SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended: March 30, 1996 Commission File Number 1-9853
--------------- ------
EMC CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2680009
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
organization or incorporation)
171 South Street
Hopkinton, Massachusetts 01748-9103
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(Address of principal executive offices, including zip code)
(508) 435-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ________
-
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, par value $.01 per share 230,747,504
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Class Outstanding as of March 30, 1996
-2-
EMC CORPORATION
Page No.
Part I - Financial Information
Consolidated Balance Sheets
March 30, 1996 and December 30, 1995.............. 3
Consolidated Statements of Operations
for the Three Months Ended
March 30, 1996 and April 1, 1995.................. 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 30, 1996
and April 1, 1995................................. 5
Notes to Interim Consolidated Financial Statements.. 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 9 - 12
Part II - Other Information................................ 13
Signatures................................................. 14
Exhibit Index.............................................. 15
-3-
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
March 30, December 30,
ASSETS 1996 1995
----------- -------------
Current assets:
Cash and cash equivalents $ 478,759 $ 379,628
Trade and notes receivable less allowance for doubtful
accounts of $7,415 and $7,062, respectively 507,876 550,473
Inventories 316,995 330,160
Deferred income taxes 35,284 44,061
Other assets 19,234 14,633
---------- ----------
Total current assets 1,358,148 1,318,955
Long-term investments 127,382 125,276
Notes receivable, net 25,110 26,497
Property, plant and equipment, net 234,244 218,901
Deferred income taxes 9,082 9,200
Intangible assets, net 59,799 20,078
Other assets, net 38,695 26,822
---------- ----------
Total assets $1,852,460 $1,745,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term obligations $ 5,833 $ 915
Accounts payable 126,060 111,721
Accrued expenses 107,665 130,596
Income taxes payable 106,546 107,717
Deferred revenue 9,995 8,411
---------- ----------
Total current liabilities 356,099 359,360
Deferred revenue 2,089 223
Long-term obligations:
4 1/4% convertible subordinated notes due 2001 229,598 229,598
Notes payable and capital lease obligations 44,136 16,247
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Total liabilities 631,922 605,428
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Stockholders' equity:
Series Preferred Stock, par value $.01; authorized 25,000,000 shares --- ---
Common Stock, par value $.01; authorized 500,000,000 shares;
issued 233,527,568 and 232,517,845, in 1996 and 1995, respectively 2,337 2,325
Additional paid-in capital 350,028 350,989
Deferred compensation (1,813) (2,140)
Retained earnings 871,144 786,599
Cumulative translation adjustment 2,811 3,766
Treasury stock, at cost, 2,780,064 and 2,646,453 shares, respectively (3,969) (1,238)
---------- ----------
Total stockholders' equity 1,220,538 1,140,301
---------- ----------
Total liabilities and stockholders' equity $1,852,460 $1,745,729
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
EMC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except per share amounts)
(unaudited)
For the Three Months Ended
----------------------------
March 30, April 1,
-------------- ------------
1996 1995
-------------- ------------
Revenues:
Net sales $509,184 $437,958
Service and rental 12,303 10,158
-------- --------
521,487 448,116
Costs and expenses:
Cost of sales and service 293,164 218,108
Research and development 35,318 39,940
Selling, general and
administrative 81,763 71,791
-------- --------
Operating income 111,242 118,277
Investment income 6,325 6,560
Interest expense (3,059) (3,509)
Other income / (expense), net 207 556
-------- --------
Income before taxes 114,715 121,884
Income tax provision 30,170 36,435
-------- --------
Net income $ 84,545 $ 85,449
======== ========
Net income per weighted average share,
primary $0.35 $0.37
======== ========
Net income per weighted average share,
fully diluted $0.35 $0.35
======== ========
Weighted average number of common
shares outstanding, primary 248,539 235,080
Weighted average number of common
shares outstanding, fully diluted 248,879 247,423
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
For the Three Months Ended
--------------------------
March 30, April 1,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 84,545 $ 85,449
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,414 12,500
Deferred income taxes 8,895 --
