EMC 2004 Annual Report Download - page 27

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Table of Contents
Investment Income
Investment income was $156.7, $187.8 and $256.2 in 2004, 2003 and 2002, respectively. Investment income was earned primarily from investments in
cash and cash equivalents, short and long-term investments and sales-type leases. Investment income decreased in both 2004 and 2003 from the previous
years due to 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 2.6%, 2.7% and 3.5% in 2004, 2003, and 2002, respectively. Realized gains (losses) were $(11.7), $30.5 and $63.0
in 2004, 2003 and 2002, respectively.
We lend certain fixed income securities to generate investment income. We have entered into various agreements to loan fixed income securities generally
on an overnight basis. Under these securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities.
The collateral is generally cash, U.S. government-backed securities or letters of credit. At December 31, 2004, there were no outstanding securities lending
transactions.
Other Expenses, Net
Other expenses, net were $8.2, $14.9 and $47.4 in 2004, 2003 and 2002, respectively. The decrease in 2004 compared to 2003 was primarily due to gains
from selling strategic investments, partially offset by increased foreign currency exchange losses. The decrease in 2003 compared to 2002 was due to a
reduction in losses on disposal of assets.
Provision for Income Taxes
Our effective income tax rate was 26.5%, 13.1% and 60.0% in 2004, 2003 and 2002, respectively. In 2004 and 2003, we reported pre-tax income, whereas
in 2002, we reported a pre-tax loss. 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 2004 and 2003, the effective tax rate
varied from the statutory rate primarily 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. For 2004, the effective income tax rate also varied from the statutory tax rate as a
result of a $20.0 reduction in our estimated income tax exposure pertaining to certain of our international tax liabilities. Partially offsetting these benefits were
non-deductible IPR&D charges of $17.4 incurred in connection with acquisitions. We did not derive a tax benefit from these charges. For 2003, the effective
tax rate also varied from the statutory tax rate as a result of the favorable resolution of a series of tax matters which aggregated $80.9. The tax matters
included the resolution of certain merger-related contingencies. Partially offsetting these benefits were non-deductible IPR&D charges of $29.1 in 2003
incurred in connection with acquisitions. 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.
Financial Condition
Cash and cash equivalents and short and long-term investments were $7,440.8, $6,907.6 and $5,685.6 at December 31, 2004, 2003 and 2002, respectively.
We invest our excess cash in U.S. government and agency obligations, U.S. corporate debt securities, asset and mortgage-backed securities, bank loans,
auction rate securities and foreign debt securities. At December 31, 2004, the fair value of our short and long-term investments was $5,964.0 compared to an
amortized cost basis of $5,992.7. Included in our portfolio are securities where the amortized cost basis exceeded the fair value by $38.5. Management
regularly reviews the portfolio to evaluate whether any impairments are other-than-temporary. Management considers the type of securities held, market
conditions, the length of the impairment, magnitude of the impairment and ability to hold the
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