Lucy Luo, Greg Idaris, Dana Cochrane, and Shweta Godse

4:35 pm - 5:40 pm (M.W.Th.)

Professor Jackson

April 14th 2014

The Financial Reporting Project: Progress Report 2

EMC Corporation

Profitability:

EMC has been increasingly profitable over the past five years. In 2009, their net income

was $1,088,000, which grew to $1,900,000 in 2010, yielding a 74.63% annual growth rate. In

2011, net income increased to $2,461,000, yielding an annual growth rate of 29.52%. The year

2012 yielded a net income of $2,733,000, causing an annual growth rate of 11.05%. By 2013, the

net income reached $2,889,000, yielding an annual growth rate of 5.71%. From 2009 to 2013,

EMC increased their net income by 165.53%. This change can be explained by looking at the

increase in revenues from 2009 to 2013. In 2009, revenues totaled $14,026,000. This figure

increased to $23,222,000 by 2013. This is a 65.57% increase in five years.

In 2011, the gross profit for EMC was $12,169,000, which can be calculated by

subtracting the revenue by the cost of goods sold. In 2012, the gross profit was $13,638,00,

yielding a 12.07% annual growth rate. In 2013, the gross profit was $14,473,000, yielding a

6.12% annual growth rate.

The profitability of EMC in the most recent year has been decent, but has been lower

than its biggest competitor: IBM. EMC had a ROE of 13% while IMB had a ROE of 79%. The

significant different in the ROE is due to the fact that EMC has more stockholder’s equity but

fewer assets than IBM. In addition, EMC’s 2013 profit margin (12.44%) was lower than IBM’s

(16.50%). However, EMC was better able to utilize its assets, resulting in a higher current ratio,

quick ratio, and receivables turnover ratio. In 2013, the cash inflow from operating activities was

$6,923 million and the net income was $2,889,000. Customers provided $24,319 million,

$16,078 million of which went to pay suppliers and employees. The increase in cash collected

from customers from 2012 to 2013 resulted from increased sales volumes and strong customer

collections.

Liquidity and Capital Structure

The liquidity of a company can be measured through their quick ratio, which is (current

assets – inventories) / current liabilities1. According to appendix A, EMC’s quick ratio is 1.23 in

2013. Because of this high quick ratio, EMC will have the ability to meet obligations as they

become due. In comparison, IBM’s quick ratio for 2013 is 0.79, meaning they have an inferior

ability to meet their obligations, as they have a lower level of liquidity.

In 2013, EMC has a total of $45,849 million total assets, $22,063 million in liabilities,

and $23,786 million in shareholders’ equity. Thus, 48% of the total assets of the company are

financed through liabilities and 52% of the assets are financed through shareholders’ equity.

In 2013, IBM has a total of $122,723 million total assets, $103,294 million in liabilities,

and $22,929 million in shareholders’ equity. Thus, 83% of the total assets of the company are

financed through liabilities and 17% of the assets are financed through shareholders’ equity. This

means that IBM will suffer from higher interest expenses through greater financing with

liabilities, in comparison to EMC, who mostly finances through shareholder’s equity, and has

fairly equal amounts of financing through shareholders’ equity and liabilities.

Corporate Governance and Executive Compensation (From Proxy Statement)

A proxy statement is a document that a corporation issues so that shareholders can make

informed decisions based on matters that will be addressed in the upcoming annual shareholders’

meeting2. The Security Exchange Commission (SEC) requires that companies provide a proxy

statement to shareholders, which cover topics that include: information on voting procedures,

information about the company’s nominated directors, Board and Executive compensation, and

information about the selection of the independent auditors2. The proxy statement will also

contain declarations made by the company’s management and the Audit Committee’s Report. In

addition to the content listed above, EMC’s proxy statement also focuses on the review and

approval of transactions with related person, certain transactions, Section 16a regarding

beneficial ownership reporting, and householding3. The information provided gives shareholders

the knowledge to make effective decisions since they are cognizant of EMC’s agenda.