Net loss on disposal of property and equipment 76 --
Changes in assets and liabilities:
Trade and notes receivable 44,025 (5,588)
Inventories 13,181 (39,646)
Other assets (18,966) (14,241)
Accounts payable 14,348 (45,758)
Accrued expenses (24,953) (12,372)
Income taxes payable (1,171) 32,231
Deferred revenue 3,450 2,118
-------- --------
Net cash provided by operating activities 139,844 14,693
-------- --------
Cash flows from investing activities:
Additions to property and equipment (29,739) (25,597)
Purchase of patents (5,000) --
Proceeds from disposal of property and equipment 681 --
Net (purchase)/maturity of long-term investments (2,106) 18,708
-------- --------
Net cash used by investing activities (36,164) (6,889)
-------- --------
Cash flows from financing activities:
Issuance of common stock 6,942 2,107
Repurchase of shares for treasury (10,295) --
Payment of long-term and short-term obligations (193) (11,646)
Issuance of long-term and short-term obligations -- 247
-------- --------
Net cash used by financing activities (3,546) (9,292)
-------- --------
Effect of exchange rate changes on cash (1,003) (42)
Net increase/(decrease) in cash and cash equivalents 100,134 (1,488)
Cash and cash equivalents at beginning of period 379,628 249,830
-------- --------
Cash and cash equivalents at end of period $478,759 $248,300
======== ========
Non-cash activity - conversion of debentures -- $ 39,536
- patents acquired by notes and other payables $ 35,000 --
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
---------------------
Company
- -------
EMC Corporation and its subsidiaries ("EMC" or the "Company") design,
manufacture, market and support a wide range of storage-related hardware,
software and service products for the mainframe, open systems and network
computer storage markets worldwide. These products are sold as storage
solutions for customers utilizing a variety of computer system platforms,
including, but not limited to, International Business Machines Corporation
("IBM") and IBM-compatible mainframe, Unisys Corporation, Compagnie des Machines
Bull S.A., Hewlett-Packard Company, NCR Corporation and other open systems
platforms.
Accounting
- ----------
The accompanying consolidated financial statements are unaudited and have been
prepared in accordance with generally accepted accounting principles. These
statements include the accounts of EMC and its subsidiaries. Certain
information and footnote disclosures normally included in the Company's annual
consolidated financial statements have been condensed or omitted. The interim
consolidated financial statements, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended March 30, 1996 and April
1, 1995.
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the entire fiscal year. It is
suggested that these interim consolidated financial statements be read in
conjunction with the audited consolidated financial statements for the year
ended December 30, 1995, which are contained in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 27, 1996.
2. Inventory
---------
March 30, 1996 December 30, 1995
-------------- -----------------
Inventories consist of:
Purchased parts $ 9,731,000 $ 22,870,000
Work-in-process 152,430,000 150,216,000
Finished goods 154,834,000 157,074,000
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$316,995,000 $330,160,000
============ ============
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EMC CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. Convertible Subordinated Debentures
-----------------------------------
In March 1992, the Company issued $60,000,000 of 6 1/4% convertible
subordinated debentures due 2002 (the "Debentures") of which $39,535,000 was
converted during 1995 and $1,000 was redeemed on April 1, 1995 in accordance
with the Company's notification to holders of its intent to redeem Debentures
not yet converted on or prior to that date. The Debentures were generally
convertible at any time prior to maturity into shares of Common Stock of the
Company at a conversion price of $3.063 per share, subject to adjustment in
certain events. Interest was paid semiannually.
4. Net Income Per Share
--------------------
Net income per share was computed on the basis of weighted average common and
dilutive common equivalent shares outstanding. Primary weighted average shares
outstanding and earnings used in per share computations for the first quarters
of 1996 and 1995 reflect the dilutive effects of the 4 1/4% convertible
subordinated notes due 2001 (the "Notes") and outstanding stock options. Fully
diluted weighted average shares outstanding and earnings used in per share
computations for the first quarter of 1995 reflect the dilutive effects of the
Debentures, in addition to the dilutive effect of the Notes and outstanding
stock options.
