes (Note 10) | 4.7 |
| | 6.1 |
|
| Prepaid expenses | 5.4 |
| | 6.1 |
|
| Hedging asset (Note 12) | 5.5 |
| | 3.4 |
|
| Assets held for sale (Note 7) | 2.5 |
| | 3.3 |
|
Restricted cash(1) | 7.5 |
| | 2.2 |
|
| Other | 20.9 |
| | 24.3 |
|
| Total other current assets | $ | 61.6 |
| | $ | 49.7 |
|
| Property, Plant and Equipment | | | |
| Land | $ | 1.2 |
| | $ | 1.2 |
|
| Buildings and leasehold improvements | 95.0 |
| | 92.6 |
|
| Machinery and equipment | 124.8 |
| | 146.1 |
|
| Construction in progress | 1.6 |
| | 1.5 |
|
| Total | 222.6 |
| | 241.4 |
|
| Less accumulated depreciation | (163.7 | ) | | (186.0 | ) |
| Property, plant and equipment, net | $ | 58.9 |
| | $ | 55.4 |
|
| Other Assets | | | |
| Deferred income taxes (Note 10) | $ | 9.3 |
| | $ | 15.8 |
|
| Pension assets (Note 9) | 6.6 |
| | 5.1 |
|
| Credit facility fees (Note 11) | 2.3 |
| | 0.3 |
|
| Other | 3.9 |
| | 3.2 |
|
| Total other assets | $ | 22.1 |
| | $ | 24.4 |
|
(1) Sheets. The second receivable is for $5.5 million and does not bear interest. This receivable requires payments between 2014 and 2018 in increasing annual increments (ranging from $0.2 million in 2014 to $2.2 million in 2018). We recorded this receivable at its estimated fair value which was calculated to be Restricted cash at$4.0 millionand as of December 31, 2012 primarily2013,$0.2 million and $3.8 million are recorded in other current assets and other assets, respectively, on our Consolidated Balance Sheets. The sale of this business resulted in a net gain of $0.9 million which was recorded as an element of discontinued operations as of December 31, 2013. Our arrangement for the sale of this business also provides Imation with the ability to receive additional consideration through 2018 to the extent the purchaser’s sales exceed certain thresholds. We will record this additional consideration, if any, only upon these sales levels being achieved by the purchaser in the future.
We use the income approach in calculating the fair value of the $5.5 million non-interest bearing receivable associated with this acquisition. Our expected cash flows are affected by various significant assumptions, including the discount rate and cash flow projections. Our valuation as of December 31, 2013 utilized a discount rate of 9.0 percent.
On January 31, 2014 we completed the sale of the XtremeMac business. The sales price consisted of $0.3 million of cash consideration received at closing and an interest-bearing note receivable of $0.3 million due on December 15, 2015. The sales price also includes additional cash consideration estimated at $3.0 million to be received based on the proceeds the purchaser is able to achieve from selling the acquired inventory. Based on the estimated value of the expected total consideration received, we adjusted the carrying value of the XtremeMac disposal group as of December 31, 2013, and recorded a charge of $1.2 million in the fourth quarter of 2013 bringing our total full-year 2013 impairment charge associated with this disposal group to $6.7 million. The impairment charge is recorded as an element of discontinued operations.
The operating results for these businesses are presented in our Consolidated Statements of Operations as discontinued operations for all periods presented and reflect revenues and expenses that are directly attributable to these businesses that will be eliminated from Nexsanongoing operations. See Note 7 - Restructuring and Other for disclosure of severance expense that was previously restrictedrecorded relating to specifically fulfill certain obligationsthese planned divestitures. As of Nexsan.December 31, 2013, the XtremeMac assets are classified as held-for-sale.
The key components of the results of discontinued operations were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2012 | | 2011 |
| | (In millions) |
| Other Current Liabilities | | | |
| Rebates | $ | 44.8 |
| | $ | 45.2 |
|
| Accrued copyright levies | 27.7 |
| | 19.7 |
|
| Employee separation costs (Note 7) | 16.7 |
| | 5.9 |
|
| Litigation settlement — current | — |
| | 18.0 |
|
| Accrued payroll | 11.4 |
| | 13.2 |
|
| Accrued royalties | 7.5 |
| | 10.7 |
|
| Deferred revenue | 6.9 |
| | 2.3 |
|
| Hedging liability (Note 12) | 1.3 |
| | 1.4 |
|
| Deferred income taxes (Note 10) | 0.3 |
| | 0.7 |
|
| Other | 41.8 |
| | 34.1 |
|
| Total other current liabilities | $ | 158.4 |
| | $ | 151.2 |
|
| Other Liabilities | | | |
| Pension liabilities | $ | 28.1 |
| | $ | 29.3 |
|
| Uncertain tax positions | 4.3 |
| | 17.6 |
|
| Deferred revenue | 2.5 |
| | — |
|
| Deferred income taxes (Note 10) | 2.1 |
| | 0.1 |
|
| Other | 15.0 |
| | 22.2 |
|
| Total other liabilities | $ | 52.0 |
| | $ | 69.2 |
|
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (In millions) |
| Net revenue | | $ | 40.7 |
| | $ | 92.9 |
| | $ | 123.8 |
|
| | | | | | | |
| Gain on sale of discontinued businesses, net of income taxes | | $ | 0.9 |
| | $ | — |
| | $ | — |
|
| Loss from operations of discontinued businesses, before income taxes | | (14.2 | ) | | (17.7 | ) | | (12.7 | ) |
| Adjustment to carrying value of disposal group | | (6.7 | ) | | — |
| | — |
|
| Income tax benefit | | — |
| | (1.8 | ) | | (1.2 | ) |
| Loss from discontinued businesses, net of income taxes | | $ | (20.0 | ) | | $ | (15.9 | ) | | $ | (11.5 | ) |
We had $5.2 million and $2.5 million of assets classified as held for sale as of December 31, 2013 and 2012, respectively.
Note 5 — Supplemental Balance Sheet Information
Additional supplemental balance sheet information is provided in the tables that follow.
|
| | | | | | | |
| | As of December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Inventories | | | |
| Finished goods | $ | 76.3 |
| | $ | 146.9 |
|
| Work in process | 2.9 |
| | 6.4 |
|
| Raw materials and supplies | 5.1 |
| | 12.7 |
|
| Total inventories | $ | 84.3 |
| | $ | 166.0 |
|
| Property, Plant and Equipment | | | |
| Land | $ | 1.2 |
| | $ | 1.2 |
|
| Buildings and leasehold improvements | 95.4 |
| | 95.0 |
|
| Machinery and equipment | 104.0 |
| | 124.8 |
|
| Construction in progress | 1.1 |
| | 1.6 |
|
| Total | 201.7 |
| | 222.6 |
|
| Less accumulated depreciation | (150.1 | ) | | (163.7 | ) |
| Property, plant and equipment, net | $ | 51.6 |
| | $ | 58.9 |
|
| | | | Accounts | Accounts |
| | Receivable* | Receivable* |
| | (In millions) | (In millions) |
| Reserves and Allowances | | |
| Balance, as of December 31, 2009 | $ | 28.6 |
| |
| Additions | 9.0 |
| |
| Write-offs, net of recoveries | (17.0 | ) | |
| Balance, as of December 31, 2010 | $ | 20.6 |
| $ | 20.6 |
|
| Additions | 10.5 |
| 10.5 |
|
| Write-offs, net of recoveries | (12.7 | ) | (12.7 | ) |
| Balance, as of December 31, 2011 | $ | 18.4 |
| $ | 18.4 |
|
| Additions | 10.3 |
| 10.3 |
|
| Write-offs, net of recoveries | (10.7 | ) | (10.7 | ) |
| Balance, as of December 31, 2012 | $ | 18.0 |
| $ | 18.0 |
|
| Additions | | 6.6 |
|
| Write-offs, net of recoveries | | (10.1 | ) |
| Balance, as of December 31, 2013 | | $ | 14.5 |
|
*Accounts receivable reserves and allowances include estimated amounts for customer returns, discounts on payment terms and the inability of certain customers to make the required payment.
Other current liabilities (included as a separate line item in our Consolidated Balance Sheet) includes rebates payable of $33.2 million and $44.8 million at December 31, 2013 and 2012, respectively.
Note 6 — Intangible Assets and Goodwill
Intangible Assets
Intangible assets consist of the following:
| | | | Trade Names | | Software | | Customer Relationships | | Other | | Total | Trade Names | | Software | | Customer Relationships | | Other | | Total |
| | (In millions) | (In millions) |
| December 31, 2013 | | | | | | | | | | |
| Cost | | $ | 34.3 |
| | $ | 58.5 |
| | $ | 20.4 |
| | $ | 26.3 |
| | $ | 139.5 |
|
| Accumulated amortization | | (9.2 | ) | | (53.3 | ) | | (2.1 | ) | | (6.3 | ) | | (70.9 | ) |
| Intangible assets, net | | $ | 25.1 |
| | $ | 5.2 |
| | $ | 18.3 |
| | $ | 20.0 |
| | $ | 68.6 |
|
| December 31, 2012 | | | | | | | | | | | | | | | | | | |
| Cost | $ | 37.7 |
| | $ | 58.4 |
| | $ | 21.2 |
| | $ | 26.8 |
| | $ | 144.1 |
| $ | 37.7 |
| | $ | 58.4 |
| | $ | 21.2 |
| | $ | 26.8 |
| | $ | 144.1 |
|
| Accumulated amortization | (6.0 | ) | | (52.0 | ) | | (1.0 | ) | | (3.2 | ) | | (62.2 | ) | (6.0 | ) | | (52.0 | ) | | (1.0 | ) | | (3.2 | ) | | (62.2 | ) |
| Intangible assets, net | $ | 31.7 |
| | $ | 6.4 |
| | $ | 20.2 |
| | $ | 23.6 |
| | $ | 81.9 |
| $ | 31.7 |
| | $ | 6.4 |
| | $ | 20.2 |
| | $ | 23.6 |
| | $ | 81.9 |
|
| December 31, 2011 | | | | | | | | | | |
| Cost | $ | 347.1 |
| | $ | 57.9 |
| | $ | 61.5 |
| | $ | 13.9 |
| | $ | 480.4 |
| |
| Accumulated amortization | (57.5 | ) | | (51.1 | ) | | (45.5 | ) | | (4.6 | ) | | (158.7 | ) | |
| Intangible assets, net | $ | 289.6 |
| | $ | 6.8 |
| | $ | 16.0 |
| | $ | 9.3 |
| | $ | 321.7 |
| |
For purposes of long-lived asset impairment assessments, we have generally determined our asset groups to be at the level of each brand as this is the lowest level for which identifiable cash flows are available and are largely independent of the cash flows of other assets. Each reporting period, we review our long-lived assets and associated asset groups to determine if there is a triggering event which would require that we perform an impairment test.
2013 Intangible Asset Analysis
As a part of our annual goodwill impairment test for our Storage Solutions and Mobile Security reporting units (as further discussed below), we also tested for impairment the long-lived assets, including intangible assets, within the asset groups included in our Mobile Security and Storage Solutions reporting units. In performing these tests, we compared the carrying values of these asset groups with their estimated undiscounted future cash flows and determined that the undiscounted cash flows expected to be generated by the asset groups exceeded their carrying values resulting in no impairment. There were no interim triggering events that occurred during 2013 that warranted an impairment test to be performed on our long-lived assets (including intangible assets) other than goodwill.
2012 Intangible Asset Analysis
During the second and third quarters of 2012, as noted below under our 2012 goodwill analysis discussion, we performed interim goodwill impairment testing for our Mobile Security business (referred to as our Americas-Mobile Security business in 2012) due to changes in the timing of expected cash flows and lower than expected short-term revenues and gross margins. We also determined these factors to be an event that warranted interim tests as to whether our intangible assets associated with the Mobile Security business were impaired. Based on our impairment analysis performed in the second and third quarters of 2012, we concluded that we did not have an impairment of our intangible assets in the Mobile Security asset group at those times.
During the fourth quarter of 2012, we determined that the results of our revised internal financial forecast, which was finalized during the quarter and took into account the expected actions and outcomes associated with the acceleration of our strategic transformation (as further described in Note 1 - Basis of Presentation.), qualified as a triggering event for impairment testing. This required the assessment of the recoverability of the long-lived assets (including definite-lived intangible assets) included in all of our asset groups with the exception of the recent acquisition of Nexsan.
We generally determined our asset groups to be associated with our various brands as that is the lowest level for which identifiable cash flows are largely independent of one another. Based on the facts that existed in the fourth quarter and as of December 31, 2012, all of our long-lived assets were evaluated for impairment under the "held and used" impairment model and, while we were in the process of exploring strategic options (including potential disposition) of our XtremeMac and Memorex brands (pertaining only to the consumer electronics products), such asset groups did not qualify as being classified as held-for-sale as of December 31, 2012 as the criteria for such classification were not met as of that date.
We compared the carrying value of our asset groups with their estimated undiscounted future cash flows and determined that the carrying value of certain asset groups exceeded the undiscounted cash flows expected to be generated by the asset group. For those asset groups, we then compared the carrying value of the asset group to its estimated fair value to determine the amount by which our long-lived assets (primarily intangible assets) within the asset group were impaired. As a result of these analyses, we recorded an impairment charge of $260.5 million in theour Consolidated Statements of Operations.Operations for the year ended December 31, 2012. During 2013, the impairment charge of $8.7 million that related to our Memcorp Asset Group was reclassified to discontinued operations and thus the 2012 impairment charge from continuing operations in our Consolidated Statement of Operations as of December 31, 2013 is reported as $251.8 million. See Note 4 - Acquisitions and Divestitures for more information on our discontinued operations.
The impairment of these intangible assets was accounted for in accordance with ASC 360-10. The following illustrates the carrying values, estimated fair values and impairment losses recorded, by asset group, associated with the fourth quarter 2012 impairment charge:
|
| | | | | | | | | | | | |
| | | Carrying Value | | Estimated Fair Value | | Impairment |
| | | (In millions) |
| Memorex Asset Group | | $ | 164.1 |
| | $ | 8.6 |
| | $ | 155.5 |
|
| TDK Asset Group | | 96.7 |
| | 6.3 |
| | 90.4 |
|
| Memcorp Asset Group | | 8.7 |
| | — |
| | 8.7 |
|
| Imation Asset Group | | 5.9 |
| | — |
| | 5.9 |
|
| Total | | | | | | $ | 260.5 |
|
The intangible assets included within each of the above asset groups (all of which were impaired) consisted primarily of trade names, customer lists and intellectual property relating to each brand. The remaining intangible assets within the Memorex and TDK asset groups as of December 31, 2012 subsequent to the impairment charge consisted of trade names.
In calculating the estimated fair value ofreviewing these asset groups to determine whether a triggering event had occurred which would require an impairment test, we assessed factors impacting the asset groups we usedincluding our views associated with changes in the income approach, a valuation technique under which we estimateestimated future cash flows using our financial forecasts associated with theeach of our asset groups. OurRevenues for the Memorex, TDK and Imation asset groups are derived primarily from sales of optical and magnetic media with each asset group having its own separately identifiable stream of cash flows. Revenues for the Memcorp asset group are derived primarily from sales of consumer electronics under the Memorex brand name. During the fourth quarter of 2012, the magnitude of decline in certain of our key product lines across the aforementioned asset groups widened and, at that time, we determined that we now expected this rate of decline to continue into the foreseeable future. This determination resulted in our decision in the fourth quarter of 2012 to accelerate our strategic transformation (as further described in Note 1 - Basis of Presentation) and to further focus our efforts on our growth categories in data storage and data security. As a result of this determination in the fourth quarter of 2012, we revised our revenue forecast and projected cash flows are affected by various significant assumptions, including projected sales, gross margin and expense expectations as well asaccordingly, concluded that a discount rate. Our analyses utilized forecasted cash flows ranging from a four yeartriggering event to a 10 year period depending on the asset group, andtest our business plans served as the basislong-lived assets for these cash flow assumptions. The analysis utilized discount rates ranging from 15.0 percent to 15.5 percent depending on the asset group.impairment had occurred.
As a part of this analysis, we also re-assessed the useful lives of any remaining intangible assets, excluding the intangible assets acquired in the recent Nexsan acquisition, and have adjusted the remaining lives accordingly.as necessary.
Also during 2012, we accelerated the amortization of several intangible assets due to certain business decisions to abandon the intangible assets during year. The total charge for the accelerated amortization of these intangible assets was $1.9 million which was recorded in restructuring and other in theour Consolidated Statements of Operations.
As of December 31, 2012,2013, we had $80.266.9 million of definite-lived intangible assets subject to amortization and $1.7 million of indefinite-lived intangible assets not subject to amortization. While we believe that the current carrying value of these assets is recoverable, different assumptions regarding future performance of our businesses could result in significant impairment losses.
Amortization expense from continuing operations for intangible assets consisted of the following:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | (In millions) |
| Amortization expense | $ | 27.5 |
| | $ | 26.0 |
| | $ | 23.6 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Amortization expense | $ | 13.2 |
| | $ | 23.9 |
| | $ | 22.2 |
|
Based on the intangible assets in service as of December 31, 2012,2013, estimated amortization expense for each of the next five years ending December 31 is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| | (In millions) |
| Amortization expense | $ | 14.1 |
| | $ | 12.7 |
| | $ | 11.2 |
| | $ | 9.2 |
| | $ | 8.2 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| | (In millions) |
| Amortization expense | $ | 12.6 |
| | $ | 11.9 |
| | $ | 8.5 |
| | $ | 7.7 |
| | $ | 6.3 |
|
Goodwill
The following table presents the changes in goodwill allocated to our reportable segments:
| | | | Americas | | Europe | | North Asia | | Total | TSS | | CSA | | Total |
| | (In millions) | (In millions) |
| Balance as of December 31, 2010: | |
| | |
| | |
| | |
| |
| Goodwill | $ | 102.9 |
| | $ | 39.2 |
| | $ | 10.2 |
| | $ | 152.3 |
| |
| Accumulated impairment losses | (102.9 | ) | | (39.2 | ) | | (10.2 | ) | | (152.3 | ) | |
| | — |
| | — |
| | — |
| | — |
| |
| | | | | | | | | |
| Encryptx acquisition | 1.6 |
| | — |
| | — |
| | 1.6 |
| |
| MXI Security acquisition | 21.9 |
| | — |
| | — |
| | 21.9 |
| |
| IronKey acquisition | 9.4 |
| | — |
| | — |
| | 9.4 |
| |
| Goodwill impairment | (1.6 | ) | | — |
| | — |
| | (1.6 | ) | |
| Balance as of December 31, 2011: | |
| | |
| | |
| | |
| |
| | |
| | |
|
| Goodwill | 135.8 |
| | 39.2 |
| | 10.2 |
| | 185.2 |
| $ | 135.8 |
| | $ | 49.4 |
| | $ | 185.2 |
|
| Accumulated impairment losses | (104.5 | ) | | (39.2 | ) | | (10.2 | ) | | (153.9 | ) | (104.5 | ) | | (49.4 | ) | | (153.9 | ) |
| | 31.3 |
| | — |
| | — |
| | 31.3 |
| 31.3 |
| | — |
| | 31.3 |
|
| | | | | | | | | | | | | |
| Nexsan acquisition | 65.5 |
| | — |
| | — |
| | 65.5 |
| 65.5 |
| | — |
| | 65.5 |
|
| Goodwill impairment | (23.3 | ) | | — |
| | — |
| | (23.3 | ) | (23.3 | ) | | — |
| | (23.3 | ) |
| Balance as of December 31, 2012: | |
| | |
| | |
| | |
| |
| | |
| | |
|
| Goodwill | 201.3 |
| | 39.2 |
| | 10.2 |
| | 250.7 |
| 201.3 |
| | 49.4 |
| | 250.7 |
|
| Accumulated impairment losses | (127.8 | ) | | (39.2 | ) | | (10.2 | ) | | (177.2 | ) | (127.8 | ) | | (49.4 | ) | | (177.2 | ) |
| | $ | 73.5 |
| | $ | — |
| | $ | — |
| | $ | 73.5 |
| 73.5 |
| | — |
| | 73.5 |
|
| | | | | | | |
| Nexsan purchase price adjustment | | (1.6 | ) | | — |
| | (1.6 | ) |
| Foreign currency translation | | 0.2 |
| | — |
| | 0.2 |
|
| Balance as of December 31, 2013: | | | | | | |
| Goodwill | | 199.9 |
| | 49.4 |
| | 249.3 |
|
| Accumulated impairment losses | | (127.8 | ) | | (49.4 | ) | | (177.2 | ) |
| | | $ | 72.1 |
| | $ | — |
| | $ | 72.1 |
|
See Note 4 - Acquisitions for information associated withon goodwill acquired in the Nexsan acquisition during various business acquisitions that occurred during 2012 and 2011.2012.
We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. Our reporting units for goodwill are our operating segments (Americas, Europe, North Asia and South Asia) with the exception of the Americas operating segment which is further divided between the Americas-Consumer, Americas-Commercial and Americas-MobileMobile Security reporting units.unit and the Storage Solutions reporting unit which are one level below our TSS reporting segment. We do not have any goodwill in our CSA operating segment. Goodwill resulting from the acquisition of the MXI Security and IronKey businesses is allocated to the Americas-MobileMobile Security reporting unit. Goodwill resulting from the acquisition of Nexsan is allocated to its ownthe Storage Solutions reporting unit.
2013 Goodwill Analysis
During the fourth quarter of 2013, we performed our annual impairment testing of goodwill for our Mobile Security and Storage Solutions reporting units. In performing Step 1 of these tests, we compared the estimated fair value of these reporting units to their carrying value. These impairment tests resulted in no impairment of goodwill as the estimated fair value of each reporting unit Americas-Nexsan, as it functions as a business with discrete financial information. Thisexceeded the carrying value in Step 1 of the impairment tests by 25.7 percent and 34.2 percent, for the Storage Solutions and Mobile Security reporting units, respectively. There
were no triggering events that occurred during 2013 that warranted an interim goodwill was not tested for impairment during 2012 as it was acquired on December 31, 2012 and representstest to be performed.
In determining the estimated fair value of the reporting units, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts and the market approach, a valuation technique that provides an estimate of the value of the reporting unit based on a comparison to other similar businesses. Our expected cash flows are affected by various significant assumptions, including projected revenue, gross margin and expense expectations, terminal growth rate and a discount rate. Our analyses utilized discounted forecasted cash flows of a ten year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the acquisition.basis for these cash flow assumptions. The analysis utilized discount rates of 13.5 percent and 15.5 percent depending on the reporting unit and a terminal growth rate of 3.0 percent.
