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SECURITIES AND EXCHANGE COMMISSION
For The
Quarter Ended: March 31, 2005 |
Commission File Number 1-9853 |
EMC CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts (State or other jurisdiction of incorporation or organization) | 04-2680009 (I.R.S. Employer Identification Number) |
(508) 435-1000
(Registrants telephone number, including area
code)
Yes [X] No [ ]
Yes [X] No [ ]
EMC CORPORATION
Page No.
|
||
---|---|---|
PART
I FINANCIAL INFORMATION |
||
Item
1. Financial Statements (unaudited) |
||
Consolidated
Balance Sheets at March 31, 2005 and December 31, 2004 |
3 |
|
Consolidated
Income Statements for the Three Months Ended March 31, 2005 and 2004 |
4 |
|
Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2005 and
2004 |
5 |
|
Consolidated
Statements of Comprehensive Income for the Three Months Ended March 31, 2005 and 2004 |
6 |
|
Notes
to Interim Consolidated Financial Statements |
7 |
|
Item
2. Managements Discussion and Analysis of Financial Condition and
Results of Operations |
19 |
|
Item
3. Quantitative and Qualitative Disclosures About Market Risk |
34 |
|
Item
4. Controls and Procedures |
34 |
|
PART
II OTHER INFORMATION |
||
Item
1. Legal Proceedings |
35 |
|
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds |
35 |
|
Item
6. Exhibits |
35 |
|
SIGNATURES |
36 |
|
EXHIBIT
INDEX |
37 |
PART I
FINANCIAL INFORMATION
Item 1. | Financial Statements |
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per
share amounts)
(unaudited)
March 31, 2005 |
December 31, 2004 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||
Current
assets: |
||||||||||
Cash and cash
equivalents |
$ | 1,684,959 | $ | 1,476,803 | ||||||
Short-term
investments |
1,377,973 | 1,236,726 | ||||||||
Accounts and
notes receivable, less allowance for doubtful accounts of $38,587 and $39,901 |
1,085,260 | 1,162,387 | ||||||||
Inventories |
594,260 | 514,065 | ||||||||
Deferred
income taxes |
307,280 | 289,810 | ||||||||
Other current
assets |
161,207 | 151,135 | ||||||||
Total current
assets |
5,210,939 | 4,830,926 | ||||||||
Long-term
investments |
4,433,790 | 4,727,237 | ||||||||
Property,
plant and equipment, net |
1,583,976 | 1,571,810 | ||||||||
Intangible
assets, net |
516,749 | 499,478 | ||||||||
Other assets,
net |
533,328 | 509,041 | ||||||||
Goodwill,
net |
3,526,083 | 3,284,414 | ||||||||
Total
assets |
$ | 15,804,865 | $ | 15,422,906 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||
Current
liabilities: |
||||||||||
Notes payable
and current portion of long-term obligations |
$ | 351 | $ | 183 | ||||||
Accounts
payable |
525,344 | 522,587 | ||||||||
Accrued
expenses |
1,123,440 | 1,090,666 | ||||||||
Income taxes
payable |
409,521 | 404,772 | ||||||||
Deferred
revenue |
1,001,309 | 930,492 | ||||||||
Total current
liabilities |
3,059,965 | 2,948,700 | ||||||||
Deferred
revenue |
584,917 | 570,995 | ||||||||
Long-term
convertible debt |
128,081 | 128,456 | ||||||||
Deferred
income taxes |
198,696 | 141,600 | ||||||||
Other
liabilities |
109,520 | 109,868 | ||||||||
Commitments
and contingencies |
||||||||||
Stockholders equity: |
||||||||||
Series
preferred stock, par value $.01; authorized 25,000 shares; none outstanding |
| | ||||||||
Common stock,
par value $.01; authorized 6,000,000 shares; issued and outstanding 2,402,770 and 2,404,969 shares |
24,028 | 24,050 | ||||||||
Additional
paid-in capital |
6,193,424 | 6,221,099 | ||||||||
Deferred
compensation |
(131,100 | ) | (124,286 | ) | ||||||
Retained
earnings |
5,707,180 | 5,437,346 | ||||||||
Accumulated
other comprehensive loss, net |
(69,846 | ) | (34,922 | ) | ||||||
Total
stockholders equity |
11,723,686 | 11,523,287 | ||||||||
Total
liabilities and stockholders equity |
$ | 15,804,865 | $ | 15,422,906 |
The accompanying notes are an integral part of the consolidated financial
statements.
