Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 5, 2014)
  • 10-Q (Aug 1, 2014)
  • 10-Q (May 1, 2014)
  • 10-Q (Nov 7, 2013)
  • 10-Q (Aug 2, 2013)
  • 10-Q (May 3, 2013)

 
8-K

 
Other

EMC 10-Q 2012
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012 March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 1-9853

EMC CORPORATION

(Exact name of registrant as specified in its charter)

 

Massachusetts   04-2680009
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

176 South Street

Hopkinton, Massachusetts

(Address of principal executive offices)

 

01748

(Zip Code)

(508) 435-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x    Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of March 31, 2012 was 2,099,710,476.

 

 

 


Table of Contents

EMC CORPORATION

 

     Page No.  

PART I — FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

Consolidated Balance Sheets at March 31, 2012 and December 31, 2011

     3   

Consolidated Income Statements for the Three Months Ended March 31, 2012 and 2011

     4   

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011

     5   

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011

     6   

Consolidated Statements of Shareholders’ Equity for the Three Months Ended March  31, 2012 and 2011

     7   

Notes to Consolidated Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     33   

Item 4. Controls and Procedures

     33   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     34   

Item 1A. Risk Factors

     34   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     44   

Item 3. Defaults Upon Senior Securities

     44   

Item 4. Mine Safety Disclosures

     44   

Item 5. Other Information

     44   

Item 6. Exhibits

     44   

SIGNATURES

     45   

EXHIBIT INDEX

     46   

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Federal securities laws, about our business and prospects. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “plans,” “intends,” “expects,” “goals” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Our future results may differ materially from our past results and from those projected in the forward-looking statements due to various uncertainties and risks, including those described in Item 1A of Part II (Risk Factors). The forward-looking statements speak only as of the date of this Quarterly Report and undue reliance should not be placed on these statements. We disclaim any obligation to update any forward-looking statements contained herein after the date of this Quarterly Report.

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

EMC CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 4,671,175     $ 4,531,036  

Short-term investments

     1,667,780       1,786,987  

Accounts and notes receivable, less allowance for doubtful accounts of $68,647 and $61,804

     2,661,923       2,937,499  

Inventories

     1,034,250       1,009,968  

Deferred income taxes

     750,172       733,308  

Other current assets

     514,950       583,885  
  

 

 

   

 

 

 

Total current assets

     11,300,250       11,582,683  

Long-term investments

     4,539,588       4,525,106  

Property, plant and equipment, net

     2,879,264       2,833,149  

Intangible assets, net

     1,713,829       1,766,115  

Goodwill

     12,216,710       12,154,970  

Other assets, net

     1,335,607       1,406,156  
  

 

 

   

 

 

 

Total assets

   $ 33,985,248     $ 34,268,179  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 922,624     $ 1,101,659  

Accrued expenses

     2,246,253       2,354,979  

Notes converted and payable (See Note 4)

     14,046       1,699,832  

Income taxes payable

     24,253       155,909  

Convertible debt (See Note 4)

     1,606,675       1,605,142  

Deferred revenue

     4,073,273       3,458,689  
  

 

 

   

 

 

 

Total current liabilities

     8,887,124       10,376,210  

Income taxes payable

     233,352       238,851  

Deferred revenue

     2,723,353       2,715,361  

Deferred income taxes

     605,320       603,398  

Other liabilities

     297,115       287,912  
  

 

 

   

 

 

 

Total liabilities

     12,746,264       14,221,732  
  

 

 

   

 

 

 

Convertible debt (See Note 4)

     103,646       119,325  

Commitments and contingencies (See Note 14)

    

Shareholders’ equity:

    

Preferred stock, par value $0.01; authorized 25,000 shares; none outstanding

              

Common stock, par value $0.01; authorized 6,000,000 shares; issued and outstanding 2,099,710 and 2,048,890 shares

     20,997       20,489  

Additional paid-in capital

     3,512,585       3,052,932  

Retained earnings

     16,707,463       16,120,621  

Accumulated other comprehensive loss, net

     (185,692     (235,009
  

 

 

   

 

 

 

Total EMC Corporation’s shareholders’ equity

     20,055,353       18,959,033  

Non-controlling interest in VMware, Inc.

     1,079,985       968,089  
  

 

 

   

 

 

 

Total shareholders’ equity

     21,135,338       19,927,122  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 33,985,248     $ 34,268,179  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


Table of Contents

EMC CORPORATION

CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share amounts)

(unaudited)

 

     For the
Three Months Ended
 
     March 31,
2012
    March 31,
2011
 

Revenues:

    

Product sales

   $ 3,068,857     $ 2,931,259  

Services

     2,025,521       1,676,359  
  

 

 

   

 

 

 
     5,094,378       4,607,618  

Costs and expenses:

    

Cost of product sales

     1,301,550       1,320,488  

Cost of services

     679,611       588,079  

Research and development

     587,817       502,108  

Selling, general and administrative

     1,650,197       1,495,931  

Restructuring and acquisition-related charges

     25,893       26,893  
  

 

 

   

 

 

 

Operating income

     849,310       674,119  

Non-operating income (expense):

    

Investment income

     29,452       38,227  

Interest expense

     (18,183     (44,979

Other expense, net

     (43,690     (43,174
  

 

 

   

 

 

 

Total non-operating expense

     (32,421     (49,926
  

 

 

   

 

 

 

Income before provision for income taxes

     816,889       624,193  

Income tax provision

     190,910       121,639  
  

 

 

   

 

 

 

Net income

     625,979       502,554  

Less: Net income attributable to the non-controlling interest in VMware,

    

Inc.

     (39,137     (25,406
  

 

 

   

 

 

 

Net income attributable to EMC Corporation

   $ 586,842     $ 477,148  
  

 

 

   

 

 

 

Net income per weighted average share, basic attributable to EMC

    

Corporation common shareholders

   $ 0.28     $ 0.23  
  

 

 

   

 

 

 

Net income per weighted average share, diluted attributable to EMC

    

Corporation common shareholders

   $ 0.27     $ 0.21  
  

 

 

   

 

 

 

Weighted average shares, basic

     2,067,828       2,066,136  
  

 

 

   

 

 

 

Weighted average shares, diluted

     2,201,933       2,258,278  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4


Table of Contents

EMC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     For the Three Months
Ended
 
     March 31,
2012
    March 31,
2011
 

Net income

   $ 625,979      $ 502,554   

Other comprehensive income (loss), net of taxes (benefits):

    

Foreign currency translation adjustments

     14,986       19,143  

Changes in market value of investments:

    

Changes in unrealized gains, net of taxes of $13,045 and $8,959

     25,862       20,733  

Less: reclassification adjustment for net gains realized in net income, net of taxes of $1,650 and $1,257

     (903     (5,446
  

 

 

   

 

 

 

Net change in market value of investments

     24,959       15,287  

Changes in market value of derivatives:

    

Changes in market value of derivatives, net of taxes of $5,928 and $3,392

     10,001       (3,560

Less: reclassification adjustment for net losses included in net income, net of tax benefits of $(5) and $(1,109)

     33       7,766  
  

 

 

   

 

 

 

Net change in the market value of derivatives

     10,034       4,206  
  

 

 

   

 

 

 

Other comprehensive income

     49,979       38,636  
  

 

 

   

 

 

 

Comprehensive income

     675,958       541,190  

Less: Net income attributable to the non-controlling interest in VMware, Inc.

     (39,137     (25,406

Less: Other comprehensive income attributable to the non-controlling interest in VMware, Inc.

     (662     (2,922
  

 

 

   

 

 

 

Comprehensive income attributable to EMC Corporation

   $ 636,159      $ 512,862   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5


Table of Contents

EMC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Cash flows from operating activities:

    

Cash received from customers

   $ 6,023,588     $ 5,392,175  

Cash paid to suppliers and employees

     (4,114,849     (4,009,553

Dividends and interest received

     18,483       33,927  

Interest paid

     (1,342     (4,749

Income taxes paid

     (237,692     (277,023
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,688,188       1,134,777  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (153,631     (165,525

Capitalized software development costs

     (105,848     (111,993

Purchases of short- and long-term available-for-sale securities

     (1,585,822     (1,601,241

Sales of short- and long-term available-for-sale securities

     1,439,393       1,341,335  

Maturities of short- and long-term available-for-sale securities

     273,982       261,228  

Business acquisitions, net of cash acquired

     (102,105     (14,950

Decrease (increase) in strategic and other related investments

     10,100       (198,049

Other, net

     5,000       (45,000
  

 

 

   

 

 

 

Net cash used in investing activities

     (218,931     (534,195
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of EMC’s common stock from the exercise of stock options

     180,189       224,347  

Issuance of VMware’s common stock from the exercise of stock options

     111,041       90,171  

EMC repurchase of EMC’s common stock

            (868,065

EMC purchase of VMware’s common stock

     (39,993     (38,000

VMware repurchase of VMware’s common stock

            (147,729

Excess tax benefits from stock-based compensation

     106,024       109,008  

Payment of long-term and short-term obligations

     (355     (11

Proceeds from long-term and short-term obligations

     2,742       294  

Payment of convertible debt

     (1,699,816       
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,340,168     (629,985
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     11,050       12,597  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     140,139       (16,806

Cash and cash equivalents at beginning of period

     4,531,036       4,119,138  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 4,671,175     $ 4,102,332  
  

 

 

   

 

 

 

Reconciliation of net income to net cash provided by operating activities:

    

Net income

   $ 625,979     $ 502,554  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     367,453       339,272  

Non-cash interest expense on convertible debt

     9,323       26,291  

Non-cash restructuring and other special charges

     4,477       382  

Stock-based compensation expense

     200,572       212,265  

Provision for doubtful accounts

     9,472       6,415  

Deferred income taxes, net

     (52,320     (10,834

Excess tax benefits from stock-based compensation

     (106,024     (109,008

Other, net

     (8,987     (8,316

Changes in assets and liabilities, net of acquisitions:

    

Accounts and notes receivable

     299,977       223,464  

Inventories

     (96,249     (102,729

Other assets

     (19,580     (127,747

Accounts payable

     (28,686     (136,802

Accrued expenses

     (167,584     (121,190

Income taxes payable

     5,538       (144,550

Deferred revenue

     619,761       554,678  

Other liabilities

     25,066       30,632  
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 1,688,188     $ 1,134,777  
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6


Table of Contents

EMC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

For the three months ended March 31, 2012:

 

     Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Non-controlling
Interest in
VMware
    Shareholders’
Equity
 
    Shares     Par
Value
           

Balance, January 1, 2012

    2,048,890     $ 20,489      $ 3,052,932      $ 16,120,621      $ (235,009   $ 968,089      $ 19,927,122   

Stock issued through stock option and stock purchase plans

    15,145       152       180,037                            180,189  

Tax benefit from stock options exercised

                  143,182                            143,182  

Restricted stock grants, cancellations and withholdings, net

    3,330       33       (47,708                          (47,675

EMC purchase of VMware stock

                  (34,485                   (5,508     (39,993

Stock-based compensation

                  203,043                            203,043  

Impact from equity transactions of VMware, Inc.