2012 Goodwill Analysis
During the second and third quarters of 2012, we adjusted our internal financial forecast for our Americas-
Mobile Security reporting unit (referred to as our Americas-Mobile Security reporting unit in 2012) due to changes in the timing of expected cash flows and lower than expected short-term revenues and gross margins. As we considered these factors to be an event that warranted an interim test as to whether the goodwill was impaired we performed an impairment test as of each of these periods. These impairment tests resulted in no impairment of goodwill as the estimated fair value of the reporting units exceeded the carrying value in stepStep 1 of the impairment tests by 43.3 percent and 17.7 percent, during the second and third quarter of 2012, respectively. During the fourth quarter of 2012, our internal financial forecast for our Americas-MobileMobile Security reporting unit was again adjusted with further declines in our revenue and gross margin projections resulting from lower expectations in the high-security market segment. In accordance with our policy, we performed our annual assessment of goodwill in the Americas-MobileMobile Security reporting unit during the fourth quarter of 2012 and, as a result of this assessment, it was determined that the carrying value of our Americas-MobileMobile Security reporting unit exceeded its estimated fair value as our internal financial forecasts were again lowered. Accordingly, we performed a Step 2 of the goodwill impairment test which compared the implied value of the goodwill associated with Mobile Security to the carrying value of such goodwill. Based on this analysis, the carrying value of the Mobile Security goodwill exceeded its implied value and, consequently, we recorded an impairment charge of $23.3 million in restructuring and other in theour Consolidated Statements of Operations.
In determining the estimated fair value of the reporting unit, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts.forecasts and the market approach, a valuation technique that provides an estimate of the value of the reporting unit based on a comparison to other similar businesses. Our expected cash flows are affected by various significant assumptions, including the discount rate,projected revenue, and gross margin and expense expectations, terminal growth rate and terminal value growtha discount rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions includedanalysis utilized a discount rate of 16.0 percent and a terminal growth rate of 2.5 percent.
The goodwill assigned to our Storage Solutions reporting unit from the acquisition of Nexsan was not tested for impairment during 2012 as it was acquired on December 31, 2012 and represents fair value based on the acquisition.
During 2011, we determined that the $1.6 million of carrying value of goodwill in the Americas-CommercialMobile Security reporting unit exceeded its implied fair value and consequently,as a result of acquisition of the goodwillassets of Encryptx was fully impaired. Asimpaired and as a result, a $1.6 million charge was recorded in 2011 in restructuring and other in theour Consolidated Statements of Operations.
Note 7 — Restructuring and Other Expense
Restructuring expenses generally include severance and related charges, lease termination costs and other costs related to restructuring programs. Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans. Generally, these charges are reflected in the period in which the Board approves the associated actions, the actions are probable and the amounts are estimable which may occur prior to the communication to the affected employee(s). This estimate takes into account all information available as of the date the financial statements are issued. Severance amounts, for which affected employees were required to render service in order to receive benefits at their termination dates, are measured at the date such benefits were communicated to the applicable employees and recognized as expense over the employees’ remaining service periods.
The components of our restructuring and other expense and other certain expenses related to restructuring plans included in our Consolidated Statements of Operations were as follows:2012 Global Process Improvement Restructuring Program
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | (In millions) |
| Restructuring | | | | | |
| Severance and related | $ | 16.9 |
| | $ | 7.0 |
| | $ | 13.0 |
|
| Lease termination costs | 0.6 |
| | 3.3 |
| | 1.7 |
|
| Other | 2.2 |
| | 1.1 |
| | — |
|
| Gain on sale of fixed assets held for sale | (0.7 | ) | | — |
| | — |
|
| Total restructuring | 19.0 |
| | 11.4 |
| | 14.7 |
|
| Other | | | | | |
| Contingent consideration fair value adjustment (Note 4) | (8.6 | ) | | — |
| | — |
|
| Intangible asset abandonment (Note 6) | 1.9 |
| | — |
| | — |
|
| Acquisition and integration related costs | 3.7 |
| | 2.6 |
| | — |
|
| Pension settlement/curtailment (Note 9) | 2.4 |
| | 2.5 |
| | 2.8 |
|
| Asset disposals | — |
| | 7.0 |
| | — |
|
| Asset impairments | — |
| | — |
| | 31.2 |
|
| Other | 2.7 |
| | (2.0 | ) | | 2.4 |
|
| Total | $ | 21.1 |
| | $ | 21.5 |
| | $ | 51.1 |
|
2012 Global Process Improvement Restructuring Program
On October 22, 2012, the Board of Directors approved the Global Process Improvement Restructuringour GPI Program (GPI Program) relatedin order to the realignment ofrealign our business structure and the reduction of ourreduce operating expenses in excess of 25 percent over time. This restructuring program addressesaddressed product line rationalization and infrastructure and is anticipated to includeincluded a planned reduction of approximately 20 percent ofin our global workforce. TheseThe majority of these actions were implemented during 2013. As of December 31, 2013 we have reduced operating expenses by approximately 30 percent, not considering the incremental operating expense from the acquisition of Nexsan, and we have reduced our global workforce by over 20 percent under the GPI Program.
Other Prior Programs Substantially Complete
We have two additional programs, as described further below, that were initiated in prior years and are being implemented beginning in 2013.now substantially complete.
During 2012, we recorded restructuring charges of $14.9 million associated with this program. These charges were primarily associated with severance related activity and were included in restructuring and other in our Consolidated Statements of Operations.
Activity related to the 2012 GPI Program accruals was as follows:
|
| | | | | | | | | | | | | | | |
| | Severance and Related | | Lease Termination Costs | | Other | | Total |
| | (In millions) |
| Accrued balance at December 31, 2011 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Charges | 13.9 |
| | 0.1 |
| | 0.9 |
| | 14.9 |
|
| Usage | (0.1 | ) | | — |
| | (0.1 | ) | | (0.2 | ) |
| Currency impacts | — |
| | — |
| | — |
| | — |
|
| Accrued balance at December 31, 2012 | $ | 13.8 |
| | $ | 0.1 |
| | $ | 0.8 |
| | $ | 14.7 |
|
The 2011 Corporate Strategy Restructuring Program
On January 31, 2011, was initiated during the Boardfirst quarter of Directors approved the 2011 Corporate Strategy Restructuring Program (2011 Corporate Program) to rationalize certain product lines, increase efficiency and gain greater focus in support of our go-forward strategy. Major components of the program included charges associated with certain benefit plans, improvements to our global sourcing and distribution network, costs associated with further rationalization of our product lines and evolution of our skill sets to align with our announced strategy. At December 31, 2012, we had approximately $15$15 million of authorized spending amounts remaining related to this program. At December 31, 2012, this remaining authorization was transferred and added to the GPI programProgram and any future charges, as well as the remaining spend relating to the 2011 Corporate Program, will be accounted for under the 2012 GPI Program.
The 2011 Manufacturing Redesign Restructuring Program (2011 Manufacturing Program) was initiated during the first quarter of 2011 to rationalize certain product lines and discontinue tape coating operations at our Weatherford, Oklahoma facility and subsequently close the facility.
The components of our restructuring and other expense and other certain expenses included in our Consolidated Statements of Operations were as follows:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2013 | | 2012 | | 2011 |
| | | (In millions) |
| Restructuring | | | | | | |
| Severance and related | | $ | 2.1 |
| | $ | 16.9 |
| | $ | 7.0 |
|
| Lease termination costs | | 0.7 |
| | 0.6 |
| | 3.3 |
|
| Other | | 2.4 |
| | 2.2 |
| | 1.1 |
|
| Total restructuring | | $ | 5.2 |
| | $ | 19.7 |
| | $ | 11.4 |
|
| Other | | | | | | |
| Settlement of UK pension plan (Note 9) | | 10.6 |
| | — |
| | — |
|
| Gain on sale of fixed assets held for sale | | (9.8 | ) | | (0.7 | ) | | — |
|
| Acquisition and integration related costs | | 2.8 |
| | 3.7 |
| | 2.6 |
|
| Pension settlement/curtailment (Note 9) | | 2.1 |
| | 2.4 |
| | 2.5 |
|
| Contingent consideration fair value adjustment (Note 4) | | (0.6 | ) | | (8.6 | ) | | — |
|
| Intangible asset abandonment (Note 6) | | — |
| | 1.9 |
| | — |
|
| Asset disposals | | — |
| | — |
| | 7.0 |
|
| Other | | 1.0 |
| | 2.7 |
| | (2.0 | ) |
| Total | | $ | 11.3 |
| | $ | 21.1 |
| | $ | 21.5 |
|
Total restructuring charges of $5.2 million recorded for the year ended December 31, 2013 were all related to the GPI Program.
DuringFor the year ended December 31, 2012, we recorded restructuring charges of $14.9 million, primarily related to severance, under the GPI Program. Also during 2012, we recorded restructuring charges of $4.2 million associated with this program. These charges wereunder the 2011 Corporate Program primarily associated withrelated to severance and were included in$0.6 million of other restructuring charges under the 2011 Manufacturing Program.
For the year ended December 31, 2011, we recorded restructuring charges of $10.2 million, primarily related to severance and other in our Consolidatedlease termination costs under the 2011 Corporate Program. Also during 2011, we recorded
restructuring charges of $0.3 million for lease termination and modification costs and $0.9 million of site clean-up costs under the 2011 Manufacturing Program.
In addition to the restructuring charges recorded in restructuring and other, we recorded inventory write-offs of $2.7 million, $2.3 million and $9.1 million related to the planned rationalization of certain product lines as part of our restructuring programs, for the years ended December 31, 2013, 2012 and 2011, respectively, which are included in cost of goods sold in our Consolidated Statements of Operations.
Since the inception of this program,the GPI Program, we have recorded a total of $17.6 million of severance and related expenses, $5.0 million of inventory write-offs, $0.8 million of lease termination and modification costs, and $3.3 million of other charges.
Since the inception of the 2011 Corporate Program, we have recorded a total of $13.4 million of severance and related expenses, $3.5 million of lease termination and modification costs, $1.6 million of inventory write-offs, $0.3 million related to a pension curtailment charge and $0.9 million of other charges. Inventory write-offs are included in cost of goods sold in our Consolidated Statements of Operations.
During 2011, we recorded restructuring charges of $10.2 million primarily related to severance and lease termination costs. In addition, we also recorded inventory write-offs of $1.6 millionActivity related to the planned rationalization of certain product lines as part of this program, which are included in cost of goods sold in the Consolidated Statements of Operations. During 2010, we recorded restructuring charges of $3.4 million for severance and related expenses.
Changes in the 2011 Corporate2012 GPI Program accruals werewas as follows:
| | | | Severance and Related | | Lease Termination Costs | | Other | | Total | Severance and Related | | Lease Termination Costs | | Other | | Total |
| | (In millions) | (In millions) |
| Accrued balance at December 31, 2010 | $ | 3.4 |
| | $ | — |
| | $ | — |
| | $ | 3.4 |
| |
| Charges | 7.0 |
| | 3.0 |
| | 0.2 |
| | 10.2 |
| |
| Usage | (5.7 | ) | | (2.3 | ) | | (0.5 | ) | | (8.5 | ) | |
| Currency impacts | (0.1 | ) | | (0.1 | ) | | 0.3 |
| | 0.1 |
| |
| Accrued balance at December 31, 2011 | $ | 4.6 |
| | $ | 0.6 |
| | $ | — |
| | $ | 5.2 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Charges | 3.0 |
| | 0.5 |
| | 0.7 |
| | 4.2 |
| 13.9 |
| | 0.1 |
| | 0.9 |
| | 14.9 |
|
| Usage | (6.1 | ) | | (0.6 | ) | | (0.6 | ) | | (7.3 | ) | (0.1 | ) | | — |
| | (0.1 | ) | | (0.2 | ) |
| Currency impacts | 0.1 |
| | (0.1 | ) | | 0.1 |
| | 0.1 |
| — |
| | — |
| | — |
| | — |
|
| Accrued balance at December 31, 2012 | $ | 1.6 |
| | $ | 0.4 |
| | $ | 0.2 |
| | $ | 2.2 |
| $ | 13.8 |
| | $ | 0.1 |
| | $ | 0.8 |
| | $ | 14.7 |
|
| Transfer from 2011 Corporate Program | | 1.6 |
| | 0.4 |
| | 0.2 |
| | 2.2 |
|
| Charges | | 3.7 |
| | 0.7 |
| | 2.4 |
| | 6.8 |
|
| Usage | | (16.9 | ) | | (0.7 | ) | | (2.5 | ) | | (20.1 | ) |
| Currency impacts | | — |
| | (0.1 | ) | | (0.1 | ) | | (0.2 | ) |
| Accrued balance at December 31, 2013 | | $ | 2.2 |
|
| $ | 0.4 |
| | $ | 0.8 |
| | $ | 3.4 |
|
Other Prior Programs Substantially Complete
We have had activityDuring the year endedDecember 31, 2013, severance expense of $1.6 million related to two additional programs, as described further below, that were initiatedemployees directly associated with the XtremeMac and Memorex consumer electronics businesses was recorded in prior yearsdiscontinued operations. See Note 4 - Acquisitions and are now substantially complete. The 2011 Manufacturing Redesign Restructuring Program (2011 Manufacturing Program) was initiated during the first quarter of 2011 to rationalize certain product lines and discontinue tape coating operations at our Weatherford, Oklahoma facility and subsequently close the facility. The 2008 Corporate Redesign Restructuring Program (2008 Corporate Program) was initiated during the fourth quarter of 2008 and aligned our cost structure by reducing SG&A expenses. We reduced costs by rationalizing key accounts and products and by simplifying our corporate structure globally.
During 2012, we recorded a gain on the sale of assets from the Weatherford facility of $0.7 million and charges of $0.6 million related to our 2011 Manufacturing Program. These costs were included in restructuring and other in our Consolidated Statements of Operations.
During 2011, we recorded restructuring charges of $0.3 millionDivestitures for lease termination and modification costs and $0.9 million of site clean-up expenses related tomore information on our 2011 Manufacturing Program. These costs were included in restructuring and other in our Consolidated Statements of Operations. We also recorded non-cash inventory write-offs of $7.5 million, relating to our 2011 Manufacturing Program, which were included in cost of goods sold in our Consolidated Statements of Operations.
During 2010, we recorded restructuring charges of $3.2 million for severance and related expenses and non-cash inventory write-offs of $14.2 million in connection with our 2011 Manufacturing Program. The inventory write-offs are included in cost of goods sold in our Consolidated Statements of Operations. During 2010, we recorded $6.4 million of severance and related expenses and $1.7 million of lease termination costs related to our 2008 Corporate Program.discontinued operations.
Other
Certain amounts recorded in Other are discussed elsewhere in our Notes to Consolidated Financial Statements. See note references in table above.
During 2012, we recorded acquisition and integration related costs of $3.7 million and other costs of $2.7 million. These costs were recorded in restructuring and other expense in our Consolidated Statements of
Operations. In addition, we recorded inventory write-offs of $2.3 million related to the planned rationalization of certain product lines, which are included in cost of goods sold in our Consolidated Statements of Operations.
During 2011, we recorded acquisition and integration related costs as a result of our acquisition activities of $2.6 million. Additionally, we amended a long-term disability benefit plan, resulting in a $2.0 million gain. These items were recorded in restructuring and other expense in our Consolidated Statements of Operations.
Our Camarillo, California manufacturing facility ceased operations on December 31, 2008 and the facility, comprised of a building and property, was classified as held for sale. During 2011, in an effort to increase the salability of the property, we demolished the building which resulted in a $7.0 million loss on disposal during the period. The land related to the facility continues to meet the criteria for held for sale accounting and, therefore, remains classified in other current assets on the Consolidated Balance Sheet as of December 31, 2012 at a book value of $0.2 million. On October 7, 2011 we entered into an agreement to sell the land for $10.5 million, contingent upon the change of certain zoning requirements for the land as well as other standard conditions. If these conditions are met, the sale is expected to close in 2013.
During 2010, we recorded $0.2 million of other chargesThe land related to the 2008 Corporate Program. Additionally during 2010, other expenses included costs associated with the announced retirement of our former Vice Chairman and Chief Executive Officer, including a severance related charge of $1.4 million and a charge of $0.8 million relatedfacility continued to the accelerated vesting of his unvested options and restricted stock.
In 2010, certain assets held primarily at our Weatherford, Oklahoma facility were determined to be impaired in accordance with the provisions of impairment of long-lived assets. These long-lived assets held and used include the property, building and equipment primarily related to the manufacturing of magnetic tape which was consolidated to the TDK Group Yamanashi manufacturing facility in 2011 as a part of our 2011 Manufacturing Program. The land and building had a carrying amount of $17.0 million and were written down to their fair value of $2.3 million, resulting in an impairment charge of $14.7 million during 2010. The fair value of the equipment was assessed based upon sales proceeds from similar equipment sold as part of the closing of our Camarillo, California facility. The Weatherford equipment had a carrying amount of $17.4 million and was written down to its fair value of $0.9 million resulting in an impairment charge of $16.5 million during 2010. The impairments were recorded as part of restructuring and other charges in our Consolidated Statements of Operations in 2010. As of June 30, 2011, our Weatherford facility metmeet the criteria for classification as held for sale outlinedaccounting and, therefore, was classified in the accounting guidance for the sale of a long-lived asset. Accordingly, the book values of the building and property of $2.3 million were transferred into other current assets on our Consolidated Balance SheetsSheet as of December 31, 2012 at a book value of $0.2 million. The sale was completed in December 2013, and are no longer being depreciated.
2012 Activity
The following table summarizes 2012the related gain of $9.8 million was recorded in restructuring and other activity by restructuring program:expense during the fourth quarter.
|
| | | | | | | | | | | | | | | |
| | 2012 GPI Program | | 2011 Corporate Strategy Program | | Other | | Total |
| | (In millions) |
| Restructuring | | | |
| | |
| | |
|
| Severance and related | $ | 13.9 |
| | $ | 3.0 |
| | $ | — |
| | $ | 16.9 |
|
| Lease termination costs | 0.1 |
| | 0.5 |
| | — |
| | 0.6 |
|
| Other | 0.9 |
| | 0.7 |
| | 0.6 |
| | 2.2 |
|
| Gain on sale of fixed asset held for sale | — |
| | — |
| | (0.7 | ) | | (0.7 | ) |
| Total restructuring | 14.9 |
| | 4.2 |
| | (0.1 | ) | | 19.0 |
|
| Other | | | |
| | |
| | |
|
| Contingent consideration fair value adjustment | — |
| | — |
| | (8.6 | ) | | (8.6 | ) |
| Intangible asset abandonment | — |
| | — |
| | 1.9 |
| | 1.9 |
|
| Pension settlement/curtailment | — |
| | — |
| | 2.4 |
| | 2.4 |
|
| Acquisition and integration costs | — |
| | — |
| | 3.7 |
| | 3.7 |
|
| Other | — |
| | — |
| | 2.7 |
| | 2.7 |
|
| Total | $ | 14.9 |
| | $ | 4.2 |
| | $ | 2.0 |
| | $ | 21.1 |
|
2011 Activity
The following table summarizes 2011 restructuring and other activity by restructuring program:
|
| | | | | | | | | | | | | | | |
| | 2011 Manufacturing Redesign Program | | 2011 Corporate Strategy Program | | Other | | Total |
| | (In millions) |
| Restructuring | |
| | |
| | |
| | |
|
| Severance and related | $ | — |
| | $ | 7.0 |
| | $ | — |
| | $ | 7.0 |
|
| Lease termination costs | 0.3 |
| | 3.0 |
| | — |
| | 3.3 |
|
| Other | 0.9 |
| | 0.2 |
| | — |
| | 1.1 |
|
| Total restructuring | 1.2 |
| | 10.2 |
| | — |
| | 11.4 |
|
| Other | |
| | |
| | |
| | |
|
| Pension settlement/curtailment | — |
| | — |
| | 2.5 |
| | 2.5 |
|
| Asset disposals | — |
| | — |
| | 7.0 |
| | 7.0 |
|
| Acquisition and integration costs | — |
| | — |
| | 2.6 |
| | 2.6 |
|
| Other | — |
| | — |
| | (2.0 | ) | | (2.0 | ) |
| Total | $ | 1.2 |
| | $ | 10.2 |
| | $ | 10.1 |
| | $ | 21.5 |
|
2010 Activity
The following table summarizes 2010 restructuring and other activity by restructuring program:
|
| | | | | | | | | | | | | | | | | | | |
| | 2011 Manufacturing Redesign Program | | 2011 Corporate Strategy Program | | 2008 Corporate Redesign Program | | Other | | Total |
| | (In millions) |
| Restructuring | | | |
| | |
| | |
| | |
|
| Severance and related | $ | 3.2 |
| | $ | 3.4 |
| | $ | 6.4 |
| | $ | — |
| | $ | 13.0 |
|
| Lease termination costs | — |
| | — |
| | 1.7 |
| | — |
| | 1.7 |
|
| Total restructuring | 3.2 |
| | 3.4 |
| | 8.1 |
| | — |
| | 14.7 |
|
| Other | | | |
| | |
| | |
| | |
|
| Pension settlement/curtailment | — |
| | 0.3 |
| | 2.5 |
| | — |
| | 2.8 |
|
| Asset Impairments | 31.2 |
| | — |
| | — |
| | — |
| | 31.2 |
|
| Other | — |
| | — |
| | 0.2 |
| | 2.2 |
| | 2.4 |
|
| Total | $ | 34.4 |
| | $ | 3.7 |
| | $ | 10.8 |
| | $ | 2.2 |
| | $ | 51.1 |
|
Note 8 — Stock-Based Compensation
Stock compensation consisted of the following: |
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | (In millions) |
| Stock compensation expense | $ | 7.3 |
| | $ | 7.5 |
| | $ | 6.9 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Stock compensation expense | $ | 6.3 |
| | $ | 6.6 |
| | $ | 6.9 |
|
We have stock-based compensation awards outstanding under five plans (collectively, the Stock Plans). We have stock options outstanding under our 1996 Directors Stock Compensation Plan (Directors Plan) and stock options and restricted stock outstanding under our 2000 Stock Incentive Plan (2000 Incentive Plan), our 2005 Stock Incentive Plan (2005 Incentive Plan), and our 2008 Stock Incentive Plan (2008 Incentive Plan). We have stock options, restricted stock and stock appreciations rights (SARs) outstanding under our 2011 Stock Incentive Plan (2011 Incentive Plan). Restricted stock granted and stock option awards exercised are issued from our treasury stock. The purchase of treasury stock is discretionary and will be subject to determination by our Board
of Directors each quarter following its review of our financial performance and other factors.
No further shares are available for grant under the Directors Plan, the 2000 Incentive Plan, the 2005 Incentive Plan or the 2008 Incentive Plan. Stock-based compensation awards issued under these plans generally have terms of ten years and, for employees, vest over a four-year period. Awards issued to directors under these plans become fully exercisable on the first anniversary of the grant date. Stock options granted under these plans are not incentive stock options. Exercise prices of awards issued under these plans are equal to the fair value of the Company's stock on the date of grant. As of December 31, 2012,2013, there were 4,607,1573,332,242 stock-based compensation awards outstanding that were issued under these plans and consist of stock options and restricted stock.
