SECURITIES AND EXCHANGE COMMISSION
THE SECURITIES EXCHANGE ACT OF 1934
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) |
Hopkinton, Massachusetts 01748
(Address of principal executive offices, including zip code)
(508) 435-1000
(Registrant’s telephone number, including area code)
Yes [X] No [ ]
Yes [X] No [ ]
EMC CORPORATION
Page No. | ||
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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. Management’s 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)
of the fair value of stock options granted to employees in the basic financial statements. Previously, we elected to only disclose the impact of expensing the fair value of stock options in the notes to the financial statements. The statement is required to be adopted commencing with our first quarter of 2006.
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)
$0.3 million was paid through March 31, 2005. The termination benefits will be paid through 2005 and the lease liabilities will be paid over the remaining lease periods through 2008.
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)
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities by the American Jobs Creation Act of 2004.” FSP 109-1 treats the deduction as a “special deduction” as described in FAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the same period in which the deduction is claimed in our tax return. We are currently evaluating the impact the AJCA will have on our results of operations and financial position.
18
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management’s 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
MANAGEMENT’S 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
MANAGEMENT’S 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 | % |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)
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MANAGEMENT’S 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 |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)
Financial Condition
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)
25
MANAGEMENT’S 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)
We have experienced delivery delays from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. If any of our suppliers were to cancel or materially change contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell certain products cost-effectively or on a timely basis, if at all, and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition. Additionally, we periodically transition our product line to incorporate new technologies. The importance of transitioning our customers smoothly to new technologies, along with our historically uneven pattern of quarterly sales, intensifies the risk that the failure of a supplier to meet our quality or delivery requirements will have a material adverse impact on our revenues and earnings.
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 management’s 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 |
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MANAGEMENT’S 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.
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MANAGEMENT’S 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.
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MANAGEMENT’S 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – (Continued)
reliance on channel partners, which may negatively impact our gross margins. There can be no assurance that we will be successful in maintaining or expanding these channels. If we are not successful, we may lose sales opportunities, customers and market share. Furthermore, the partial reliance on channel partners may materially reduce the visibility to our management of potential customers and demand for products and services, thereby making it more difficult to accurately forecast such demand. In addition, there can be no assurance that our channel partners will not develop, market or sell products or services in competition with us in the future.
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.
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MANAGEMENT’S 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.
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MANAGEMENT’S 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 |
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 4. | CONTROLS AND PROCEDURES |
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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 |
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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 Corporation’s Quarterly Report on Form 10-Q filed August 9, 2001 (No. 1-9853). |
(2) | Incorporated by reference to EMC Corporation’s Quarterly Report on Form 10-Q filed November 3, 2004 (No. 1-9853). |
(3) | Incorporated by reference to EMC Corporation’s Annual Report on Form 10-K filed March 31, 1988 (No. 0-14367). |
(4) | Incorporated by reference to EMC Corporation’s Definitive Proxy Statement on Schedule 14A filed March 11, 2005 (No. 033-03656). |
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