Overview
Imation Corp. is a Delaware corporation whose primary businesses are (1) the development, manufacturing, sourcing, marketing and distribution of removable data storage media products and accessories and (2) sourcing and distribution of a range of audio and video consumer electronic products and accessories. As used herein, the terms "Imation," "Company," " we," "us," or "our" mean Imation Corp. and its subsidiaries unless the context indicates otherwise. We sell our removable data storage media products across multiple technology platforms or "pillars" - magnetic media, recordable optical media, flash drives and removable and external hard drives. We sell our products in approximately 100 countries around the world, primarily under the Imation, Memorex and TDK Life on Record brand names. We also have distribution agreements under which we distribute certain removable data storage media products under other brands as well, including International Business Machines Corp., Sun Microsystems Inc., Hewlett Packard Co. and Exabyte. Our consumer electronic products and accessories are sold primarily under the Memorex, TDK Life on Record and XtremeMac brand names, primarily in North America. Except for certain magnetic tape media formats, we do not manufacture the products we sell and distribute. We seek to differentiate these products through unique designs, product positioning, packaging, merchandising, and branding. We source these products from a variety of third party manufacturers.
The global data storage market, including hardware and services, is estimated to be in excess of $100 billion, of which the removable data storage media market is approximately $20 billion, including magnetic and optical media, flash and solid state drives, removable and external hard disk drives. Our removable data storage media products are designed to help users capture, create, protect, preserve and retrieve valuable digital assets. Our primary products include recordable and rewritable optical discs, magnetic tape cartridges, USB flash drives, and external and removable hard drives used by business and individual customers.
Demand for data storage capacity is expected to grow slowly for the next several years, driven by the growth of information in digital form, the growth of complex databases as a result of new hardware and software applications, increased ability to access data remotely and across multiple locations, increased regulatory requirements for record retention and the pervasive use of the Internet. This increased quantity of data has put data security and archiving at the forefront of critical business processes. Further, the continued growth in the variety and functionality of consumer electronic devices has historically increased demand for a range of convenient, low-cost removable data storage media to capture, store, edit and manage data, photographs, video, images and music. Within the data storage media industry, the magnetic tape market remains important to Imation across a substantial installed base of commercial information technology users, a relatively small number of competitors and high barriers to entry. Imation enjoys a leading market share, significant intellectual property portfolio, solid industry reputation and relationships among key original equipment manufacturers (OEMs). Many of our legacy tape formats, which are proprietary or semi-proprietary, have the highest gross profit margins among all our products.
We also participate in the audio and video and accessories marketplace of the much larger consumer electronics market. Our consumer electronics market includes traditional analog-based audio and video devices as well as digital-based audio and video hardware and accessories for recording and replaying audio and video content. Our accessories portion of the market includes cases, cleaning and labeling products, cables and connectors sold through retail outlets and distribution channels. Both consumer electronic products and accessories are primarily sourced from manufacturers throughout Asia. Consumer electronic products are sold based on a variety of factors, including brand and reputation, product features and designs, distribution coverage, innovation and price.
The global consumer electronics 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. Products we sell include CD and DVD players, LCD displays (flat panel televisions and digital picture frames), iPod® accessories, MP3 players, karaoke machines, and alarm clocks and clock-radios sold primarily under the Memorex brand name. We compete primarily in mass merchant channels for second tier brand preference in the United States and are expanding into Canada, Mexico and Europe with the Memorex brand, targeting female consumers, and the XtremeMac brand, targeting the Apple enthusiast.
The significant and rapid downturn in the global economy has negatively affected demand for both our commercial and consumer product lines, and is impacting suppliers, distributors and channel partners. We have seen softness in the markets we participated in during 2008 and we have planned for these trends to continue throughout 2009.

Executive Summary
Consolidated Results of Operations for the Six Months Ended June 30, 2009
• Revenue of $854.1 million for the six months ended June 30, 2009 was down 20.8 percent compared with $1,077.9 million in the same period last year.