The 2011 Incentive Plan was approved and adopted by our shareholders on May 4, 2011 and became effective immediately. The 2011 Incentive Plan was amended and approved by our shareholders on May 8, 2013. The 2011 Incentive Plan permits the grant of stock options, stock appreciation rights,SARs, restricted stock, restricted stock units, dividend equivalents, performance awards, stock awards and other stock-based awards. The aggregate number of shares of our common stock that may be issued under all stock-based awards made under the 2011 Incentive Plan is 4.5 million and the maximum number of shares that may be awarded pursuant to grants of awards other than options and stock appreciation rights is 1.16.0 million. The number of shares available for awards, as well as the terms of outstanding awards, is subject to adjustments as provided in the 2011 Incentive Plan for stock splits, stock dividends, recapitalization and other similar events. Awards may be granted under the 2011 Incentive Plan until the earlier to occur of May 3, 2021 or the date on which all shares available for awards under the 2011 Incentive Plan have been granted; provided, however, that incentive stock options may not be granted after February 10, 2021.
Stock-based compensation awards issued under the 2011 Incentive Plan generally have a term of ten years and, for employees, vest over a three-year period. Awards issued to directors under this plan become fully exercisable on the first anniversary of the grant date. Stock options granted under these plans are not incentive stock options. Exercise prices of awards issued under these plans are equal to the fair value of the Company's stock on the date of grant.
During the year ended December 31, 2013, we granted 3.1 million SARs under the 2011 Incentive Plan to certain employees associated with our Nexsan and Mobile Security operations. These awards expire in five years and only vest when both of the market and performance conditions specified by the terms of the SARs are met. For the market conditions, based on the terms of the awards, 50 percent of the SARs may vest if the 30-day average Imation stock price reaches $10 per share or more by December 31, 2016 and the remaining 50 percent of the SARs may vest if the 30-day average Imation stock price reaches $15 per share or more by December 31, 2016. Additionally, for the performance condition, as a condition necessary for vesting, the net revenue of Nexsan or Mobile Security (depending on the award) must reach certain specified stretch targets by December 31, 2016. If exercised, the SARs require a cash payment to the holder in an amount based on the Imation stock price at the date of exercise as compared to the stock priced at the date of grant. As of December 31, 2012,2013 we have not recorded any compensation expense associated with these SARs based on the applicable accounting rules. We will continue to assess these SARs each quarter to determine if any expense should be recorded.
As of December 31, 2013 we had 2,237,1193,231,617 of stock-based compensation awards consisting of stock options, and restricted stock and SARs outstanding under the 2011 Incentive Plan. As of December 31, 20122013 there were 2,098,4742,168,693 shares available for grant under our 2011 Incentive Plan.
On February 8, 2013, the Board adopted, subject to shareholder approval, amendments to the Imation Corp. 2011 Incentive Plan (the “Stock Plan Amendments”). The purpose of the Stock Plan Amendments is, among other things, to permit the Company to continue to grant awards under the 2011 Incentive Plan beyond the date when the currently authorized shares have been exhausted, to give the Compensation Committee additional flexibility in granting performance-based awards and remove the limitation on the number of shares that can be issued pursuant to full value awards.
Stock Options
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the valuation model are supported primarily by historical indicators and current
market conditions. Volatility was calculated using the historical weekly close rate for a period of time equal to the expected term. The risk-free rate of return was determined by using the U.S. Treasury yield curve in effect at the time of grant. The expected term was calculated on an aggregated basis and estimated based on an analysis of options already exercised and any foreseeable trends or changes in recipients’ behavior. In determining the expected term, we considered the vesting period of the awards, the contractual term of the awards, historical average holding periods, stock price history, impacts from recent restructuring initiatives and the relative weight for each of these factors. The dividend yield was based on the latest dividend payments made on or announced by the date of the grant.
The following table summarizes our weighted average assumptions used in the valuation of options for the years ended December 31:
| | | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 |
| Volatility | 45 | % | | 44 | % | | 43 | % | 43 | % | | 45 | % | | 44 | % |
| Risk-free interest rate | 1.07 | % | | 2.13 | % | | 2.49 | % | 1.05 | % | | 1.07 | % | | 2.13 | % |
| Expected life (months) | 71 |
| | 70 |
| | 66 |
| 72 |
| | 71 |
| | 70 |
|
| Dividend yield | — | % | | — | % | | — | % | — | % | | — | % | | — | % |
The following table summarizes our stock option activity:
| | | | Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value | Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
| | | | | | | | (millions) | | | | | | | (millions) |
| Outstanding December 31, 2009 | 4,594,838 |
| | $ | 27.19 |
| | 6.2 | | $ | 0.1 |
| |
| Granted | 889,089 |
| | 10.46 |
| | | |
| Exercised | (1,000 | ) | | 8.11 |
| | | |
| Canceled | (421,146 | ) | | 31.19 |
| | | |
| Forfeited | (145,693 | ) | | 17.97 |
| | | | | |
| Outstanding December 31, 2010 | 4,916,088 |
| | $ | 24.10 |
| | 5.6 | | $ | 0.7 |
| 4,916,088 |
| | $ | 24.10 |
| | 5.6 | | $ | 0.7 |
|
| Granted | 1,401,163 |
| | 9.41 |
| | | 1,401,163 |
| | 9.41 |
| | |
| Exercised | (45,429 | ) | | 10.13 |
| | | (45,429 | ) | | 10.13 |
| | |
| Canceled | (475,703 | ) | | 35.11 |
| | | (475,703 | ) | | 35.11 |
| | |
| Forfeited | (116,540 | ) | | 14.34 |
| | | (116,540 | ) | | 14.34 |
| | | | |
| Outstanding December 31, 2011 | 5,679,579 |
| | $ | 19.87 |
| | 6.0 | | $ | — |
| 5,679,579 |
| | $ | 19.87 |
| | 6.0 | | $ | — |
|
| Granted | 1,178,780 |
| | 5.80 |
| | | 1,178,780 |
| | 5.80 |
| | |
| Exercised | — |
| | — |
| | | — |
| | — |
| | |
| Canceled | (752,415 | ) | | 26.61 |
| | | (752,415 | ) | | 26.61 |
| | |
| Forfeited | (287,472 | ) | | 9.24 |
| | | | | (287,472 | ) | | 9.24 |
| | |
| Outstanding December 31, 2012 | 5,818,472 |
| | $ | 16.57 |
| | 5.9 | | $ | — |
| 5,818,472 |
| | $ | 16.57 |
| | 5.9 | | $ | — |
|
| Granted | | 1,034,406 |
| | 3.85 |
| | |
| Exercised | | — |
| | — |
| | |
| Canceled | | (1,069,192 | ) | | 25.22 |
| | |
| Forfeited | | (412,148 | ) | | 7.13 |
| | | | |
| Outstanding December 31, 2013 | | 5,371,538 |
| | $ | 13.11 |
| | 6.1 | | $ | 0.8 |
|
Of the options granted during the year ended December 31, 2013, 113,125 were performance-based options that vest based on the Company's performance against Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) targets for 2013, 2014, and 2015. Our 2013 performance was partially met and, accordingly, some of the options for 2013 vested. No performance-based options were granted during the years ended December 31, 2012 or 2011. Of the options granted during the year ended December 31, 2010, 105,397 were performance-based options that vest based on the Company’s performance against operating income targets for 2010. Our 2010 performance exceeded these operating income targets and, accordingly, these options will vest 25 percent per year over four years from the date of grant.
The aggregate intrinsic value of all outstanding stock options was $0.8 million, less than $0.1 million, and $0.0 million and $0.7 million as of December 31, 2013, 2012 2011 and 2010,2011, respectively. The intrinsic value of options exercised during 2011 and 2010 was less than $0.1 million each year.. The weighted average grant date fair value of options granted during the years 2013, 2012 2011 and 20102011 was $2.531.61, $4.152.53 and $4.464.15, respectively.
The following table summarizes exercisable options and options expected to vest as of December 31, 20122013:
| | | | Exercisable Options | | Options Expected to Vest | Exercisable Options | | Options Expected to Vest |
| | | | Weighted Average Remaining | | Weighted Average | | | | Weighted Average Remaining | | Weighted Average | | | Weighted Average Remaining | | Weighted Average | | | | Weighted Average Remaining | | Weighted Average |
| Range of Exercise | Stock | | Contractual | | Exercise | | Stock | | Contractual | | Exercise | Stock | | Contractual | | Exercise | | Stock | | Contractual | | Exercise |
| Prices | Options | | Life (Years) | | Price | | Options | | Life (Years) | | Price | Options | | Life (Years) | | Price | | Options | | Life (Years) | | Price |
| $4.26 to $6.16 | — |
| | 0.0 | | $ | — |
| | 900,302 |
| | 9.4 | | $ | 5.76 |
| |
| $6.17 to $14.15 | 1,578,296 |
| | 6.0 | | 9.76 |
| | 1,117,314 |
| | 8.0 | | 9.43 |
| |
| $14.16 to $19.20 | — |
| | 0.0 | | — |
| | — |
| | 0.0 | | — |
| |
| $3.48 to $6.16 | | 287,915 |
| | 8.1 | | $ | 5.75 |
| | 1,381,213 |
| | 8.8 | | $ | 4.57 |
|
| $6.17 to $9.64 | | 509,312 |
| | 5.7 | | 8.60 |
| | 77,456 |
| | 7.9 | | 7.12 |
|
| $9.65 to $19.20 | | 1,325,913 |
| | 5.6 | | 10.10 |
| | 355,502 |
| | 7.0 | | 9.96 |
|
| $19.21 to $23.95 | 13,000 |
| | 5.6 | | 20.62 |
| | — |
| | 0.0 | | — |
| 9,500 |
| | 4.2 | | 20.20 |
| | — |
| | 0.0 | | — |
|
| $23.96 to $28.70 | 749,952 |
| | 3.8 | | 24.43 |
| | — |
| | 0.0 | | — |
| 521,320 |
| | 3.2 | | 24.49 |
| | — |
| | 0.0 | | — |
|
| $28.71 to $39.38 | 863,713 |
| | 2.0 | | 35.33 |
| | — |
| | 0.0 | | — |
| 475,438 |
| | 1.8 | | 36.01 |
| | — |
| | 0.0 | | — |
|
| $39.39 to $41.75 | 310,965 |
| | 2.2 | | 41.34 |
| | — |
| | 0.0 | | — |
| 228,775 |
| | 1.5 | | 41.24 |
| | — |
| | 0.0 | | — |
|
| $41.76 to $46.97 | 33,000 |
| | 0.6 | | 44.34 |
| | — |
| | 0.0 | | — |
| 2,500 |
| | 2.4 | | 45.76 |
| | — |
| | 0.0 | | — |
|
| $4.26 to $46.97 | 3,548,926 |
| | 4.2 | | $ | 22.21 |
| | 2,017,616 |
| | 8.6 | | $ | 7.79 |
| |
| $3.48 to $46.97 | | 3,360,673 |
| | 4.7 | | $ | 17.57 |
| | 1,814,171 |
| | 8.4 | | $ | 5.73 |
|
Total stock-based compensation expense associated with stock options related to continuing operations recognized in theour Consolidated Statements of Operations for the years ended December 31, 2013, 2012 2011 and 20102011 was $3.62.7 million, $4.13.3 million
and $3.8 million, respectively. This expense would result in related tax benefits of $1.10.9 million, $1.31.1 million and $1.21.3 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. However, these tax benefits are included in the U.S. deferred tax assets which are subject to a full valuation allowance, and due to the valuation allowance, we did not recognize the related tax benefits in 2013, 2012 2011 and 2010.or 2011. As of December 31, 20122013 there was $5.42.8 million of total unrecognized compensation expense related to outstanding stock options. That expense is expected to be recognized over a weighted average period of 1.81.5 years.
No related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2013, 2012 2011 or 2010.2011.
Restricted Stock
The following table summarizes our restricted stock activity:
| | | | Restricted Stock | | Weighted Average Grant Date Fair Value Per Share | Restricted Stock | | Weighted Average Grant Date Fair Value Per Share |
| Nonvested as of December 31, 2009 | 461,702 |
| | $ | 14.84 |
| |
| Granted | 524,655 |
| | 10.45 |
| |
| Vested | (209,302 | ) | | 15.17 |
| |
| Forfeited | (37,859 | ) | | 11.15 |
| |
| Nonvested as of December 31, 2010 | 739,196 |
| | $ | 11.34 |
| 739,196 |
| | $ | 11.34 |
|
| Granted | 385,049 |
| | 9.28 |
| 385,049 |
| | 9.28 |
|
| Vested | (274,934 | ) | | 12.15 |
| (274,934 | ) | | 12.15 |
|
| Forfeited | (54,265 | ) | | 12.05 |
| (54,265 | ) | | 12.05 |
|
| Nonvested as of December 31, 2011 | 795,046 |
| | $ | 10.02 |
| 795,046 |
| | $ | 10.02 |
|
| Granted | 708,573 |
| | 5.67 |
| 708,573 |
| | 5.67 |
|
| Vested | (321,103 | ) | | 10.30 |
| (321,103 | ) | | 10.30 |
|
| Forfeited | (156,712 | ) | | 8.72 |
| (156,712 | ) | | 8.72 |
|
| Nonvested as of December 31, 2012 | 1,025,804 |
| | $ | 7.12 |
| 1,025,804 |
| | $ | 7.12 |
|
| Granted | | 837,443 |
| | 3.75 |
|
| Vested | | (561,099 | ) | | 6.99 |
|
| Forfeited | | (109,827 | ) | | 6.59 |
|
| Nonvested as of December 31, 2013 | | 1,192,321 |
| | $ | 4.87 |
|
ThereOf the restricted stock granted during the year ended December 31, 2013, 529,141 were no performance-based restricted stock that vest based on the Company's cost reduction efforts and performance against EBITDA targets for 2013, 2014, and 2015. Our 2013 performance was partially met and, accordingly, some of the restricted stock for 2013 vested and will be issued subsequent to December 31, 2013. No performance-based restricted shares were granted during the years ended December 31, 2012 or 2011. Of the restricted shares granted during the year ended December 31, 2010, 265,837 were performance-based awards that vest based on the Company’s performance against operating income targets for 2010. Our 2010 performance exceeded these operating income targets and accordingly, these restricted shares will vest 25 percent per year over four years from the date
The total fair value of shares that vested during the years 2013, 2012 2011 and 20102011 was $3.33.9 million, $3.3 million and $3.23.3 million, respectively.
Total related stock-based compensation expense associated with restricted stock relating to continuing operations recognized in theour Consolidated Statements of Operations for the years ended December 31, 2013, 2012 2011 and 20102011 was $3.6 million, $3.43.3 million and $3.1 million, respectively. This expense would result in related tax benefits of $1.41.5 million, $1.31.4 million and $1.21.3 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. However, these tax benefits are included in the U.S. deferred tax assets which are subject to a full valuation allowance and due to the valuation allowance, we did not recognize the related tax benefit in 2013, 2012 2011 and 2010.2011. As of December 31, 20122013 there was $4.83.1 million of total unrecognized compensation expense related to outstanding restricted stock. That expense is expected to be recognized over a weighted average period of 1.71.4 years.
No related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2013, 2012 2011 or 2010.2011.
Note 9 — Retirement Plans
Pension Plans
We have various non-contributory defined benefit pension plans covering United States employees employed prior to January 1, 2010 and certain employees outside the United States, primarily in Germany the United
Kingdom and Japan. Total pension expense was $2.02.6 million, $2.42.0 million and $4.52.4 million in 2013, 2012 and 2011, and 2010, respectively. Total pension expense decreased year over year due primarily to lower service and interest costs. The measurement date of our pension plans is December 31. During the twelve months ended December 31, 20122013 we contributed $5.11.5 million to our worldwide pension plans. We presently anticipate contributing between $2 million and $4 million to fund our worldwide pension plans in 2013.2014. It is our general practice, at a minimum, to fund amounts sufficient to meet the requirements set forth in applicable benefits laws and local tax laws. From time to time, we contribute additional amounts, as we deem appropriate.
Effective January 1, 2010, the U.S. plan was amended to exclude new hires and rehires from participating in the plan. In addition, we eliminated benefit accruals under the U.S. plan as of January 1, 2011, thus “freezing” the defined benefit pension plan. Under the plan freeze, no pay credits were made to a participant’s account balance after December 31, 2010. However, interest credits will continue in accordance with the annual update process. These actions resulted in the recognition of all prior service costs as a curtailment loss of $0.3 million in 2010, included as a component of restructuring and other in the Consolidated Statements of Operations.
For the U.S. plan, employees who have completed three years or more of service, including service with 3M Company before July 1, 1996, or who have reached age 65, are entitled to pension benefits beginning at normal retirement age (65) based primarily on employees’ pay credits and interest credits. Through December 31, 2009, pay credits were made to each eligible participant's account equal to six percent of that participant's eligible earnings for the year. Beginning on January 1, 2010 and through December 31, 2010, pay creditscredit contributions were reduced to three percent of each participant’s eligible earnings. In conjunction with the plan freeze, no additional pay credits will be made to a participant’s account balance after December 31, 2010. A monthly interest credit is made to each eligible participant’s account based on the participant’s account balance as of the last day of the preceding year. The interest credit rate is established annually and is based on the interest rate of certain low-risk debt instruments. The interest credit rate was 3.022.80 percent for 2012.2013. In accordance with the annual update process, the interest credit rate will be 2.803.80 percent for 2013.2014.
In connection with actions taken under our announced restructuring programs, the number of employees accumulating benefits under our pension plan in the United States continues to decline. Participants in our U.S. plan have the option of receiving cash lump sum payments when exiting the plan, which a number of participants exiting the plan have elected to receive. Lump sum payments in 2013, 2012 2011 and 20102011 exceeded the service and interest costs associated with those years. As a result, a partial settlement event occurred in those years and, accordingly, we recognized a settlement loss of $2.42.1 million, $2.52.4 million and $2.5 million during 2013, 2012 2011 and 2010,2011, respectively. These settlement losses are included in restructuring and other in our Consolidated Statements of Operations.
The U.S. pension plan permits four payment options: a lump-sum option, a life income option, a survivor option or a period certain option.
We maintained a defined benefit pension plan located in the United Kingdom (UK Plan) for former employees with no current employees in the plan. During the third quarter of 2013 we settled our UK Plan by way of a transaction with Pension Insurance Corporation (PIC) whereby PIC fully assumed the projected benefit obligation and underlying plan assets. The net balance assumed by PIC represented an asset balance of $6.4 million and no cash consideration took place between Imation and PIC associated with this transaction. As a result of this
transaction, we removed this net asset and related unrecognized net actuarial loss in other comprehensive loss and recorded a loss of $10.6 million in restructuring and other in our Consolidated Statements of Operations during the year ended December 31, 2013. Additionally, the settlement of the UK Plan resulted in the removal of a deferred tax liability related to the plan resulting in a $2.3 million credit to income tax expense for the year ended December 31, 2013. See Note 10 - Income Taxes for further discussion of the impact on the income tax rate. It is a standard practice in the United Kingdom (UK) for a review process by the UK government, entailing a review of the plan obligations and participant data, to occur upon a transaction such as this one involving a transfer of a pension plan. We expect that this government review will be completed within the next twelve months. Upon the conclusion of this regulatory review, we will record a true-up, if necessary, in the period in which it occurs.
The benefit obligations and plan assets, changes to the benefit obligations and plan assets, and the funded status of the defined benefit pension plans were as follows:
| | | | United States | | International | United States | | International |
| | As of December 31, | | As of December 31, | As of December 31, | | As of December 31, |
| | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 | | 2013 | | 2012 |
| | (In millions) | (In millions) |
| Change in benefit obligation | | | | | | | | | | | | | | |
| Benefit obligation, beginning of year | $ | 92.2 |
| | $ | 93.8 |
| | $ | 55.6 |
| | $ | 58.9 |
| $ | 88.3 |
| | $ | 92.2 |
| | $ | 63.4 |
| | $ | 55.6 |
|
| Service cost | — |
| | — |
| | 0.6 |
| | 0.7 |
| — |
| | — |
| | 0.5 |
| | 0.6 |
|
| Interest cost | 3.2 |
| | 4.2 |
| | 2.2 |
| | 2.5 |
| 3.3 |
| | 3.2 |
| | 2.0 |
| | 2.2 |
|
| Actuarial (gain) loss | 2.2 |
| | 5.1 |
| | 6.9 |
| | 4.4 |
| (1.7 | ) | | 2.2 |
| | (4.7 | ) | | 6.9 |
|
| Benefits paid | (1.9 | ) | | (1.8 | ) | | (2.4 | ) | | (2.2 | ) | (2.0 | ) | | (1.9 | ) | | (3.5 | ) | | (2.4 | ) |
| Settlements | (7.4 | ) | | (9.1 | ) | | — |
| | (8.4 | ) | (9.4 | ) | | (7.4 | ) | | (24.8 | ) | | — |
|
| Foreign exchange rate changes | — |
| | — |
| | 0.5 |
| | (0.3 | ) | — |
| | — |
| | (1.5 | ) | | 0.5 |
|
| Projected benefit obligation, end of year | $ | 88.3 |
| | $ | 92.2 |
| | $ | 63.4 |
| | $ | 55.6 |
| $ | 78.5 |
| | $ | 88.3 |
| | $ | 31.4 |
| | $ | 63.4 |
|
| Change in plan assets | | | | | | | | | | | | | | |
| Fair value of plan assets, beginning of year | $ | 69.6 |
| | $ | 70.9 |
| | $ | 53.5 |
| | $ | 61.2 |
| $ | 71.7 |
| | $ | 69.6 |
| | $ | 58.0 |
| | $ | 53.5 |
|
| Actual return on plan assets | 8.5 |
| | (0.9 | ) | | 3.7 |
| | 1.6 |
| 10.7 |
| | 8.5 |
| | (3.3 | ) | | 3.7 |
|
| Foreign exchange rate changes | — |
| | — |
| | 1.0 |
| | (0.3 | ) | — |
| | — |
| | (1.8 | ) | | 1.0 |
|
| Company contributions | 2.9 |
| | 10.5 |
| | 2.2 |
| | 3.8 |
| — |
| | 2.9 |
| | 1.5 |
| | 2.2 |
|
| Benefits paid | (1.9 | ) | | (1.8 | ) | | (2.4 | ) | | (2.2 | ) | (2.0 | ) | | (1.9 | ) | | (3.5 | ) | | (2.4 | ) |
| Settlement payments | (7.4 | ) | | (9.1 | ) | | — |
| | (10.6 | ) | (9.4 | ) | | (7.4 | ) | | (24.8 | ) | | — |
|
| Fair value of plan assets, end of year | 71.7 |
| | 69.6 |
| | 58.0 |
| | 53.5 |
| 71.0 |
| | 71.7 |
| | 26.1 |
| | 58.0 |
|
| Funded status of the plan, end of year | $ | (16.6 | ) | | $ | (22.6 | ) | | $ | (5.4 | ) | | $ | (2.1 | ) | $ | (7.5 | ) | | $ | (16.6 | ) | | $ | (5.3 | ) | | $ | (5.4 | ) |
Amounts recognized in theour Consolidated Balance Sheets consisted of the following:
| | | | United States | | International | United States | | International |
| | As of December 31, | | As of December 31, | As of December 31, | | As of December 31, |
| | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 | | 2013 | | 2012 |
| | (In millions) | (In millions) |
| Noncurrent assets | $ | — |
| | $ | — |
| | $ | 6.1 |
| | $ | 4.6 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 6.1 |
|
| Noncurrent liabilities | (16.6 | ) | | (22.6 | ) | | (11.5 | ) | | (6.7 | ) | (7.5 | ) | | (16.6 | ) | | (5.3 | ) | | (11.5 | ) |
| Accumulated other comprehensive loss — pre-tax | 25.8 |
| | 30.2 |
| | 14.2 |
| | 8.6 |
| 14.3 |
| | 25.8 |
| | 4.6 |
| | 14.2 |
|
Amounts recognized in accumulated other comprehensive loss consisted of the following:
| | | | United States | | International | United States | | International |
| | As of December 31, | | As of December 31, | As of December 31, | | As of December 31, |
| | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 | | 2013 | | 2012 |
| | (In millions) | (In millions) |
| Net actuarial loss | $ | 25.8 |
| | $ | 30.2 |
| | $ | 18.2 |
| | $ | 13.3 |
| $ | 14.3 |
| | $ | 25.8 |
| | $ | 7.6 |
| | $ | 18.2 |
|
| Prior service cost (credit) | — |
| | — |
| | (5.4 | ) | | (6.5 | ) | |
| Prior service credit | | — |
| | — |
| | (4.0 | ) | | (5.4 | ) |
| Transition asset obligation | — |
| | — |
| | 1.4 |
| | 1.8 |
| — |
| | — |
| | 1.0 |
| | 1.4 |
|
| Total | $ | 25.8 |
| | $ | 30.2 |
| | $ | 14.2 |
| | $ | 8.6 |
| $ | 14.3 |
| | $ | 25.8 |
| | $ | 4.6 |
| | $ | 14.2 |
|
The following table includes information for pension plans with an accumulated benefit obligation in excess of plan assets. This excludes oneThe balances presented as of December 31, 2013 exclude our international plansJapan plan which hashad plan assets in excess of accumulated benefit obligations.