                  930                     77,605       78,535  

Change in market value of investments

                                24,464       495       24,959  

Change in market value of derivatives

                                9,867       167       10,034  

Translation adjustment

                                14,986              14,986  

Convertible debt conversions and warrant settlement

    32,345       323       (1,025                          (702

Reclassification of convertible debt (to)/from mezzanine (Note 4)

                  15,679                            15,679  

Net income

                         586,842              39,137       625,979  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

    2,099,710     $ 20,997      $ 3,512,585      $ 16,707,463      $ (185,692   $ 1,079,985      $ 21,135,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended March 31, 2011:

 

    Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Non-controlling
Interest in
VMware
    Shareholders’
Equity
 
    Shares     Par Value            

Balance, January 1, 2011

    2,069,246     $ 20,692      $ 3,816,681      $ 13,659,284      $ (92,617   $ 762,736      $ 18,166,776   

Stock issued through stock option and stock purchase plans

    18,423       184       224,163                            224,347  

Tax benefit from stock options exercised

                  147,810                            147,810  

Restricted stock grants, cancellations and withholdings, net

    2,950       30       (45,992                          (45,962

Repurchase of common stock

    (33,051     (330     (867,735                          (868,065

EMC purchase of VMware stock

                  (33,944                   (4,056     (38,000

Stock-based compensation

                  226,222                            226,222  

Impact from equity transactions of VMware, Inc.

                  (69,846                   18,759       (51,087

Change in market value of investments

                                12,365       2,922       15,287  

Change in market value of derivatives

                                4,206              4,206  

Translation adjustment

                                19,143              19,143  

Reclassification of convertible debt (to)/from mezzanine (Note 4)

                  29,363                            29,363  

Net income

                         477,148              25,406       502,554  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011

    2,057,568     $ 20,576      $ 3,426,722      $ 14,136,432      $ (56,903   $ 805,767      $ 18,332,594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

7


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

Company

EMC Corporation (“EMC”) and its subsidiaries develop, deliver and support the Information Technology (“IT”) industry’s broadest range of information infrastructure and virtual infrastructure technologies, solutions and services.

EMC’s Information Infrastructure business provides a foundation for organizations to store, manage, protect, analyze and secure their vast and ever-increasing quantities of information, improve business agility, lower cost of ownership and enhance their competitive advantage within traditional data centers, virtual data centers and cloud-based IT infrastructures. EMC’s Information Infrastructure business comprises three segments – Information Storage, RSA Information Security and Information Intelligence Group.

EMC’s VMware Virtual Infrastructure business, which is represented by EMC’s majority equity stake in VMware, Inc. (“VMware”), is the leader in virtualization and virtualization-based cloud infrastructure solutions utilized by businesses to help them transform the way they build, deliver and consume IT resources in a manner that is evolutionary and based on their specific needs. VMware’s virtualization infrastructure software solutions run on industry-standard desktop computers and servers and support a wide range of operating system and application environments, as well as networking and storage infrastructures.

General

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These consolidated financial statements include the accounts of EMC, its wholly owned subsidiaries and VMware, a company majority-owned by EMC. All intercompany transactions have been eliminated.

Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. Accordingly, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2011 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2012.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. The interim consolidated financial statements, in the opinion of management, reflect all adjustments necessary to fairly state the results as of and for the three-month periods ended March 31, 2012 and 2011.

Net Income Per Share

Basic net income per weighted average share has been computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per weighted average share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of stock options, restricted stock and restricted stock units, our $1.725 billion 1.75% convertible senior notes due 2013 and associated warrants. Additionally, for purposes of calculating diluted net income per weighted average share, net income is adjusted for the difference between VMware’s reported diluted and basic net income per weighted average share, if any, multiplied by the number of shares of VMware held by EMC.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year’s presentation.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased disclosures regarding valuation inputs and investment categorization. The adoption of this new accounting guidance in 2012 did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

8


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

2.  Non-controlling Interest in VMware, Inc.

The non-controlling interests’ share of equity in VMware is reflected as Non-controlling interest in VMware, Inc. in the accompanying consolidated balance sheets and was $1,080.0 million and $805.8 million as of March 31, 2012 and 2011, respectively. At March 31, 2012, EMC held approximately 97% of the combined voting power of VMware’s outstanding common stock and approximately 79% of the economic interest in VMware.

The effect of changes in our ownership interest in VMware on our equity was as follows (table in thousands):

 

     For the Three Months
Ended
 
     March 31,
2012
    March 31,
2011
 

Net income attributable to EMC Corporation

   $ 586,842     $ 477,148  

Transfers (to) from the non-controlling interest in VMware, Inc.:

    

Increase in EMC Corporation’s additional paid-in-capital for VMware’s equity issuances

     37,982       35,069  

Decrease in EMC Corporation’s additional paid-in-capital for VMware’s other equity activity

     (37,052     (104,915
  

 

 

   

 

 

 

Net transfers (to) from non-controlling interest

     930       (69,846
  

 

 

   

 

 

 

Change from net income attributable to EMC Corporation and transfers from the non-controlling interest in VMware, Inc.

   $ 587,772     $ 407,302  
  

 

 

   

 

 

 

3.  Acquisitions

During the three months ended March 31, 2012, we acquired all of the outstanding capital stock of Likewise Software, a provider of technology for managing cross-platform access to data files and software for managing unstructured data, and Pivotal Labs, a provider of services and technology to build Big Data applications. These acquisitions complement and expand our Information Storage segment. The aggregate cash consideration for these two acquisitions was $102.1 million, net of cash acquired. The consideration paid was allocated to the fair value of the assets acquired and liabilities assumed based on estimated fair values as of the respective acquisition dates. The aggregate allocation to goodwill, intangibles and net assets was approximately $61.7 million, $33.3 million and $7.1 million, respectively. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized. The results of these acquisitions have been included in the consolidated financial statements from the date of purchase. Pro forma results of operations have not been presented as the results of the acquired companies were not material, individually or in the aggregate, to our consolidated results of operations for the three months ended March 31, 2012 or 2011.

4.  Convertible Debt

In November 2006, we issued our $1,725 million 1.75% convertible senior notes due 2011 (the “2011 Notes”) and our $1,725 million 1.75% convertible senior notes due 2013 (the “2013 Notes”) for total gross proceeds of $3.45 billion. The 2011 Notes and 2013 Notes are senior unsecured obligations and rank equally with all other existing and future senior unsecured debt.

The 2011 Notes matured and a majority of the noteholders exercised their right to convert the outstanding 2011 Notes at the end of 2011. Pursuant to the settlement terms, the majority of the converted 2011 Notes were not settled until January 9, 2012. At that time, we paid the noteholders $1,699.8 million in cash for the outstanding principal and 29.5 million shares for the $661.4 million excess of the conversion value over the principal amount, as prescribed by the terms of the 2011 Notes.

The holders of the 2013 Notes may convert their 2013 Notes at their option on any day prior to the close of business on the scheduled trading day immediately preceding September 1, 2013 only under the following circumstances: (1) during the five business-day period after any five consecutive trading-day period (the “measurement period”) in which the price per 2013 Note for each day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; (2) during any calendar quarter, if the last reported sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (3) upon the occurrence of certain events specified in the 2013 Notes. Additionally, the 2013 Notes will become convertible during the last three months prior to their maturity.

 

9


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Upon conversion, we will pay cash up to the principal amount of the debt converted. With respect to any conversion value in excess of the principal amount of the 2013 Notes converted, we have the option to settle the excess with cash, shares of our common stock, or a combination of cash and shares of our common stock based on a daily conversion value, determined in accordance with the indenture, calculated on a proportionate basis for each day of the relevant 20-day observation period. The initial conversion rate for the 2013 Notes will be 62.1978 shares of our common stock per one thousand dollars of principal amount of 2013 Notes, which represents a 27.5% conversion premium from the date the 2013 Notes were issued and is equivalent to a conversion price of approximately $16.08 per share of our common stock. The conversion price is subject to adjustment in some events as set forth in the indenture. In addition, if a “fundamental change” (as defined in the indenture) occurs prior to the maturity date, we will in some cases increase the conversion rate for a holder of 2013 Notes that elects to convert its 2013 Notes in connection with such fundamental change.

At March 31, 2012, the contingent conversion thresholds on the 2013 Notes were exceeded. As a result, the 2013 Notes became convertible at the option of the holder through June 30, 2012. Accordingly, since the terms of the 2013 Notes require the principal to be settled in cash, we reclassified from shareholders’ equity the portion of the 2013 Notes attributable to the conversion feature which had not yet been accreted to its face value, and the 2013 Notes were classified as a current liability. Contingencies continue to exist regarding the holders’ ability to convert the 2013 Notes in future quarters. The determination of whether the 2013 Notes are convertible will be performed on a quarterly basis. Consequently, the 2013 Notes might not be convertible in future quarters and therefore the 2013 Notes may be reclassified as long-term debt if the contingent conversion thresholds are not met. Approximately $14.7 million of the 2013 Notes have been converted as of March 31, 2012.

The carrying amount of the 2013 Notes reported in the consolidated balance sheets as of March 31, 2012 was $1,710.3 million and the fair value was $3,191.9 million. The carrying amount of the equity component of the 2013 Notes was $279.2 million at March 31, 2012. As of March 31, 2012, the unamortized discount on the 2013 Notes consists of $103.6 million, which will be fully amortized by December 1, 2013.

The 2013 Notes pay interest in cash at a rate of 1.75% semi-annually in arrears on December 1 and June 1 of each year. The effective interest rate on the 2011 Notes and 2013 Notes was 5.6% for both the three months ended March 31, 2012 and 2011.

The following table represents the key components of our interest expense on convertible debt (table in thousands):

 

     For the Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Contractual interest expense on the coupon

   $ 7,523      $ 15,094  

Amortization of the discount component recognized as interest expense

     14,700        29,363  
  

 

 

    

 

 

 

Total interest expense on the convertible debt

   $ 22,223      $ 44,457  
  

 

 

    

 

 

 

In connection with the issuance of the 2011 Notes and 2013 Notes, we entered into separate convertible note hedge transactions with respect to our common stock (the “Purchased Options”). The Purchased Options allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would pay to the holders of the 2011 Notes and 2013 Notes upon conversion. The Purchased Options will cover, subject to customary anti-dilution adjustments, approximately 215 million shares of our common stock. We paid an aggregate amount of $669.1 million of the proceeds from the sale of the 2011 Notes and 2013 Notes for the Purchased Options that was recorded as additional paid-in-capital in shareholders’ equity. In the fourth quarter of 2011, we exercised 107.5 million of the Purchased Options in conjunction with the planned settlements of the 2011 Notes, and we received 29.5 million shares of net settlement on January 9, 2012, representing the excess conversion value of the options. The remaining 107.5 million of the Purchased Options expire on December 1, 2013.