• Litigation settlement expense of $49.0 million and restructuring and other expense of $15.3 million for the six months ended June 30, 2009.

• Operating loss of $65.0 million for the six months ended June 30, 2009, compared with operating income of $31.7 million in the same period last year.

• Diluted loss per share was $1.29 for the six months ended June 30, 2009, compared with diluted earnings per share of $0.48 for the same period last year.

Cash Flow/Financial Condition for the Six Months Ended June 30, 2009
• Cash and cash equivalents totaled $89.2 million as of June 30, 2009, compared with $96.6 million at December 31, 2008.

• Cash flow provided by operating activities was $6.3 million for the six months ended June 30, 2009, compared with $78.3 million in the same period last year.

Results of Operations
Net Revenue

                              Three Months Ended                     Six Months Ended
                                   June 30,            Percent           June 30,            Percent
   (Dollars in millions)       2009         2008       Change       2009         2008        Change

Our worldwide revenue for the three months ended June 30, 2009 compared with the same period last year, was negatively impacted by overall price erosion of 11 percent, volume declines of 7 percent and unfavorable foreign currency translation of 4 percent. The continuing soft economy, particularly given our exposure to the financial sector, and the nature of the mature markets of some of our legacy tape products resulted in revenue declines in optical products of $57.1 million, magnetic products of $51.8 million, flash products of $7.0 million and electronic products, accessories and other products of $3.2 million.
Our worldwide revenue for the six months ended June 30, 2009 compared with the same period last year, was negatively impacted by overall price erosion of 10 percent, overall volume declines of 7 percent and unfavorable foreign currency translation of 4 percent. The continuing soft economy, particularly given our exposure to the financial sector, and the nature of the mature markets of some of our legacy tape products resulted in revenue declines in optical products of $107.4 million, magnetic products of $107.0 million and flash products of $13.5 million, offset by revenue growth in electronic products, accessories and other products of $4.1 million.

Gross Profit

                              Three Months Ended                     Six Months Ended
                                   June 30,            Percent           June 30,           Percent
   (Dollars in millions)       2009          2008      Change        2009        2008       Change

Our gross margin as a percent of revenue for the three month and six month periods ended June 30, 2009 decreased compared with the same periods last year, driven by changes in product mix associated mainly with revenue declines in higher margin tape products, partially offset by improved gross margins on optical products.

Selling, General and Administrative (SG&A)

                                 Three Months Ended                                  Six Months Ended
                                      June 30,                  Percent                  June 30,                  Percent
(Dollars in millions)           2009             2008           Change            2009             2008            Change
Selling, general and
administrative               $   60.1          $ 72.7            -17.3 %        $ 125.7          $ 144.6            -13.1 %
As a percent of

The decrease in SG&A expense for the three months ended June 30, 2009, compared with the same period last year, was primarily due to benefits from restructuring actions and aggressive cost control. SG&A included litigation expense of $6.5 million and $2.3 million during the three months ended June 30, 2009 and 2008, respectively, related primarily to the Philips dispute.
The decrease in SG&A expense for the six months ended June 30, 2009, compared with the same period last year, was primarily due to benefits from restructuring actions and aggressive cost control. SG&A included litigation expense of $13.0 million and $3.0 million during the six months ended June 30, 2009 and 2008, respectively, related primarily to the Philips dispute. Research and Development (R&D)

                               Three Months Ended                      Six Months Ended
                                    June 30,             Percent           June 30,           Percent
 (Dollars in millions)         2009           2008       Change        2009         2008      Change
 Research and development    $   4.7        $   6.0       -21.7 %    $  10.0      $ 12.6       -20.6 %
 As a percent of revenue         1.1 %          1.1 %                    1.2 %       1.2 %

R&D expense as a percent of revenue for the three and six month periods ended June 30, 2009, compared with the same periods last year, remained flat. The decrease in expense compared to the same period last year was due to our restructuring actions and aggressive cost control actions.