Tableobligation as of ContentsDecember 31, 2013. The balances presented as of December 31, 2012 exclude our UK Plan which had plan assets in excess of accumulated benefit obligation as of December 31, 2012. The UK Plan was settled during 2013 as discussed further above.
| | | | United States | | International | United States | | International |
| | As of December 31, | | As of December 31, | As of December 31, | | As of December 31, |
| | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 | | 2013 | | 2012 |
| | (In millions) | (In millions) |
| Projected benefit obligation, end of year | $ | 88.3 |
| | $ | 92.2 |
| | $ | 37.3 |
| | $ | 31.7 |
| $ | 78.5 |
| | $ | 88.3 |
| | $ | 25.7 |
| | $ | 37.3 |
|
| Accumulated benefit obligation, end of year | 88.3 |
| | 92.2 |
| | 36.9 |
| | 31.4 |
| 78.5 |
| | 88.3 |
| | 25.7 |
| | 36.9 |
|
| Plan assets at fair value, end of year | 71.7 |
| | 69.6 |
| | 25.8 |
| | 25.1 |
| 71.0 |
| | 71.7 |
| | 19.7 |
| | 25.8 |
|
Components of net periodic pension cost included the following:
| | | | United States | | International | United States | | International |
| | Years Ended December 31, | | Years Ended December 31, | Years Ended December 31, | | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions) |
| Service cost | $ | — |
| | $ | — |
| | $ | 1.7 |
| | $ | 0.6 |
| | $ | 0.7 |
| | $ | 0.6 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.5 |
| | $ | 0.6 |
| | $ | 0.7 |
|
| Interest cost | 3.2 |
| | 4.2 |
| | 4.8 |
| | 2.2 |
| | 2.5 |
| | 2.8 |
| 3.3 |
| | 3.2 |
| | 4.2 |
| | 2.0 |
| | 2.2 |
| | 2.5 |
|
| Expected return on plan assets | (5.7 | ) | | (6.3 | ) | | (5.7 | ) | | (2.3 | ) | | (3.0 | ) | | (3.1 | ) | (5.1 | ) | | (5.7 | ) | | (6.3 | ) | | (2.5 | ) | | (2.3 | ) | | (3.0 | ) |
| Amortization of net actuarial loss | 1.5 |
| | 1.2 |
| | 0.4 |
| | 0.3 |
| | 0.2 |
| | 0.2 |
| 1.9 |
| | 1.5 |
| | 1.2 |
| | 0.5 |
| | 0.3 |
| | 0.2 |
|
| Amortization of prior service cost (credit) | — |
| | — |
| | 0.1 |
| | (0.5 | ) | | (0.5 | ) | | (0.4 | ) | |
| Amortization of prior service credit | | — |
| | — |
| | — |
| | (0.4 | ) | | (0.5 | ) | | (0.5 | ) |
| Amortization of transition obligation | — |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
| | 0.3 |
| — |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
| | 0.3 |
|
| Net periodic pension cost (credit) | (1.0 | ) | | (0.9 | ) | | 1.3 |
| | 0.6 |
| | 0.2 |
| | 0.4 |
| 0.1 |
| | (1.0 | ) | | (0.9 | ) | | 0.4 |
| | 0.6 |
| | 0.2 |
|
| Settlements and curtailments | 2.4 |
| | 2.5 |
| | 2.8 |
| | — |
| | 0.6 |
| | — |
| 2.1 |
| | 2.4 |
| | 2.5 |
| | — |
| | — |
| | 0.6 |
|
| Total pension cost (credit) | $ | 1.4 |
| | $ | 1.6 |
| | $ | 4.1 |
| | $ | 0.6 |
| | $ | 0.8 |
| | $ | 0.4 |
| |
| Total pension cost | | $ | 2.2 |
| | $ | 1.4 |
| | $ | 1.6 |
| | $ | 0.4 |
| | $ | 0.6 |
| | $ | 0.8 |
|
Total pension cost for each of our international plans individually ranged from less than$0.1 million to $0.5 million in 2013, $0.1 million to $0.6 million in 2012 and $0.1 million to $0.4 million in 2011 and less than $0.1 million to $0.4 million in 2010.2011. Total pension credit ranged from less than $0.1 million to $0.2 million during 2013, 2012 2011 and 2010.2011.
The estimated net actuarial loss, prior service credit and net obligations at transition for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit costs over the next fiscal yearin 2014 are $2.31.5 million loss, $0.50.4 million credit and $0.20.3 million obligation, respectively.
Assumptions used to determine benefit obligations were as follows (international assumptions are a weighted average of all of our international plans):
| | | | United States | | International | United States | | International |
| | As of December 31, | | As of December 31, | As of December 31, | | As of December 31, |
| | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 | | 2013 | | 2012 |
| Discount rate | 3.50 | % | | 3.75 | % | | 3.33 | % | | 4.07 | % | 4.50 | % | | 3.50 | % | | 3.20 | % | | 3.33 | % |
| Rate of compensation increase | — | % | | — | % | | 3.02 | % | | 3.05 | % | — | % | | — | % | | 2.89 | % | | 3.02 | % |
Assumptions used to determine net periodic benefit costs were as follows (international assumptions are a weighted average of all of our international plans):
| | | | United States | | International | United States | | International |
| | As of December 31, | | As of December 31, | As of December 31, | | As of December 31, |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
Discount rate | 3.75 | % | | 4.75 | % | | 5.30 | % | | 4.09 | % | | 4.56 | % | | 5.00 | % | 4.00 | % | | 3.75 | % | | 4.75 | % | | 2.70 | % | | 4.09 | % | | 4.56 | % |
| Expected return on plan assets | 8.00 | % | | 8.00 | % | | 8.00 | % | | 4.32 | % | | 4.92 | % | | 5.52 | % | 7.75 | % | | 8.00 | % | | 8.00 | % | | 4.53 | % | | 4.32 | % | | 4.92 | % |
| Rate of compensation increase | — | % | | — | % | | 4.75 | % | | 2.57 | % | | 2.77 | % | | 2.98 | % | — | % | | — | % | | — | % | | 2.00 | % | | 2.57 | % | | 2.77 | % |
(1) The discount rate of 4.00 percent used to determine the 2013 net periodic benefit cost for the U.S. plan is an average of the discount rates used during the year of 3.50 percent for the first six months of the year and 4.50 percent for the last six months of the year.
The discount rate for the U.S. plan is determined through a modeling process utilizing a customized portfolio of high-quality bonds whose annual cash flows cover the expected benefit payments of the plan, as well as comparing
the results of our modeling to other corporate bond and pension liability indices. Appropriate benchmarks are used to determine the discount rate for the international plans. The expected long-term rate of return on assets assumption is derived from a study that includes a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate. The expected long-term rate of return on assets assumption for the international plans reflects the investment allocation and expected total portfolio returns specific to each plan and country. Beginning in 2011, the projected salary increase assumption was not applicable for the U.S. plan due to the elimination of benefit accruals as of January 1, 2011.
The plans' asset allocations by asset category were as follows:
| | | | United States | | International | United States | | International |
| | As of December 31, | | As of December 31, | As of December 31, | | As of December 31, |
| | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 | | 2013 | | 2012 |
| Short-term investments | 9 | % | | 2 | % | | 1 | % | | 1 | % | 1 | % | | 9 | % | | 1 | % | | 1 | % |
| Fixed income securities | 19 | % | | 15 | % | | 40 | % | | 41 | % | 18 | % | | 19 | % | | 23 | % | | 40 | % |
| Equity securities | 56 | % | | 65 | % | | 26 | % | | 24 | % | 63 | % | | 56 | % | | — | % | | 26 | % |
| Absolute return strategy equity funds | 16 | % | | 18 | % | | — | % | | — | % | 18 | % | | 16 | % | | — | % | | — | % |
| Insurance contracts | — | % | | — | % | | 33 | % | | 34 | % | — | % | | — | % | | 76 | % | | 33 | % |
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | 100 | % | | 100 | % | | 100 | % | | 100 | % |
For the U.S. plan, we maintain target allocation percentages among various asset classes based on an investment policy established for the plan, which is designed to achieve long-term objectives of return, while mitigating against downside risk and considering expected cash flows. The current target asset allocation includes equity securities at 5035 to 80 percent, fixed income securities at 1520 to 2540 percent and other investments at 10 to 20 percent. Other investments include short-term investments and absolute return strategy funds which are investments designed to achieve a certain return. Management reviews our U.S. investment policy for the plan at least annually. Outside the U.S., the investment objectives are similar to the U.S., subject to local regulations. In some countries, a higher percentage allocation to fixed income securities is required.
As of December 31, 2012,2013, the following reflects future benefit payments services expected to be paid, by the plans, in each of the next five years and in the aggregate for the five years thereafter: | | | | United States | | International | United States | | International |
| | (In millions) | (In millions) |
| 2013 | $17.5 | | $2.2 | |
| 2014 | 4.3 | | 2.4 | $15.8 | | $1.3 |
| 2015 | 4.5 | | 2.4 | 3.6 | | 1.4 |
| 2016 | 5.4 | | 2.6 | 5.0 | | 1.4 |
| 2017 | 5.1 | | 2.7 | 4.4 | | 1.5 |
| 2018-2022 | 28.4 | | 14.9 | |
| 2018 | | 4.7 | | 1.5 |
| 2019-2023 | | 26.3 | | 8.1 |
The assets in our defined benefit pension plans are measured at fair value on a recurring basis (at least annually).A three-level hierarchy is used for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability as of the measurement date.
Following is a description of the valuation methodologies used for assets measured at fair value.
Short-term investments. The carrying value of these assets approximates fair value because maturities are generally less than three months. Accordingly, these investments are classified as Level 1 financial instruments.
Mutual funds. Investments in mutual funds are valued using the net asset value (NAV) of shares held as of December 31. The NAV is a quoted transactional price for participants in the fund which do not represent an active market. In relation to these investments, there are no unfunded commitments and the shares can be redeemed on a daily basis with minimal restrictions. Events that may lead to a restriction to transact with the funds are not considered probable. These investments are generally classified as Level 1 financial instruments, however for
certain mutual funds, the NAV is not published, and accordingly, these investments are classified as Level 2 financial instruments. The investment objective of our mutual funds in the U.S. Plan is to provide capital appreciation through an investment strategy that allocates its assets among limited liability companies and/or separate investment accounts or to invest in large cap equity funds focusing on high quality yields through short maturity investments in spread sectors depending on the fund.
Common stocks. Investments in common stock are valued at the closing price reported on major markets on which the individual securities are traded. Accordingly, these investments are classified as Level 1 financial instruments.
Comingled trust funds. These assets are valued using the NAV of shares as of December 31, 2012.31. The NAV is a quoted transactional price for participants in the fund which do not represent an active market. In relation to these investments, there are no unfunded commitments and the shares can be redeemed on a daily basis with minimal restrictions and can do so daily.restrictions. Events that may lead to a restriction to transact with the funds are not considered probable. Accordingly, theseThese investments are classified as Level 2 financial instruments. The Fund’s investment objective is to achieve long-term growth primarily by investing in a diversified portfolio of equity securities of companies located in any country other than the United States.
Insurance contracts. These assets are valued using quoted prices for similar assets. Accordingly, these investments are classified as Level 2 financial instruments.
These methods may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values. Furthermore, while we believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different value measurement. Investments, in general, are subject to various risks, including credit, interest and overall market volatility risks. There were no transfers into or out of Level 1 or Level 2 during the years ended December 31, 20122013 or December 31, 2011.2012.
The fair value of the plan assets by asset category were as follows:
|
| | | | | | | | | | | | | | | |
| United States | December 31, 2013 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| | (In millions) |
| Short-term investments | | | | | | | |
| Money market securities | $ | 0.5 |
| | $ | 0.5 |
| | $ | — |
| | $ | — |
|
| Mutual Funds |
| | | | | | |
| Equity securities | | | | | | | |
| Large-cap growth funds | 16.1 |
| | — |
| | 16.1 |
| | — |
|
| International growth fund | 11.1 |
| | 7.5 |
| | 3.6 |
| | — |
|
| Fixed income securities | 13.0 |
| | 13.0 |
| | — |
| | — |
|
| Absolute return strategy funds | 12.8 |
| | — |
| | 12.8 |
| | — |
|
| Common stocks | 8.3 |
| | 8.3 |
| | — |
| | — |
|
| Commingled trust funds | 9.2 |
| | — |
| | 9.2 |
| | — |
|
| Total | $ | 71.0 |
| | $ | 29.3 |
| | $ | 41.7 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| International | December 31, 2013 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| | (In millions) |
| Short-term investments | | | | | | | |
| Other | $ | 0.3 |
| | $ | — |
| | $ | 0.3 |
| | $ | — |
|
| Mutual Funds | | | | | | | |
| Fixed income securities | 6.1 |
| | — |
| | 6.1 |
| | — |
|
| Insurance contracts | 19.7 |
| | — |
| | 19.7 |
| | — |
|
| Total | $ | 26.1 |
| | $ | — |
| | $ | 26.1 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| United States | December 31, 2012 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| | (In millions) |
| Short-term investments | | | | | | | |
| Money market securities | $ | 6.3 |
| | $ | 6.3 |
| | $ | — |
| | $ | — |
|
| Mutual Funds | | | | | | | |
| Equity securities | | | | | | | |
| Large-cap growth funds | 14.0 |
| | — |
| | 14.0 |
| | — |
|
| International growth fund | 7.4 |
| | 7.4 |
| | — |
| | — |
|
| Fixed income securities | 14.0 |
| | 14.0 |
| | — |
| | — |
|
| Absolute return strategy funds | 11.6 |
| | — |
| | 11.6 |
| | — |
|
| Common stocks | 10.7 |
| | 10.7 |
| | — |
| | — |
|
| Commingled trust funds | 7.7 |
| | — |
| | 7.7 |
| | — |
|
| Total | $ | 71.7 |
| | $ | 38.4 |
| | $ | 33.3 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| International | December 31, 2012 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| | (In millions) |
| Short-term investments | | | | | | | |
| Other | $ | 0.3 |
| | $ | — |
| | $ | 0.3 |
| | $ | — |
|
| Mutual Funds | | | | | | | |
| Equity securities - blended funds | 15.3 |
| | — |
| | 15.3 |
| | — |
|
| Fixed income securities | 23.5 |
| | — |
| | 23.5 |
| | — |
|
| Insurance contracts | 18.9 |
| | — |
| | 18.9 |
| | — |
|
| Total | $ | 58.0 |
| | $ | — |
| | $ | 58.0 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| United States | December 31, 2011 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| | (In millions) |
| Short-term investments | | | | | | | |
| Money market securities | $ | 1.5 |
| | $ | 1.5 |
| | $ | — |
| | $ | — |
|
| Mutual Funds | | | | | | | |
| Equity securities | | | | | | | |
| Large-cap growth funds | 18.0 |
| | — |
| | 18.0 |
| | — |
|
| International growth fund | 6.8 |
| | 6.8 |
| | — |
| | — |
|
| Fixed income securities | 10.7 |
| | 10.7 |
| | — |
| | — |
|
| Absolute return strategy funds | 12.2 |
| | — |
| | 12.2 |
| | — |
|
| Common stocks | 13.3 |
| | 13.3 |
| | — |
| | — |
|
| Commingled trust funds | 7.1 |
| | — |
| | 7.1 |
| | — |
|
| Total | $ | 69.6 |
| | $ | 32.3 |
| | $ | 37.3 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| International | December 31, 2011 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| | (In millions) |
| Short-term investments | | | | | | | |
| Other | $ | 0.3 |
| | $ | — |
| | $ | 0.3 |
| | $ | — |
|
| Mutual Funds | | | | | | | |
| Equity securities - blended funds | 13.0 |
| | — |
| | 13.0 |
| | — |
|
| Fixed income securities | 21.9 |
| | — |
| | 21.9 |
| | — |
|
| Insurance contracts | 18.3 |
| | — |
| | 18.3 |
| | — |
|
| Total | $ | 53.5 |
| | $ | — |
| | $ | 53.5 |
| | $ | — |
|
Employee Retirement Savings Plans
Effective January 1, 2011, our matching formula under our 401(k) retirement plan is 100 percent of employee contributions up to the first five percent of eligible compensation. We used shares of treasury stock to match
employee 401(k) contributions for 2013, 2012 2011 and 2010.2011. Total expense related to the use of shares of treasury stock to match employee 401(k) contributions was $2.31.7 million, $2.12.3 million and $1.72.1 million in 2013, 2012 2011 and 2010,2011, respectively.
We also sponsor a variable compensation program in which we may, at our discretion, contribute up to three percent of eligible employee compensation to employees’ 401(k) retirement accounts, depending upon total company performance. We use shares of treasury stock for this contribution. No contribution was made under the variable compensation program during the years ended December 31, 2013 or 2011. A contribution of $0.7$0.7 million was made under the variable compensation program during the year ended December 31, 2012 for 2011.No contributions were made under the variable compensation program for the years ended December 31, 2011 or 2010.
Note 10 — Income Taxes
The components of loss from continuing operations before income taxes were as follows:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions) |
| U.S. | $ | (282.5 | ) | | $ | (67.0 | ) | | $ | (114.3 | ) | $ | (25.2 | ) | | $ | (266.1 | ) | | $ | (57.1 | ) |
| International | (58.6 | ) | | 24.1 |
| | 37.9 |
| 2.2 |
| | (57.3 | ) | | 26.9 |
|
| Total | $ | (341.1 | ) | | $ | (42.9 | ) | | $ | (76.4 | ) | $ | (23.0 | ) | | $ | (323.4 | ) | | $ | (30.2 | ) |
The components of the income tax provision (benefit) from continuing operations were as follows:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions) |
| Current | | | | | | | | | | |
| Federal | $ | (11.9 | ) | | $ | 1.5 |
| | $ | 12.1 |
| $ | (0.7 | ) | | $ | (11.5 | ) | | $ | 2.2 |
|
| State | — |
| | — |
| | 3.8 |
| — |
| | — |
| | — |
|
| International | 4.9 |
| | 5.5 |
| | 9.0 |
| 5.9 |
| | 6.3 |
| | 6.0 |
|
| Deferred | | | | | | | | | | |
| Federal | 8.8 |
| | — |
| | 44.7 |
| — |
| | 8.8 |
| | — |
|
| State | — |
| | — |
| | 8.6 |
| — |
| | — |
| | — |
|
| International | (2.2 | ) | | (3.2 | ) | | 3.7 |
| (3.8 | ) | | (2.2 | ) | | (3.2 | ) |
| Total | $ | (0.4 | ) | | $ | 3.8 |
| | $ | 81.9 |
| $ | 1.4 |
| | $ | 1.4 |
| | $ | 5.0 |
|
The income tax provision from continuing operations differs from the amount computed by applying the statutory United States income tax rate (35 percent) because of the following items:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions) |
| Tax at statutory U.S. tax rate | $ | (119.4 | ) | | $ | (15.0 | ) | | $ | (26.8 | ) | $ | (8.1 | ) | | $ | (113.2 | ) | | $ | (10.6 | ) |
| State income taxes, net of federal benefit | (6.8 | ) | | (2.2 | ) | | (3.7 | ) | (0.2 | ) | | (6.3 | ) | | (1.9 | ) |
| Net effect of international operations | 23.6 |
| | (1.3 | ) | | (2.8 | ) | 3.1 |
| | 25.0 |
| | (0.8 | ) |
| Settlement of UK pension plan | | (2.3 | ) | | — |
| | — |
|
| Valuation allowances | 95.9 |
| | 17.6 |
| | 105.2 |
| (3.2 | ) | | 89.2 |
| | 11.6 |
|
| U.S. tax on foreign earnings | 3.9 |
| | 4.8 |
| | 5.1 |
| 6.2 |
| | 3.9 |
| | 4.8 |
|
| Stock-based compensation | | 3.1 |
| | 2.4 |
| | 1.6 |
|
| Uncertain tax positions | 0.3 |
| | 0.2 |
| | 1.3 |
| 2.2 |
| | 0.3 |
| | 0.2 |
|
| Other | 2.1 |
| | (0.3 | ) | | 3.6 |
| 0.6 |
| | 0.1 |
| | 0.1 |
|
| Income tax provision (benefit) | $ | (0.4 | ) | | $ | 3.8 |
| | $ | 81.9 |
| |
| Income tax provision | | $ | 1.4 |
| | $ | 1.4 |
| | $ | 5.0 |
|
In comparing our 2012 tax benefit of $0.4 million to our 2011Our 2013 tax provision of $3.8$1.4 million, primarily represents tax expense related to operations outside the primary change is dueUnited States and unrecognized tax benefits recorded during the year offset by the tax benefit related to lower withholdingthe settlement of our UK pension plan during the year.
Our 2012 tax expense incurred during 2012,provision of $1.4 million primarily represents tax expense related to operations outside the United States, offset by tax benefit from settlements with taxing authorities concluded during
2012 the impact ofand activity in other comprehensive income and the mix of taxable income (loss) by country.during 2012.
In comparing our2013, 2012 and 2011 tax provision of $3.8 million to our 2010 tax provision of $81.9 million, the primary change is due to the U.S. not receiving a tax benefit from the 2011 net operating loss and the establishment of a valuation allowance in 2010 on our U.S. deferred tax assets. Other items that had an impact on the 2011 tax provision included a $5.0 million benefit for the reversal of a foreign net operating loss valuation allowance and changes in the mix of income (loss) by jurisdiction.