EMC’s most recent shareholder’s meeting was held on May 1st of 2013. During the

stockholder’s meeting six primary proposals were discussed and subsequently voted on. The

proposals and issues were: (1) election of the eleven members of the Board of Directors, (2)

ratification of the selection by the Audit Committee of EMC’s independent auditors, (3) approval

of the EMC Corporation Amended and Restated 1989 Employee Stock Purchase Plan, (4)

advisory approval of our executive compensation, (5) approval of the EMC Corporation

Amended and Restated 2003 Stock Plan, and (6) approval of amendments to EMC’s Articles of

Organization and Bylaws to allow shareholders to act by written consent by less than unanimous

approval4.  

According to EMC’s Bylaws, the Board of Directors may determine the number of

directors that are selected at each annual meeting of shareholders. As of April 30 th 2014, the

Board of Directors has fixed that number of directors at 113. For the upcoming elections for the

Board of Directors, 9 out of the 11 nominees are independent directors3. As defined by the SEC,

an independent (non-executive) director is an individuals “other than an Executive Officer or

employee of the Company or any other individual having a relationship which, in the opinion of

the Company’s board of directors, would interfere with the exercise of independent judgment in

carrying out the responsibility of the director5.” Hence, a majority of EMC’s Board of Directors

is constituted of independent directors. Independent directors are objective and therefore can

accurately evaluate the performance of the company without conflict of interests. Since

independent directors are separate from management and do not accept compensation for

anything other than board service, they are unbiased when discussing matter such as

compensation and executive agreements. Independent directors ensure that the company is being

run legally, effectively, and ethically with the interests of the shareholders in mind6.

EMC Corporation has five committees of the Board of Directors. The committees are the

Audit Committee, Leadership and Compensation Committee, Corporate Governance &

Nominating Committee, Finance Committee, and Mergers & Acquisition Committee. The Audit

Committee, which cannot be comprised of fewer than three members, assists the Board’s

oversight of the integrity in EMC’s financial statements, the compliance with legal requirements

and regulatory requirements, the qualification and independence of the company’s registered

public accounting firm, and the performance of the company’s internal audit function and

independent auditor7. The Audit Committee must also prepare the disclosure required by the

rules of the SEC for inclusion in the company’s proxy statement. In addition, specific obligations

found in the Audit Committee Charter include7:

The appointment, compensation, and retention of the work of the independent auditor in

order to prepare or issue an audit report services for the Corporation. The Audit Committee

is responsible for solving disagreements between management and the independent auditor

regarding financial reporting.

Reviewing major issues in regards to the accounting principles and financial statements. For

instance, changes in the Company’s selection or application of accounting principles.   

An Audit Committee Charter has been established that outlines the role of the audit committee

and how it abides to the SEC’s protocols.  

Recommendations:

        By closely examining EMC’s financial statements, we have come to the conclusion that

investing money in EMC Corporation would be favorable. EMC has performed well over the

past few years, increasing assets while balancing and keeping liabilities in check. They have also

kept shareholders satisfied by increasing total shareholders’ equity from $16,560,000 in 2009 to

$22,301,000 in 2013. Investing money in EMC would be a good decision for both short-term and

long-term purposes. For two consecutive years, EMC has managed to keep their total liabilities

considerably lower than their total assets. The P/E Ratio for EMC is also higher than IBM’s,

showing that investors are expecting to earn more from EMC than IBM in the future. EMC’s net

income and gross profit has also been steadily increasing for the past few years, which offers a

positive outlook for the years to come and indicates that EMC is a profitable company. EMC

also has a low Debt-to-Equity Ratio, symbolizing that EMC has a low amount of debt (Appendix

A). EMC has been a leader in technology and software services, and after considerate review, we

believe that EMC will continue on a path to success. Overall, we would recommend investing in

EMC.