Litigation Settlement

                               Three Months Ended                     Six Months Ended
                                    June 30,            Percent           June 30,            Percent
  (Dollars in millions)          2009          2008     Change         2009          2008     Change
  Litigation settlement      $     49.0        $ -        NM        $    49.0        $ -        NM
  As a percent of revenue          11.5 %        - %                      5.7 %        - %

NM - Not Meaningful

A litigation settlement charge of $49.0 million was recorded for the three and six month periods ended June 30, 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 have been involved in a complex series of disputes in multiple jurisdictions regarding cross-licensing and patent infringement related to recordable optical media. The settlement provides 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 will pay Philips $53 million over a period of three years. As a result of the settlement, we recorded a charge in the second quarter of 2009, based on the present value of these payments, of $49.0 million. The pre-tax cash impact for 2009 will be approximately $16.5 million, occurring during the second half of this year.

Restructuring and Other

                               Three Months Ended                      Six Months Ended
                                    June 30,             Percent           June 30,           Percent
  (Dollars in millions)        2009           2008       Change         2009        2008      Change
  Restructuring and other    $   9.8        $   4.0        NM        $   15.3      $ 4.7        NM

NM - Not Meaningful

Restructuring and other expense was $9.8 million and $15.3 million for the three and six month periods ended June 30, 2009, respectively. For the three and six months ended June 30, 2009, we recorded $5.2 million and $2.3 million of pension settlement and asset impairment charges, respectively. We also recorded $2.3 and $7.6 million of restructuring charges for the three and six month periods ended June 30, 2009, respectively, mainly related to our 2008 corporate redesign restructuring program initiated during the fourth quarter of 2008. This program further accelerates the alignment of our cost structure by reducing SG&A expense. See Note 9 to the Condensed Consolidated Financial Statements herein.

Restructuring and other expense was $4.0 million for the three months ended June 30, 2008, primarily related to restructuring charges of $7.1 million offset by income of $2.3 million associated with a TDK post-closing purchase price adjustment. Restructuring charges for the three months ended June 30, 2008 were related to lease termination costs of $1.9 million associated with the full settlement of a leased office space no longer utilized and severance and severance-related costs of $2.5 million.

Operating (Loss) Income

                               Three Months Ended                     Six Months Ended
                                    June 30,            Percent           June 30,           Percent
  (Dollars in millions)         2009          2008      Change        2009         2008      Change

NM -   Not Meaningful


   Our operating loss for the three and six month periods ended June 30, 2009,
compared with operating income for the same periods last year, was driven by
litigation settlement expense, lower revenues and lower gross margins as well as
higher restructuring and other charges, all discussed above.
Other (Income) and Expense

                            Three Months Ended                       Six Months Ended
                                 June 30,             Percent            June 30,            Percent
(Dollars in millions)       2009           2008        Change        2009          2008       Change
Interest income           $    (0.2 )     $  (0.7 )      -71.4 %   $    (0.4 )    $ (1.6 )      -75.0 %
Interest expense                0.3           0.3          0.0 %         0.7         1.0        -30.0 %
Other expense, net              3.3           2.0         65.0 %        10.9         3.4         NM

Total                           3.4           1.6        112.5 %        11.2         2.8        300.0 %
As a percent of revenue         0.8 %         0.3 %                      1.3 %       0.3 %

NM - Not Meaningful

The increase in other expense for the three months ended June 30, 2009, compared with the same period last year, was driven by additional foreign currency losses of $0.8 million offset by lower interest income of $0.5 million.
The increase in other expense for the six months ended June 30, 2009, compared with the same period last year, was driven by a reserve of $4.0 million related to a note receivable from one of our commercial partners whose financial condition had significantly deteriorated, as well as additional foreign currency exchange losses of $3.1 million and lower interest income of $1.2 million.