In 2012, 2011 and 2010 the net cash received (or paid)paid for income taxes, relating to both continuing and discontinued operations, was ($4.4)$4.6 million, ($4.9)$4.4 million and $6.4$4.9 million,, respectively.
Tax laws require certain items to be included in our tax returns at different times than the items are reflected in our results of operations. Some of these items are temporary differences that will reverse over time. We record the tax effect of temporary differences as deferred tax assets and deferred tax liabilities in our Consolidated Balance Sheets.
The components of net deferred tax assets and liabilities were as follows:
| | | | As of December 31, | As of December 31, |
| | 2012 | | 2011 | 2013 | | 2012 |
| | (In millions) | (In millions) |
| Accounts receivable allowances | $ | 6.9 |
| | $ | 5.6 |
| $ | 3.0 |
| | $ | 6.9 |
|
| Inventories | 12.9 |
| | 12.3 |
| 9.1 |
| | 12.9 |
|
| Compensation and employee benefits | 11.2 |
| | 9.7 |
| 8.0 |
| | 11.2 |
|
| Tax credit carryforwards | 39.2 |
| | 35.0 |
| 35.8 |
| | 39.2 |
|
| Net operating loss carryforwards | 83.5 |
| | 49.5 |
| 115.2 |
| | 83.5 |
|
| Accrued liabilities and other reserves | 9.3 |
| | 16.3 |
| 9.0 |
| | 9.3 |
|
| Pension | 9.4 |
| | 8.7 |
| 6.0 |
| | 9.4 |
|
| Property, plant and equipment | — |
| | 14.0 |
| 8.9 |
| | — |
|
| Intangible assets | 76.9 |
| | 5.6 |
| |
| Intangible assets, net | | 55.3 |
| | 76.9 |
|
| Other, net | 2.7 |
| | 5.5 |
| 1.8 |
| | 2.7 |
|
| Gross deferred tax assets | 252.0 |
| | 162.2 |
| 252.1 |
| | 252.0 |
|
| Valuation allowance | (239.1 | ) | | (141.1 | ) | (239.4 | ) | | (239.1 | ) |
| Deferred tax assets | 12.9 |
| | 21.1 |
| 12.7 |
| | 12.9 |
|
| | | | | | | |
| Property, plant and equipment | (1.3 | ) | | — |
| — |
| | (1.3 | ) |
| Deferred tax liabilities | (1.3 | ) | | — |
| — |
| | (1.3 | ) |
| Net deferred tax assets | $ | 11.6 |
| | $ | 21.1 |
| $ | 12.7 |
| | $ | 11.6 |
|
We regularly assess the likelihood that our deferred tax assets will be recovered in the future. A valuation allowance is recorded to the extent we conclude a deferred tax asset is not considered to be more-likely-than-not to be realized. We consider all positive and negative evidence related to the realization of the deferred tax assets in assessing the need for a valuation allowance.
During the fourth quarter of 2010, we recognized significant restructuring charges related to our U.S. operations. Due to these charges and cumulative losses incurred in recent years, we were no longer able to conclude that it was more-likely-than-not that our U.S. deferred tax assets would be fully realized. Therefore, during 2010, we recorded a charge to establish a valuation allowance of $105.6 million related to our U.S. deferred tax assets. The valuation allowance charge is included in income tax provision on our Consolidated Statement of Operations.
Our accounting for deferred tax consequences represents our best estimate of future events. A valuation allowance established or revised as a result of our assessment is recorded through income tax provision (benefit) in our Consolidated Statements of Operations. Changes in our current estimates due to unanticipated events, or other factors, could have a material effect on our financial condition and results of operations.
We maintain a valuation allowance related to our U.S. deferred tax assets and certain foreign net operating losses. The valuation allowance was $239.1239.4 million, $141.1239.1 million and $127.4141.1 million as of December 31, 2013, 2012 2011
and 2010,2011, respectively. The valuation allowance change in 2013 compared to 2012 was not significant. The valuation change in 2012 compared to 2011 was due primarily to operating losses and the impact of intangible asset impairments charges.charges in 2012.
The valuation allowance increaseaccounting rules require the current and non-current components of the deferred tax balances to be netted by jurisdiction prior to disclosure in 2011,the balance sheet. The table below shows the components of our deferred tax balances after the results of that netting process as compared to 2010, was due to $13.4 million of additional federal tax credits related to the repatriation of cash to the U.S., $3.8 million of additional U.S. net operating losses and $1.5 million of other items, offset by a $5.0 million benefit from the reversal of a foreign net operating loss valuation allowance.they are recorded on our Consolidated Balance Sheets:
|
| | | | | | | |
| | As of December 31 |
| | 2013 | | 2012 |
| | (In millions) |
| Deferred tax asset - current | $ | 4.6 |
| | $ | 4.7 |
|
| Deferred tax asset - non-current | 9.5 |
| | 9.3 |
|
| Deferred tax liability - current | (0.4 | ) | | (0.3 | ) |
| Deferred tax liability - non-current | (1.0 | ) | | (2.1 | ) |
| Total | $ | 12.7 |
| | $ | 11.6 |
|
Federal net operating loss carry forwards totaling $182.7260.5 million will begin expiring in 2026. We have state income tax loss carryforwards of $263.8313.4 million, $2.33.6 million of which will expire between 20132014 and 20152016 and the remaining will expire at various dates up to 2032.2033. We have U.S. and foreign tax credit carryforwards of $39.235.8 million, $5.96.8 million of which will expire between 20132014 and 2015 and the remaining2016, $26.6 million of which will expire between 2016 2017
and 2031.2032 and $2.4 million may be carried forward indefinitely. Of the aggregate foreign net operating loss carryforwards totaling $46.135.4 million, $4.10.3 million will expire in the next 3 years,between 2014 and 2016, $12.97.4 million will expire at various dates up to 20322022 and $29.127.7 million may be carried forward indefinitely.
In January 2012, we made a distribution to the U.S. as partAs of the 2011 distribution plan. In December 2012, we continue to have loans to the U.S. from our overseas subsidiaries, which we expect to repay in future periods.
31, 2013, approximately During the fourth quarter of 2011, we distributed funds to the U.S. These distributions were treated as permanent repatriations$101.5 million of unremitted earnings during the fourth quarter of 2011. Our 2011 provision includes a $4.0 million chargeattributable to record the U.S. tax liability associated with these earnings. Some of these distributions were loans to the U.S. from our subsidiaries.
Any amount of earnings in excess of the loan amounts described above were either already invested in the foreign operations or needed as working capital. The remaining unremitted earnings of our foreign subsidiaries will continuewere considered to be permanently reinvestedinvested in their operations and no additional deferred taxes have been recorded. The actual U.S. tax cost of any future repatriation of foreign earnings would depend on income tax law and circumstances at the time of distribution. Determination of the related tax liability is not practicable because of the complexities associated with the hypothetical calculation. As of December 31, 2012, approximately $92.8 million of earnings attributablecalculation, however the amount would be limited primarily to required withholding taxes in foreign subsidiaries were considered to be permanently investedjurisdictions given that we have a full valuation allowance recorded in those operations.the U.S.
Our income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we record accruals for items that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position in the financial statements is that the position must be more-likely-than-not to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | Amount | Amount |
| | (In Millions) | (In Millions) |
| Balance at December 31, 2009 | $ | 13.8 |
| |
| Balance at December 31, 2010 | | $ | 14.9 |
|
| Additions: | | |
| Tax positions of current years | 0.3 |
| 0.3 |
|
| Tax positions of prior years | 1.3 |
| |
| Reductions: | | |
| Settlements with taxing authorities | (0.2 | ) | |
| Lapse of statute of limitations | (0.3 | ) | |
| Balance at December 31, 2010 | 14.9 |
| |
| Additions: | | |
| Tax positions of current year | 0.3 |
| |
| Tax positions of prior years | 0.1 |
| 0.1 |
|
| Reductions: | | |
| Settlements with taxing authorities | — |
| — |
|
| Lapse of statute of limitations | (0.2 | ) | (0.2 | ) |
| Balance at December 31, 2011 | 15.1 |
| 15.1 |
|
| Additions: | | |
| Tax positions of current year | 0.3 |
| 0.3 |
|
| Tax positions of prior years | 0.6 |
| 0.6 |
|
| Reductions: | | |
| Tax positions of prior years | (11.3 | ) | (11.3 | ) |
| Settlements with taxing authorities | (0.2 | ) | (0.2 | ) |
| Lapse of statute of limitations | (0.1 | ) | (0.1 | ) |
| Balance at December 31, 2012 | $ | 4.4 |
| 4.4 |
|
| Additions: | | |
| Tax positions of current year | | 0.3 |
|
| Tax positions of prior years | | 1.1 |
|
| Reductions: | | |
| Tax positions of prior years | | (0.4 | ) |
| Settlements with taxing authorities | | — |
|
| Lapse of statute of limitations | | (0.1 | ) |
| Balance at December 31, 2013 | | $ | 5.3 |
|
The total amount of unrecognized tax benefits, which excludes accrued interest and penalties described below, as of December 31, 20122013 was $4.45.3 million. The $11.3 million reduction made during 2012 related to prior year tax positions included $10.5 million of tax benefit that was offset by a corresponding increase in valuation allowance against deferred tax assets. If the unrecognized tax benefits remaining at December 31, 20122013 were recognized in our consolidated financial statements, $4.45.3 million would ultimately affect income tax expense and our related effective tax rate.
It is reasonably possible that the amount of the unrecognized tax benefits could increase or decrease significantly during the next twelve months; however, it is not possible to reasonably estimate the effect on the unrecognized tax benefit at this time.
Interest and penalties recorded for uncertain tax positions are included in our income tax provision. During the years ended December 31, 2013, 2012 2011 and 2010,2011, we recognized approximately$0.8 million expense, $1.3 million benefit $0.2 million benefit and $0.50.2 million expense, respectively, in interest and penalties. We had approximately $0.31.1 million, $2.50.3 million and $2.62.5 million accrued, excluding the tax benefit of deductible interest, for the payment of interest and penalties at December 31, 2013, 2012 2011 and 2010,2011, respectively. The reversal of accrued interest and penalties would affect income tax expense and our related effective tax rate.
Our federal income tax returns for 2010 through 20112012 are subject to examination by the Internal Revenue Service (IRS). The IRS completed its field examination of our U.S. federal income tax returns for the years 2006 through 2008 in the second quarter of 2010. The IRS completed its field examination for the 2009 tax year in the fourth quarter of 2011. We protested certain IRS positions in both audit cycles and reached a final settlement through the IRS appeals process during the fourth quarter of 2012. We currently have foreign tax audits underway. Based on available information, the uncertain tax position associated with these foreign audits have been assessed and included in our income tax provision. For state and foreign tax purposes, the statutes of limitation vary by jurisdiction. With few exceptions, we are no longer subject to examination by foreign tax jurisdictions or state and city tax jurisdictions for years before 2006. In the event that we have determined not to file tax returns with a particular state or city, all years remain subject to examination by the tax jurisdiction.
Note 11 — Debt
On March 30, 2006, we entered into a credit agreement with a group of banks (the Credit Agreement). Subsequently, we entered into various amendments which, among other things, added Imation Europe B.V. as a borrower (European Borrower).
On May 18, 2012, we entered into an amendment (the Amendment) to the Credit Agreement (as amended to date, the Amended Credit Agreement). The Amendment modified the Credit Agreement by extending the expiration date of the borrowing arrangement to May 18, 2017, requiring that the equity interests of material foreign subsidiaries be pledged to support the obligations, if any, of the European Borrower, lowered the applicable margin on interest, lowered the Company's minimum required Consolidated Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be maintained as well as provided for certain other less significant changes.
The Amended Credit Agreement includes a senior revolving credit facility that allows for the borrowing of amounts up to a maximum of $200170 million, including sublimits of $150140 million in the United States and $5030 million in Europe. Borrowings in both the United States and Europe are limited to the lesser of the sublimit(s) and the borrowing base as defined in the Amended Credit Agreement and are payable upon expiration of the Amended Credit Agreement or immediately, but only to the extent the applicable sublimit(s) are reduced to an amount less than the amount borrowed at that time. Our borrowing base is calculated each quarter unless our outstanding loan amount is greater than $5.0 million in which our borrowing base is calculated monthly. Our borrowing base is based on our amounts of receivables, inventories and other factors that influence the borrowing base and, to the extent any outstanding borrowing exceedexceeds the borrowing base, any such excess is due and payable immediately.
As of December 31, 2012,2013, we had $20.0 million of borrowings outstanding under the Amended Credit Agreement, all of which was borrowed in the United States and bore interest at a rate of 2.24 percent as of December 31, 2013. As of December 31, 2013, our total remaining borrowing capacity under this arrangementthe Amended Credit Agreement was $30.1 million, consisting of $76.419.0 million in the United States and $13.911.1 million in Europe.
Prior to August 15, 2012, borrowings bore interest at an interest rate equal to (1) the Eurodollar Rate (as defined in the Amended Credit Agreement) plus 2.00 percent or (2) the Base Rate (as defined in the Amended Credit Agreement) plus 1.00 percent. After August 15, 2012, the applicable margins for the Eurodollar Rate and the Base Rate are subject to adjustments based on average daily availability (as defined in the Amended Credit Agreement).
Our U.S. obligations under the Amended Credit Agreement are guaranteed by the material domestic subsidiaries of Imation Corp. (the Guarantors) and are secured by a first priority lien (subject to customary exceptions) on the real property comprising Imation Corp.’s corporate headquarters and all of the personal property of Imation Corp., its subsidiary Imation Enterprises Corp., which is also an obligor under the Amended Credit Agreement, and the Guarantors. Borrowings under the U.S. portion of the Credit Facility are limited to the lesser of (a) $150140 million and (b) the “U.S. borrowing base.” The U.S. borrowing base is equal to the following:
up to 85 percent of eligible accounts receivable; plus
up to the lesser of 65 percent of eligible inventory or 85 percent of the appraised net orderly liquidation value of eligible inventory; plus
up to 60 percent of the appraised fair market value of eligible real estate (the Original Real Estate Value), such Original Real Estate Value to be reduced each calendar month by 1/120th, provided, that the Original Real Estate Value shall not exceed $40 million; plus
such other classes of collateral as may be mutually agreed upon and at advance rates as may be determined by the Agent; minus
such reserves as the Agent may establish in good faith.
Our European obligations under the Credit Agreement are secured by a first priority lien on substantially all of the material personal property of the European Borrower. Borrowings under the European portion of the Credit Facility are limited to the lesser of (a) $5030 million and (b) the “European borrowing base.” The European borrowing base calculation is fundamentally the same as the U.S. borrowing base, subject to certain differences to account for European law and other similar issues.
As of December 31, 2012, we had $20.0 million of borrowings outstanding under the Amended Credit Agreement, all of which was borrowed in the United States. Outstanding borrowings in the United States bear interest of 2.25 percent as of December 31, 2012. As of December 31, 2012, our total remaining borrowing capacity under the Credit Facility was $90.3 million.
The Amended Credit Agreement contains covenants which are customary for similar credit agreements, including covenants related to financial reporting and notification, payment of indebtedness, taxes and other obligations; compliance with applicable laws; and limitations regarding additional liens, indebtedness, certain
acquisitions, investments and dispositions of assets. The Amended Credit Agreement contains a conditional financial covenant that requires Imation Corp. to have a Consolidated Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) of not less than 1.00 or a liquidity requirement of $30.0 million of domestic borrowing availability. We were in compliance with the liquidity requirement as of December 31, 2012.2013 and our U.S. availability discussed above considers the $30 million liquidity requirement.
On July 16, 2013, we entered into an additional credit agreement for a revolving credit facility with a lender in Japan with Imation Corporation Japan as the borrower and Imation Corp. as the guarantor. We intend to use the credit facility for general operating purposes. The credit agreement is a three year asset-based revolving credit facility with a borrowing base consistent with our existing Credit Agreement that allows for the borrowing of amounts up to 3.0 billion Japanese Yen, or approximately $30.0 million. Borrowings under the credit facility will bear interest at an interest rate equal to the base rate based on LIBOR or TIBOR plus the applicable margins provided for in the credit agreement. The credit agreement contains financial covenants applicable to Imation Corporation Japan including a fixed charge coverage ratio requirement. As of December 31, 2013, our borrowing capacity under this arrangement was $12.4 million and we did not have any borrowings outstanding under this credit facility. We are in compliance with all covenant requirements as of December 31, 2013.
During 2013 we capitalized $0.4 million of debt issuance costs related to the Japan Credit Agreement and during 2012 we capitalized $2.6 million of debt issue costs related to the Amended Credit Agreement. These costs were recorded to Other assets in our Consolidated Balance Sheets as of December 31, 2013 and 2012 and are being amortized over the term of each of the credit agreements.
As of December 31, 20122013 and 20112012 we had outstanding standby letters of credit of $0.40.7 million and $0.60.4 million, respectively. The outstanding standby letters of credit are required by our insurance companies to cover potential deductibles and reduce our allowed borrowing capacity under the Amended Credit Agreement.
During 2012 we capitalized $2.6 million of debt issuance costs related to the Amended Credit Agreement. These costs were recorded to Other assets in the Consolidated Balance Sheets Additionally, as of December 31, 2012 and are being amortized over the term2013 we had a $6.0 million overdraft line of the Amended Credit Agreement.credit available in Japan.
Our interest expense, which includes letter of credit fees, facility fees, commitment fees under the Amended Credit Agreement and amortization of debt issuance costs, for 2013, 2012 and 2011 and 2010 was$2.5 million, $2.9 million, and $3.7 million and $4.2 million, respectively. Cash paid for interest for 2013, 2012 2011 and 2010,2011, relating to both continuing and discontinued operations, was $2.41.7 million, $2.72.4 million and $2.7 million, respectively.
Note 12 — Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or the exit price in an orderly transaction between market participants on the measurement date. A three-level hierarchy is used for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability as of the measurement date. Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable inputs. A financial instrument's level within the hierarchy is
based on the highest level of any input that is significant to the fair value measurement. Following is a description of our valuation methodologies used to estimate the fair value for our assets and liabilities.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The Company's non-financial assets such as goodwill, intangible assets and property, plant and equipment are recorded at fair value when an impairment is recognized or at the time acquired in a business combination. As discussed in Note 6 - Intangible Assets and Goodwill and Note 7 - Restructuring and Other Expense, during each of 2012 2011 and 2010,2011, we recorded impairment charges associated with goodwill, intangible assets or property, plant and equipment and reduced the carrying amount of such assets subject to the impairment to their estimated fair value. Additionally, as discussed in Note 4 - Acquisitions, the Company consummated various business acquisitions during 2012 and 2011 and recorded the acquired assets and liabilities, including goodwill, intangible assets and property, plant and equipment at their estimated fair value. The determination of the estimated fair value of such assets required the use of significant unobservable inputs which would be considered Level 3 fair value measurements.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at their estimated fair value on a recurring basis, including cash and cash equivalents, derivative instruments and our contingent consideration obligations associated with certain acquisitions.
Derivative Financial Instruments
We maintain a foreign currency exposure management policy that allows the use of derivative instruments, principally foreign currency forward, option contracts and option combination strategies to manage risks associated with foreign exchange rate volatility. Generally, these contracts are entered into to fix the U.S. dollar amount of the eventual cash flows. The derivative instruments range in duration at inception from between one to 16 months. The fair value of our derivative instruments is determined based on inputs that are observable in the public market, but are other than publicly quoted prices (Level 2). We are exposed to the risk of nonperformance by our counter-parties, but we do not anticipate nonperformance by any of these counter-parties. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits and by using major international banks and financial institutions as counter-parties.
Cash Flow Hedges. We attempt to substantially mitigate the risk that forecasted cash flows denominated in foreign currencies may be adversely affected by changes in the currency exchange rates through the use of option,
forward and combination option contracts. The degree of our hedging can fluctuate based on management judgment and forecasted projections. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking the hedged items. This process includes linking all derivatives to forecasted transactions. We formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in the cash flows of hedged items. At December 31, 20122013 and 2011,2012, our contracts had durations of 12 months or less. The fair value of these contracts is recorded in other current assets and other current liabilities on our Consolidated Balance Sheets.
Gains and losses related to cash flow hedges are deferred in accumulated other comprehensive loss.loss with a corresponding asset or liability. When the hedged transaction occurs, the gains and losses in accumulated other comprehensive loss are reclassified into theour Consolidated Statements of Operations in the same line as the item being hedged. If at any time it is determined that a derivative is not highly effective as a hedge, we discontinue hedge accounting prospectively, with deferred gains and losses being recognized in current period operations. The following table sets forth our cash flow hedges which are measured at fair value on a recurring basis.
| | | | December 31, 2012 | | December 31, 2011 | December 31, 2013 | | December 31, 2012 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
| | (In millions) | (In millions) |
| Derivative assets | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency option contracts | $ | — |
| | $ | 5.5 |
| | $ | — |
| | $ | — |
| | $ | 2.3 |
| | $ | — |
| $ | — |
| | $ | 1.8 |
| | $ | — |
| | $ | — |
| | $ | 5.5 |
| | $ | — |
|
| Foreign currency forward contracts | — |
| | — |
| | — |
| | — |
| | 1.1 |
| | — |
| — |
| | 3.3 |
| | — |
| | — |
| | — |
| | — |
|
| Derivative liabilities | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency option contracts | — |
| | (1.2 | ) | | — |
| | — |
| | (1.4 | ) | | — |
| — |
| | (0.2 | ) | | — |
| | — |
| | (1.2 | ) | | — |
|
| Foreign currency forward contracts | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | — |
| — |
| | (0.5 | ) | | — |
| | — |
| | (0.1 | ) | | — |
|
| Total | $ | — |
| | $ | 4.2 |
| | $ | — |
| | $ | — |
| | $ | 2.0 |
| | $ | — |
| $ | — |
| | $ | 4.4 |
| | $ | — |
| | $ | — |
| | $ | 4.2 |
| | $ | — |
|
Other Derivative Instruments. We use foreign currency forward contracts to manage the foreign currency exposure related to our monetary assets and liabilities denominated in foreign currencies. We record the estimated fair value of these forward contracts within other current assets or other current liabilities on our Consolidated Balance Sheets and because we do not receive hedge accounting for these derivatives, changes in their value are recognized every reporting period in theour Consolidated Statements of Operations.
For 2013, 2012 2011 and 20102011 we recorded foreign currency gains of $0.5 million and losses of $1.6 million, and $4.6 million and $2.2 million, respectively, in Other Expenses,expenses, net in theour Consolidated Statements of Operations. These losses reflect changes in foreign exchange rates on foreign denominated assets and liabilities and are net of a gain of $0.7 million and include lossesgains of $1.7 million and $4.30.7 million and losses of $1.7 million, from the related foreign currency forward contracts for 2013, 2012 2011 and 2010,2011, respectively.