We also entered into separate transactions in which we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 215 million shares of our common stock at an exercise price of approximately $19.55 per share of our common stock. We received aggregate proceeds of $391.1 million from the sale of the associated warrants. Upon exercise, the value of the warrants is required to be settled in shares. Half of the associated warrants were exercised between February 15, 2012 and March 14, 2012 and the remaining half of the associated warrants have expiration dates between February 18, 2014 and March 18, 2014. During the three months ended March 31, 2012, the exercised warrants were settled with 32.3 million shares of our common stock.

 

10


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The Purchased Options and associated warrants will generally have the effect of increasing the conversion price of the 2013 Notes to approximately $19.55 per share of our common stock, representing an approximate 55% conversion premium based on the closing price of $12.61 per share of our common stock on November 13, 2006, which was the issuance date of the 2013 Notes.

In 2010, EMC entered into interest rate swap contracts with an aggregate notional amount of approximately $900 million. These swaps were designated as cash flow hedges of the semi-annual interest payments of the forecasted issuance of debt in 2011 when our 2011 Notes were scheduled to become due. As such, the unrealized loss on these hedges was recognized in other comprehensive loss until the underlying exposure was realized. In November 2011, we settled these swaps and replaced them with new interest rate swap contracts for the forecasted issuance of debt in 2012. The notional amount and other terms match the underlying hedged item and both the original and the new swaps were deemed as effective hedges. As such, the unrealized loss on these new hedges at March 31, 2012 was recorded in other comprehensive loss. The realized loss on the replaced interest rate swap contracts was $141.0 million at the time of settlement. Since we intend to issue debt in 2012, this loss will be realized over the life of the new debt issued under the related interest rate swap contracts and recognized as a component of interest expense in the consolidated income statements.

5.  Fair Value of Financial Assets and Liabilities

Our fixed income and equity investments are classified as available for sale and recorded at their fair market values. We determine fair value using the following hierarchy:

 

   

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Most of our fixed income securities are classified as Level 2, with the exception of some of our U.S. government and agency obligations and our investments in publicly traded equity securities, which are classified as Level 1, and all of our auction rate securities, which are classified as Level 3. In addition, our strategic investments held at cost are classified as Level 3. At March 31, 2012, the vast majority of our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities. In the event observable inputs are not available, we assess other factors to determine the security’s market value, including broker quotes or model valuations. Each month, we perform independent price verifications of all of our fixed income holdings. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair market value.

In general, investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. Our publicly traded equity securities are classified as long-term investments and our strategic investments held at cost are classified as other assets. As a result of the lack of liquidity for auction rate securities, we have classified these as long-term investments as of March 31, 2012 and December 31, 2011. At March 31, 2012 and December 31, 2011, all of our short- and long-term investments, excluding auction rate securities, were recognized at fair value, which was determined based upon observable inputs from our pricing vendors for identical or similar assets. At March 31, 2012 and December 31, 2011, auction rate securities were valued using a discounted cash flow model.

 

11


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The following tables summarize the composition of our short- and long-term investments at March 31, 2012 and December 31, 2011 (tables in thousands):

 

     March 31, 2012  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
(Losses)
    Aggregate
Fair Value
 

U.S. government and agency obligations

   $ 2,212,101      $ 10,111      $ (1,680   $ 2,220,532  

U.S. corporate debt securities

     1,371,048        11,498        (475     1,382,071  

High yield corporate debt securities

     451,107        21,441        (3,199     469,349  

Asset-backed securities

     42,766        105        (15     42,856  

Municipal obligations

     898,319        2,316        (655     899,980  

Auction rate securities

     82,675                (4,278     78,397  

Foreign debt securities

     1,026,224        6,708        (318     1,032,614  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed income securities

     6,084,240        52,179        (10,620     6,125,799  

Publicly traded equity securities

     58,059        23,510               81,569  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 6,142,299      $ 75,689      $ (10,620   $ 6,207,368  
  

 

 

    

 

 

    

 

 

   

 

 

 

We held approximately $1.0 billion in foreign debt securities at March 31, 2012. These securities have an average credit rating of AA-, and approximately 7% of these securities are deemed sovereign debt with an average credit rating of AA+. None of the securities deemed sovereign debt are from Greece, Italy, Ireland, Portugal or Spain. Additionally, we have an immaterial amount of exposure to French agencies and financial institutions.

 

     December 31, 2011  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
(Losses)
    Aggregate
Fair Value
 

U.S. government and agency obligations

   $ 2,474,029      $ 12,420      $ (1,488   $ 2,484,961  

U.S. corporate debt securities

     1,400,373        9,953        (2,573     1,407,753  

High yield corporate debt securities

     442,723        12,498        (7,742     447,479  

Asset-backed securities

     29,101        72        (25     29,148  

Municipal obligations

     814,657        2,021        (597     816,081  

Auction rate securities

     82,900                (8,304     74,596  

Foreign debt securities

     984,696        5,185        (2,807     987,074  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed income securities

     6,228,479        42,149        (23,536     6,247,092  

Publicly traded equity securities

     58,199        6,802               65,001  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 6,286,678      $ 48,951      $ (23,536   $ 6,312,093  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

12


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The following table represents our fair value hierarchy for our financial assets and liabilities measured at fair value as of March 31, 2012 (in thousands):

 

     Level 1      Level 2     Level 3      Total  

Cash

   $ 1,821,521      $      $       $ 1,821,521  

Cash equivalents

     2,796,165        53,489               2,849,654  

U.S. government and agency obligations

     1,130,349        1,090,183               2,220,532  

U.S. corporate debt securities

             1,382,071               1,382,071  

High yield corporate debt securities

             469,349               469,349  

Asset-backed securities

             42,856               42,856  

Municipal obligations

             899,980               899,980  

Auction rate securities

                    78,397        78,397  

Foreign debt securities

             1,032,614               1,032,614  

Publicly traded equity securities

     81,569                       81,569  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total cash and investments

   $ 5,829,604      $ 4,970,542     $ 78,397      $ 10,878,543  
  

 

 

    

 

 

   

 

 

    

 

 

 

Other items:

          

Strategic investments held at cost

   $       $      $ 203,847      $ 203,847  

Convertible debt

             (3,191,887             (3,191,887

Foreign exchange derivative assets

             42,778               42,778  

Foreign exchange derivative liabilities

             (32,291             (32,291

Commodity derivative liabilities

             (5,410             (5,410

Interest rate swap contracts

             (3,831             (3,831

Our auction rate securities are predominantly rated AAA and are primarily collateralized by student loans. The underlying loans of all but two of our auction rate securities, with a market value of $19.3 million, have partial guarantees by the U.S. government as part of the Federal Family Education Loan Program (“FFELP”) through the U.S. Department of Education. FFELP guarantees at least 95% of the loans which collateralize the auction rate securities. The two securities whose underlying loans are not guaranteed by the U.S. government have credit enhancements and are insured by third party agencies. We believe the quality of the collateral underlying all of our auction rate securities will enable us to recover our principal balance in full.

To determine the estimated fair value of our investment in auction rate securities, we used a discounted cash flow model using a five year time horizon. As of March 31, 2012, the coupon rates used ranged from 1% to 5% and the discount rate was 1%, which rate represents the rate at which similar FFELP backed securities with a five year time horizon outside of the auction rate securities market were trading at March 31, 2012. The assumptions used in preparing the discounted cash flow model include an incremental discount rate for the lack of liquidity in the market (“liquidity discount margin”) for an estimated period of time. The discount rate we selected was based on AA-rated banks as the majority of our portfolio is invested in student loans where EMC acts as a financier to these lenders. The liquidity discount margin represents an estimate of the additional return an investor would require for the lack of liquidity of these securities over an estimated five-year holding period. The rate used for the discount margin was 1% at March 31, 2012 compared to 2% at December 31, 2011 due to the narrowing of credit spreads on AA-rated banks during 2012.

The following table provides a summary of changes in fair value of our Level 3 auction rate securities for the three months ended March 31, 2012 (table in thousands):

 

     Three Months Ended
March 31, 2012
 

Balance, beginning of the period

   $ 74,596  

Calls at par value

     (225

Decrease in previously recognized unrealized losses included in other comprehensive income

     4,026  
  

 

 

 

Balance, end of the period

   $ 78,397  
  

 

 

 

 

13


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Significant changes in the unobservable inputs discussed above could result in a significantly lower or higher fair value measurement. Generally, an increase in the discount rate, liquidity discount margin or coupon rate results in a decrease in our fair value measurement and a decrease in the discount rate, liquidity discount margin or coupon rate results in an increase in our fair value measurement.

We perform a fair value calculation of our strategic investments held at cost on a quarterly basis using the most currently available information. To determine the estimated fair value of our private strategic investments we use a combination of several valuation techniques including discounted cash flow models, acquisition comparables and trading comparables. In addition, we evaluate the impact of pre- and post-money valuations of recent financing events and the impact of those on our fully diluted ownership percentages, and we consider any available information regarding the issuer’s historical and forecasted performance as well as market comparables and conditions. The fair value of these investments is considered in our review for impairment if any events and changes in circumstances occur that might have a significant adverse effect on their value.

Investment Losses

Unrealized losses on investments at March 31, 2012 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows (table in thousands):

 

     Less Than 12 Months     12 Months or Greater     Total  
     Fair Value      Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
 

U.S. government and agency obligations

   $ 862,747       $ (1,651   $ 1,482       $ (29   $ 864,229       $ (1,680

U.S. corporate debt securities

     254,514        (475                    254,514        (475

High yield corporate debt securities

     64,144        (2,818     1,689        (381     65,833        (3,199

Asset-backed securities

     12,391        (14     5        (1     12,396        (15

Municipal obligations

     287,508        (655                    287,508        (655

Auction rate securities

                    78,397        (4,278     78,397        (4,278

Foreign debt securities

     169,025        (318                    169,025        (318
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,650,329       $ (5,931   $ 81,573       $ (4,689   $ 1,731,902       $ (10,620
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of March 31, 2012, there were no publicly traded equity securities in a continuous unrealized loss position. For all of our securities for which the amortized cost basis was greater than the fair value at March 31, 2012, we have concluded that currently we neither plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating, third party guarantees and the time to maturity.

Contractual Maturities

The contractual maturities of fixed income securities held at March 31, 2012 are as follows (table in thousands):

 

     March 31, 2012  
     Amortized
Cost Basis
     Aggregate
Fair Value
 

Due within one year

   $ 1,658,223      $ 1,662,038  

Due after 1 year through 5 years

     3,654,373        3,677,387  

Due after 5 years through 10 years

     440,857        456,844  

Due after 10 years

     330,787        329,530  
  

 

 

    

 

 

 

Total

   $ 6,084,240      $ 6,125,799  
  

 

 

    

 

 

 

Short-term investments on the consolidated balance sheet include a $5.7 million variable rate note which has a contractual maturity in 2014, and is not classified within investments due within one year above.