3
EMC CORPORATION
CONSOLIDATED INCOME STATEMENTS
(in thousands, except
per share amounts)
(unaudited)
For the Three Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
||||||||||
Revenues: |
|||||||||||
Product
sales |
$ | 1,620,503 | $ | 1,378,596 | |||||||
Services |
622,628 | 493,033 | |||||||||
2,243,131 | 1,871,629 | ||||||||||
Costs and
expenses: |
|||||||||||
Cost of
product sales |
798,539 | 705,946 | |||||||||
Cost of
services |
270,371 | 228,014 | |||||||||
Research and
development |
234,297 | 204,596 | |||||||||
Selling,
general and administrative |
615,746 | 534,625 | |||||||||
Restructuring
and other special charges |
968 | 28,228 | |||||||||
Operating
income |
323,210 | 170,220 | |||||||||
Investment
income |
42,995 | 41,030 | |||||||||
Interest
expense |
(2,033 | ) | (1,973 | ) | |||||||
Other
expense, net |
(2,304 | ) | (5,777 | ) | |||||||
Income before
taxes |
361,868 | 203,500 | |||||||||
Income tax
provision |
92,034 | 63,695 | |||||||||
Net
income |
$ | 269,834 | $ | 139,805 | |||||||
Net income
per weighted average share, basic |
$ | 0.11 | $ | 0.06 | |||||||
Net income
per weighted average share, diluted |
$ | 0.11 | $ | 0.06 | |||||||
Weighted
average shares, basic |
2,395,509 | 2,415,550 | |||||||||
Weighted
average shares, diluted |
2,443,455 | 2,467,209 |
The accompanying notes are an integral part of the consolidated financial
statements.
4
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
For
the Three Months Ended
|
||||||||
---|---|---|---|---|---|---|---|---|
March
31, 2005 |
March
31, 2004 |
|||||||
Cash
flows from operating activities: |
||||||||
Cash
received from customers |
$ | 2,411,574 | $ | 2,005,241 | ||||
Cash
paid to suppliers and employees |
(1,839,614 | ) | (1,580,610 | ) | ||||
Dividends
and interest received |
53,343 | 38,849 | ||||||
Interest
paid |
(3,179 | ) | (1,188 | ) | ||||
Income
taxes paid |
(21,694 | ) | (39,727 | ) | ||||
Net
cash provided by operating activities |
600,430 | 422,565 | ||||||
Cash
flows from investing activities: |
||||||||
Additions
to property, plant and equipment |
(98,290 | ) | (86,182 | ) | ||||
Capitalized
software development costs |
(42,127 | ) | (41,893 | ) | ||||
Purchases
of short and long-term available for sale securities |
(1,946,021 | ) | (2,270,847 | ) | ||||
Sales
and maturities of short and long-term available for sale securities |
2,050,682 | 1,900,525 | ||||||
Business
acquisitions, net of cash acquired |
(252,904 | ) | (529,664 | ) | ||||
Other |
(1,000 | ) | (4,337 | ) | ||||
Net
cash used in investing activities |
(289,660 | ) | (1,032,398 | ) | ||||
Cash
flows from financing activities: |
||||||||
Issuance
of common stock |
34,459 | 44,906 | ||||||
Purchase
of treasury stock |
(127,097 | ) | (44,557 | ) | ||||
Payment
of long-term and short-term obligations |
(44 | ) | (2,951 | ) | ||||
Proceeds
from long-term and short-term obligations |
163 | | ||||||
Net
cash used in financing activities |
(92,519 | ) | (2,602 | ) | ||||
Effect
of exchange rate changes on cash |
(10,095 | ) | (50 | ) | ||||
Net
increase (decrease) in cash and cash equivalents |
208,156 | (612,485 | ) | |||||
Cash
and cash equivalents at beginning of period |
1,476,803 | 1,752,976 | ||||||
Cash
and cash equivalents at end of period |
$ | 1,684,959 | $ | 1,140,491 | ||||
Reconciliation
of net income to net cash provided by operating activities: |
||||||||
Net
income |
$ | 269,834 | $ | 139,805 | ||||
Adjustments
to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation
and amortization |
152,595 | 144,039 | ||||||
Non-cash
restructuring and other special charges |
3,100 | 16,129 | ||||||
Amortization
of deferred compensation |
13,875 | 13,755 | ||||||
Provision
for doubtful accounts |
709 | 1,243 | ||||||
Deferred
income taxes, net |
43,494 | 5,223 | ||||||
Tax
benefit from stock options exercised |
14,111 | 22,194 | ||||||
Other |
