Memorex 2011 Annual Report Download - page 22

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is intended to be read in conjunction with Item 1. Business, the Consolidated Financial
Statements and related notes that appear elsewhere in this Annual Report on Form 10-K.
Overview
Imation is a global scalable storage and data security company. Our portfolio includes tiered storage and security
offerings for business and products designed to manage audio and video information in the home. Imation reaches customers
in more than 100 countries through a global distribution network and well recognized brands.
Optical media product revenue comprised 39.6 percent, 42.4 percent and 44.8 percent of our total consolidated revenue
in 2011, 2010 and 2009, respectively. The optical media market continues to contract as consumers adopt alternatives such
as digital streaming, hard disk and flash media, resulting in decreasing revenues. We believe we are generally maintaining
our worldwide market share. During 2010 and 2011 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, mitigated partially by successfully negotiated price increases with our
customers, causing 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, we reversed $7.8 million of
accruals related to prior year European optical media copyright levies payable for which we considered payment remote. See
Note 2 to the Consolidated Financial Statements for further information regarding levies.
Magnetic product revenue comprised 25.4 percent, 23.8 percent and 24.6 percent of our total consolidated revenue in
2011, 2010 and 2009, respectively. While we expect the demand for data storage capacity to increase, advances in
technology allow increasingly more data to be stored on a single unit of magnetic tape and thus over the recent past the
market has declined each year. While the market is getting smaller, we believe we are maintaining our market share in all of
our regional business segments. During 2011, in order to gain efficiencies and reduce manufacturing costs, we discontinued
tape coating operations at our Weatherford, Oklahoma facility. We signed a strategic agreement with TDK Corporation to
jointly develop and manufacture magnetic tape technologies. Under the agreement, we are collaborating on the research and
development of future tape formats in both companies’ research centers in the United States and Japan and we consolidated
tape coating operations to the TDK Yamanashi manufacturing facility. The contracting magnetic tape market size impacted all
of our segments resulting in decreasing revenues, and we expect these trends to continue into 2012.
Other traditional storage product revenue comprised 3.7 percent, 4.3 percent and 4.7 percent of our total consolidated
revenue in 2011, 2010 and 2009, respectively. We expect the demand for audio video tape and optical drives, the products
which comprise the majority of the revenue in this category, to decrease similarly to our magnetic products.
Secure and scalable storage product revenue comprised 16.3 percent, 14.2 percent and 10.0 percent of our total
consolidated revenue in 2011, 2010 and 2009, respectively. During 2011 we committed substantial investment in secure and
scalable storage products to complement our Defender line of secure storage products with the acquisitions of the Encryptx
security solutions for removable storage devices and removable storage media from BeCompliant Corporation, the secure
data storage hardware business of IronKey Systems, Inc. (IronKey), the portable security solutions and technologies of MXI
Security from Memory Experts International, Inc. and certain intellectual assets of Prostor Systems and Nine Technology.
With these investments, we have expanded our offerings of encrypted and biometric 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. With our acquisition of ProStor Systems’
InfiniVault data-archive appliance and related technologies for our scalable storage portfolio, we’ve added a new portfolio of
data protection and data archive appliances designed to help data-intensive, compliance-driven small and medium sized
businesses retain, retrieve and recover valuable data. We are moving beyond removable storage offerings to a portfolio of
appliances designed specifically for the storage needs of small and medium businesses. We anticipate revenue from secure
and scalable storage products to grow during 2012 in all of our regional business segments.
Audio and video information product revenue comprised 15.0 percent, 15.3 percent and 15.9 percent of our total
consolidated revenue in 2011, 2010 and 2009, respectively. During 2011, we rationalized our product lines by exiting certain
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