 

14


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

6.  Inventories

Inventories consist of (table in thousands):

 

     March 31,
2012
     December 31,
2011
 

Work-in-process

   $ 512,119      $ 492,064  

Finished goods

     522,131        517,904  
  

 

 

    

 

 

 
   $ 1,034,250      $ 1,009,968  
  

 

 

    

 

 

 

7.  Accounts and Notes Receivable and Allowance for Credit Losses

Our accounts and notes receivable are recorded at cost. The portion of our notes receivable due in one year or less are included in accounts and notes receivable and the long-term portion is included in other assets, net. Lease receivables arise from sales-type leases of products. We typically sell, without recourse, the contractual right to the lease payment stream and assets under lease to third parties. For certain customers, we retain the lease.

The contractual amounts due under the leases we retained as of March 31, 2012 were as follows (table in thousands):

 

Year

   Contractual Amounts
Due Under Leases
 

Due within one year

   $ 112,125  

Due within two years

     87,656  

Due within three years

     78,307  

Thereafter

     899  
  

 

 

 

Total

     278,987  

Less amounts representing interest

     (6,156
  

 

 

 

Present value

     272,831  

Current portion (included in accounts and notes receivable)

     109,604  
  

 

 

 

Long-term portion (included in other assets, net)

   $ 163,227  
  

 

 

 

Subsequent to March 31, 2012, we sold $42.6 million of these notes to third parties without recourse.

We maintain an allowance for credit losses on our accounts and notes receivable. The allowance is based on the credit worthiness of our customers, including an assessment of the customer’s financial position, operating performance and their ability to meet their contractual obligation. We assess the credit scores for our customers each quarter. In addition, we consider our historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account.

In the event we determine that a lease may not be paid, we include in our allowance an amount for the outstanding balance related to the lease receivable. As of March 31, 2012, amounts from lease receivables past due for more than 90 days were not significant.

The following table presents the activity of our allowance for credit losses related to lease receivables for the three months ended March 31, 2012 and 2011 (table in thousands):

 

     March 31,
2012
    March 31,
2011
 

Balance, beginning of the period

   $ 24,247     $ 44,661  

Recoveries

     (11,758     (14,332

Provisions

     8,559       16,313  
  

 

 

   

 

 

 

Balance, end of the period

   $ 21,048     $ 46,642  
  

 

 

   

 

 

 

 

15


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Gross lease receivables totaled $279.0 million and $277.7 million as of March 31, 2012 and 2011, respectively, before the allowance. The components of these balances were individually evaluated for impairment.

8.  Property, Plant and Equipment

Property, plant and equipment consist of (table in thousands):

 

     March 31,
2012
    December 31,
2011
 

Furniture and fixtures

   $ 184,273     $ 180,800  

Equipment and software

     4,851,949       4,680,118  

Buildings and improvements

     1,768,677       1,748,214  

Land

     117,790       117,513  

Building construction in progress

     146,650       146,650  
  

 

 

   

 

 

 
     7,069,339       6,873,295  

Accumulated depreciation

     (4,190,075     (4,040,146
  

 

 

   

 

 

 
   $ 2,879,264     $ 2,833,149  
  

 

 

   

 

 

 

Building construction in progress at March 31, 2012 includes $65.8 million for facilities not yet placed in service that we are holding for future use.

9.  Joint Ventures

VCE Company LLC

In 2009, Cisco and EMC formed VCE Company LLC (“VCE”). VMware and Intel are also investors in VCE. VCE, through Vblock infrastructure platforms, delivers an integrated IT offering that combines network, computing, storage, management, security and virtualization technologies for converged infrastructures and cloud based computing models. As of March 31, 2012, we have contributed $447.0 million in funding and $11.7 million in stock-based compensation to VCE since inception and own approximately 58% of VCE’s outstanding equity. In April 2012, EMC contributed an additional $94.7 million in funding to VCE.

We consider VCE a variable interest entity. Authoritative guidance related to variable interest entities states that the primary beneficiary of a variable interest entity must have both of the following characteristics: (a) the power to direct the activities of a variable interest entity that most significantly will impact the entity’s economic performance; and (b) the obligation to absorb losses that could be potentially significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Since the power to direct the activities of VCE which most significantly impact its economic performance are determined by its board of directors, which is comprised of equal representation of EMC and Cisco, and all significant decisions require the approval of the minority shareholders, we have determined we are not the primary beneficiary, and as such we account for the investment under the equity method.

Our portion of VCE’s gains and losses is recognized in other expense, net, in the consolidated income statements. Our consolidated share of VCE’s losses, based upon our portion of the overall funding, was approximately 63.2% for the three months ended March 31, 2012 and 58% for the three months ended March 31, 2011. As of March 31, 2012, we have recorded net accumulated losses from VCE of $308.8 million since inception, of which $55.5 million and $41.9 million were recorded in the three months ended March 31, 2012 and 2011, respectively.

We recognized $58.4 million and $22.3 million in revenue from sales of product and services to VCE during the three months ended March 31, 2012 and 2011, respectively. We perform certain administrative services, pursuant to an administrative services agreement, on behalf of VCE and we pay certain operating expenses on behalf of VCE. Accordingly, we have a receivable from VCE related to the administrative services agreement of $26.3 million and $27.0 million as of March 31, 2012 and December 31, 2011, respectively, which is included in other current assets in the consolidated balance sheets.

 

16


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

10.   Accrued Expenses

Accrued expenses consist of (table in thousands):

 

     March 31,
2012
     December 31,
2011
 

Salaries and benefits

   $ 851,581      $ 961,587  

Product warranties

     263,181        254,554  

Partner rebates

     138,267        167,813  

Restructuring, current (See Note 13)

     62,896        61,541  

Derivatives

     40,185        50,963  

Other

     890,143        858,521  
  

 

 

    

 

 

 
   $ 2,246,253      $ 2,354,979  
  

 

 

    

 

 

 

Product Warranties

Systems sales include a standard product warranty. At the time of the sale, we accrue for systems’ warranty costs. The initial systems’ warranty accrual is based upon our historical experience, expected future costs and specific identification of systems’ requirements. Upon sale or expiration of the initial warranty, we may sell additional maintenance contracts to our customers. Revenue from these additional maintenance contracts is included in deferred revenue and recognized ratably over the service period. The following represents the activity in our warranty accrual for the three months ended March 31, 2012 and 2011 (table in thousands):

 

     For the Three Months
Ended
 
     March 31,
2012
    March 31,
2011
 

Balance, beginning of the period

   $ 254,554     $ 236,131  

Provision

     48,253       45,825  

Amounts charged to the accrual

     (39,626     (38,322
  

 

 

   

 

 

 

Balance, end of the period

   $ 263,181     $ 243,634  
  

 

 

   

 

 

 

The provision includes amounts accrued for systems at the time of shipment, adjustments for changes in estimated costs for warranties on systems shipped in the period and changes in estimated costs for warranties on systems shipped in prior periods. It is not practicable to determine the amounts applicable to each of the components.

11.   Income Taxes

Our effective income tax rates were 23.4% and 19.5% for the three months ended March 31, 2012 and 2011, respectively. The effective income tax rate is based upon the estimated income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits or resolutions of tax audits or other tax contingencies. For the three months ended March 31, 2012 and 2011, the effective tax rate varied from the statutory tax rate principally 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; substantially all of our income before provision for income taxes from foreign operations has been earned by our Irish subsidiaries. We do not believe that any recent or currently expected developments in non-U.S. tax jurisdictions are reasonably likely to have a material impact on our effective rate.

The increase in the effective tax rate in 2012 compared to 2011 was due primarily to the expiration of the U.S. federal research and development tax credit for 2012 which negatively impacted the rate by 2.5 percentage points, and unfavorable discrete items.

We have concluded all U.S. federal income tax matters for years through 2008. We also have income tax audits in process in numerous state, local and international jurisdictions. Based on the timing and outcome of examinations of EMC, the result of the

 

17


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing authorities, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in our statement of financial position. We anticipate that several of these audits may be finalized within the next 12 months. Based on the status of these examinations, and the protocol of finalizing such audits, it is not possible to estimate the impact of the amount of such changes, if any, to our previously recorded uncertain tax positions.

12.   Stockholders’ Equity

The reconciliation from basic to diluted earnings per share for both the numerators and denominators is as follows (table in thousands):

 

     For the Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Numerator:

    

Net income attributable to EMC Corporation

   $ 586,842     $ 477,148  

Incremental dilution from VMware

     (2,891     (2,764
  

 

 

   

 

 

 

Net income – dilution attributable to EMC Corporation

   $ 583,951     $ 474,384  
  

 

 

   

 

 

 

Denominator:

    

Weighted average shares, basic

     2,067,828       2,066,136  

Weighted common stock equivalents

     45,606       59,841  

Assumed conversion of the 2013 Notes and associated warrants

     88,499       132,301  
  

 

 

   

 

 

 

Weighted average shares, diluted

     2,201,933       2,258,278  
  

 

 

   

 

 

 

Due to the cash settlement feature of the principal amount of the 2013 Notes, we only include the impact of the premium feature in our diluted earnings per share calculation when the 2013 Notes are convertible due to maturity or when the average stock price exceeds the conversion price of the 2013 Notes.

Concurrent with the issuance of the 2011 Notes and 2013 Notes, we also entered into separate transactions in which we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 215 million shares of our common stock at an exercise price of approximately $19.55 per share of our common stock. Half of the associated warrants were exercised during the three months ended March 31, 2012. We include the impact of the remaining outstanding sold warrants in our diluted earnings per share calculation when the average stock price exceeds the exercise price.

Restricted stock awards, restricted stock units and options to acquire shares of our common stock in the amount of 4.6 million and 15.9 million for the three months ended March 31, 2012 and 2011, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive. The incremental dilution from VMware represents the impact of VMware’s dilutive securities on EMC’s consolidated diluted net income per share and is calculated by multiplying the difference between VMware’s basic and diluted earnings per share by the number of VMware shares owned by EMC.

Repurchases of Common Stock

We utilize both authorized and unissued shares (including repurchased shares) for all issuances under our equity plans. In 2008, our Board of Directors authorized the repurchase of 250.0 million shares of our common stock. Of the 250.0 million shares authorized for repurchase, we have repurchased 195.8 million shares at a total cost of $3.7 billion, leaving a remaining balance of 54.2 million shares authorized for future repurchases. We did not repurchase any shares in the three months ended March 31, 2012. We plan to spend up to $700.0 million in 2012 on common stock repurchases.

