EMC 2006 Annual Report Download - page 33

Table of Contents
Investment Income
Investment income was $224.9, $190.4 and $156.7 in 2006, 2005 and 2004, respectively. Investment income increased in 2006 compared to 2005 due
to greater yields on investments and decreased realized losses on investments, partially offset by lower average outstanding cash and investment balances due
to a significant increase in repurchases of our common stock in the open market. Investment income increased in 2005 compared to 2004 due to higher
outstanding cash and investment balances and greater yields on investments and was partially offset by increased realized losses on investments. The
weighted average return on investments, excluding realized losses, was 4.2%, 3.4% and 2.6% in 2006, 2005 and 2004, respectively. Net realized losses were
$27.8, $58.9 and $11.7 in 2006, 2005 and 2004, respectively.
Interest Expense
Interest expense was $34.1, $8.0 and $7.5 in 2006, 2005 and 2004, respectively. Interest expense increased in 2006 compared to 2005 primarily due to
higher debt balances. In September 2006, we borrowed $2,200.0 under a six-month unsecured credit facility to finance the acquisition of RSA. In November
2006, we completed the issuance of our $1,725.0 1.75% convertible senior notes due 2011 (the "2011 Notes") and our $1,725.0 1.75% convertible senior
notes due 2013 (the "2013 Notes" and, together with the 2011 Notes, the "Notes"). A portion of the proceeds from the Notes was used to repay in full the
$2,200.0 of outstanding indebtedness under the aforementioned unsecured credit facility. Interest expense in 2005 and 2004 was primarily attributable to
interest associated with our $125.0 4.5% Senior Convertible Notes due April 1, 2007, which were assumed in connection with the Documentum (the
"Documentum Notes") acquisition. The Documentum Notes were redeemed in April 2006.
Other Expense, Net
Other expense, net was $8.6, $10.6 and $8.2 in 2006, 2005 and 2004, respectively. The decrease in other expense in 2006 compared to 2005 was
primarily attributable to a decrease in foreign currency transaction losses. Other expense increased in 2005 compared to 2004 due to higher foreign currency
transaction losses.
Provision for Income Taxes
Our effective income tax rate was 11.7%, 31.4% and 26.5% in 2006, 2005 and 2004, respectively. The effective income tax rate is based upon the
income for the year, the composition of the income in different countries, and adjustments, if any, for the potential tax consequences, benefits, resolutions of
tax audits or other tax contingencies. For 2006, 2005 and 2004 the effective tax rate varied from the statutory rate as a result of 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.
Additionally, in 2006, we recognized an income tax benefit of $171.8 from the favorable resolution of income tax audits and expiration of statutes of
limitations. Partially offsetting these benefits were non-deductible IPR&D charges of $35.4 from acquisitions and $73.3 in non-deductible stock-based
compensation expense for options issued as incentive stock options and shares issued under EMC's ESPP. In 2005, we repatriated approximately $3,000.0
under the American Jobs Creation Act of 2004 (the "AJCA"). The repatriation resulted in an incremental income tax expense of $180.2. Also in 2005, we
incurred $17.4 of non-deductible IPR&D charges from acquisitions. These unfavorable increases to our effective tax rate were partially offset by an income
tax benefit of $163.9 from the favorable resolution of certain income tax audits and expiration of statutes of limitations. For 2004, as a result of tax audits, we
recognized a $20.0 reduction in our estimated income tax exposure pertaining to our international tax liabilities. Partially offsetting these benefits were non-
deductible IPR&D charges of $17.4 from acquisitions.
Financial Condition
Cash provided by operating activities was $2,140.4 in 2006, $2,216.3 in 2005 and $2,102.3 in 2004. Cash received from customers was $11,167.2,
$9,732.8 and $8,329.4 in 2006, 2005 and 2004, respectively. The annual increases were attributable to higher sales volume and greater cash proceeds from the
sale of maintenance contracts. Cash paid to suppliers and employees was $8,666.6, $7,539.9 and $6,299.1 in 2006, 2005 and 2004, respectively. The annual
increases were partially attributable to higher headcount. Total headcount was approximately 31,100, 26,500 and 22,700 at December 31, 2006, 2005 and
2004, respectively. The majority of the headcount increases was due to the general growth of the business, as well as increased acquisition activity including
the acquisitions of Smarts and Captiva in 2005 and RSA in 2006. Greater levels of inventory purchases to support the transition to our next generation storage
systems also contributed to the increased amounts of payments to suppliers. Inventory increased from $724.8 at December 31, 2005 to $834.8 at
December 31, 2006. The increase was primarily attributable to higher inventory levels for new products to support the overall growth of the business. Cash
received from dividends and interest was $258.6, $249.2 and $162.4 in 2006, 2005 and 2004, respectively. The annual increases were due to higher rates of
return received on our cash, cash equivalents and short and long-term investments. In 2006, 2005 and 2004, we paid $592.1, $216.7 and $84.0,
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