Income Tax Provision

                                 Three Months Ended                                  Six Months Ended
                                      June 30,                  Percent                  June 30,                 Percent
(Dollars in millions)           2009              2008           Change            2009             2008           Change
Income tax provision
(benefit)                    $   (24.1 )        $  3.4             NM           $  (27.7 )        $ 10.7             NM
Effective tax rate                39.5 %          32.1 %                            36.4 %          37.0 %

NM - Not Meaningful

The effective income tax rate for the three months ended June 30, 2009 was 39.5 percent compared with 32.1 percent in the same period last year. The effective rate increase was due primarily to the mix of taxable loss/income by country.
Segment Results
We operate in two broad market categories: (1) removable data storage media products and accessories (Data Storage Media) and (2) audio and video consumer electronic products and accessories (Electronic Products).

Our Data Storage Media business is organized, managed and internally and externally reported as segments differentiated by the regional markets we serve:
Americas, Europe and Asia Pacific. Each of these segments has responsibility for selling virtually all Imation product lines. Consumer electronic products are sold primarily through our Electronic Products segment. The Electronic Products segment is currently focused primarily in North America and primarily under the Memorex brand name.
We evaluate segment performance based on revenue and operating income. Revenue for each segment is generally based on customer location where the product is shipped. The operating income 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 earnings. Corporate and unallocated amounts include research and development costs, corporate expense, stock-based compensation expense and restructuring and other costs which are not allocated to the segments.
Information related to our segments is as follows:

Data Storage Media
   Americas

                               Three Months Ended                     Six Months Ended
                                    June 30,            Percent           June 30,           Percent
  (Dollars in millions)         2009         2008       Change        2009        2008       Change
  Net revenue                $  169.4      $ 190.2       -10.9 %    $ 325.9     $ 404.9       -19.5 %
  Operating income               14.4         17.5       -17.7 %       26.4        41.3       -36.1 %
  As a percent of revenue         8.5 %        9.2 %                    8.1 %      10.2 %

The Americas segment is our largest segment comprising 39.6 percent of our total revenue for the three months ended June 30, 2009 and 38.2 percent of our total revenue for the six months ended June 30, 2009. Our revenue decrease for the three months ended June 30, 2009, compared with the same period last year, was mainly due to price declines of approximately 12 percent partly offset by volume increases of approximately 2 percent. From a product perspective, we experienced revenue declines primarily in magnetic, consumer electronics and flash products offset by an increase in optical. Our revenue decrease for the six months ended June 30, 2009, compared with the same period last year, was mainly due to price declines of approximately 11 percent and volume declines of approximately 8 percent. From a product perspective, we experienced revenue declines in all products except hard disk drives.
The decrease in operating income as a percentage of revenue for the three months ended June 30, 2009, compared with the same period last year, was driven by lower gross profit in magnetic and consumer electronic products partly offset by higher gross profit in optical and lower SG&A expense. The decrease in operating income as a percentage of revenue for the six months ended June 30, 2009, compared with the same period last year, was driven by lower gross profit in magnetic, flash and consumer electronic products offset by higher gross profit in optical and lower SG&A expense.

   Europe

                               Three Months Ended                     Six Months Ended
                                    June 30,            Percent           June 30,           Percent
  (Dollars in millions)         2009         2008       Change        2009        2008       Change
  Net revenue                $  117.9      $ 185.3       -36.4 %    $ 253.2     $ 361.4       -29.9 %
  Operating income                0.8          7.2       -88.9 %        2.5        12.9       -80.6 %
  As a percent of revenue         0.7 %        3.9 %                    1.0 %       3.6 %