 

18


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, which is presented net of tax, consists of the following (table in thousands):

 

     March 31,
2012
    December 31,
2011
 

Foreign currency translation adjustments

   $ 4,206     $ (10,780

Unrealized losses on temporarily impaired investments, net of tax benefits of $(3,850) and $(8,492)

     (6,770     (15,044

Unrealized gains on investments, net of taxes of $28,396 and $18,343

     47,293       30,608  

Unrealized losses on derivatives, net of tax benefits of $(56,287) and $(62,210)

     (90,412     (100,446

Recognition of actuarial net loss from pension and other postretirement plans, net of tax benefits of $(81,798) and $(81,798)

     (139,108     (139,108
  

 

 

   

 

 

 
     (184,791     (234,770

Less: accumulated other comprehensive income attributable to the non-controlling interest in VMware, Inc.

     (901     (239
  

 

 

   

 

 

 
   $ (185,692   $ (235,009
  

 

 

   

 

 

 

13.   Restructuring and Acquisition-Related Charges

For the three months ended March 31, 2012 and 2011, we incurred restructuring and acquisition-related charges of $25.9 million and $26.9 million, respectively. For the three months ended March 31, 2012, we incurred $24.2 million of restructuring charges, primarily related to our current year restructuring program and $1.7 million of charges in connection with acquisitions for financial advisory, legal and accounting services. For the three months ended March 31, 2011, we incurred $23.3 million of restructuring charges, primarily related to our 2011 restructuring programs and $3.6 million of costs in connection with acquisitions for financial advisory, legal and accounting services.

In the first quarter of 2012, we implemented a restructuring program to create further operational efficiencies which will result in a workforce reduction of 298 positions. The actions will impact positions around the globe covering our Information Storage, RSA Information Security and Information Intelligence Group segments. All of these actions are expected to be completed by the end of 2012.

During 2011, we implemented separate restructuring programs to create further operational efficiencies which will result in a workforce reduction of 787 positions, of which 33 positions were identified in the three months ended March 31, 2011. The actions will impact positions around the globe covering our Information Storage, RSA Information Security and Information Intelligence Group segments. All of these actions are expected to be completed by the end of 2012.

For the three months ended March 31, 2012 and 2011, we recognized $3.7 million and $18.7 million, respectively, of lease termination costs for facilities vacated in the period in accordance with our plan as part of all of our restructuring programs. These costs are expected to be utilized by the end of 2015.

 

19


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The activity for the restructuring programs is presented below (tables in thousands):

Three Months Ended March 31, 2012

2012 Programs

Category

   Beginning
Balance
     2012
Charges
    Utilization     Balance as of
March 31, 2012
 

Workforce reductions

   $       $ 23,348      $ (2,706   $ 20,642   

Consolidation of excess facilities

             1,318       (710     608  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $       $ 24,666      $ (3,416   $ 21,250   
  

 

 

    

 

 

   

 

 

   

 

 

 

Other Programs

Category

   Beginning
Balance
     Adjustments
to the
Provision
    Utilization     Balance as of
March 31, 2012
 

Workforce reductions

   $ 49,863       $ (2,876   $ (15,675   $ 31,312   

Consolidation of excess facilities and other contractual obligations

     30,112        2,389       (4,320     28,181  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 79,975       $ (487   $ (19,995   $ 59,493   
  

 

 

    

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2011

 

Category

   Beginning
Balance
     2011
Charges
     Utilization     Balance as of
March 31, 2011
 

Workforce reductions

   $ 53,946       $ 4,640       $ (22,298   $ 36,288   

Consolidation of excess facilities and other contractual obligations

     27,818        18,659        (10,561     35,916  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 81,764       $ 23,299       $ (32,859   $ 72,204   
  

 

 

    

 

 

    

 

 

   

 

 

 

14.   Commitments and Contingencies

Line of Credit

We have available for use a credit line of $50.0 million in the United States. As of March 31, 2012, we had no borrowings outstanding on the line of credit. The credit line bears interest at the bank’s base rate and requires us, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. In the event the covenants are not met, the lender may require us to provide collateral to secure the outstanding balance. At March 31, 2012, we were in compliance with the covenants.

RSA Special Charge

In March 2011, RSA was the target of a sophisticated cyber attack which resulted in information related to RSA’s SecurID products being compromised. In the first quarter of 2011, we incurred and accrued costs associated with investigating the attack, hardening our systems and working with our customers to implement remediation programs. In the second quarter of 2011, we recorded a $66.3 million charge in cost of sales related to the expansion of the customer remediation programs. We expanded our customer remediation programs in June 2011 to respond to heightened customer concerns resulting from press coverage relating to an unsuccessful cyber attack on one of our defense sector customers, as well as broad media coverage of cyber attacks on other high profile organizations. At March 31, 2012, we had a remaining reserve of $44.0 million included in accrued liabilities on the consolidated balance sheet. We considered whether additional losses might result from the pending remediation efforts beyond our existing accrual and concluded that no additional material losses related to the remediation efforts are reasonably possible. We expect that the remediation efforts will be substantially completed by the end of the second quarter of 2012.

Litigation

We are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, product liability, employment, benefits and securities matters. As required by authoritative guidance, we have estimated the amount of probable losses that may result from all currently pending matters, and such amounts are reflected in our consolidated financial

 

20


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

statements. These recorded amounts are not material to our consolidated financial position or results of operations and no additional material losses related to these pending matters are reasonably possible. While it is not possible to predict the outcome of these matters with certainty, we do not expect the results of any of these actions to have a material adverse effect on our business, results of operations or financial condition. Because litigation is inherently unpredictable, however, the actual amounts of loss may prove to be larger or smaller than the amounts reflected in our consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our operating results or cash flows in a particular period.

15.   Segment Information

We manage our business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure. EMC Information Infrastructure operates in three segments: Information Storage, Information Intelligence Group and RSA Information Security, while VMware Virtual Infrastructure operates in a single segment. Our management measures are designed to assess performance of these operating segments excluding certain items. As a result, the corporate reconciling items are used to capture the items excluded from the segment operating performance measures, including stock-based compensation expense and acquisition-related intangible asset amortization expense. Additionally, in certain instances, restructuring and acquisition-related charges, transition costs and infrequently occurring gains or losses are also excluded from the measures used by management in assessing segment performance. The VMware Virtual Infrastructure amounts represent the revenues and expenses of VMware as reflected within EMC’s consolidated financial statements. Research and development expenses, selling, general and administrative, and other income associated with the EMC Information Infrastructure business are not allocated to the segments within the EMC Information Infrastructure business, as they are managed centrally at the corporate level. For the three segments within the EMC Information Infrastructure business, gross profit is the segment operating performance measure.

Our segment information for the three months ended March 31, 2012 and 2011 is as follows (tables in thousands, except percentages):

 

    EMC Information Infrastructure                          
    Information
Storage
    Information
Intelligence
Group
    RSA
Information
Security
    EMC
Information
Infrastructure
    VMware
Virtual
Infrastructure
within EMC
    Corp
Reconciling
Items
    Consolidated  

Three Months Ended:

             

March 31, 2012

             

Revenues:

             

Product revenues

  $ 2,454,735      $ 36,062      $ 96,489      $ 2,587,286      $ 481,571      $      $ 3,068,857   

Services revenues

    1,234,172       109,491       110,028       1,453,691       571,830              2,025,521  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated revenues

    3,688,907       145,553       206,517       4,040,977       1,053,401              5,094,378  

Cost of sales

    1,629,038       55,932       73,155       1,758,125       128,185       94,851       1,981,161  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 2,059,869      $ 89,621      $ 133,362        2,282,852       925,216       (94,851     3,113,217  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit percentage

    55.8     61.6     64.6     56.5     87.8            61.1

Research and development

          338,216       178,665       70,936       587,817  

Selling, general and administrative

          1,094,012       404,593       151,592       1,650,197  

Restructuring and acquisition-related charges

                        25,893       25,893  
       

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

          1,432,228       583,258       248,421       2,263,907  
       

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

          850,624       341,958       (343,272     849,310  

Other income (expense), net

          (28,502     7,301       (11,220     (32,421
       

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

          822,122       349,259       (354,492     816,889  

Income tax provision

          220,453       62,969       (92,512     190,910  
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          601,669       286,290       (261,980     625,979  

Net income attributable to the non-controlling interest in VMware, Inc.

                 (58,588     19,451       (39,137
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

        $ 601,669      $ 227,702      $ (242,529   $ 586,842   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

    EMC Information Infrastructure                          
    Information
Storage
    Information
Intelligence
Group
    RSA
Information
Security
    EMC
Information
Infrastructure
    VMware
Virtual
Infrastructure
within EMC
    Corp
Reconciling
Items
    Consolidated  

Three Months Ended:

             

March 31, 2011

             

Revenues:

             

Product revenues

  $ 2,384,011      $ 41,132      $ 87,180      $ 2,512,323      $ 418,936      $      $ 2,931,259   

Services revenues

    1,055,466       110,043       87,074       1,252,583       423,776              1,676,359  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated revenues

    3,439,477       151,175       174,254       3,764,906       842,712              4,607,618  

Cost of sales

    1,574,251       57,705       79,919       1,711,875       127,290       69,402       1,908,567  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 1,865,226      $ 93,470      $ 94,335        2,053,031       715,422       (69,402     2,699,051  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit percentage

    54.2     61.8     54.1     54.5     84.9            58.6

Research and development

          298,133       123,661       80,314       502,108  

Selling, general and administrative

          1,005,264       334,589       156,078       1,495,931  

Restructuring and acquisition-related charges

                        26,893       26,893  
       

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

          1,303,397       458,250       263,285       2,024,932  
       

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

          749,634       257,172       (332,687     674,119  

Other income (expense), net

          (23,993     1,524       (27,457     (49,926
       

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

          725,641       258,696       (360,144     624,193  

Income tax provision

          172,214       49,253       (99,828     121,639  
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          553,427       209,443       (260,316     502,554  

Net income attributable to the non-controlling interest in VMware, Inc.

                 (41,679     16,273       (25,406
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

        $ 553,427      $ 167,764      $ (244,043   $ 477,148   
       

 

 

   

 

 

   

 

 

   

 

 

 

Our revenues are attributed to the geographic areas according to the location of the customers. Revenues by geographic area are included in the following table (table in thousands):

 

     For the Three Months Ended  
     March  31,
2012
     March  31,
2011
 
     

United States

   $ 2,633,394      $ 2,371,032  

Europe, Middle East and Africa

     1,464,292        1,386,783  

Asia Pacific and Japan

     711,693        595,064  

Latin America, Mexico and Canada

     284,999        254,739  
  

 

 

    

 

 

 

Total

   $ 5,094,378      $ 4,607,618  
  

 

 

    

 

 

 

No country other than the United States accounted for 10% or more of revenues during the three months ended March 31, 2012 or 2011.