Appendix A: Ratio Calculations for 2013

Calculating Return on Equity Ratio:

EMC IBM

Net Income 2,889,000 16,483,000

Average Stockholder’s Equity 22,329,000 20,956,000

Return on Equity: 13% 79%

Calculating Return on Assets Ratio:

EMC IBM

Net Income 2,889,000 16,483,000

Average Total Assets 41,906,000 122,723,000

Return on Assets 6.89% 13.43%

Calculating Earnings Per Share Ratio:

EMC IBM

Net Income 2,889,000 16,483,000

Average # of Shares of Common Stock Outstanding 2,074,000 1,094,486,604

Earnings Per Share: $1.39 $15.06

Calculating Profit Margin Ratio:

EMC IBM

Net Income 2,889,000 16,483,000

Net Sales Revenue 23,222,000 99,751,000

Profit Margin: 12.44% 16.50%

Calculating Current Ratio:

EMC IBM

Current Assets 17,278,000 51,350,000

Current Liabilities 11,799,000 40,154,000

Current Ratio: 1.46 1.28

Calculating Quick Ratio:

EMC IBM

Quick Assets 14,525,000 31,836,000

Current Liabilities 11,799,000 40,154,000

Quick Ratio: 1.23 0.79

Calculating Receivable Turnover Ratio:

EMC IBM

Net Credit Sales 23,222,000 99,751,000

Average Net Receivables 3,647,0000 33,487,000

Receivable Turnover Ratio: 6.37 Times 2.98 Times

Calculating Inventory Turnover Ratio:

EMC IBM

Cost of Goods Sold 8,749,000 51,246,000

Average Inventory 1,268,000 2,299,000

Inventory Turnover Ratio: 6.90 Times 22.30 Times

*Cost of goods sold = Cost of Product Sales + Cost of Services = 5,650,000+3,099,000 = 8,749,000

Calculating Times Interest Earned Ratio:

EMC IBM

Net Income 2,889 16,483

Interest Expense 156 402

Income Tax Expense 772 3041

Interest Expense 156 402

Times Interest Earned: 24.47 Times 49.57 Times

Calculating Debit-to-Equity Ratio:

EMC IBM

Total Liabilities 22,063,000 103,294,000

Stockholder’s Equity 22,301,000 22,929,000

Debit-to-Equity: 0.99 4.50

*Stockholder’s Equity taken from Total EMC Stockholder’s Equity Section

Calculating Price/Earnings Ratio:

EMC IBM

Market Price/Per Share 27.48 191.91

Earnings Per Share 1.49 15.06

P/E Ratio: $18.44 $12.74

*Market Price as of April 4th

Appendix B: Work Cited

1. "Quick Ratio." Investopedia. N.p., n.d. Web. 12 Apr. 2014.

<http://www.investopedia.com/terms/q/quickratio.asp>.

2. "Proxy Statement." Investopedia. N.p., n.d. Web. 13 Apr. 2014.

<http://www.investopedia.com/terms/p/proxystatement.asp>.

3. "Notice of 2014 Annual Meeting of Shareholders and Proxy Statement." EMC. N.p., n.d.

Web. <http://www.emc.com/collateral/about/investor-relations/2014-definitive-proxy.pdf>.

4. "EMC 2013: Definitive Proxy Statement." N.p., n.d. Web.

<http://www.emc.com/collateral/corporate/investor-relations/2013-definitive-proxy-

statement.pdf>.

5. "Text of the Proposed Rule Change." Security And Exchange Commission. N.p., n.d. Web.

<http://www.sec.gov/rules/sro/nasdaq/2013/34-68640-ex5.pdf>.

6. Dashew, Leslie. "Importance of Independent Directors." Leslie Dashew: Human Side of

Enterprise. N.p., n.d. Web. <http://www.lesliedashew.com/pdf/importance-of-independent-

contractors.pdf>.

7. "Audit Committee Charter." EMC: Corporate Governance. N.p., n.d. Web.

<http://www.emc.com/collateral/corporation/charter-audit-committee.pdf>.