The Europe segment comprised 27.6 percent of our total revenue for the three months ended June 30, 2009 and 29.6 percent of our total revenue for the six months ended June 30, 2009. Our revenue decrease for the three months ended June 30, 2009, compared with the same period last year, was due to overall volume decreases of approximately 20 percent, unfavorable foreign currency impacts of approximately 9 percent and price declines of approximately 7 percent. From a product perspective, we experienced revenue declines in all products except consumer electronics. Our revenue decrease for the six months ended June 30, 2009, compared with the same period last year, was due to volume declines of approximately 16 percent, unfavorable foreign currency impacts of approximately 8 percent and price declines of approximately 6 percent. From a product perspective, we experienced revenue declines in all products except consumer electronics and hard disk drives. We anticipate that our GDM joint venture will be wound down by the end of 2009 as a result of the litigation settlement previously discussed. This joint venture contributed $27.8 million and $50.5 million of revenue for the three months ended June 30, 2009 and 2008, respectively, and $57.5 million and $86.6 million of revenue for the six months ended June 30, 2009 and 2008, respectively.

The decrease in operating income for the three and six month periods ended June 30, 2009, compared with the same periods last year, was driven by lower sales and gross profit in our optical and magnetic products partly offset by lower SG&A expense.

   Asia Pacific (APAC)

                               Three Months Ended                     Six Months Ended
                                    June 30,            Percent           June 30,           Percent
  (Dollars in millions)         2009         2008       Change        2009        2008       Change
  Net revenue                $   93.1      $ 113.3       -17.8 %    $ 196.0     $ 227.6       -13.9 %
  Operating income                3.3          8.0       -58.8 %        9.0        15.7       -42.7 %
  As a percent of revenue         3.5 %        7.1 %                    4.6 %       6.9 %

The APAC segment comprised 21.8 percent of our total revenue for the three months ended June 30, 2009 and 22.9 percent of our total revenue for the six months ended June 30, 2009. Our revenue decrease for the three months ended June 30, 2009, compared with the same period last year, was due to price declines of approximately 20 percent and unfavorable foreign currency impacts of approximately 4 percent partly offset by overall volume increases of approximately 6 percent. Our revenue decrease for the six months ended June 30, 2009, compared with the same period last year, was due to price declines of approximately 18 percent, unfavorable foreign currency impacts of approximately 7 percent partly offset by overall volume increases of approximately 11 percent. From a product perspective, the decreases in revenue for the three and six month periods ended June 30, 2009, compared with the same periods last year, were mainly driven by a decrease in optical, magnetic, audio and video tape and flash product sales as a result of the continuing economic slowdown, partly offset by an increase in hard disk drive and services revenue.
The decreases in operating income as a percentage of revenue for the three and six month periods ended June 30, 2009, compared with the same periods last year, were driven by lower gross profit in optical and magnetic products partly offset by lower SG&A expense.

Electronic Products

                               Three Months Ended                     Six Months Ended
                                    June 30,            Percent           June 30,           Percent
  (Dollars in millions)         2009          2008      Change        2009        2008       Change
  Net revenue                $    47.5      $ 58.2       -18.4 %    $ 79.0      $ 84.0         -6.0 %
  Operating (loss) income         (1.2 )       0.6        NM          (5.1 )      (2.1 )       NM
  As a percent of revenue        (2.5) %       1.0 %                  (6.5 )%     (2.5 )%

NM - Not Meaningful

The Electronic Products segment comprised 11.1 percent of our total revenue for the three months ended June 30, 2009 and 9.2 percent of our total revenue for the six months ended June 30, 2009. The decline in revenue for the three months ended June 30, 2009, compared with the same period last year, was driven primarily by decreased video product sales. The decrease in revenue for the six months ended June 30, 2009, compared with the same period last year, was driven primarily by decreased video product sales partly offset by increased audio product sales.
The change in the Electronic Products segment's operating (loss) income as a percentage of revenue for the three months ended June 30, 2009, compared with the same period last year, was driven mainly by lower gross profit in video products. The increase in the Electronic Products segment's operating loss as a percentage of revenue for the six months ended June 30, 2009, compared with the same period last year, was driven by mainly by lower gross profit in video . . .