Long-lived assets, excluding financial instruments, deferred tax assets, goodwill and intangible assets, in the United States were $3,631.2 million at March 31, 2012 and $3,622.8 million at December 31, 2011. Internationally, long-lived assets, excluding financial instruments and deferred tax assets, were $583.6 million at March 31, 2012 and $616.5 million at December 31, 2011. No country other than the United States accounted for 10% or more of total long-lived assets, excluding financial instruments and deferred tax assets, at March 31, 2012 or December 31, 2011.

 

22


Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements and should also be read in conjunction with the risk factors set forth in Item 1A of Part II. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof.

All dollar amounts expressed numerically in this MD&A are in millions.

Certain tables may not add due to rounding.

INTRODUCTION

We manage our business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure.

EMC Information Infrastructure

Our EMC Information Infrastructure business consists of three segments: Information Storage, Information Intelligence and RSA Information Security. The objective for our EMC Information Infrastructure business is to simultaneously increase our market share, invest in the business and improve our financial returns. During 2012, we will continue to innovate and invest in expanding our total addressable market through internal research and development (“R&D”) and through acquisitions to capitalize on the continued expansion of enterprise data. We have developed a product portfolio with customers’ current and future needs in mind; these needs will continue to evolve as the largest transformation in information technology (“IT”) history creates enormous opportunities in three secular trends: Cloud Computing, Big Data and Trust.

Cloud Computing leverages an on-demand, self-managed, virtualized infrastructure to deliver IT-as-a-Service in a more efficient, flexible and cost-effective manner. While the fundamental transition to Cloud Computing architectures is gaining traction, customers are increasingly recognizing that their ability to compete is tied to the efficiency, flexibility and agility of their IT operations and that transitioning to a cloud-based architecture will be a key component to their success. We believe our offerings are well-suited to capitalize on this trend as it unfolds over the next several years. Big Data, which is a primary contributor to the pace of overall data growth, refers to the large repositories of corporate and external data, including unstructured information created by new applications (e.g. medical, entertainment, energy and geophysical), social media and other web repositories. With the continued growth of the investments we made in Big Data, we believe we are well-positioned in this market to continue assisting our customers in storing, managing and unlocking the value contained within this information. The successful transition to a model that leverages Cloud Computing and Big Data is dependent upon both the right infrastructure and the ability to build Trust into that infrastructure. Having a holistic and data-centric approach to security dangers is key to building Trust, and we have been at the forefront of this security trend. The new threat environment is transforming the way customers think about Trust, and we continue to build our data-centric approach to security to enable our customers to take full advantage of the benefits afforded by Cloud Computing and Big Data.

Our go-to-market model, where we continue to leverage our direct sales force and services organization, as well as our channel and services partners and service providers, positions us well for 2012 to help customers transition to Cloud Computing and benefit from Big Data. Additionally, momentum continues to build at VCE Company LLC, our joint venture with Cisco, and other investors VMware and Intel, as it becomes an important element of our go-to-market model, with their Vblock converged infrastructure product for building out cloud data centers.

VMware Virtual Infrastructure

VMware’s financial focus is on long-term revenue growth to generate cash flows to fund its expansion of industry segment share and evolve its virtualization-based products for data centers, desktop computers and cloud computing through a combination of internal development and acquisitions. VMware expects to grow its business by broadening its virtualization infrastructure software solutions technology and product portfolio, increasing product awareness, promoting the adoption of virtualization and building long-term relationships with its customers through the adoption of enterprise license agreements (“ELAs”). Since the introduction of VMware vSphere in 2009, VMware has introduced more products that build on the vSphere foundation including

 

23


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

VMware vSphere 5 and a comprehensive suite of cloud infrastructure technologies, as well as VMware View 5. VMware plans to continue to introduce additional products in the future. Additionally, VMware has made, and expects to continue to make, acquisitions designed to strengthen its product offerings or extend its strategy to deliver solutions that can be hosted at customer data centers or at service providers.

On a consolidated basis, our best-of-breed offerings, wealth of experience and proven track record will allow us to leverage our strengths and position us to capitalize on the evolving trends of Cloud Computing, Big Data and Trust through 2012. As a result, we believe we will grow faster than the markets we serve in the remainder of 2012 while simultaneously investing in the business and growing earnings per share at a rate faster than the rate at which we will grow our revenue.

RESULTS OF OPERATIONS

Revenues

The following table presents revenue by our segments:

 

     For the Three Months Ended         
     March  31,
2012
     March  31,
2011
              
           $ Change     % Change  

Information Storage

   $ 3,688.9      $ 3,439.5      $ 249.4       7.3

Information Intelligence Group

     145.6        151.2        (5.6     (3.7

RSA Information Security

     206.5        174.3        32.2       18.5  

VMware Virtual Infrastructure

     1,053.4        842.7        210.7       25.0  
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 5,094.4      $ 4,607.6      $ 486.8       10.6
  

 

 

    

 

 

    

 

 

   

Consolidated product revenues increased 4.7% from $2,931.3 for the three months ended March 31, 2011 to $3,068.9 for the three months ended March 31, 2012. The consolidated product revenues increase was primarily driven by the Information Storage and VMware Virtual Infrastructure segments’ product revenues. The overall growth in product revenue was due to a continued higher demand for our IT infrastructure offerings to address the storage and virtualization needs for continued information growth, particularly as customers continue to build out their own data centers to develop and support their private or public cloud infrastructures.

The Information Storage segment’s product revenues increased 3.0% to $2,454.7 for the three months ended March 31, 2012. Within the high-end of the Information Storage segment, product revenues decreased 9.5% for the three months ended March 31, 2012, primarily due to the strong growth in the three months ended March 31, 2011 which was in turn primarily driven by the pent up demand associated with the introduction of FAST VP in conjunction with VMAX. Within the mid-tier of the Information Storage segment, which includes Unified products, Backup and Recovery Systems, EMC Isilon and EMC Atmos, product revenues increased 26.4% for the three months ended March 31, 2012, due to strong performance across the product groups. Our VNX family has brought in just under 6,000 new customers since it was introduced in the three months ended March 31, 2011. Our Backup and Recovery Systems division delivered strong year over year growth driven by the strong performance of our portfolio of backup products including EMC Data Domain and EMC Avamar, which continue to bring in new customers each quarter. EMC Isilon continues to play an important role among our mid-tier products with revenue almost doubling from the comparable period in 2011. Finally, our EMC Greenplum Big Data analytics solutions portfolio delivered strong year-over-year revenue growth as it continued to experience strong customer demand for its broad portfolio of services.

The VMware Virtual Infrastructure segment’s product revenues increased 15.0% to $481.6 for the three months ended March 31, 2012. VMware’s license revenues increased in the first quarter of 2012 primarily due to global demand for vSphere and continued interest in their management and automation solutions. For both the three months ended March 31, 2012 and 2011, ELAs comprised 22% of total sales.

The RSA Information Security segment’s product revenues increased 10.7% to $96.5 for the three months ended March 31, 2012. The increase in product revenues was primarily attributable to increased demand for our Identity Management and Protection and our Security Management and Compliance products. The growth for the three months ended March 31, 2012 was greater than the growth for the three months ended March 31, 2011 primarily due to a pause in SecurID shipments during the first quarter of 2011 as we reviewed and hardened our internal systems in response to a sophisticated cyber attack targeting RSA.

 

24


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

The Information Intelligence Group segment’s product revenues declined 12.3% to $36.1 for the three months ended March 31, 2012. The decrease in product revenues was primarily attributable to changing customer demand. The Information Intelligence Group segment continues to evolve to meet the buying preferences of today’s content management customers by transitioning to lighter-weight, content-enabled applications using modern virtualized frameworks.

Consolidated services revenues increased 20.8% from $1,676.4 for the three months ended March 31, 2011 to $2,025.5 for the three months ended March 31, 2012. The consolidated services revenues increase was primarily driven by the Information Storage and VMware Virtual Infrastructure segments’ services revenues where we continue to provide expertise to customers on effective ways to enable Cloud Computing and to leverage their Big Data assets.

The Information Storage segment’s services revenues increased 16.9% to $1,234.2 for the three months ended March 31, 2012. The increase in services revenues was primarily attributable to higher demand for maintenance-related services associated with increased sales in storage products as well as increased maintenance renewals. In addition, a growing demand for professional services also contributed to the increase in services revenues.

The VMware Virtual Infrastructure segment’s services revenues increased 34.9% to $571.8 for the three months ended March 31, 2012. The increase in services revenues was primarily attributable to growth in VMware’s software maintenance revenues. In the three months ended 2012, software maintenance revenues benefited from strong renewals, multi-year software maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with new software license sales. Additionally, VMware experienced increased demand in their professional services, driven by the growth in their license sales and installed base.

The RSA Information Security segment’s services revenues increased 26.4% to $110.0 for the three months ended March 31, 2012. Services revenues increased due to an increase in professional services and maintenance revenues resulting from continued demand for support from our installed base. The Information Intelligence Group segment’s services revenues decreased 0.5% to $109.5 for the three months ended March 31, 2012.

Consolidated revenues by geography were as follows:

 

     For the Three Months Ended         
     March  31,
2012
     March  31,
2011
     % Change  
        

United States

   $ 2,633.4      $ 2,371.0        11.1 

Europe, Middle East and Africa

     1,464.3        1,386.8        5.6  

Asia Pacific and Japan

     711.7        595.1        19.6  

Latin America, Mexico and Canada

     285.0        254.7        11.9  
  

 

 

    

 

 

    

Total revenues

   $ 5,094.4      $ 4,607.6        10.6 
  

 

 

    

 

 

    

Revenues increased for the three months ended March 31, 2012 compared to the same period in 2011 in all of our geographic markets due to greater demand for our products and services offerings.

Changes in exchange rates negatively impacted revenue growth by 0.5% for the three months ended March 31, 2012, compared to the same period in 2011. The impact of the change in rates was most significant in the Euro zone, partially offset by the Asia Pacific markets, primarily Australia and Japan, for the three months ended March 31, 2012.

 

25


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

Costs and Expenses

The following table presents our costs and expenses, other income and net income attributable to EMC Corporation:

 

      For the Three Months Ended        
      March 31,
2012 
    March  31,
2011
    $ Change     % Change  
        

Cost of revenue:

        

Information Storage

   $ 1,629.0     $ 1,574.3     $ 54.7       3.5

Information Intelligence Group

     55.9       57.7       (1.8     (3.1

RSA Information Security

     73.2       79.9       (6.7     (8.4

VMware Virtual Infrastructure

     128.2       127.3       0.9       0.7  

Corporate reconciling items

     94.9       69.4       25.5       36.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     1,981.2       1,908.6       72.6       3.8  

Gross margins:

        

Information Storage

     2,059.9       1,865.2       194.7       10.4  

Information Intelligence Group

     89.6       93.5       (3.9     (4.2

RSA Information Security

     133.4       94.3       39.1       41.5  

VMware Virtual Infrastructure

     925.2       715.4       209.8       29.3  

Corporate reconciling items

     (94.9     (69.4     (25.5     36.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross margin

     3,113.2       2,699.1       414.1       15.3  

Operating expenses:

        

Research and development(1)

     587.8       502.1       85.7       17.1  

Selling, general and administrative(2)

     1,650.2       1,495.9       154.3       10.3  

Restructuring and acquisition-related charges

     25.9       26.9       (1.0     (3.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,263.9       2,024.9       239.0       11.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     849.3       674.1       175.2       26.0  

Investment income, interest expense and other expenses

     (32.4     (49.9     17.5       (35.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     816.9       624.2       192.7       30.9  

Income tax provision

     190.9       121.6       69.3       57.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     626.0       502.6       123.4       24.6  

Less: Net income attributable to the non-controlling interest in VMware, Inc.