The notional amounts and fair values of our derivative instruments recorded in other current assets and other current liabilities in theour Consolidated Financial Statements were as follows:
| | | | December 31, 2012 | | December 31, 2011 | December 31, 2013 | | December 31, 2012 |
| | | | Fair Value | | | | Fair Value | | | Fair Value | | | | Fair Value |
| | Notional Amount | | Other Current Assets | | Other Current Liabilities | | Notional Amount | | Other Current Assets | | Other Current Liabilities | Notional Amount | | Other Current Assets | | Other Current Liabilities | | Notional Amount | | Other Current Assets | | Other Current Liabilities |
| | (In millions) | (In millions) |
| Cash flow hedges designated as hedging instruments | $ | 248.6 |
| | $ | 5.5 |
| | $ | (1.3 | ) | | $ | 208.2 |
| | $ | 3.4 |
| | $ | (1.4 | ) | $ | 133.8 |
| | $ | 5.1 |
| | $ | (0.7 | ) | | $ | 248.6 |
| | $ | 5.5 |
| | $ | (1.3 | ) |
| Other hedges not receiving hedge accounting | 46.5 |
| | — |
| | — |
| | 32.9 |
| | — |
| | — |
| 29.4 |
| | — |
| | — |
| | 46.5 |
| | — |
| | — |
|
| Total | $ | 295.1 |
| | $ | 5.5 |
| | $ | (1.3 | ) | | $ | 241.1 |
| | $ | 3.4 |
| | $ | (1.4 | ) | $ | 163.2 |
| | $ | 5.1 |
| | $ | (0.7 | ) | | $ | 295.1 |
| | $ | 5.5 |
| | $ | (1.3 | ) |
On December 31, 20122013 we entered into certain hedges not receiving hedge accounting treatment and the estimated fair value of these hedges were inconsequential as of December 31, 2012.2013.
Other Assets and Liabilities
Contingent Consideration.Contingent consideration recorded for earn-out payments related to our acquisitions is recorded at fair value and remeasured on a recurring basis. We use the income approach in calculating the fair value of our contingent consideration. Changes in the fair value of our contingent consideration obligations are recognized as a fair value adjustment within restructuring and other in our Consolidated Statements of Operations. These fair value measurements are calculated using the income approach with cash flow projections based on significant inputs not observable in the market and therefore represent Level 3 measurements. See Note 4 - Acquisitions for further discussion of the fair value calculation of our contingent consideration as of December 31, 2012. The following table sets forth a summary of changes in the fair value of our contingent consideration Level 3 liabilities:
|
| | | | | | | | | | | |
| | MXI Security | | Encryptx | | Total |
| | (In millions) |
| Balance as of December 31, 2010 | $ | — |
| | $ | — |
| | $ | — |
|
| Addition from acquisitions | 9.2 |
| | 1.3 |
| | 10.5 |
|
| Balance as of December 31, 2011 | 9.2 |
| | 1.3 |
| | 10.5 |
|
| Fair value adjustment | (8.6 | ) | | — |
| | (8.6 | ) |
| Payments | — |
| | (0.7 | ) | | (0.7 | ) |
| Balance as of December 31, 2012 | $ | 0.6 |
| | $ | 0.6 |
| | $ | 1.2 |
|
Other
The carrying value of accounts receivable and accounts payable approximate their fair values due to the short-term duration of these items. Additionally, our borrowings of $20.0 million of outstanding debt under the Amended Credit Agreement at December 31, 2012,2013, as further described in Note 11 - Debt, approximates fair value due to the short nature of this debt.
Note 13 — Shareholders' Equity
Shareholder Rights Plan
Effective February 11, 2013, our Board of Directors amended the Rights Agreement dated as of June 21, 2006 to change the final expiration date from July 1, 2016 to February 11, 2013, effectively terminating the Rights Agreement. This amendment had no accounting implications to the Company.
Treasury Stock
On May, 2, 2012 our Board of Directors authorized a share repurchase program that allowed for the repurchase of 5.0 million shares of common stock. Since the inception of this authorization we have repurchased 1.21.8 million shares of common stock for $6.5$9.0 million and, as of December 31, 20122013, we had authorization to repurchase up to 3.83.2 million additional shares. The treasury stock held as of December 31, 20122013 was acquired at an average price of $24.1124.03 per share. Following is a summary of treasury share activity:
|
| | |
| | Treasury Shares |
Balance as of December 31, 2009 | 4,826,705 |
|
Purchases | — |
|
Exercise of stock options | (1,000 | ) |
Restricted stock grants and other | (439,175 | ) |
401(k) matching contribution | (174,245 | ) |
| Balance as of December 31, 2010 | 4,212,285 |
|
| Purchases | 1,099,219 |
|
| Exercise of stock options | (45,429 | ) |
| Restricted stock grants and other | (365,712 | ) |
| 401(k) matching contribution | (236,440 | ) |
| Balance as of December 31, 2011 | 4,663,923 |
|
| Purchases | 1,236,161 |
|
| Exercise of stock options | — |
|
| Restricted stock grants and other | (499,851 | ) |
| 401(k) matching contribution | (517,588 | ) |
| Shares issued for acquisition | (3,319,324 | ) |
| Balance as of December 31, 2012 | 1,563,321 |
|
| Purchases | 616,581 |
|
| Exercise of stock options | — |
|
| Restricted stock grants and other | (622,241 | ) |
| 401(k) matching contribution | (435,735 | ) |
| Balance as of December 31, 2013 | 1,121,926 |
|
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss and related activity consisted of the following:
|
| | | | | | | |
| | December 31, |
| | 2012 | | 2011 |
| | (In millions) |
| Cumulative currency translation adjustment | $ | (49.1 | ) | | $ | (47.4 | ) |
| Pension adjustments, net of income tax | (27.8 | ) | | (26.8 | ) |
| Cash flow hedging and other, net of income tax | 2.7 |
| | 1.6 |
|
| Total accumulated other comprehensive loss | $ | (74.2 | ) | | $ | (72.6 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Gains (Losses) on Derivative Financial Instruments | | Defined Benefit Plans | | Foreign Currency Translation | | Total |
| | | (In millions) |
| Balance as of December 31, 2012 | | $ | 2.7 |
| | $ | (27.8 | ) | | $ | (49.1 | ) | | $ | (74.2 | ) |
Other comprehensive (loss) income before reclassifications, net of tax (1) | | 7.0 |
| | 10.7 |
| | (4.5 | ) | | 13.2 |
|
| Amounts reclassified from accumulated other comprehensive loss, net of tax | | (7.3 | ) | | 5.5 |
| | — |
| | (1.8 | ) |
| Net current period other comprehensive income (loss) | | (0.3 | ) | | 16.2 |
| | (4.5 | ) | | 11.4 |
|
| Balance as of December 31, 2013 | | $ | 2.4 |
| | $ | (11.6 | ) | | $ | (53.6 | ) | | $ | (62.8 | ) |
Comprehensive Loss(1) Income tax expense of $4.4 million was recorded for unrealized gains on derivative financial instruments and $1.7 million for liability adjustments for defined benefit plans for the year ended December 31, 2013.
ComponentsDetails of amounts reclassified from Accumulated other comprehensive loss consistedand the line item in our Consolidated Statement of Operations for the following:year ended December 31, 2013 are as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | (In millions) |
| Other comprehensive income (loss), net of tax: | | | | | |
| Net unrealized (losses) gains on derivative financial instruments: | | | | | |
| Net holding (losses) gains arising during the period | $ | 5.1 |
| | $ | 0.3 |
| | $ | 0.7 |
|
| Tax benefit (expense) | (2.0 | ) | | (0.1 | ) | | (0.1 | ) |
| Reclassification adjustment for net realized (gains) losses included in net loss | (3.0 | ) | | 0.8 |
| | — |
|
| Tax expense (benefit) | 1.0 |
| | (0.2 | ) | | — |
|
| Total net unrealized (losses) gains on derivative financial instruments | $ | 1.1 |
| | $ | 0.8 |
| | $ | 0.6 |
|
| | | | | | |
| Net pension adjustments: | | | | | |
| Reclassification of adjustments for defined benefit plans recorded in net loss | $ | (0.9 | ) | | $ | (13.0 | ) | | $ | 8.2 |
|
| Tax benefit (expense) | (0.1 | ) | | 0.3 |
| | (3.6 | ) |
| Total net pension adjustments | $ | (1.0 | ) | | $ | (12.7 | ) | | $ | 4.6 |
|
| | | | | | |
| Unrealized foreign currency translation (losses) gains | $ | (1.7 | ) | | $ | — |
| | $ | 3.0 |
|
|
| | | | | | |
| | | Amounts Reclassified from Accumulated Other Comprehensive Loss | | Affected Line Item in the Statement Where Net Loss is Presented |
| | | (In millions) | | |
| (Gains) losses on cash flow hedges | | $ | (11.8 | ) | | Cost of goods sold |
| Income tax expense | | 4.5 |
| | Income tax (benefit) provision |
| Net (gains) losses on cash flow hedges | | (7.3 | ) | | |
| Amortization of net actuarial loss | | 2.1 |
| | Selling, general and administrative |
| Pension settlement loss | | 3.5 |
| | Restructuring and other |
| Income tax benefit | | (0.1 | ) | | Income tax (benefit) provision |
| Net pension adjustments, net of tax | | 5.5 |
| | |
| Total reclassifications for the period | | $ | (1.8 | ) | | |
Amounts above are presented to show each component of comprehensive loss on a gross basis and the related taxes. Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries. Reclassification adjustments are made to avoid double counting in comprehensive loss items that are also recorded as part of net loss. These itemsloss and are presented net of taxes in the Consolidated Statements of Comprehensive Loss.
Note 14 — Business Segment Information and Geographic Data
AsIn the first quarter of and for each of the years ended December 31, 2012, 2011 and 2010,2013, we revised our segment reporting to reflect changes in how we manage our business, was organized, managedreview operating performance and internallyallocate resources. We now manage our business through two reporting segments, Consumer Storage and externally reportedAccessories (CSA) and Tiered Storage and Security Solutions (TSS). Our new reporting segments are generally aligned with our key consumer and commercial channels.
We have two major product categories under our CSA segment: Consumer storage media and Audio and accessories. Consumer storage media products include primarily optical products such as segments differentiated by the regional markets we serve: Americas, Europe, North AsiaDVDs, CDs and South Asia. EachBlu-ray disc recordable media as well as flash media. Audio and accessories include primarily headphones, audio electronics and accessories. We have two major product categories under our TSS segment: Commercial storage media and Storage and security solutions. Commercial storage media products consist mainly of these geographic segments has responsibilitymagnetic data storage tape media and RDX® media. Storage and security solutions includes storage hardware products, services and software for selling all of our product lines.backup and archiving as well as primary storage; encrypted and biometric flash drives and hard disk drives; secure portable desktop solutions; and software solutions, including products which contain various security features such as password authentication, encryption and remote manageability.
Our Americas segment includes North America, Central America and South America.
Our Europe segment includes Europe and parts of Africa.
Our North Asia segment includes Japan, China, Hong Kong, Korea and Taiwan.
Our South Asia segment includes Australia, Singapore, India, the Middle East and parts of Africa
For each of the years presented, we evaluatedWe evaluate segment performance based on revenue and operating income (loss). Revenue for each segment is generally based on customer location where the product is shipped. The operating income (loss) reported in our segments excludes corporate and other unallocated amounts. Although such amounts are excluded from the business segment results, they are included in reported consolidated results. Corporate and unallocated amounts include depreciation and amortization, litigation settlement expense, goodwill impairment, intangible impairments, intangible asset abandonment, research and development expense, corporate expense, stock-based compensation expense, contingent consideration adjustments, inventory write-offs related to our restructuring programs and restructuring and other expenses which are not allocated to the segments. The methodology to determine corporate and unallocated amounts is applied consistently among all years.
During the first quarter of 2013, we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. The operating results for these businesses are presented in our Consolidated Statements of Operations as discontinued operations and are not included in segment results for any periods presented. The consumer storage business under the Memorex and TDK Life on Record brands and the consumer electronics business under the TDK Life on Record brand are being retained. See Note 4 - Acquisitions and Divestitures for further information.
Net revenue and operating income (loss) by segment were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | (In millions) |
| Net Revenue | | | | | |
| Americas | $ | 504.7 |
| | $ | 595.9 |
| | $ | 712.9 |
|
| Europe | 208.8 |
| | 248.0 |
| | 289.8 |
|
| North Asia | 272.5 |
| | 307.2 |
| | 315.2 |
|
| South Asia | 113.6 |
| | 139.3 |
| | 143.0 |
|
| Total | $ | 1,099.6 |
| | $ | 1,290.4 |
| | $ | 1,460.9 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Net Revenue | | | | | |
| Consumer Storage and Accessories | | | | | |
| Consumer storage media | $ | 435.7 |
| | $ | 594.3 |
| | $ | 740.2 |
|
| Audio and accessories | 42.6 |
| | 41.0 |
| | 35.0 |
|
| Total Consumer Storage and Accessories | 478.3 |
| | 635.3 |
| | 775.2 |
|
| Tiered Storage and Security Solutions | | | | | |
| Commercial storage media | 251.0 |
| | 311.6 |
| | 378.8 |
|
| Storage and security solutions | 131.5 |
| | 59.8 |
| | 12.6 |
|
| Total Tiered Storage and Security Solutions | 382.5 |
| | 371.4 |
| | 391.4 |
|
| Total Net Revenue | $ | 860.8 |
| | $ | 1,006.7 |
| | $ | 1,166.6 |
|
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2012 | | 2011 | | 2012 | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions) |
| Operating Income (Loss) | | | | | | | | | | |
| Americas | $ | 2.9 |
| | $ | 8.4 |
| | $ | 36.8 |
| |
| Europe | (3.9 | ) | | 10.3 |
| | (0.6 | ) | |
| North Asia | 5.9 |
| | 12.5 |
| | 14.9 |
| |
| South Asia | 0.6 |
| | 4.0 |
| | 4.0 |
| |
| Consumer Storage and Accessories | | $ | 52.3 |
| | $ | 61.5 |
| | $ | 57.1 |
|
| Tiered Storage and Security Solutions | | (16.1 | ) | | (26.7 | ) | | 9.2 |
|
| Total segment operating income | 5.5 |
| | 35.2 |
| | 55.1 |
| 36.2 |
| | 34.8 |
| | 66.3 |
|
| Corporate and unallocated | (341.6 | ) | | (68.3 | ) | | (124.8 | ) | (56.3 | ) | | (353.2 | ) | | (86.7 | ) |
| Total operating loss | (336.1 | ) | | (33.1 | ) | | (69.7 | ) | (20.1 | ) | | (318.4 | ) | | (20.4 | ) |
| Interest income | (0.5 | ) | | (0.9 | ) | | (0.8 | ) | (0.2 | ) | | (0.5 | ) | | (0.9 | ) |
| Interest expense | 2.9 |
| | 3.7 |
| | 4.2 |
| 2.5 |
| | 2.9 |
| | 3.7 |
|
| Other expense, net | 2.6 |
| | 7.0 |
| | 3.3 |
| 0.6 |
| | 2.6 |
| | 7.0 |
|
| Loss from continuing operations before income taxes | $ | (341.1 | ) | | $ | (42.9 | ) | | $ | (76.4 | ) | $ | (23.0 | ) | | $ | (323.4 | ) | | $ | (30.2 | ) |
We have not provided specific asset information by segment, as it is not regularly provided to our chief operating decision maker for review at a segment specific level. Corporate and unallocated amounts above include non-cash goodwill impairment charges of $23.3 million, and $1.6 million and $23.5 million for the years ended December 31, 2012, 2011, and 2010, respectively, non-cash intangible asset impairment charges for $260.5of $251.8 million for the year ended December 31, 2012, restructuring and other costs of $21.111.3 million, $21.521.1 million and $51.121.5 million for the years ended December 31, 2013, 2012 and 2011, respectively and 2010, respectivelylitigation settlement gains of $2.5 million for the year ended December 31, 2013 and litigation settlement charges of $2.0 million and $2.6 millionfor the yearsyear ended December 31, 2011 and 2010, respectively.2011.
We have three major product categories: traditional storage, secure and scalable storage and audio and video information. Traditional storage products include optical products, magnetic products and other traditional storage media products. Optical products include primarily DVDs, CDs and Blu-ray disc recordable media. Magnetic products include primarily data storage tape media. Other traditional storage products include primarily optical drives and audio and video tape media. Secure and scalable storage products include flash memory and hard disk drive products, including encrypted and biometric universal serial bus (USB) drives, encrypted and biometric hard disk drives, secure portable desktop solutions, and software solutions, including products which contain various security features such as password authentication, encryption and remote manageability, RDX cartridges and drives, and data protection and data archive appliances. Audio and video information products include primarily audio electronics such as portable stereo systems, iPod® docking stations and accessories and other accessories such as CD and DVD jewel cases and headphones.
Net revenue by major product category was as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | (In Millions) |
| Net Revenue | | | | | |
| Traditional storage | | | | | |
| Optical products | $ | 426.8 |
| | $ | 511.9 |
| | $ | 619.3 |
|
| Magnetic products | 286.2 |
| | 327.4 |
| | 347.8 |
|
| Other traditional storage | 15.4 |
| | 47.7 |
| | 62.8 |
|
| Total traditional storage | 728.4 |
| | 887.0 |
| | 1,029.9 |
|
| Secure and scalable storage | 210.1 |
| | 210.1 |
| | 207.5 |
|
| Audio and video information | 161.1 |
| | 193.3 |
| | 223.5 |
|
| Total | $ | 1,099.6 |
| | $ | 1,290.4 |
| | $ | 1,460.9 |
|
The following table presents net revenue by geographical region based on the country in which the revenue originated:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions) |
| Net Revenue | |
| | |
| | |
| |
| | |
| | |
|
| United States | $ | 447.4 |
| | $ | 519.2 |
| | $ | 633.1 |
| $ | 348.1 |
| | $ | 376.2 |
| | $ | 420.8 |
|
| International | 652.2 |
| | 771.2 |
| | 827.8 |
| 512.7 |
| | 630.5 |
| | 745.8 |
|
| Total | $ | 1,099.6 |
| | $ | 1,290.4 |
| | $ | 1,460.9 |
| $ | 860.8 |
| | $ | 1,006.7 |
| | $ | 1,166.6 |
|
The United States and Japan each comprise more than 10 percent of our total net revenue. Net revenue from Japan was 19.720.6 percent, 17.621.0 percent and 16.019.4 percent of total net revenue for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively.
The following table presents long-lived assets by geographical region:
| | | | As of December 31, | As of December 31, |
| | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions) |
| Long-Lived Assets | |
| | |
| | |
| |
| | |
| | |
|
| United States | $ | 55.1 |
| | $ | 51.6 |
| | $ | 62.4 |
| $ | 150.7 |
| | $ | 166.9 |
| | $ | 321.0 |
|
| International | 3.8 |
| | 3.8 |
| | 4.5 |
| 41.6 |
| | 47.4 |
| | 87.4 |
|
| Total | $ | 58.9 |
| | $ | 55.4 |
| | $ | 66.9 |
| $ | 192.3 |
| | $ | 214.3 |
| | $ | 408.4 |
|
Note 15 — Litigation, Commitments and Contingencies
Litigation
In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. Performance under these indemnities would generally be triggered by a breach of terms of the contract or by a supportable third-party claim. There have historically been no material losses related to such indemnifications. As of December 31, 20122013 and 2011,2012, estimated liability amounts associated with such indemnifications are inconsequential.
We are the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Additionally, our businesses are subject to allegations of patent infringement by our competitors as well as by non-practicing entities (NPEs), sometimes referred to as “patent trolls,” who may seek monetary settlements from us, our competitors, suppliers and resellers.resellers, including the One-Blue litigation described below. Consequently, as of December 31, 20122013, we are unable to reasonably estimate the ultimate aggregate amount of any monetary liability or financial impact that we may incur with respect to these matters. It is reasonably possible that the ultimate resolution of these matters could materially affect our operating results.
On January 11, 2011, we signed a patent cross-license agreement with SanDisk Corporation (SanDisk) to settle
two patent cases filed by SanDisk in Federal District Court against our flash memory products, including USB drivesoperations and solid state disk (SSD) drives. Under the terms of the cross-license, we will pay SanDisk royalties on certain flash memory products that were previously not licensed. The specific terms of the cross-license are confidential. The cross-license agreement required us to make a one-time payment of $2.6 million in 2011, which was included in litigation settlement expense in the Consolidated Statements of Operations during 2010.cash flows.
On June 19, 2009 Advanced Research Corp. (ARC)May 22, 2013, Imation was sued Imation in Ramsey CountyU.S. District Court for breachthe District of contract relating to a supply agreement under which we purchased magnetic heads to write servo patterns on magnetic tape, requesting the court to order that Imation pay damages and return the purchased heads to ARC. In September 2011 we agreed to a settlement of $2.0 millionDelaware by five entities: One-Blue, LLC (One-Blue), which is includedan entity with licensing authority for a pool of patents relating to Blu-ray discs, and four members of One-Blue, Koninklijke Philips N.V., Panasonic Corporation, Pioneer Corporation and Sony Corporation.The plaintiffs allege that Imation's sales of certain Blu-ray discs infringe six patents and seek unspecified damages, treble damages, and attorney's fees.On June 13, 2013, Imation filed an Answer, Affirmative Defenses, and Counterclaims, naming various defenses including that plaintiffs are barred, in litigation settlement expensewhole or in part, from any recovery or relief by their refusal to license the patents-in-suit under fair, reasonable, and nondiscriminatory terms.Imationintends to vigorously defend the case. This matter is now in the Consolidated Statementsdiscovery phase for issues relating to determination of Operations asa fair, reasonable, and nondiscriminatory royalty rate.In addition, Imation has a dispute with One-Blue regarding One-Blue's refusal to license its Japanese Blu-ray patents under fair, reasonable, and nondiscriminatory terms in Japan, where Imation’s sales of December 31, 2011 and was paid during 2012.
In 2009 we entered into a confidential settlement agreement ending all legal disputes with Philips Electronics N.V., U.S. Philips Corporation and North American Philips Corporation (collectively, Philips). We had been involved in a complex series of disputes in multiple jurisdictions regarding cross-licensing and patent infringement related to recordable optical media. The settlement provided resolution of all claims and counterclaims filed by the parties without any finding or admission of liability or wrongdoing by any party. As a term of the settlement, we agreed to pay Philips $53.0 million over a period of three years. Based on the present value of these settlement payments, we recorded a charge of $49.0 million in 2009. We made payments of $16.5 million, $8.3 million, $8.2 million and $20.0 million in 2012, 2011, 2010 and 2009, respectively, in full satisfaction of this settlement. Interest accretion of $0.5 million, $1.2 million and $1.5 million was recorded in 2012, 2011 and 2010, respectively. The interest accretion is includedBlu-ray discs are substantially greater than in the interest expense onU.S. Imation Corporation Japan, Imation's Japanese subsidiary, has sued One-Blue in Japan regarding its unlawful interference with certain of our Consolidated Statementscustomer relationships. Imation has notified its manufacturers of Operations. At December 31, 2012,their indemnity obligations that it believes cover a portion of its liability, if any, to One-Blue and the settlement was paid in full.other plaintiffs.