10,479 | | ||||||
Changes
in assets and liabilities, net of acquisitions: |
||||||||
Accounts
and notes receivable |
100,600 | (26,088 | ) | |||||
Inventories |
(82,188 | ) | (24,419 | ) | ||||
Other
assets |
(21,973 | ) | 7,110 | |||||
Accounts
payable |
(4,092 | ) | 21,380 | |||||
Accrued
expenses |
23,868 | (52,477 | ) | |||||
Income
taxes payable |
12,788 | (3,734 | ) | |||||
Deferred
revenue |
67,134 | 158,457 | ||||||
Other
liabilities |
(3,904 | ) | (52 | ) | ||||
Net
cash provided by operating activities |
$ | 600,430 | $ | 422,565 | ||||
Non-cash
activity: |
||||||||
-
Issuance of stock options exchanged in business combinations |
$ | 37,360 | $ | 72,026 |
The accompanying notes are an integral part of the consolidated financial
statements.
5
EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in
thousands)
(unaudited)
For the Three Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
||||||||||
Net
income |
$ | 269,834 | $ | 139,805 | |||||||
Other
comprehensive income (loss), net of taxes: |
|||||||||||
Foreign
currency translation adjustments, net of tax benefits of $1,919 and $536 |
(4,257 | ) | (10,434 | ) | |||||||
Changes in
market value of derivatives, net of taxes of $19 and $0 |
200 | (397 | ) | ||||||||
Changes in
market value of investments, net of taxes (benefit) of $(8,449) and $7,229 |
(30,867 | ) | 12,881 | ||||||||
Other
comprehensive income (loss) |
(34,924 | ) | 2,050 | ||||||||
Comprehensive
income |
$ | 234,910 | $ | 141,855 |
The accompanying notes are an integral part of the consolidated financial
statements.
6
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
1. | Basis of Presentation |
7
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the Three Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
||||||||||
Net
income |
$ | 269,834 | $ | 139,805 | |||||||
Add back: Stock
compensation costs, net of taxes, on stock-based awards |
9,019 | 9,943 | |||||||||
Less: Stock
compensation costs, net of taxes, had stock compensation expense been measured at fair value |
(93,846 | ) | (97,733 | ) | |||||||
Incremental
stock compensation expense per FAS No. 123, net of taxes |
(84,827 | ) | (87,790 | ) | |||||||
Adjusted net
income |
$ | 185,007 | $ | 52,015 | |||||||
Net income per
weighted average share, basic as reported |
$ | 0.11 | $ | 0.06 | |||||||
Net income per
weighted average share, diluted as reported |
$ | 0.11 | $ | 0.06 | |||||||
Adjusted net
income per weighted average share, basic |
$ | 0.08 | $ | 0.02 | |||||||
Adjusted net
income per weighted average share, diluted |
$ | 0.08 | $ | 0.02 |
2005 |
2004 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Dividend
yield |
None |
None |
||||||||
Expected
volatility |
45.0% |
55.0% |
||||||||
Risk-free
interest rate |
3.79% |
3.13% |
||||||||
Expected life
(in years) |
4.0 |
5.0 |
8
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. | Business Acquisitions and Goodwill |
Expected life
(in years) |
4.0 | |||||
Expected
volatility |
45.0 | % | ||||
Risk free
interest rate |
2.7 | % |
9
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Current
assets |
$ | 22,382 | ||||
Property,
plant and equipment |
7,596 | |||||
Other
long-term assets |
533 | |||||
Goodwill |
254,629 | |||||
Intangible
assets: |
||||||
Developed
technology (estimated useful lives 4-7 years) |
24,870 | |||||
Customer
relationships (estimated useful lives of 4-8 years) |
16,170 | |||||
Tradenames
and trademarks (estimated useful lives of 2-7 years) |
1,660 | |||||
Non-solicitation agreements (estimated useful life of 3 years) |
1,570 | |||||
Acquired
IPR&D |
3,100 | |||||
Total
intangible assets |
47,370 | |||||
Deferred
compensation |
3,536 | |||||
Current
liabilities |
(24,747 | ) | ||||
Deferred
income taxes |
(11,374 | ) | ||||
Long-term
liabilities |
(9,662 | ) | ||||
Total
purchase price |
$ | 290,263 |
10