5. Litigation
----------
On June 10, 1993, Storage Technology Corporation ("STK") filed suit against EMC
in the United States District Court for the District of Colorado alleging that
EMC was infringing three patents. On September 23, 1994, EMC filed suit against
STK in the United States District Court for the District of Delaware alleging
that STK was infringing one EMC patent.
On April 16, 1996, EMC and STK announced that the above patent litigation had
been settled. The settlement included a cross-licensing agreement limited to
patents covering DASD (direct-access storage devices) and solid-state disk
technologies. All claims and counterclaims in the above lawsuits have been
dismissed as a result of this agreement.
The Company is a party to other litigation which it considers routine and
incidental to its business. Management does not expect the results of any of
these actions to have a material adverse effect on the Company's business or
financial condition.
-8-
EMC CORPORATION
6. Acquisition of Patents
----------------------
In February 1996 the Company acquired a patent portfolio valued at $40 million
which has been included in intangible assets, net of accumulated amortization of
approximately $1 million, at March 30, 1996 and will be amortized over five
years. The Company has paid $5 million to date and the remainder will be paid
in annual installments over five years.
7. Repurchase of Treasury Shares
-----------------------------
In January 1996 the Company's Board of Directors authorized the repurchase of
up to 15 million shares of the Company's common stock over a five-year period.
The repurchased shares will be used primarily to issue shares under the
Company's stock option and stock purchase plans.
As of March 30, 1996, the Company had repurchased 500,000 shares of its
common stock at an average price of $20.44 per share, of which approximately
130,000 shares remain in treasury.
8. Subsequent Events
-----------------
At the Annual Meeting held on May 8, 1996, the Company's stockholders elected
three Class III members to the Board of Directors for a three-year term,
approved the addition of 1,000,000 shares of common stock to the Company's 1989
Employee Stock Purchase Plan and approved certain amendments to the Company's
1992 Stock Option Plan for Directors.
-9-
EMC CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - First Quarter of 1996 compared to First Quarter of 1995
- --------------------------------------------------------------------------------
Revenues
- --------
Revenues for the quarter ended March 30, 1996 were $521,487,000 compared to
$448,116,000 for the first quarter of 1995, an increase of $73,371,000 or 16%.
Revenues from net sales increased by $71,226,000, or 16%, in the first quarter
of 1996 from the first quarter of 1995, while revenue from service and rental
income increased by $2,145,000, or 21% in the first quarter of 1996 as compared
with the first quarter of 1995. While the Company expects revenue to continue
to grow throughout 1996 as compared to the respective periods in 1995, such
increases may not on a percentage basis, continue at the levels experienced in
the first quarter of 1996.
The increase in revenues was due primarily to the continued strong demand for
the Company's series of Integrated Cached Disk Array ("ICDA") based products,
which include the Symmetrix 5000 series of products for the mainframe market,
the Symmetrix 3000 series of products and Centriplex series of products for the
open systems market and the Harmonix series of IBM-compatible disk products for
the AS/400 market. Revenues from the Symmetrix series of products in the
mainframe markets decreased by $56,230,000, or 15%, to $309,155,000 in the first
quarter of 1996 from $365,385,000 in the first quarter of 1995. Revenues from
the midrange series of products decreased by $17,898,000, or 61%, to $11,326,000
in the first quarter of 1996 from $29,224,000 in the first quarter of 1995.
These decreases, as well as continuing product pricing declines, were offset by
increased revenues from the Company's products in the open systems storage
market of $128,196,000, or 693%, to $146,707,000 in the first quarter of 1996
from $18,511,000 in the first quarter of 1995. Also, revenues from McDATA
Corporation ("McDATA"), a wholly owned subsidiary of the Company, increased by
$12,096,000, or 44%, to $39,296,000 in the first quarter of 1996 from
$27,200,000 in the first quarter of 1995.