Operating Leases
We incur rent expense under operating leases, which primarily relate to equipment and office space. Most long-term leases include one or more options to renew at the then fair rental value for a period of approximately one to three years. The following table sets forth the components of net rent expense for the years ended December 31:
| | | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 |
| | (In millions) | (In millions) |
| Minimum lease payments | $ | 6.1 |
| | $ | 8.7 |
| | $ | 9.6 |
| $ | 8.5 |
| | $ | 6.1 |
| | $ | 8.7 |
|
| Contingent rentals | 6.1 |
| | 4.5 |
| | 7.2 |
| 3.8 |
| | 6.1 |
| | 4.5 |
|
| Rental income | (3.4 | ) | | (3.1 | ) | | (2.9 | ) | (8.4 | ) | | (3.4 | ) | | (3.1 | ) |
| Sublease income | (0.7 | ) | | (0.8 | ) | | (0.5 | ) | (0.5 | ) | | (0.7 | ) | | (0.8 | ) |
| Total rental expense | $ | 8.1 |
| | $ | 9.3 |
| | $ | 13.4 |
| $ | 3.4 |
| | $ | 8.1 |
| | $ | 9.3 |
|
Minimum lease payments and contingent rental expenses associated with agreements with warehouse providers are included as a component of cost of goods sold in theour Consolidated Statements of Operations. The minimum lease payments under such arrangements were $0.80.9 million, $0.8 million and $2.00.8 million in 2013, 2012 2011
and 2010,2011, respectively. The contingent rental expenses under such arrangements were $1.82.8 million, $1.71.8 million and $3.61.7 million in 2013, 2012 2011 and 2010,2011, respectively.
The following table sets forth the minimum rental payments under operating leases with non-cancelable terms in excess of one year as of December 31, 2012:2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | Thereafter | | Total |
| | (In millions) |
| Minimum lease payments | $ | 8.0 |
| | $ | 4.9 |
| | $ | 2.1 |
| | $ | 1.3 |
| | $ | 0.9 |
| | $ | 1.6 |
| | $ | 18.8 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | Thereafter | | Total |
| | (In millions) |
| Minimum lease payments | $ | 6.9 |
| | $ | 5.3 |
| | $ | 2.3 |
| | $ | 1.4 |
| | $ | 0.7 |
| | $ | 1.5 |
| | $ | 18.1 |
|
Minimum payments have not been reduced by minimum sublease rentals of approximately $0.5 million due in the future under non-cancelable lease agreements.
Environmental Matters
Our operations are subject to a wide range of federal, state and local environmental laws. Environmental remediation costs are accrued when a probable liability has been determined and the amount of such liability has been reasonably estimated. These accruals are reviewed periodically as remediation and investigatory activities
proceed and are adjusted accordingly. Compliance with environmental regulations has not had a material adverse effect on our financial results. As of December 31, 2012,2013, we had environmental-related accruals totaling $0.40.2 million recorded in other liabilities and we have minor remedial activities underway at one of our prior manufacturing facilities. We believe that our accruals are adequate, though it is reasonably possible that the ultimate amount of expense relating to remediation actions and compliance with applicable environmental laws could have a material impact on our results of operations.
Copyright Levies
In many European Union (EU) member countries, the sale of recordable optical media is subject to a private copyright levy. The levies are intended to compensate copyright holders forwith "fair compensation" for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (Directive). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which, in turn, are intendedexpected to distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law making activities. On October 21, 2010, the European Court of Justice (ECJ) ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The ECJ stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The ECJ also stated that the indiscriminate application of the private copying levy to devices not made available to private users and clearly reserved for uses other than private copying is incompatible with the Directive. The ECJ ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons intendingpresumed to makebe making private copies. Within this disclosure, we use the term "commercial channel sales" when referring to products intended for uses other than private copying and "consumer channel sales" when referring to products intended for uses including private copying.
Since the Directive was implemented in 2002, we estimate that we have paid approximatelyin excess of $100 million in levies to various ongoing collecting societies related to professional and commercial channel sales. Based on the ECJ's October 2010 ruling and subsequent litigation and law making activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various collecting societies. Accordingly, insubsequent to the October 21, 2010 ECJ ruling, we began withholding levy payments on consumer product sales to the various collecting societies.societies and, in 2011, we reversed our existing accruals (totaling $7.8 million) for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer product sales.channel sales, in all applicable jurisdictions except Italy and France due to recent court rulings that are discussed below. As of December 31, 20122013 and 2011,2012, we had recorded a liabilityaccrued liabilities of $27.710.0 million and $19.727.7 million, respectively, associated with levies related to consumer productchannel sales for which we are withholding payment. At December 31, 2012, the recovery of some or all of the approximately $100 million of copyright levies previously paid on professional and commercial sales represents a gain contingency that has not yet met the required criteria for recognition in our financial statements. There is no assurance that we will realize any of this gain contingency.
Since the October 2010 ECJ ruling, we evaluate quarterly evaluate on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) accrued, but unpaid, copyright levies on prior period consumer productchannel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law making activities within each jurisdiction as well as throughout the EU. Cost of goods sold for the year ended December 31, 2011 was reduced by $7.8$7.8 million due to reversal of prior year obligations that were determined to be
remote. We did not reverse any amounts into cost of goods sold for prior year obligations in 2012. See following for discussion of reversals of copyright levies in 2013.
Italy. During the second quarter of 2013, an Italian court rendered a decision associated with a copyright levy matter to which Imation was not a party. This decision (i) confirmed and provided further specificity to the October 21, 2010 ruling of the ECJ that levies should not be paid on commercial channel sales and (ii) evaluated, via audit, the plaintiff's documentation and evidence for distinguishing between levies paid on commercial and consumer channel sales. Based on the ruling of this Italian court, in combination with other applicable levy and law-making activities within the EU, including Italy, we believed there was sufficient evidence that we may offset with the Italian collecting society the estimated $39 million we have overpaid for copyright levies in Italy (due to us paying levies on commercial channel sales prior to the October 21, 2010 ECJ ruling) against the amounts owed to the Italian collecting society for unpaid levies on consumer channel sales. As such, our liability for Italian copyright levies in the amount of $13.6 million (existing at the time of the of the second quarter 2013 Italian court decision) that arose from consumer channel sales that had been accrued but not paid was reversed and recorded as a reduction of cost of sales during the second quarter of 2013. We did not record a receivable for the remaining estimated $25.4 million that we believed was owed to us by the Italian collection society for our historical over payment on levies associated with commercial channel sales as we are not assured of its collectability. Rather, going forward, such amount began to be realized as a reduction to cost of goods sold upon the incurrence of (and for the same amount of) valid levies for consumer channel sales. During the remainder of 2013 we have off-set an additional $2.6 million (within cost of sales) against a similar amount of consumer channel levies incurred and, accordingly, we have an estimated $22.8 million of historical over payments of levies on commercial channel sales remaining to set-off in future periods.
The Italian court required sufficient documentation and evidence to support the determination of levies between those paid on commercial versus consumer channel sales. We believe that we have utilized a methodology, and have sufficient documentation and evidence, to fully support our estimates that we have overpaid $39 million to the Italian collection society of levies on commercial channel sales and that we have incurred (but not paid) $13.6 million of levies on consumer channel sales in Italy. However, such amounts could be subject to challenge in court and there is no certainty that our estimates would be upheld and supported. Additionally, due to the expected continued decline in our sales associated with optical media products, we cannot be assured that we will ever be able to fully realize the estimated amounts owed to us by the Italian collection society through offsetting such amounts against levies incurred on future consumer channel sales or other measures.
France. During the fourth quarter of 2013, a French court issued a favorable ruling to Imation in a case brought against Imation in the fourth quarter of 2011 by the French levy society, Societie Pour la Perception de la Remuneration de la Copie Privee Audiovisuelle et Sonore (Copie France). Copie France had sought a judicial order in summary proceedings to compel Imation to pay to Copie France $3.6 million in withheld copyright levies. Imation had withheld levies otherwise due on consumer channel sales against previous levies paid on commercial channel sales. Imation argued that there was a serious legal dispute as to whether the demanded sums were owed, in light of what Imation believed to be the inconsistency between the French levy system and the Directive, as interpreted by ECJ case law. In June 2012, the Paris Court of First Instance had rejected Copie France’s claims, ruling that Imation had raised serious issues about the validity of the French levy scheme. Copie France appealed that order, and on November 19, 2013, the French appeals court rejected Copie France’s appeal.Based on the rulings of the French courts, in combination with other applicable levy and law-making activities within the EU, including France, we believe there is sufficient evidence that we may offset with Copie France the estimated $55.1 million we have overpaid for copyright levies in France (due to us paying levies on commercial channel sales prior to the October 21, 2010 ECJ ruling) against the amounts owed to Copie France for unpaid levies on consumer channel sales. As such, our liability for French copyright levies in the amount of $9.5 million (existing at the time of the of the fourth quarter 2013 French court decision) that arose from consumer channel sales that had been accrued but not paid was reversed and recorded as a reduction of cost of sales during the fourth quarter of 2013. We did not record a receivable for the remaining estimated $45.6 million that we believe is owed to us by Copie France for our historical over payment on levies associated with commercial channel sales as we are not assured of its collectability. Rather, going forward, such amount will be realized as a reduction to cost of sales upon the incurrence of (and for the same amount of) valid levies for consumer channel sales.
We believe that we have utilized a methodology, and have sufficient documentation and evidence, to fully support our estimates that we have overpaid $55.1 million to the French collection society of levies on commercial channel sales and that we have incurred (but not paid) $9.5 million of levies on consumer channel sales in France. However, such amounts could be subject to challenge in court and there is no certainty that our estimates would be upheld and supported. Additionally, due to the expected continued decline in our sales associated with optical media products, we cannot be assured that we will ever be able to fully realize the estimated amounts owed to us
by the French collection society through offsetting such amounts against levies incurred on future consumer channel sales or other measures.
Other Jurisdictions. At December 31, 2013, the recovery of some or all of the copyright levies previously paid on commercial sales in EU jurisdictions other than Italy and France represents a gain contingency that has not yet met the required criteria for recognition in our financial statements. There is no assurance that we will realize any of this gain contingency. We also have an estimated $9.4 million of accrued but unpaid levies associated with consumer sales in EU jurisdictions other than Italy and France that we continue to carry on our books.
We are subject to several pending or threatened legal actions by the individual European national levy collecting societies in relation to private copyright levies under the European Copyright Directive. Those actions generally seek payment of the commercial and consumer optical levies withheld by Imation. Imation has corresponding claims in those actions seeking reimbursement of levies improperly collected by those collecting societies. We are subject to threatened actions by certain customers of Imation seeking reimbursement of funds they allege relate to commercial levies that they claim they should not have paid. Although these actions are subject to the uncertainties inherent in the litigation process, based on the information presently available to us, management does not expect that the ultimate resolution of these actions will have a material adverse effect on our financial condition, results of operations or cash flows. We anticipate that additional court decisions may be rendered in 20132014 that may directly or indirectly impact our levy exposure in specific European countries which could trigger a review of our levy exposure in those countries.
Note 16 - Related Party Transactions
As a result of the arrangement to acquire the rights to the TDK Life on Record brand under an exclusive long-term license from TDK Corporation (TDK), TDK became our largest shareholder and owned approximately 18
percent and 20 percent of our shares as of December 31, 20122013 and 2011.2012. In connection with this arrangement we entered into a Supply Agreementsupply agreement, dated July31, 2007, with TDK.TDK (Supply Agreement).
In 2013, 2012 2011 and 20102011 we purchased products and services under the Supply Agreement which allows us to purchase a limited number of LTO Tape media and Blu-ray removable recording media products and accessory products for resale in the aggregate amounts of approximately $3828 million, $5038 million and $2850 million, respectively, from TDK or its affiliates. The Supply Agreement will be terminated on March 31, 2014. We did not sell products nor provide services to TDK or its affiliates in 2013, 2012 2011 or 2010.2011. Trade payables to TDK or its affiliates were $9.11.6 million and $9.8 million at December 31, 20122013 and 2011,2012 respectively. No trade receivables from TDK or its affiliates were outstanding as of December 31, 20122013 or December 31, 2011.2012.
On January 13,In 2011 the Board of Directors approved a restructuring plan to discontinuewe discontinued our tape coating operations at our Weatherford, Oklahoma facility by April 2011 and subsequently closeclosed the facility. We signed a strategic agreement with TDK to jointly develop and manufacture magnetic tape technologies. Under the agreement,technologies in which we will collaboratecollaborated on the research and development of future tape formats in both companies’ research centers in the U.S. and Japan, while consolidatingJapan. At the end of 2013, TDK announced its intent to cease manufacturing of magnetic tape coating operationsand as a result we will transition to the TDK Yamanashi manufacturing facility.
source our product from alternate magnetic tape suppliers during 2014.
Note 17 - Quarterly Data (Unaudited)
| | | | First | | Second | | Third | | Fourth | | Total(1) | First | | Second | | Third | | Fourth | | Total(1) |
| | (In millions, except per share amounts) | (In millions, except per share amounts) |
| 2011 | |
| | |
| | |
| | |
| | |
| |
| Net revenue | $ | 316.5 |
| | $ | 323.0 |
| | $ | 308.6 |
| | $ | 342.3 |
| | $ | 1,290.4 |
| |
| Gross profit | 54.0 |
| | 54.0 |
| | 57.2 |
| | 51.5 |
| | 216.7 |
| |
| Operating loss | (3.4 | ) | | (9.3 | ) | | (8.3 | ) | | (12.1 | ) | | (33.1 | ) | |
| Net loss | (7.2 | ) | | (12.5 | ) | | (14.1 | ) | | (12.9 | ) | | (46.7 | ) | |
| Loss per common share, net loss: | |
| | |
| | |
| | |
| | |
| |
| Basic | $ | (0.19 | ) | | $ | (0.33 | ) | | $ | (0.38 | ) | | $ | (0.34 | ) | | $ | (1.24 | ) | |
| Diluted | (0.19 | ) | | (0.33 | ) | | (0.38 | ) | | (0.34 | ) | | (1.24 | ) | |
| 2012 | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Net revenue | $ | 281.7 |
| | $ | 270.6 |
| | $ | 248.2 |
| | $ | 299.1 |
| | $ | 1,099.6 |
| $ | 263.3 |
| | $ | 249.2 |
| | $ | 227.4 |
| | $ | 266.8 |
| | $ | 1,006.7 |
|
| Gross profit | 56.1 |
| | 52.4 |
| | 45.7 |
| | 48.1 |
| | 202.3 |
| 53.6 |
| | 49.6 |
| | 43.1 |
| | 43.0 |
| | 189.3 |
|
| Operating loss | (8.9 | ) | | (10.3 | ) | | (6.5 | ) | | (310.4 | ) | | (336.1 | ) | (5.6 | ) | | (7.5 | ) | | (3.7 | ) | | (301.6 | ) | | (318.4 | ) |
| Loss from continuing operations | | (9.2 | ) | | (9.5 | ) | | (3.8 | ) | | (302.3 | ) | | (324.8 | ) |
| Loss from discontinued operations | | (3.0 | ) | | (2.5 | ) | | (2.5 | ) | | (7.9 | ) | | (15.9 | ) |
| Net loss | (12.2 | ) | | (12.0 | ) | | (6.3 | ) | | (310.2 | ) | | (340.7 | ) | (12.2 | ) | | (12.0 | ) | | (6.3 | ) | | (310.2 | ) | | (340.7 | ) |
| Loss per common share, net loss: | |
| | |
| | |
| | |
| | |
| |
| Loss per common share, continuing operations: | | |
| | |
| | |
| | |
| | |
|
| Basic | $ | (0.33 | ) | | $ | (0.32 | ) | | $ | (0.17 | ) | | $ | (8.34 | ) | | $ | (9.09 | ) | $ | (0.25 | ) | | $ | (0.25 | ) | | $ | (0.10 | ) | | $ | (8.13 | ) | | $ | (8.67 | ) |
| Diluted | (0.33 | ) | | (0.32 | ) | | (0.17 | ) | | (8.34 | ) | | (9.09 | ) | (0.25 | ) | | (0.25 | ) | | (0.10 | ) | | (8.13 | ) | | (8.67 | ) |
| Loss per common share, discontinued operations: | | | | | | | | | | |
| Basic | | (0.08 | ) | | (0.07 | ) | | (0.07 | ) | | (0.21 | ) | | (0.42 | ) |
| Diluted | | (0.08 | ) | | (0.07 | ) | | (0.07 | ) | | (0.21 | ) | | (0.42 | ) |
| Loss per common share, net income: | | | | | | | | | | |
| Basic | | (0.33 | ) | | (0.32 | ) | | (0.17 | ) | | (8.34 | ) | | (9.09 | ) |
| Diluted | | (0.33 | ) | | (0.32 | ) | | (0.17 | ) | | (8.34 | ) | | (9.09 | ) |
| 2013 | | |
| | |
| | |
| | |
| | |
|
| Net revenue | | $ | 224.4 |
| | $ | 211.7 |
| | $ | 191.9 |
| | $ | 232.8 |
| | $ | 860.8 |
|
| Gross profit | | 42.1 |
| | 55.2 |
| | 36.1 |
| | 55.3 |
| | 188.7 |
|
| Operating (loss) income | | (14.7 | ) | | — |
| | (26.5 | ) | | 21.1 |
| | (20.1 | ) |
| (Loss) income from continuing operations | | (15.6 | ) | | (1.8 | ) | | (26.2 | ) | | 19.2 |
| | (24.4 | ) |
| Loss from discontinued operations | | (5.5 | ) | | (3.3 | ) | | (8.7 | ) | | (2.5 | ) | | (20.0 | ) |
| Net (loss) income | | (21.1 | ) | | (5.1 | ) | | (34.9 | ) | | 16.7 |
| | (44.4 | ) |
| (Loss) earnings per common share, continuing operations: | | |
| | |
| | |
| | |
| | |
|
| Basic | | $ | (0.39 | ) | | $ | (0.04 | ) | | $ | (0.65 | ) | | $ | 0.47 |
| | $ | (0.60 | ) |
| Diluted | | (0.39 | ) | | (0.04 | ) | | (0.65 | ) | | 0.47 |
| | (0.60 | ) |
| Loss per common share, discontinued operations: | | | | |
| | |
| | | | |
| Basic | | (0.14 | ) | | (0.08 | ) | | (0.21 | ) | | (0.06 | ) | | (0.49 | ) |
| Diluted | | (0.14 | ) | | (0.08 | ) | | (0.21 | ) | | (0.06 | ) | | (0.49 | ) |
| (Loss) earnings per common share, net income: | | | | |
| | |
| | |
| | |
| Basic | | (0.52 | ) | | (0.13 | ) | | (0.86 | ) | | 0.41 |
| | (1.10 | ) |
| Diluted | | (0.52 | ) | | (0.13 | ) | | (0.86 | ) | | 0.41 |
| | (1.10 | ) |
| |
(1) | The sum of the quarterly loss per share may not equal the annual loss per share due to changes in average shares outstanding. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Based on an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 20122013, the end of the period covered by this report, the President and Chief Executive Officer, Mark E. Lucas, and the Senior Vice President and Chief Financial Officer, Paul R. Zeller, have concluded that the disclosure controls and procedures were effective.
Changes in Internal Controls. During the quarter ended December 31, 20122013, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting. Management of Imation is responsible for establishing and maintaining adequate internal control over financial reporting. Imation’s internal control system is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Imation management assessed the effectiveness of Imation’s internal control over financial reporting as of December 31, 20122013. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.Framework version 1992. Based on our assessment, we concluded that, as of December 31, 20122013, Imation’s internal control over financial reporting was effective, based on those criteria. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2012 excluded Nexsan, which was acquired on December 31, 2012. Nexsan's assets represent 18 percent of the consolidated total assets of the Company as of December 31, 2012. There were no results of operations included in the consolidated statements of operations for the year ended December 31, 2012 for Nexsan as the acquisition occurred on December 31, 2012. Companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of acquisition while integrating the acquired company under guidelines established by the SEC. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of our internal control over financial reporting, as stated in their report which appears herein.
Item 9B. Other Information.
None.
PART III
Except where otherwise noted, the information required by Items 10 through 14 is incorporated by reference from our definitive Proxy Statement pursuant to general instruction G(3) to Form 10-K, with the exception of the executive officers section of Item 10, which is included in Item 1 of this Form 10-K. We will file our definitive Proxy Statement pursuant to Regulation 14A by April 30, 2013.2014.
Item 10. Directors, Executive Officers and Corporate Governance.
Board of Directors
Information regarding our Board of Directors as of March 13, 20132014 is set forth below:
David P. Berg, Executive Vice PresidentChief Operating Officer of Carlson Companies, Inc. (a global hospitality and President, Outback Steakhouse International (a chain of Australian themed steakhouse restaurants owned by Bloomin' Brands International)travel company).
Theodore H. Bunting, Jr., Group President, Utility Operations, Entergy Corporation (an integrated energy company engaged primarily in electric power production and retail distribution operations).
Charles A. Haggerty, former Chief Executive Officer, Le Conte Associates, LLC (a consulting and investment company) and former Chairman, President and Chief Executive Officer, Western Digital Corporation (a hard disk maker).
William G. LaPerch, President of LaPerch Consulting, LLC (provides consulting services to private equity firms) and former Chief Executive Officer, President and Director of AboveNet Inc. (a leading provider of high bandwidth connectivity solutions for businesses and carriers).
Mark E. Lucas, President and Chief Executive Officer, Imation Corp. See Executive Officers of the Registrant in Item 1. Business herein for further information.
L. White Matthews, III, retired Executive Vice President and Chief Financial Officer, Ecolab Inc. (a developer and marketer of cleaning and sanitizing products and services), former Executive Vice President and Chief Financial Officer, Union Pacific Corporation (a company involved in rail/truck transportation and oil/gas exploration and production) and Non-Executive Chairman of our Board.
Trudy A. Rautio, President and Chief Executive Officer, Carlson Companies, Inc., (a global hospitality and travel company).
David B. Stevens, former Chief Technology Officer and Vice President, Corporate Development of Brocade Communications Systems, Inc. (a provider of networking solutions for data centers, enterprises and service providers).
Daryl J. White, retired President and Chief Financial Officer, Legerity, Inc. (a supplier of data and voice communications integrated circuitry), and former Senior Vice President of Finance and Chief Financial Officer, Compaq Computer Corporation (a computer equipment manufacturer).
See Part I of this Form 10-K, “Executive Officers of the Registrant.” The Sections of the Proxy Statement entitled “Board of Directors-Director Independence and Determination of Audit Committee Financial Expert,” “Board of Directors-Meetings of the Board and Board Committees,” “Information Concerning Solicitation and Voting —
Section 16(a) Beneficial Ownership Reporting Compliance” and “Item No. 1-Election of Directors — Information Concerning Directors” are incorporated by reference into this Form 10-K.
We adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer/controller, or persons performing similar functions and all our other employees. This code of ethics is part of our broader Business Conduct Policy, posted on our website. The Internet address for our website is http://www.imation.com and the Business Conduct Policy may be found on the “Corporate Governance” web page, which can be accessed from the “Investor Relations” page, which can be accessed from the main web page. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the required code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer/controller or persons performing similar functions by posting such information on our website, at the address and location specified above.