     (39.1     (25.4     (13.7     53.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

   $ 586.8     $ 477.1     $ 109.7       23.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amount includes corporate reconciling items of $70.9 and $80.3 for the three months ended March 31, 2012 and 2011, respectively.
(2) Amount includes corporate reconciling items of $151.6 and $156.1 for the three months ended March 31, 2012 and 2011, respectively.

Gross Margins

Overall our gross margin percentages were 61.1% and 58.6% for the three months ended March 31, 2012 and 2011, respectively. The increase in the gross margin percentage in the first quarter of 2012 compared to the same period in 2011 was attributable to the VMware Virtual Infrastructure segment, which increased overall gross margins by 174 basis points, the Information Storage segment, which increased overall gross margins by 93 basis points and the RSA Information Security segment, which increased overall gross margins by 41 basis points, partially offset by the Information Intelligence Group segment, which decreased overall gross margins by 1 basis point. The increase in corporate reconciling items, consisting of stock-based compensation, restructuring and acquisition-related charges, acquisition-related intangible asset amortization, amortization of VMware’s capitalized software from prior periods and transition costs, decreased the consolidated gross margin percentage by 54 basis points. Transition costs represent the incremental costs incurred to streamline our current cost structure.

For segment reporting purposes, stock-based compensation, restructuring and acquisition-related charges, acquisition-related intangible asset amortization, amortization of VMware’s capitalized software from prior periods and transition costs are recognized as corporate expenses and are not allocated among our various operating segments. The increase of $25.5 in the corporate reconciling items for the three months ended March 31, 2012 compared to the same period in 2011 was attributable to a $18.6

 

26


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

increase in amortization of VMware’s capitalized software from prior periods, an $8.2 increase in acquisition-related intangible asset amortization expense and a $1.0 increase in transition costs, partially offset by a $2.4 decrease in stock-based compensation expense.

The gross margin percentages for the Information Storage segment were 55.8% and 54.2% for the three months ended March 31, 2012 and 2011, respectively. The increase in gross margin percentage for the three months ended March 31, 2012 compared to the same period in 2011 was attributable to improved product and service gross margins, driven by a shift in mix towards higher margin products and services, higher sales volume and an improved cost structure.

The gross margin percentages for the VMware Virtual Infrastructure segment were 87.8% and 84.9% for the three months ended March 31, 2012 and 2011, respectively. The increase in gross margin percentage for the three months ended March 31, 2012 compared to the same period in 2011 was primarily attributable to improvements in license gross margins resulting from decreased software capitalization amortization expense as well as increases in services margins.

The gross margin percentages for the RSA Information Security segment were 64.6% and 54.1% for the three months ended March 31, 2012 and 2011, respectively. The increase in gross margin percentage for the three months ended March 31, 2012 compared to the same period in 2011 was due to an increase in product margins. The increase in product margins was due to the one-time impact of RSA remediation associated with working with our customers to implement remediation programs which negatively impacted margin in the first quarter of 2011.

The gross margin percentages for the Information Intelligence Group segment were 61.6% and 61.8% for three months ended March 31, 2012 and 2011, respectively. The decrease in gross margin percentage for the three months ended March 31, 2012 compared to the same period in 2011 was attributable to a decrease in product margins.

Research and Development

As a percentage of revenues, R&D expenses were 11.5% and 10.9% for the three months ended March 31, 2012 and 2011, respectively. R&D expenses increased $85.7 for the three months ended March 31, 2012 compared to the same period in 2011 primarily due to an increase in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions, infrastructure costs and depreciation expense. Additionally, there was a decrease in VMware’s capitalized software development costs. Personnel-related costs increased by $46.9, infrastructure costs increased by $21.6 and depreciation expense increased by $2.6. Also increasing these costs was a decrease in capitalized software development costs of $8.3.

Corporate reconciling items within R&D, which consist of stock-based compensation, intangible asset amortization and transition costs, decreased $9.4 to $70.9 for the three months ended March 31, 2012 when compared to the same period in 2011. Stock-based compensation expense decreased $8.5 and intangible asset amortization decreased $1.3, partially offset by an increase in transition costs of $0.4 for the three months ended March 31, 2012. The decrease in stock-based compensation expense was primarily due to the significant costs during 2011 related to the Isilon acquisition, which was consummated in the fourth quarter of 2010.

R&D expenses within EMC’s Information Infrastructure business, as a percentage of EMC’s Information Infrastructure business revenues, were 8.4% and 7.9% for the three months ended March 31, 2012 and 2011, respectively. R&D expenses increased $40.1 primarily due to increases in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions, cost of facilities and depreciation expense. Personnel-related costs increased by $28.0, cost of facilities increased by $18.6 and depreciation expense increased by $3.6. Partially offsetting these increased costs was an increase in capitalized software development costs of $19.1. The increase in capitalized software development costs is primarily due to the timing of products reaching technological feasibility.

R&D expenses within the VMware Virtual Infrastructure business, as a percentage of VMware’s revenues, were 17.0% and 14.7% for the three months ended March 31, 2012 and 2011, respectively. VMware’s R&D expenses as a percentage of revenues increased year over year due to an increase in development costs as VMware ceased capitalization of software development costs. Following the release of vSphere 5 and the comprehensive suite of cloud infrastructure technologies in the third quarter of 2011, VMware determined that its go-to-market strategy had changed from single solutions to product suite solutions. As a result of this change in strategy, and the related increased importance of interoperability between VMware’s products, the length of time between achieving technological feasibility and general release to customers significantly decreased. VMware expects its products to be available for general release soon after technological feasibility has been established. R&D expenses increased $55.0 for the

 

27


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

three months ended March 31, 2012 compared to the same period in 2011 largely due to increases in personnel-related costs of $27.1. Additionally, capitalized software development costs decreased $27.4 for the three months ended March 31, 2012 compared to the same period in 2011 primarily due to a change in VMware’s go-to-market strategy.

Selling, General and Administrative

As a percentage of revenues, selling, general and administrative (“SG&A”) expenses were 32.4% and 32.5% for the three months ended March 31, 2012 and 2011, respectively. SG&A expenses increased by $154.3 for the three months ended March 31, 2012 compared to the same period in 2011 primarily due to increases in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions, commissions, depreciation expense and other various operating expenses, partially offset by a decrease in infrastructure costs. Personnel-related costs increased by $101.6, commissions increased by $40.2 and depreciation expense increased by $9.0, partially offset by a decrease in infrastructure costs of $54.5.

Corporate reconciling items within SG&A, which consist of stock-based compensation, intangible asset amortization and transition costs decreased $4.5 to $151.6 for the three months ended March 31, 2012 when compared to the same period in 2011. Stock-based compensation expense decreased $3.5 and intangible asset amortization decreased $2.0, partially offset by an increase in transition costs of $1.0 for the three months ended March 31, 2012. The decrease in stock-based compensation expense was primarily due to the significant costs during 2011 related to the Isilon acquisition, which was consummated in the fourth quarter of 2010.

SG&A expenses within EMC’s Information Infrastructure business, as a percentage of EMC’s Information Infrastructure business revenues, were 27.1% and 26.7% for the three months ended March 31, 2012 and 2011, respectively. SG&A expenses increased $88.7 for the three months ended March 31, 2012 when compared to the same period in 2011 primarily due to increases in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions, commissions, depreciation expense and other various operating expenses, partially offset by a decrease in cost of facilities. Personnel-related costs increased by $51.4, commissions increased by $38.9 and depreciation expense increased by $7.7, partially offset by a decrease in cost of facilities of $57.9.

SG&A expenses within the VMware Virtual Infrastructure business, as a percentage of VMware’s revenues, were 38.4% and 39.7% for the three months ended March 31, 2012 and 2011, respectively. SG&A expenses increased $70.0 for the three months ended March 31, 2012 when compared to the same period in 2011 primarily due to growth in personnel-related expenses driven by incremental headcount as well as expenses related to a global conference held in the first quarter 2012.

Restructuring and Acquisition-Related Charges

For the three months ended March 31, 2012 and 2011, we incurred restructuring and acquisition-related charges of $25.9 and $26.9, respectively. For the three months ended March 31, 2012, we incurred $24.2 of restructuring charges, primarily related to our current year restructuring program and $1.7 of charges in connection with acquisitions for financial advisory, legal and accounting services.

Investment Income

Investment income was $29.5 and $38.2 for the three months ended March 31, 2012 and 2011, respectively. Investment income decreased for the three months ended March 31, 2012 compared to the same period in 2011 primarily due to more realized gains in our portfolio of fixed income securities in 2011. Net realized gains were $2.6 and $6.7 for the three months ended March 31, 2012 and 2011, respectively. The weighted average return on investments, excluding realized losses and gains, was 1.1% and 1.4% for the first quarters of 2012 and 2011, respectively.

Interest Expense

Interest expense was $18.2 and $45.0 for the three months ended March 31, 2012 and 2011, respectively. Interest expense consists primarily of interest on the 2011 Notes and 2013 Notes. Included in interest expense are non-cash interest charges related to amortization of the debt discount attributable to the conversion feature of $14.7 and $29.4 for the three months ended March 31, 2012 and 2011, respectively, as we are accreting the 2011 Notes and 2013 Notes to their stated values over their term. See Note 4 to the consolidated financial statements.

 

28


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

Other Expense, Net

Other expense, net was $43.7 and $43.2 for the three months ended March 31, 2012 and 2011, respectively. Other expense in the first quarter of 2012 primarily consists of our consolidated share of the losses from our converged infrastructure joint venture, VCE Company LLC, partially offset by our net gains from the sale of strategic investments held at cost. Our consolidated share of the losses from VCE was $55.5 and $41.9 for the three months ended March 31, 2012 and 2011, respectively. This joint venture is accounted for under the equity method. See Note 9 to the consolidated financial statements. Net gains from the sale of strategic investments held at cost were $22.0 and $0.8 at March 31, 2012 and 2011, respectively.

Provision for Income Taxes

Our effective income tax rates were 23.4% and 19.5% for the three months ended March 31, 2012 and 2011, respectively. The effective income tax rate is based upon the estimated income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits or resolutions of tax audits or other tax contingencies. For the three months ended March 31, 2012 and 2011, the effective tax rate varied from the statutory tax rate principally 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; substantially all of our income before provision for income taxes from foreign operations has been earned by our Irish subsidiaries. We do not believe that any recent or currently expected developments in non-U.S. tax jurisdictions are reasonably likely to have a material impact on our effective rate.