Revenues on sales into the market of North America increased by $46,348,000, or
18%, to $307,622,000 in the first quarter of 1996 from $261,274,000 in the first
quarter of 1995. This increase was due primarily to increased revenue levels
from sales of the Symmetrix series of products in the open systems storage
market.
Revenues on sales into the markets of Europe, Africa and the Middle East
increased by $25,653,000, or 18%, to $165,753,000 in the first quarter of 1996
from $140,100,000 in the first quarter of 1995, due primarily to increased
revenue levels from sales of the Symmetrix series of products in the open
systems storage market.
-10-
EMC CORPORATION
Revenues on sales into the markets in the Asia Pacific region increased by
$1,293,000, or 3%, to $48,117,000 in the first quarter of 1996 from $46,824,000
in the first quarter of 1995.
Cost of Sales and Service
- -------------------------
As a percentage of revenues, cost of sales and service increased to 56.2% in the
first quarter of 1996 from 48.7% in the first quarter of 1995, primarily due to
continuing price declines in the storage markets and to a lesser extent due to
certain marketing concessions for overseas strategic account expansion and other
factors. During the first quarter of 1996, the Company experienced lower costs
associated with DRAMs and drive assemblies which partially offset the impact
from declines in product pricing. The Company believes that pricing pressures
are likely to continue.
Research and Development
- ------------------------
Research and development ("R&D") expenses were $35,318,000 and $39,940,000 in
the first quarters of 1996 and 1995, respectively, a decrease of $4,622,000, or
11.6%. R&D expenses were 6.8% and 8.9% of revenues in the first quarters of
1996 and 1995, respectively. Dollar decreases in R&D spending reflect the
continued consolidation of domestic development efforts and the capitalization
of software development costs primarily related to specific stand-alone software
products. The decrease was partially offset by the cost of additional technical
staff and depreciation expenses associated with capital equipment acquired to
facilitate development. The Company expects to continue to spend substantial
amounts for R&D in 1996.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative ("SG&A") expenses were 81,763,000 and
$71,791,000 in the first quarters of 1996 and 1995, respectively, an increase of
$9,972,000 or 13.9%. SG&A expenses were 15.7% and 16.0% of revenues in the first
quarters of 1996 and 1995, respectively. The dollar increase is due primarily to
costs associated with additional sales and support personnel and their related
overhead costs, both domestically and internationally, in connection with the
Company's increased revenue levels and the Company's initiative to expand its
open systems storage group, international direct selling offices and OEM
programs. SG&A expenses are expected to increase in dollar terms during 1996.
-11-
EMC CORPORATION
Investment Income and Interest Expense
- --------------------------------------
Investment income was $6,325,000 in the first quarter of 1996 compared with
$6,560,000 in the same period a year ago. Interest income was earned from
investments in cash equivalents and long-term investments and, to a lesser
extent, from sales-type leases of the Company's products. Investment income
decreased in 1996 primarily due to decreased rates of interest in the first
quarter of 1996 over the same period in 1995.
Interest expense decreased slightly in the first quarter of 1996 from the first
quarter of 1995, primarily due to conversion and redemption of the Debentures
through April 1, 1995.
Provision for Income Taxes
- --------------------------
The provision for income taxes was $30,170,000 and $36,435,000 in the first
quarters of 1996 and 1995, respectively, which resulted in an effective tax rate
of 26.3% in the first quarter of 1996 and 29.9% in the first quarter of 1995.
The decrease in the effective tax rate is mainly attributable to the realization
of benefits associated with the implementation of the Company's tax strategies.
The Company provides for income taxes based upon its estimate of full year
earnings on a country-by-country basis.
Earnings Fluctuations
- ---------------------
Due to (i) customers' tendencies to make purchase decisions late in each fiscal
quarter, (ii) the desire by customers to evaluate new, more expensive products
for longer periods of time, (iii) the timing of product and technology
announcements by the Company and its competitors, (iv) fluctuating currency
exchange rates, (v) competitive pricing pressures in the computer storage market
and (vi) the relative and varying rates of product price and component cost
declines, the Company's period to period revenues and earnings can fluctuate
significantly.