Materials posted on our website are not incorporated by reference into this Form 10-K.
Item 11. Executive Compensation.
The Sections of the Proxy Statement entitled “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Compensation of Named Executive Officers” and “Board of Directors — Compensation of Directors” are incorporated by reference into this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The Sections of the Proxy Statement entitled “Information Concerning Solicitation and Voting - Security Ownership of Certain Beneficial Owners” and “Information Concerning Solicitation and Voting - Security Ownership of Management” and Item No. 2 - Approval of Amendments to the 2011 Stock Incentive Plan - Equity Compensation Plan Information are incorporated by reference into this Form 10-K.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued under all of our existing equity compensation plans as of December 31, 2013, including the 2011 Stock Incentive Plan, 2008 Stock Incentive Plan, the 2005 Stock Incentive Plan, the 2000 Stock Incentive Plan and the 1996 Directors Stock Compensation Program. As of December 31, 2013, options and restricted stock had been granted under the 2000 Stock Incentive Plan, 2005 Stock Incentive Plan and 2008 Stock Incentive Plan, options, restricted stock and stock appreciation rights had been granted under the 2011 Stock Incentive Plan and options, restricted stock and restricted stock units had been granted to directors under the 2005 Stock Incentive Plan and 1996 Directors Stock Compensation Program. Our shareholders have approved all of the compensation plans listed below.
|
| | | | | | | | | | | | |
| | | | | | | | Number of Securities |
| | | | | | | | Remaining Available for |
| | | | | | | | Future Issuance |
| | | Number of Securities | | Weighted-Average | | Under Equity |
| | | to be Issued Upon | | Exercise Price of | | Compensation |
| | | Exercise of | | Outstanding | | Plans (Excluding |
| | | Outstanding Options, | | Options, | | Securities Reflected |
| Equity Compensation Plans Approved by Shareholders | | Warrants and Rights | | Warrants and Rights | | in the First Column) |
| 2011 Stock Incentive Plan | | 2,110,110 |
| (1) | | $ | 5.18 |
| | 2,168,693 |
| |
| 2008 Stock Incentive Plan | | 2,132,728 |
| (1) | | $ | 10.55 |
| | — |
| (2) |
| 2005 Stock Incentive Plan | | 906,305 |
| | | $ | 32.11 |
| | — |
| (2) |
| 2000 Stock Incentive Plan | | 168,350 |
| | | $ | 34.28 |
| | — |
| (2) |
| 1996 Directors Stock Compensation Program | | 54,045 |
| | | $ | 39.50 |
| | — |
| (2) |
| Total | | 5,371,538 |
| | | $ | 13.11 |
| | 2,168,693 |
| |
(1) This number does not include restricted stock of 1,121,507 shares under our 2011 Stock Incentive Plan or 70,814 shares under our 2008 Stock Incentive Plan.
(2) No additional awards may be granted under our 2008 Stock Incentive Plan, 2005 Stock Incentive Plan, 2000 Stock Incentive Plan or 1996 Directors Stock Compensation Program.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The Sections of the Proxy Statement entitled “Information Concerning Solicitation and Voting — Related Person Transactions and Related Person Transaction Policy”, andPolicy,” “Board of Directors — Director Independence and Determination of Audit Committee Financial Expert” and "Board of Directors - Meetings of the Board and Board Committees" are incorporated by reference into this Form 10-K.
Item 14. Principal Accountant Fees and Services.
The Section of the Proxy Statement entitled “Audit and Other Fees and Audit and Finance Committee Pre-Approval Policy” is incorporated by reference into this Form 10-K.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
List of Documents Filed as Part of this Report
1. Financial Statements
2. Financial Statement Schedules
All financial statement schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or the notes thereto.
3. Exhibits
The following Exhibits are filed as part of, or incorporated by reference into, this report:
|
| | |
| Number | Description of Exhibit |
| | |
| 2.1 |
| Asset Purchase Agreement, dated May 7, 2007, among Hopper Radio of Florida, Inc., Memcorp, Inc., Memcorp Asia Limited and Imation Corp. (incorporated by reference to Exhibit 2.1 of Imation’s Form 10-Q for the quarter ended March 31, 2007) |
| 2.2 |
| Acquisition Agreement, dated April 19, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 2.1 to Imation’s Form 8-K Current Report filed on April 25, 2007) |
| 2.3 |
| Acquisition Agreement, dated January 19, 2006, by and between Imation Corp. and Memorex International Inc. (incorporated by reference to Exhibit 2.1 to Imation’s Form 8-K Current Report filed on January 25, 2006) |
| 2.4 |
| Inducement Agreement, dated January 19, 2006, among Hanny Holding Limited, Hanny Magnetics (B.V.I.) Limited, Investor Capital Management Asia Limited, Investor Capital Partners — Asia Fund L.P, Global Media Limited, Memorex Holdings Limited and Imation Corp. (incorporated by reference to Exhibit 2.2 to Imation’s Form 8-K Current Report filed on January 25, 2006) |
| 2.5 |
| Purchase Agreement, dated October 5, 2011, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.5 of Imation's Annual Report on Form 10-K for the year ended December 31, 2011) |
| 2.6 |
| First Amendment to Purchase Agreement, dated January 5, 2012, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.6 of Imation's Annual Report on Form 10-K for the year ended December 31, 2011) |
| 2.7 |
| Second Amendment to Purchase Agreement, dated January 31, 2012, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.7 of Imation's Annual Report on Form 10-K for the year ended December 31, 2011) |
| 2.8 |
| Third Amendment to Purchase Agreement, dated February 10, 2012, by and between Imation Corp. and FF Realty LLC (incorporated by reference to Exhibit 2.8 of Imation's Annual Report on Form 10-K for the year ended December 31, 2011) |
| 2.9 |
| Fourth Amendment to Purchase Agreement, dated November 6, 2013, by and between Imation Corp. and FF Realty LLC |
| 2.10 |
| Agreement and Plan of Merger dated December 31, 2012, by and among Imation Corp., Naboo Merger Corp., and Nexsan Corporation (incorporated by reference to Exhibit 2.1 to Imation's Form 8-K/A Current Report filed on March 12, 2013) (Schedules have been omitted pursuant to Item 601(b(2) of Regulation S-K. Imation agrees to furnish a supplemental copy of any omitted schedule to the Securities and Exchange Commission upon request.) *** |
| 3.1 |
| Restated Certificate of Incorporation of Imation Corp. (incorporated by reference to Exhibit 3.1 to Registration Statement on Form 10, No. 1-14310) |
| 3.2 |
| Amended and Restated Bylaws of Imation Corp., effective February 8,November 7, 2013 (incorporated by reference to Exhibit 3.1 to Imation’s Form 8-K Current Report filed on February 13,10-Q for the quarter ended September 30, 2013) |
|
| | |
| Number | Description of Exhibit |
| |
| 4.1 |
| Rights Agreement between Imation Corp., and The Bank of New York, as Rights Agent, dated as of June 21, 2006 (incorporated by reference to Exhibit 4.1 to Imation’s Registration Statement on Form 8-A filed on June 23, 2006) |
|
| | |
Number | Description of Exhibit |
| |
| 4.2 |
| First Amendment to Rights Agreement, dated as of July 30, 2007 (incorporated by reference to Exhibit 4.3 to Imation’s Registration Statement on Form 8-A/A filed on August 1, 2007) |
| 4.3 |
| Second Amendment to Rights Agreement, dated as of November 12, 2010 (incorporated by reference to Exhibit 4.4 to Imation’s Registration Statement on Form 8-A filed on November 12, 2010) |
| 4.4 |
| Third Amendment to Rights Agreement, dated as of February 11,2013 (incorporated by reference to Imation’s Registration Statement on Form 8-A/A filed on February 13, 2013) |
| 4.5 |
| Amended and Restated Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 4.2 to Imation’s Registration Statement on Form 8-A filed on June 23, 2006) |
| 10.1 |
| Shareholders Agreement in relation to Global Data Media FZ-LLC (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 2003) |
10.2 |
| Amendment Agreement to Shareholders Agreement in relation to Global Data Media FZ-LLC (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on January 26, 2006) |
10.3 |
| Trademark License Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on August 3, 2007) |
10.410.2 |
| IMN Trademark License Agreement, dated July 31, 2007, by and between IMN Data Storage Holdings C.V. and TDK Corporation (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on August 3, 2007) |
10.510.3 |
| Supply Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on August 3, 2007) |
10.610.4 |
| Investor Rights Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on August 3, 2007) |
10.710.5 |
| Amended and Restated Credit Agreement among Imation Corp., Imation Enterprises Corp. and Imation Europe B.V., as borrowers, Bank of America, N.A., as administrative agent and l/c issuer, and a Consortium of Lenders, dated as of August 3, 2010 (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on August 6, 2010) |
10.810.6 |
| First Amendment, dated as of June 28, 2011, to the Amended and Restated Credit Agreement among Imation Corp., Imation Enterprises Corp. and Imation Europe B.V., as borrowers, Bank of America, N.A., as administrative agent and l/c issuer, and a Consortium of Lenders, dated as of August 3, 2010 (incorporated by reference to Exhibit 10.3 to Imation's Form 10-Q for the quarter ended June 30, 2011) |
10.9*10.7 |
| Third Amendment, dated as of May 18, 2012, to the Amended and Restated Credit Agreement among Imation Corp., Imation Enterprises Corp. and Imation Europe B.V., as borrowers, Bank of America, N.A., as administrative agent and l/c issuer, and a consortium of Lenders, dated as of August 3, 2010 (incorporated by reference to Exhibit 10.1 to Imation's Form 8-K Current Report filed on May 24,2012)*** |
10.10*10.8 |
| Fourth Amendment, dated as of April 12, 2013, to the Amended and Restated Credit Agreement among Imation Corp., Imation Enterprises Corp. and Imation Europe B.V., as borrowers, Bank of America, N.A., as administrative agent and l/c issuer, and a consortium of Lenders, dated as of August 3, 2010(incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended March 31, 2013) |
| 10.9 |
| Fifth Amendment, dated as of August 27, 2013, to the Amended and Restated Credit Agreement among Imation Corp., Imation Enterprises Corp. and Imation Europe B.V., as borrowers, Bank of America, N.A., as administrative agent and l/c issuer, and a consortium of Lenders, dated as of August 3, 2010 (incorporated by reference to Exhibit 10.1 to Imation's Form 10-Q for the quarter ended September 30, 2013) |
| 10.10 |
| Form of Indemnity Agreement between Imation Corp. and each of its directors (incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the year ended December 31, 1996) |
| 10.11* |
| 1996 Directors Stock Compensation Program, as amended May 8, 2002 (incorporated by reference to Exhibit 10.1 of Imation’s Form 10-Q for the quarter ended June 30, 2002) |
| 10.12* |
| Imation Corp. 2000 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 2003) |
| 10.13* |
| Form of 2000 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.9 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.14* |
| Amendment to 2000 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.8 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
|
| |
| Number | Description of Exhibit |
| |
|
| |
| 10.15* |
| Form of Amendment to 2000 Employee Stock Incentive Plan Restricted Stock Award Agreements — Executive Officer (incorporated by reference to Exhibit 10.2 to Imation’s Form 8- K Current Report filed on February 13, 2006) |
| 10.16* |
| Form of 2000 Stock Incentive Plan Stock Option Agreement — Executive Officers (incorporated by reference to Exhibit 10.11 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.17* |
| Form of 2000 Stock Incentive Plan Stock Option Agreement — Employees (incorporated by reference to Exhibit 10.10 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.18* |
| Form of 2000 Stock Incentive Plan Restricted Stock Award Agreement — Employees 2004 (incorporated by reference to Exhibit 10.1 of Imation’s Form 10-Q for the quarter ended September 30, 2004) |
|
| |
Number | Description of Exhibit |
| |
| 10.19* | Form of 2000 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers 2004 (incorporated by reference to Exhibit 10.2 of Imation’s Form 10-Q for the quarter ended September 30, 2004) |
| 10.20* | Form of 2000 Stock Incentive Plan Stock Option Agreement — Employees 2004 (incorporated by reference to Exhibit 10.3 of Imation’s Form 10-Q for the quarter ended September 30, 2004) |
| 10.21* | Form of 2000 Stock Incentive Plan Stock Option Agreement — Executive Officers 2004 (incorporated by reference to Exhibit 10.4 of Imation’s Form 10-Q for the quarter ended September 30, 2004) |
| 10.22* | Imation Corp. 2005 Stock Incentive Plan, as amended November 9, 2005 (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on November 16, 2005) |
| 10.23* | Form of 2005 Stock Incentive Plan Stock Option Agreement — Employees (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.24* | Form of 2005 Stock Incentive Plan Stock Option Agreement — Executive Officers (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.25* | Form of Amendment to 2005 Stock Incentive Plan Option Agreements — Executive Officer (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| 10.26* | Form of 2005 Stock Incentive Plan Stock Option Agreement — Directors (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.27* | Form of Amendment to 2005 Stock Incentive Plan Stock Option Agreement — Directors (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on November 16, 2005) |
| 10.28* | Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement — Employees (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.29* | Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement — Executive Officers (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.30* | Form of Amendment to 2005 Stock Incentive Plan Restricted Stock Award Agreements — Executive Officer (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| 10.31* | Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement — Directors (incorporated by reference to Exhibit 10.7 to Imation’s Form 8-K Current Report filed on May 9, 2005) |
| 10.32* | Form of Amendment to 2005 Stock Incentive Plan Restricted Stock Award Agreement — Directors (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on November 16, 2005) |
| 10.33* | Form of Amendment to 2004 and 2005 Executive Officer Option Agreements under the 2000 Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| 10.34* | Form of 2005 Stock Incentive Plan Amendment to 2005 Stock Option Agreements — Non-Employee Directors (incorporated by reference to Exhibit 10.7 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| 10.35* | Form of 2005 Stock Incentive Plan Non-Employee Director Option Agreement (incorporated by reference to Exhibit 10.12 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| 10.36* | Form of 2005 Stock Incentive Plan Amendment to 2005 Restricted Stock Award Agreements — Non-Employee Directors (incorporated by reference to Exhibit 10.8 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| Number | Description of Exhibit |
| |
| 10.37* | Form of 2005 Stock Incentive Plan Non-Qualified Stock Option Agreement for Executive Officers (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on May 12, 2008) |
|
| |
| 10.38* | Form of 2005 Stock Incentive Plan Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.13 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| 10.39* | Form of 2005 Stock Incentive Plan Executive Officer Option Agreement (incorporated by reference to Exhibit 10.10 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| 10.40* | Form of 2005 Stock Incentive Plan Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.11 to Imation’s Form 8-K Current Report filed on February 13, 2006) |
| 10.41* | Imation Corp. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on May 12, 2008) |
Number | Description of Exhibit |
|
| |
| |
| |
| 10.42* | Form of 2008 Stock Incentive Plan Non-Qualified Stock Option Agreement for Executive Officers (incorporated by reference to Exhibit 10.3 to Imation’s Form 8-K Current Report filed on May 12, 2008) |
| 10.43* | Form of 2008 Stock Incentive Plan Non-Qualified Stock Option Agreement for Directors (incorporated by reference to Exhibit 10.4 to Imation’s Form 8-K Current Report filed on May 12, 2008) |
| 10.44* | Form of 2008 Stock Incentive Plan Restricted Stock Agreement for Executive Officers (incorporated by reference to Exhibit 10.5 to Imation’s Form 8-K Current Report filed on May 12, 2008) |
| 10.45* | Form of 2008 Stock Incentive Plan Restricted Stock Agreement for Directors (incorporated by reference to Exhibit 10.6 to Imation’s Form 8-K Current Report filed on May 12, 2008) |
| 10.46* | Form of 2008 Stock Incentive Plan Performance-Based Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Imation’s 10-Q for the quarter ended June 30, 2010) |
| 10.47* | Form of 2008 Stock Incentive Plan Stock Option Agreement for Executive Officers (3 yr vest) (incorporated by reference to Exhibit 10.6 to Imation’s Form 10-Q for the quarter ended March 31, 2011) |
| 10.48* | Form of 2008 Stock Incentive Plan Performance-Based Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to Imation’s 10-Q for the quarter ended June 30, 2010) |
| 10.49* | Imation Corp. 2011 Stock Incentive Plan, as amended and restated (2013) (incorporated by reference to Exhibit 4.74.3 to Imation’s Form S-8 Registration Statement, File No. 333-173903,333-188429, filed on May 4, 2011)8, 2013) |
| 10.50* | Form of 2011 Stock Incentive Plan Stock Option Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 to Imation’s Form 10-Q for the quarter ended March 31, 2011) |
| 10.51* | Form of 2011 Stock Incentive Plan Performance Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.3 to Imation’s Form 10-Q for the quarter ended March 31, 2011) |
| 10.52* | Form of 2011 Stock Incentive Plan Stock Option Agreement for Directors (incorporated by reference to Exhibit 10.4 to Imation’s Form 10-Q for the quarter ended March 31, 2011) |
| 10.53* | Form of 2011 Stock Incentive Plan Restricted Stock Award Agreement for Directors (incorporated by reference to Exhibit 10.5 to Imation’s Form 10-Q for the quarter ended March 31, 2011) |
| 10.54* | Director Compensation Program, effective May 2, 2005 (as amended effective January 1, 2013) |
10.55* | Form of 2011 Stock Incentive Plan Performance Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.55 to Imation's Annual Report on Form 10-K for the year ended December 31, 2012) |
| 10.55* | Form of 2011 Stock Incentive Plan Performance Based Restricted Stock Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.3 to Imation's Form 10-Q for the quarter ended June 30, 2013) |
| 10.56* | Director Compensation Program, effective May 2, 2005 (as amended effective May 8, 2013) (incorporated by reference to Exhibit 10.2 to Imation's Form 10-Q for the quarter ended June 30, 2013) |
| 10.57* | Imation Excess Benefit Plan (incorporated by reference to Exhibit 10.10 to Registration Statement on Form 10, No. 1-14310) |
10.57*10.58* | Employment Offer Letter from Imation Corp. to Mark E. Lucas (incorporated by reference to Exhibit 10.1 to Imation’s Form 8-K Current Report filed on February 17, 2009) |
10.58*10.59* | Description of 2012 Annual Bonus Plan Target Approval (incorporated by reference to Imation’s Form 8-K Current Report filed on November 4, 2011) |
10.58*10.60* | Description of 2013 Annual Bonus Plan Target Approval (incorporated by reference to Imation’s Form 8-K Current Report filed on February 13, 2013) |
10.59*10.61* | Form of Amended and Restated Severance Agreement with Executive Officers (incorporated by reference to Exhibit 10.2 to Imation’s Form 8-K Current Report filed on August 6, 2010) |
10.60*10.62* | Amended and Restated Severance Agreement of John P. Breedlove, effective June 20, 2011 (incorporated by reference to Imation's Form 10-Q for the quarter ended June 30, 2011) |
10.61*10.63* | Form of Amended and Restated Severance Agreement with Executive Officers effective for executive officers hired after August 2012 (incorporated by reference to Exhibit 10.61 to Imation's Annual Report on Form 10-K for the year ended December 31, 2012) |
|
| | |
| Number | Description of Exhibit |
| 2.9 |
| Fourth Amendment to Purchase Agreement, dated November 6, 2013, by and between Imation Corp. and FF Realty LLC |
| 21.1 |
| Subsidiaries of Imation Corp. |
| 23.1 |
| Consent of Independent Registered Public Accounting Firm |
| 24.1 |
| Power of Attorney |
| 31.1 |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101 |
| The following financial information from Imation Corp.'s Annual Report on Form 10-K for the year ended December 31, 2012,2013, filed with the SEC on March 13, 2013,2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations for the years ended December 31, 2013, 2012 2011 and 2010,2011, (ii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 2011 and 2010,2011, (iii) the Consolidated Balance Sheets as of December 31, 20122013 and 2011,2012, (iv) the Consolidated Statements of Shareholders' Equity for the years ended December 31, 2013, 2012 2011 and 2010,2011, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 2011 and 2010,2011, and Notes to Consolidated Financial Statements**Statements |
* Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.
** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.
*** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | | Imation Corp. | |
| | | | |
| | By: | /s/ MARK E. LUCAS | |
| | | Mark E. Lucas | |
| | | President and Chief Executive Officer | |
Date: March 13, 20132014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | |
| Signature | | Title | | Date |
| | | | | | | |
| | | | | |
| /s/ MARK E. LUCAS | | President, Chief Executive Officer and Director (Principal Executive Officer) | | March 13, 20132014 |
| Mark E. Lucas | | | | |
| | | | | |
| /s/ PAUL R. ZELLER | | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | | March 13, 20132014 |
| Paul R. Zeller | | | | |
| | | | | |
| /s/ SCOTT J. ROBINSON | | Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) | | March 13, 20132014 |
| Scott J. Robinson | | | | |
| | | | | |
| * | | Director | | March 13, 20132014 |
| David P. Berg | | | | |
| | | | | |
| * | | Director | | March 13, 20132014 |
| Theodore H. Bunting, Jr. | | | | |
| | | | | |
| * | | Director | | March 13, 2013 |
Charles A. Haggerty | | | | |
| | | | |
* | | Director | | March 13, 20132014 |
| William G. LePerch | | | | |
| | | | | |
| * | | Director | | March 13, 20132014 |
| L. White Matthews, III | | | | |
| | | | | |
| * | | Director | | March 13, 20132014 |
| Trudy A. Rautio | | | | |
| | | | | |
| * | | Director | | March 13, 20132014 |
| David B. Stevens | | | | |
| | | | | |
* | | Director | | March 13, 2013 |
Daryl J. White | | | | |
|
| | | | | | |
| *By: | | /s/ JOHN P. BREEDLOVE | | | | |
| | | John P. Breedlove Attorney-in-fact | | | | |
EXHIBIT INDEX
The following exhibits are filed as part of this report:
|
| | |
| | | |
| | | |
| Exhibit Number | | Description of Exhibit |
| | | |
10.54*2.9 | | Director Compensation Program, effective May 2, 2005 (as amended effective January 1, 2013) |
10.55* | | Form of 2011 Stock Incentive Plan Performance AwardFourth Amendment to Purchase Agreement, for Executive Officers |
10.61* | | Form of Amendeddated November 6, 2013, by and Restated Severance Agreement with Executive Officers effective for executive officers hired after August 2012between Imation Corp. and FF Realty LLC |
| 21.1 | | Subsidiaries of Imation Corp |
| 23.1 | | Consent of Independent Registered Public Accounting Firm |
| 24.1 | | Power of Attorney |
| 31.1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101 | | The following financial information from Imation Corp.'s Annual Report on Form 10-K for the year ended December 31, 2012,2013, filed with the SEC on March 13, 2013,2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations for the years ended December 31, 2013, 2012 2011 and 2010,2011, (ii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 2011 and 2010,2011, (iii) the Consolidated Balance Sheets as of December 31, 20122013 and 2011,2012, (iv) the Consolidated Statements of Shareholders' Equity for the years ended December 31, 2013, 2012 2011 and 2010,2011, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 2011 and 2010,2011, and Notes to Consolidated Financial Statements**Statements |
*Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.
**Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.
