EMC 2006 Annual Report Download - page 100

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As a result of adopting FAS No. 123R, our income before taxes and net income in 2006 were $241.6 million and $204.5 million lower, respectively,
than if we had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share in 2006 would have been $0.64
and $0.63, respectively, if we had not adopted FAS No. 123R, compared to reported basic and diluted earnings per share which were each $0.54.
Prior to the adoption of FAS No. 123R, we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows
in the consolidated statement of cash flows. FAS No. 123R requires the cash flows resulting from excess tax benefits to be classified as financing cash flows,
rather than as operating cash flows. The $20.0 million excess tax benefit classified as a financing cash inflow in 2006 would have been classified as an
operating cash inflow had we not adopted FAS No. 123R.
For the periods prior to 2006, we elected to apply APB No. 25 and related interpretations in accounting for our stock-based compensation plans. The
following is a reconciliation of net income per weighted average share had we adopted the fair value recognition provisions of FAS No. 123 in 2005 and 2004
(table in thousands, except per share amounts):
2005 2004
Net income $ 1,133,165 $ 871,189
Add back: Stock compensation costs, net of tax, on stock-based awards 52,131 40,345
Less: Stock compensation costs, net of taxes, had stock compensation expense been measured at fair value (371,681) (411,929)
Incremental stock compensation expense per FAS No. 123, net of taxes (319,550) (371,584)
Adjusted net income $ 813,615 $ 499,605
Net income per weighted average share, basic – as reported $ 0.48 $ 0.36
Net income per weighted average share, diluted – as reported $ 0.47 $ 0.36
Adjusted net income per weighted average share, basic $ 0.34 $ 0.21
Adjusted net income per weighted average share, diluted $ 0.34 $ 0.20
Under the 2003 Plan, certain awards granted to an employee who meets the age and/or length of service requirements for "retirement" set forth in the
plan generally will continue to vest after such employee's retirement without additional service, subject to the terms and conditions of the grant document. In
connection with the above reconciliation of net income assuming adoption of FAS No. 123, our policy with respect to these awards has been to recognize
compensation cost over the stipulated vesting period, which is typically five years. If the employee retires before the end of the vesting period, any remaining
unrecognized compensation cost would be recognized at the date of retirement. The SEC has determined that companies that follow this approach should
continue to do so for all applicable equity-based awards issued prior to the effective date of FAS No. 123R. These awards should also continue to be
accounted for in this manner subsequent to the effective date of FAS No. 123R. The cost of applicable equity-based awards issued subsequent to the effective
date of FAS No. 123R, however, should be recognized through the retirement eligibility date. Had we recognized compensation expense over this shorter
service period, the increase in stock compensation costs, net of taxes, in addition to the amounts in the aforementioned table, would have been $57.0 million
in 2005 and $29.1 million in 2004.
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