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Information Storage Products |
Information Storage and Management Services |
EMC Software Group Products and Services |
VMware Products and Services |
Other Businesses |
Total |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance,
January 1, 2005 |
$ | 551,888 | $ | 1,615 | $ | 2,204,230 | $ | 526,681 | $ | | $ | 3,284,414 | ||||||||||||||
Goodwill
acquired |
| | 254,629 | | | 254,629 | ||||||||||||||||||||
Tax deduction
from exercise of stock options |
| | (3,737 | ) | | | (3,737 | ) | ||||||||||||||||||
Finalization
of purchase price allocations |
| | (742 | ) | (8,481 | ) | | (9,223 | ) | |||||||||||||||||
Balance,
March 31, 2005 |
$ | 551,888 | $ | 1,615 | $ | 2,454,380 | $ | 518,200 | $ | | $ | 3,526,083 |
3. | Inventories |
March 31, 2005 |
December 31, 2004 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Purchased
parts |
$ | 31,385 | $ | 46,823 | ||||||
Work-in-process |
347,179 | 349,788 | ||||||||
Finished
goods |
215,696 | 117,454 | ||||||||
$ | 594,260 | $ | 514,065 |
4. | Property, Plant and Equipment |
March 31, 2005 |
December 31, 2004 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Furniture and
fixtures |
$ | 136,385 | $ | 136,441 | ||||||
Equipment |
1,837,093 | 1,803,480 | ||||||||
Buildings and
improvements |
873,617 | 865,184 | ||||||||
Land |
105,939 | 105,184 | ||||||||
Construction in
progress |
163,184 | 155,904 | ||||||||
3,116,218 | 3,066,193 | |||||||||
Accumulated
depreciation |
(1,532,242 | ) | (1,494,383 | ) | ||||||
$ | 1,583,976 | $ | 1,571,810 |
11
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. | Accrued Expenses |
March 31, 2005 |
December 31, 2004 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Salaries and
benefits |
$ | 392,969 | $ | 426,408 | ||||||
Product
warranties |
209,595 | 180,758 | ||||||||
Restructuring |
102,489 | 115,262 | ||||||||
Other |
418,387 | 368,238 | ||||||||
$ | 1,123,440 | $ | 1,090,666 |
For the Three Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
||||||||||
Balance,
beginning of the period |
$ | 180,758 | $ | 118,816 | |||||||
Current year
accrual |
49,660 | 24,819 | |||||||||
Amounts charged
to the accrual |
(20,823 | ) | (19,809 | ) | |||||||
Balance, end of
the period |
$ | 209,595 | $ | 123,826 |
6. | Net Income Per Share |
For the Three Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
||||||||||
Numerator: |
|||||||||||
Net income,
as reported basic |
$ | 269,834 | $ | 139,805 | |||||||
Adjustment
for interest expense on convertible debt, net of taxes |
643 | | |||||||||
Net
income-diluted |
$ | 270,477 | $ | 139,805 | |||||||
Denominator: |
|||||||||||
Basic
weighted average common shares outstanding |
2,395,509 | 2,415,550 | |||||||||
Weighted
average common stock equivalents |
38,890 | 51,659 | |||||||||
Assumed
conversion of convertible debt |
9,056 | | |||||||||
Diluted weighted average shares outstanding |
2,443,455 | 2,467,209 |
12
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. | Commitments and Contingencies |
8. | Segment Information |
13
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the Three Months Ended |
Information Storage Products |
Information Storage and Management Services |
EMC Software Group Products and Services |
VMware Products and Services |
Other Businesses |
Consolidated |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March
31, 2005 |
||||||||||||||||||||||||||
Systems
revenues |
$ | 1,025,971 | $ | | $ | | $ | | $ | | $ | 1,025,971 | ||||||||||||||
Software
license revenues |
284,485 | | 247,752 | 62,295 | | 594,532 | ||||||||||||||||||||
Services
revenues |
| 441,135 | 153,573 | 17,795 | 10,125 | 622,628 | ||||||||||||||||||||
Total
revenues |
$ | 1,310,456 | $ | 441,135 | $ | 401,325 | $ | 80,090 | $ | 10,125 | $ | 2,243,131 | ||||||||||||||
Gross
profit |
$ | 556,732 | $ | 230,067 | $ | 317,638 | $ | 65,275 | $ | 4,509 | $ | 1,174,221 | ||||||||||||||
