EMC 2003 Annual Report Download - page 19

Reduction in
Cost of Sales
Inventory
Scrapped and
Charged Against
the Reserve
2003
Category
Beginning
Balance
Inventory
Sold
Favorable
Vendor
Settlements
Ending
Balance
Excess and obsolete EMC owned inventory $ 6.3 $ (5.4) $ – $ – $ 0.9
Reduction in
Cost of Sales
Inventory
Scrapped and
Charged Against
the Reserve
2002
Category
Beginning
Balance
Inventory
Sold
Favorable
Vendor
Settlements
Ending
Balance
Excess and obsolete EMC owned inventory $ 226.2 $ (182.9) $ (37.0) $ – $ 6.3
Excess and obsolete purchase obligations 29.3 (4.8) (20.9) (3.6) –
Total $ 255.5 $ (187.7) $ (57.9) $ (3.6) $ 6.3
Impact of the 2002 and 2001 Restructuring Programs. The 2002 and 2001 restructuring programs have been completed, although our ability to sell and
sublet facilities is subject to appropriate market conditions. The expected cash impact of the charges is $402.1, of which $101.9 was paid in 2003 and an
aggregate of $190.3 was paid in 2002 and 2001. The remaining accrual balances primarily relate to the consolidation of facilities that will be paid over the
respective lease terms through 2012.
Other Restructuring Programs
During 1999, we recorded a charge of $223.6 relating to restructuring, merger and other special charges primarily associated with our acquisition of Data
General. In 1998, we recorded a charge of $135.0 related to a Data General restructuring program and certain asset write-downs resulting from the program.
During 2003, the Data General restructuring accrual was reduced by $16.1. The reduction resulted from management's decision to utilize a facility for
Documentum, LEGATO and certain of our other operations that we had previously vacated. Additionally, we favorably resolved a previously recognized
contractual obligation. As of December 31, 2003, the remaining accrued obligations associated with the 1999 and 1998 charges are $12.3. The amount relates
to remaining lease obligations for vacated facilities that will be paid through 2015 and executive severance obligations attributable to the acquisition of Data
General.
Cost Savings from the Restructuring Programs
The 2003, 2002 and 2001 restructuring programs have reduced costs in all areas of our operations, favorably impacting cost of sales, SG&A expenses
and R&D expenses. As of December 31, 2003, the annualized costs savings, compared to the cost structure in place as of the end of the second quarter of
2001, is in excess of $1,275.0.
Investment Income
Investment income was $187.8 and $256.2 in 2003 and 2002, respectively. Investment income was earned primarily from investments in cash
equivalents, short and long-term investments and sales-type leases. Investment income decreased in 2003 compared to 2002 because of lower yields on
outstanding investment balances and reduced realized gains from the sale of investments. The weighted average return on investments, excluding realized
gains, was 2.7% and 3.5% in 2003 and 2002, respectively. Realized gains were $30.5 and $63.0 in 2003 and 2002, respectively. As a result of declining
interest rates, we expect our investment income to be lower in 2004 compared to 2003.
Other Expense, Net
Other expenses, net were $14.9 and $47.4 in 2003 and 2002, respectively. Other expenses, net decreased due to a reduction in losses on disposal of
assets.
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Provision for Income Taxes
In 2003, we reported pre-tax income of $571.0 resulting in a provision for income taxes of $74.9. In 2002, we reported a pre-tax loss of $296.5 resulting
in income tax benefits of $177.8. In 2003, the effective income tax rate was 13.1%. The rate of benefit was 60.0% in 2002. The effective income tax rate is
based upon the income (loss) for the year, the composition of the income (loss) in different countries, and adjustments, if any, for the potential tax
consequences, benefits or resolutions of tax audits. For 2003, the effective tax rate varied from the statutory tax rate primarily as a result of the favorable
resolution of a series of tax matters which aggregated $80.9 and the mix of income attributable to foreign versus domestic jurisdictions. Our aggregate income
tax rate in foreign jurisdictions is lower than our income tax rate in the United States. Partially offsetting this benefit were non-deductible IPR&D charges of
$29.1 incurred in connection with the acquisitions of LEGATO and Documentum. We did not derive a tax benefit from these charges. For 2002, the effective
income tax rate varied from the statutory rate primarily as a result of the overall favorable resolution of international tax matters, which aggregated $67.7.
Additionally, a reduction in the valuation allowance resulting from the realization of capital loss carryforwards contributed to the favorable rate.
We expect our income tax rate to be approximately 30.0% in 2004; however, the rate may vary depending upon the income for the year, the composition
of the income (loss) in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits.
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