FINANCIAL CONDITION
- -------------------
Cash and cash equivalents were $478,759,000 and $379,628,000 at March 30, 1996
and December 30, 1995, respectively. Cash, cash equivalents and long-term
investments were $606,141,000 and $504,904,000 at March 30, 1996 and December
30, 1995, respectively. In the first three months of 1996, the Company's
working capital increased by $42,454,000 from $959,595,000 at December 30, 1995
to $1,002,049,000 at March 30, 1996.
-12-
EMC CORPORATION
In the first three months of 1996, cash and cash equivalents increased by
$99,131,000. Cash provided by operating activities of $139,844,000 was primarily
generated by net income and decreased accounts receivable and inventory. This
was partially offset by a decrease in accrued expenses. The Company expects
further improvements in days sales outstanding and inventory turnover ratios
through the remainder of 1996. Cash used by investing activities was
$36,164,000 caused principally by additions to property, plant and equipment.
Cash used by financing activities was $3,546,000 principally due to repurchases
of treasury stock, as discussed below, offset by proceeds from stock option
exercises.
In January 1996, the Company's Board of Directors authorized the repurchase of
up to 15 million shares of the Company's common stock over a five-year period.
The repurchased shares will be used primarily to issue shares under the
Company's stock option and stock purchase plans. As of March 30, 1996, the
Company had repurchased 500,000 shares of its common stock at an average price
of $20.44 per share.
At March 30, 1996, the Company had available for use its credit lines of
$72,000,000. The Company may elect to borrow at any time from these credit
lines. Based on its current operating and capital expenditure forecasts, the
Company believes funds currently available, funds generated from operations and
its available lines of credit will be adequate to finance its operations.
To date, inflation has not had a material impact on the Company's financial
results.
-13-
EMC CORPORATION
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On June 10, 1993, Storage Technology Corporation ("STK") filed suit against EMC
in the United States District Court for the District of Colorado alleging that
EMC was infringing three patents. On September 23, 1994, EMC filed suit against
STK in the United States District Court for the District of Delaware alleging
that STK was infringing one EMC patent.
On April 16, 1996, EMC and STK announced that the above patent litigation had
been settled. The settlement included a cross-licensing agreement limited to
patents covering DASD (direct-access storage devices) and solid-state disk
technologies. All claims and counterclaims in the above lawsuits have been
dismissed as a result of this agreement.
The Company is a party to other litigation which it considers routine and
incidental to its business. Management does not expect the results of any of
these actions to have a material adverse effect on the Company's business or
financial condition.
Item 5. Other Information
-----------------
Subsequent Events. See Footnote 8 of Notes to Interim Consolidated Financial
Statements in Part I of this report.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.1 EMC Corporation 1989 Employee Stock Purchase Plan, as amended
(filed herewith)
10.2 1992 EMC Corporation Stock Option Plan for Directors, as
amended (filed herewith)
11.1 Computation of Primary and Fully Diluted Net Income Per Share
(filed herewith).
(b) Reports on Form 8-K
On February 8, 1996, the Company filed a report (Date of Report:
January 27, 1996) on Form 8-K containing the combined results of
operations from July 30, 1995 to January 27, 1996 for the Company and
McDATA Corporation.
-14-
EMC CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMC CORPORATION
Date: May 10, 1996 By: /s/ Colin G. Patteson
---------------------
Colin G. Patteson
Vice President, Chief Financial Officer
and Treasurer (Principal Financial
Officer)
By: /s/ William J. Teuber, Jr.
--------------------------
William J.Teuber, Jr.
Vice President and Controller
(Principal Accounting Officer)
-15-
EMC CORPORATION
EXHIBIT INDEX
Exhibit 10.1 EMC Corporation 1989 Employee Stock Purchase Plan, as amended
Exhibit 10.2 1992 EMC Corporation Stock Option Plan for Directors, as amended
Exhibit 11.1 Computation of Primary and Fully Diluted Net Income Per Share