Gross profit
percentage |
42.5 | % | 52.2 | % | 79.1 | % | 81.5 | % | 44.5 | % | 52.3 | % | ||||||||||||||
March
31, 2004 |
||||||||||||||||||||||||||
Systems
revenues |
$ | 894,956 | $ | | $ | | $ | | $ | | $ | 894,956 | ||||||||||||||
Software
license revenues |
251,135 | | 199,353 | 33,152 | | 483,640 | ||||||||||||||||||||
Services
revenues |
| 342,778 | 124,235 | 6,142 | 19,878 | 493,033 | ||||||||||||||||||||
Total
revenues |
$ | 1,146,091 | $ | 342,778 | $ | 323,588 | $ | 39,294 | $ | 19,878 | $ | 1,871,629 | ||||||||||||||
Gross
profit |
$ | 475,850 | $ | 173,252 | $ | 247,570 | $ | 29,992 | $ | 11,005 | $ | 937,669 | ||||||||||||||
Gross profit
percentage |
41.5 | % | 50.5 | % | 76.5 | % | 76.3 | % | 55.4 | % | 50.1 | % |
For the Three Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
||||||||||
Revenues: |
|||||||||||
United
States |
$ | 1,275,965 | $ | 1,030,071 | |||||||
Canada |
32,234 | 29,541 | |||||||||
Europe, Middle
East, Africa |
641,065 | 555,260 | |||||||||
Asia
Pacific |
247,867 | 220,513 | |||||||||
Latin America
and Mexico |
46,000 | 36,244 | |||||||||
Total |
$ | 2,243,131 | $ | 1,871,629 |
14
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. | Restructuring and Other Special Charges |
Category |
Balance as of December 31, 2004 |
Additions to the Provision |
Current Utilization |
Balance as of March 31, 2005 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Workforce
reduction |
$ | 16,380 | $ | 583 | $ | (2,838 | ) | $ | 14,125 | |||||||||
Consolidation
of excess facilities |
1,662 | | (391 | ) | 1,271 | |||||||||||||
Total |
$ | 18,042 | $ | 583 | $ | (3,229 | ) | $ | 15,396 |
15
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Category |
Balance as of December 31, 2004 |
Reductions to the Provision |
Current Utilization |
Balance as of March 31, 2005 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Workforce
reduction |
$ | 3,300 | $ | (369 | ) | $ | (681 | ) | $ | 2,250 | ||||||||
Consolidation
of excess facilities |
91,281 | (5,225 | ) | (6,378 | ) | 79,678 | ||||||||||||
Other
contractual obligations |
2,639 | (244 | ) | (4 | ) | 2,391 | ||||||||||||
Total |
$ | 97,220 | $ | (5,838 | ) | $ | (7,063 | ) | $ | 84,319 |
10. | Retirement Plans and Retiree Medical Benefits |
For the Three Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
||||||||||
Interest
cost |
$ | 4,708 | $ | 4,595 | |||||||
Expected return
on plan assets |
(7,038 | ) | (6,625 | ) | |||||||
Amortization of
transition asset |
(153 | ) | (214 | ) | |||||||
Recognized
actuarial loss |
1,520 | 1,302 | |||||||||
Net periodic
benefit credit |
$ | (963 | ) | $ | (942 | ) |
16
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the Three Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
||||||||||
Interest
cost |
$ | 60 | $ | 69 | |||||||
Expected return
on plan assets |
(8 | ) | (8 | ) | |||||||
Amortization of
transition asset |
(25 | ) | (25 | ) | |||||||
Recognized
actuarial gain |
(10 | ) | (11 | ) | |||||||
Net periodic
benefit cost |
$ | 17 | $ | 25 |
11. | Stockholders Equity |
12. | Income Taxes |
17
EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Managements Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) should be read in conjunction with our interim consolidated financial statements
and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A contained in our Annual Report on Form 10-K filed with
the Securities and Exchange Commission (the SEC) on March 4, 2005. The following discussion contains forward-looking statements and should
also be read in conjunction with FACTORS THAT MAY AFFECT FUTURE RESULTS beginning on page 26. The forward-looking statements do not include
the potential impact of any mergers, acquisitions, divestitures or business combinations that may be announced after the date hereof. |
All dollar amounts in this MD&A are in millions.