The increase in the effective tax rate in 2012 compared to 2011 was due primarily to the expiration of the U.S. federal research and development tax credit for 2012 which negatively impacted the rate by 2.5 percentage points, and unfavorable discrete items.

We have concluded all U.S. federal income tax matters for years through 2008. We also have income tax audits in process in numerous state, local and international jurisdictions. Based on the timing and outcome of examinations of EMC, the result of the expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing authorities, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in our statement of financial position. We anticipate that several of these audits may be finalized within the next 12 months. Based on the status of these examinations, and the protocol of finalizing such audits, it is not possible to estimate the impact of the amount of such changes, if any, to our previously recorded uncertain tax positions.

Our effective tax rate for the remainder of 2012 may be affected by such factors as changes in tax laws, regulations or rates, changing interpretation of existing laws or regulations, the impact of accounting for stock-based compensation, the impact of accounting for business combinations, changes in our international organization, and changes in overall levels of income before tax. Our effective tax rate may also be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.

Non-controlling Interest in VMware, Inc.

The net income attributable to the non-controlling interest in VMware was $39.1 and $25.4 for the three months ended March 31, 2012 and 2011, respectively. The increase was due to an increase in VMware’s net income and increases in the weighted average percentage ownership by the non-controlling interest in VMware. VMware’s net income was $191.4 and $125.8 for the three months ended March 31, 2012 and 2011, respectively. The weighted average non-controlling interest in VMware was approximately 20% for both the three months ended March 31, 2012 and 2011. In the first quarter of 2010, we announced a stock purchase program of VMware’s Class A Common Stock to maintain an approximately 80% majority ownership in VMware over the long term. During the three months ended March 31, 2012, EMC purchased approximately 0.5 million VMware shares for approximately $40.0.

Financial Condition

Cash provided by operating activities was $1,688.2 and $1,134.8 for the three months ended March 31, 2012 and 2011, respectively. Cash received from customers was $6,023.6 and $5,392.2 for the three months ended March 31, 2012 and 2011, respectively. The increase in cash received from customers was attributable to an increase in maintenance contracts sales volume. Cash paid to suppliers and employees was $4,114.8 and $4,009.6 for the three months ended March 31, 2012 and 2011, respectively. The increase was primarily attributable to a general growth in the business to support the increased revenue base. For the three months ended March 31, 2012 and 2011, we paid $237.7 and $277.0, respectively, in income taxes. These payments are

 

29


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

comprised of estimated taxes for the current year, extension payments for the prior year and refunds or payments associated with income tax filings and tax audits.

Cash used in investing activities was $218.9 and $534.2 for the three months ended March 31, 2012 and 2011, respectively. Cash used for business acquisitions, strategic and other related investments was $92.0 for the three months ended March 31, 2012 and includes 2012 business acquisitions, net of cash acquired, of $102.1. Cash used for business acquisitions, strategic and other related investments was $213.0 for the three months ended March 31, 2011 and includes 2011 business acquisitions, net of cash acquired and funding of $124.3 to our joint venture, VCE. We did not provide any funding to VCE in the three months ended March 31, 2012. Capital additions were $153.6 and $165.5 for the three months ended March 31, 2012 and 2011, respectively. The lower level of capital additions was primarily attributable to increased spending in 2011 on facility expansion and information technology infrastructure. Capitalized software development costs were $105.8 and $112.0 for the three months ended March 31, 2012 and 2011, respectively. The decrease was primarily attributable to VMware’s change in go-to-market strategy, somewhat offset by EMC Information Infrastructure’s efforts on its software development activities. Net sales of investments were $127.6 and $1.3 for the three months ended March 31, 2012 and 2011, respectively. This activity varies from period to period based upon our cash collections, cash requirements and maturity dates of our investments.

Cash used in financing activities was $1,340.2 and $630.0 for the three months ended March 31, 2012 and 2011, respectively. We spent $1,699.8 for payment of our convertible debt in the three months ended March 31, 2012 and we spent $40.0 to purchase 0.5 million shares of VMware’s common stock. For the three months ended March 31, 2011, we spent $868.1 to repurchase 33.1 million shares of our common stock and $38.0 to purchase 0.5 million shares of VMware’s common stock. Additionally, in the three months ended March 31, 2011, VMware spent $147.7 to repurchase 1.7 million shares of its common stock and we generated $291.2 and $314.5 during the three months ended March 31, 2012 and 2011, respectively, from the exercise of stock options. We generated $106.0 and $109.0 during the three months ended March 31, 2012 and 2011, respectively, of excess tax benefits from stock-based compensation.

We expect to continue to generate positive cash flows from operations for the remainder of 2012 and to use cash generated by operations as our primary source of liquidity. We believe that existing cash and cash equivalents, together with any cash generated from operations will be sufficient to meet normal operating requirements for the next twelve months.

The 2011 Notes matured and a majority of the noteholders exercised their right to convert the outstanding 2011 Notes at the end of 2011. Pursuant to the settlement terms, the majority of the converted 2011 Notes were not settled until January 9, 2012. At that time, we paid the noteholders $1,699.8 in cash for the outstanding principal and 29.5 million shares for the $661.4 excess of the conversion value over the principal amount, as prescribed by the terms of the 2011 Notes.

The remaining $1,710.3 of the 2013 Notes is due in November 2013. Based upon the closing price of our common stock for the prescribed measurement period during the three months ended March 31, 2012, the contingent conversion thresholds on the 2013 Notes were exceeded. As a result, the 2013 Notes are convertible at the option of the holder through June 30, 2012. Upon conversion, we are obligated to pay cash up to the principal amount of the debt converted. We have the option to settle any conversion value in excess of the principal amount with cash, shares of our common stock, or a combination thereof. Approximately $14.7 of the 2013 Notes have been converted as of March 31, 2012.

In connection with the issuance of the 2011 Notes and 2013 Notes, we entered into separate convertible note hedge transactions with respect to our common stock (the “Purchased Options”). The Purchased Options allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would pay to the holders of the 2011 Notes and 2013 Notes upon conversion. The Purchased Options will cover, subject to customary anti-dilution adjustments, approximately 215 million shares of our common stock. We paid an aggregate amount of $669.1 of the proceeds from the sale of the 2011 Notes and 2013 Notes for the Purchased Options that was recorded as additional paid-in-capital in shareholders’ equity. In the fourth quarter of 2011, we exercised 107.5 million of the Purchased Options in conjunction with the planned settlements of the 2011 Notes, and we received 29.5 million shares of net settlement on January 9, 2012, representing the excess conversion value of the options. The remaining 107.5 million of the Purchased Options expire on December 1, 2013.

We also entered into separate transactions in which we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 215 million shares of our common stock at an exercise price of approximately $19.55 per share of our common stock. We received aggregate proceeds of $391.1 from the sale of the associated warrants. Upon exercise, the value of the warrants is required to be settled in shares. Half of the associated warrants were exercised between February 15, 2012 and

 

30


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

March 14, 2012 and the remaining half of the associated warrants have expiration dates between February 18, 2014 and March 18, 2014. During the three months ended March 31, 2012, the exercised warrants were settled with 32.3 million shares of our common stock.

We have available for use a credit line of $50.0 in the United States. As of March 31, 2012, we had no borrowings outstanding on the line of credit. The credit line bears interest at the bank’s base rate and requires us, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. In the event the covenants are not met, the lender may require us to provide collateral to secure the outstanding balance. At March 31, 2012, we were in compliance with the covenants. As of March 31, 2012, the aggregate amount of liabilities of our subsidiaries was approximately $6,590.9.

At March 31, 2012, our total cash, cash equivalents, and short-term and long-term investments were $10,878.5. This balance includes approximately $5,222.2 held by VMware, of which $2,464.0 is held overseas, and $1,623.9 held by EMC in overseas entities. If these overseas funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

Use of Non-GAAP Financial Measures and Reconciliations to GAAP Results

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). EMC used certain non-GAAP financial measures in the three months ended March 31, 2012, which exclude stock-based compensation, amortization of intangible assets, restructuring and acquisition-related charges and amortization of VMware’s capitalized software from prior periods to measure its gross margin, operating margin, net income and diluted earnings per share for purposes of managing our business. EMC also assesses its financial performance by measuring its free cash flow which is also a non-GAAP financial measure. Free cash flow is defined as net cash provided by operating activities, less additions to capital expenditures and capitalized software development costs. These non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of EMC’s financial performance or liquidity prepared in accordance with GAAP. EMC’s non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how EMC defines its non-GAAP financial measures.

EMC’s management uses the non-GAAP financial measures to gain an understanding of EMC’s comparative operating performance (when comparing such results with previous periods or forecasts) and future prospects and excludes these items from its internal financial statements for purposes of its internal budgets and each reporting segment’s financial goals. These non-GAAP financial measures are used by EMC’s management in their financial and operating decision-making because management believes they reflect EMC’s ongoing business in a manner that allows meaningful period-to-period comparisons. EMC’s management believes that these non-GAAP financial measures provide useful information to investors and others (a) in understanding and evaluating EMC’s current operating performance and future prospects in the same manner as management does, if they so choose, and (b) in comparing in a consistent manner EMC’s current financial results with EMC’s past financial results.

Our non-GAAP operating results for the three months ended March 31, 2012 and 2011 were as follows:

 

     For the Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Gross margin

   $ 3,207.0     $ 2,768.4  

Gross margin percentage

     63.0     60.1

Operating income

     1,184.1       1,000.6  

Operating income percentage

     23.2     21.7

Income tax provision

     276.8       209.3  

Net income attributable to EMC

     818.0       700.4  

Diluted earnings per share attributable to EMC

   $ 0.37     $ 0.31  

The improvements in the non-GAAP gross margin and non-GAAP gross margin percentage were attributable to higher sales volume, a change in mix attributable to higher margin products and improved cost control. The improvements in the non-GAAP operating income and non-GAAP operating income percentage were attributable to an improved gross margin percentage.

 

31


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

The reconciliation of the above financial measures from GAAP to non-GAAP is as follows:

 

     For the Three Months Ended March 31, 2012  
     GAAP      Restructuring
and
acquisition-
related
charges
     Stock-based
compensation
     Intangible
asset
amortization
     Amortization
of

VMware’s
capitalized

software
from

prior periods
     Non-GAAP  

Gross margin

   $ 3,113.2       $ —         $ 30.8       $ 44.4       $ 18.6       $ 3,207.0   

Operating income

     849.3        25.9        204.7        85.6        18.6        1,184.1  

Income tax provision

     190.9        6.1        47.6        26.4        5.9        276.8  

Net income attributable to EMC

     586.8        19.8        144.7        56.5        10.1