INTRODUCTION
Results of Operations First Quarter of 2005 Compared to First Quarter of
2004
Revenues
For the Three Months Ended |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
$ Change |
% Change |
|||||||||||||||||
Information
storage products |
$ | 1,310.5 | $ | 1,146.1 | $ | 164.4 | 14 | % | ||||||||||||
Information
storage and management services |
441.1 | 342.8 | 98.3 | 29 | ||||||||||||||||
EMC Software
Group products and services |
401.3 | 323.6 | 77.7 | 24 | ||||||||||||||||
VMware
products and services |
80.1 | 39.3 | 40.8 | 104 | ||||||||||||||||
Other
businesses |
10.1 | 19.9 | (9.8 | ) | (49 | ) | ||||||||||||||
Total
revenues |
$ | 2,243.1 | $ | 1,871.6 | $ | 371.5 | 20 | % |
19
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
For the Three Months Ended |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
Percentage Change |
||||||||||||||
North America,
excluding Mexico |
$ | 1,308.2 | $ | 1,059.6 | 23 | % | ||||||||||
Europe, Middle
East and Africa |
641.1 | 555.3 | 15 | |||||||||||||
Asia
Pacific |
247.9 | 220.5 | 12 | |||||||||||||
Latin America
and Mexico |
46.0 | 36.2 | 27 |
20
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
Costs and expenses
For the Three Months Ended |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2005 |
March 31, 2004 |
$ Change |
% Change |
|||||||||||||||||
Cost of
revenue: |
||||||||||||||||||||
Information
storage products |
$ | 753.8 | $ | 670.2 | $ | 83.6 | 12 | % | ||||||||||||
Information
storage and management services |
211.0 | 169.5 | 41.5 | 24 | ||||||||||||||||
EMC Software
Group products and services |
83.7 | 76.0 | 7.7 | 10 | ||||||||||||||||
VMware
products and services |
14.8 | 9.3 | 5.5 | 59 | ||||||||||||||||
Other
businesses |
5.6 | 8.9 | (3.3 | ) | (37 | ) | ||||||||||||||
Total cost of
revenue |
1,068.9 | 933.9 | 135.0 | 14 | ||||||||||||||||
Gross
margins: |
||||||||||||||||||||
Information
storage products |
556.7 | 475.9 | 80.8 | 17 | ||||||||||||||||
Information
storage and management services |
230.1 | 173.3 | 56.8 | 33 | ||||||||||||||||
EMC Software
Group products and services |
317.6 | 247.6 | 70.0 | 28 | ||||||||||||||||
VMware
products and services |
65.3 | 30.0 | 35.3 | 118 | ||||||||||||||||
Other
businesses |
4.5 | 11.0 | (6.5 | ) | (59 | ) | ||||||||||||||
Total gross
margins |
1,174.2 | 937.7 | 236.5 | 25 | ||||||||||||||||
Operating
expenses: |
||||||||||||||||||||
Research and
development |
234.3 | 204.6 | 29.7 | 15 | ||||||||||||||||
Selling,
general and administrative |
615.7 | 534.6 | 81.1 | 15 | ||||||||||||||||
Restructuring
and other special charges |
1.0 | 28.2 | (27.2 | ) | (96 | ) | ||||||||||||||
Total
operating expenses |
851.0 | 767.4 | 83.6 | 11 | ||||||||||||||||
Operating
income |
323.2 | 170.2 | 153.0 | 90 | ||||||||||||||||
Investment
income, interest expense, and other expense, net |
38.7 | 33.3 | 5.4 | 16 | ||||||||||||||||
Income before
income taxes |
361.9 | 203.5 | 158.4 | 78 | ||||||||||||||||
Income tax
provision |
92.0 | 63.7 | 28.3 | 44 | ||||||||||||||||
Net
income |
$ | 269.8 | $ | 139.8 | $ | 130.0 | 93 | % |
21
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
22
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
Category |
Balance as of December 31, 2004 |
Additions to the Provision |
Current Utilization |
Balance as of March 31, 2005 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Workforce
reduction |
$ | 16.3 | $ | 0.6 | $ | (2.8 | ) | $ | 14.1 | |||||||||
Consolidation
of excess facilities |
1.7 | | (0.4 | ) | 1.3 | |||||||||||||
Total |
$ | 18.0 | $ | 0.6 | $ | (3.2 | ) | $ | 15.4 |
Category |
Balance as of December 31, 2004 |
Reductions to the Provision |
Current Utilization |
Balance as of March 31, 2005 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Workforce
reduction |
$ | 3.3 | $ | (0.3 | ) | $ | (0.7 | ) | $ | 2.3 | ||||||||
Consolidation
of excess facilities |
91.3 | (5.2 | ) | (6.4 | ) | 79.7 | ||||||||||||
Other
contractual obligations |
2.6 | (0.3 | ) | | 2.3 | |||||||||||||
Total |
$ | 97.2 | $ | (5.8 | ) | $ | (7.1 | ) | $ | 84.3 |
23
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
Financial Condition
24
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business could be materially adversely affected as a result of general economic and market conditions.
Our business could be materially adversely affected as a result of a lessening demand in the information technology market.
Component costs, competitive pricing, and sales volume and mix could materially adversely affect our revenues, gross margins and earnings.
If our suppliers are not able to meet our requirements, we could have decreased revenues and earnings.
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments.
|
the effect of the acquisition on our financial and strategic position and reputation |
|
the failure of an acquired business to further our strategies |
|
the failure of the acquisition to result in expected benefits, which may include benefits relating to enhanced revenues, technology, human resources, costs savings, operating efficiencies and other synergies |
|
the difficulty and cost of integrating the acquired business, including costs and delays in implementing common systems and procedures and costs and delays caused by communication difficulties or geographic distances between the two companies sites |
|
the assumption of liabilities of the acquired business, including litigation-related liabilities |
|
the potential impairment of acquired assets |
|
the lack of experience in new markets, products or technologies or the initial dependence on unfamiliar supply or distribution partners |
|
the diversion of our managements attention from other business concerns |
|
the impairment of relationships with customers or suppliers of the acquired business or our customers or suppliers |
|
the potential loss of key employees of the acquired company |
|
the potential incompatibility of business cultures |
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
We may be unable to keep pace with rapid industry, technological and market changes.
|
the difficulty in forecasting customer preferences or demand accurately |
|
the inability to expand production capacity to meet demand for new products |
|
the impact of customers demand for new products on the products being replaced, thereby causing a decline in sales of existing products and an excessive, obsolete supply of inventory |
|
delays in initial shipments of new products |
The markets we serve are highly competitive and we may be unable to compete effectively.
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
We may have difficulty managing operations.
|
retaining and hiring, as required, the appropriate number of qualified employees |
|
managing, protecting and enhancing, as appropriate, our infrastructure, including but not limited to, our information systems and internal controls |
|
accurately forecasting revenues |
|
training our sales force to sell more software and services |
|
successfully integrating new acquisitions |
|
managing inventory levels, including minimizing excess and obsolete inventory, while maintaining sufficient inventory to meet customer demands |
|
controlling expenses |
|
managing our manufacturing capacity, real estate facilities and other assets |
|
executing on our plans |
Our business could be materially adversely affected as a result of war or acts of terrorism.
Our business may suffer if we are unable to retain or attract key personnel.
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
Our quarterly revenues and earnings could be materially adversely affected by uneven sales patterns and changing purchasing behaviors.
|
the relative dollar amount of our product and services offerings in relation to many of our customers budgets, resulting in long lead times for customers budgetary approval, which tends to be given late in a quarter |
|
the tendency of customers to wait until late in a quarter to commit to purchase in the hope of obtaining more favorable pricing from one or more competitors seeking their business |
|
the fourth quarter influence of customers spending their remaining capital budget authorization prior to new budget constraints in the first six months of the following year |
|
seasonal influences |
|
we assemble our products on the basis of our forecast of near-term demand and maintain inventory in advance of receipt of firm orders from customers |
|
we generally ship products shortly after receipt of the order |
|
customers may reschedule or cancel orders with little or no penalty |
Risks associated with our distribution channels may materially adversely affect our financial results.
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
Changes in foreign conditions could impair our international operations.
Undetected problems in our products could directly impair our financial results.
Our business could be materially adversely affected as a result of the risks associated with alliances.
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
Our business may suffer if we cannot protect our intellectual property.
We may become involved in litigation that may materially adversely affect us.
We may have exposure to additional income tax liabilities.
Changes in regulations could materially adversely affect us.
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
Our stock price is volatile.
|
the announcement of acquisitions, new products, services or technological innovations by us or our competitors |
|
quarterly variations in our operating results |
|
changes in revenue or earnings estimates by the investment community |
|
speculation in the press or investment community |
33
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 4. | CONTROLS AND PROCEDURES |
34
PART II
OTHER INFORMATION
Item 1. | Legal Proceedings |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
ISSUER PURCHASES OF EQUITY SECURITIES IN THE FIRST QUARTER OF 2005
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs2 |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
January 1, 2005
January 31, 2005 |
3,953,510 | 1 | $ | 12.93 | 3,700,000 | 187,661,100 | ||||||||||||
February 1, 2005
February 28, 2005 |
6,122,000 | $ | 12.92 | 6,122,000 | 181,539,100 | |||||||||||||
Total |
10,075,510 | $ | 12.93 | 9,822,000 | 181,539,100 |
1 Includes an aggregate of 253,510 shares acquired from employees for tax withholding purposes.
2 All shares were purchased in open-market transactions pursuant to a previously announced authorization by our Board of Directors in October 2002 to repurchase 250.0 million shares of our common stock. The repurchase program does not have a termination date. In addition, in May 2001, our Board authorized the repurchase of up to 50.0 million shares of our common stock, which shares were repurchased in 2001 and 2002.
Item 6. | Exhibits |
(a) |
Exhibits |
35
SIGNATURES
EMC
CORPORATION |
||||||
Date: April 27,
2005 |
By:
/s/ William J. Teuber, Jr. William J. Teuber, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
36
EXHIBIT INDEX
3.1 | Restated Articles of Organization of EMC Corporation, as amended. (1) |
3.2 | Amended and Restated By-laws of EMC Corporation. (2) |
4.1 | Form of Stock Certificate. (3) |
10.1 | EMC Corporation 2003 Stock Plan, as amended. (4) |
10.2 | EMC Corporation 1992 Stock Option Plan for Directors, as amended (filed herewith). |
31.1 | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
31.2 | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
(1) |
Incorporated by reference to EMC Corporations Quarterly Report on Form 10-Q filed August 9, 2001 (No. 1-9853). |
(2) |
Incorporated by reference to EMC Corporations Quarterly Report on Form 10-Q filed November 3, 2004 (No. 1-9853). |
(3) |
Incorporated by reference to EMC Corporations Annual Report on Form 10-K filed March 31, 1988 (No. 0-14367). |
(4) |
Incorporated by reference to EMC Corporations Definitive Proxy Statement on Schedule 14A filed March 11, 2005 (No. 033-03656). |
37
Exhibit 10.2
EMC CORPORATION
1992 EMC CORPORATION STOCK OPTION PLAN FOR DIRECTORS,
as amended January
27, 2005
1. | PURPOSE |
2. | ADMINISTRATION |
3. | EFFECTIVE DATE |
4. | SHARES SUBJECT TO THE PLAN |
5. | ELIGIBILITY FOR OPTIONS |
1
6. | TERMS AND CONDITIONS OF OPTIONS |
2
3
7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
4
Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
1. | I have reviewed this Quarterly Report on Form 10-Q of the Registrant; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) |
Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee
of the Registrants board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: April 27,
2005 |
/s/ Joseph M. Tucci Joseph M. Tucci President and Chief Executive Officer |
38
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
1. | I have reviewed this Quarterly Report on Form 10-Q of the Registrant; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) |
Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee
of the Registrants board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: April 27,
2005 |
/s/ William J. Teuber, Jr. William J.Teuber, Jr. Executive Vice President and Chief Financial Officer |
39
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1) |
The Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Joseph M. Tucci Joseph M. Tucci President and Chief Executive Officer April 27, 2005 |
40
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1) |
The Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ William J. Teuber, Jr. William J. Teuber, Jr. Executive Vice President and Chief Financial Officer April 27, 2005 |
41