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 September 30, 2011

OR

 

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

  For 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

incorporation or organization)

  

(I.R.S. Employer

Identification Number)

176 South Street

Hopkinton, Massachusetts

   01748

(Address of principal executive offices)

   (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 September 30, 2011 was 2,039,957,250.

 

 

 


Table of Contents

EMC CORPORATION

 

     Page No.  

PART I — FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

Consolidated Balance Sheets at September 30, 2011 and December 31, 2010

     3   

Consolidated Income Statements for the Three and Nine Months Ended September 30, 2011 and 2010

     4   

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010

     5   

Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September  30, 2011 and 2010

     6   

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September  30, 2011
and 2010

     7   

Notes to Consolidated Financial Statements

     8   

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

     28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 4. Controls and Procedures

     40   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     41   

Item 1A. Risk Factors

     41   

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

     51   

Item 3. Defaults Upon Senior Securities

     51   

Item 4. Reserved

     51   

Item 5. Other Information

     51   

Item 6. Exhibits

     51   

SIGNATURES

     52   

EXHIBIT INDEX

     53   

 

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)

 

     September 30,
2011
    December 31,
2010
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 3,125,610      $ 4,119,138   

Short-term investments

     1,635,533        1,256,175   

Accounts and notes receivable, less allowance for doubtful accounts of $60,264 and $57,385

     2,650,392        2,569,523   

Inventories

     1,104,143        856,405   

Deferred income taxes

     642,716        609,832   

Other current assets

     789,329        372,249   
  

 

 

   

 

 

 

Total current assets

     9,947,723        9,783,322   

Long-term investments

     4,499,373        4,170,742   

Property, plant and equipment, net

     2,756,003        2,528,432   

Intangible assets, net

     1,851,967        1,624,267   

Goodwill

     12,153,651        11,772,650   

Other assets, net

     1,221,954        953,871   
  

 

 

   

 

 

 

Total assets

   $ 32,430,671      $ 30,833,284   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 1,007,805      $ 1,062,600   

Accrued expenses

     2,357,448        2,090,035   

Income taxes payable

            199,735   

Convertible debt

     3,280,957        3,214,771   

Deferred revenue

     3,325,466        2,810,873   
  

 

 

   

 

 

 

Total current liabilities

     9,971,676        9,378,014   

Income taxes payable

     243,206        265,549   

Deferred revenue

     2,398,596        1,853,263   

Deferred income taxes

     624,183        717,004   

Other liabilities

     242,967        217,449   
  

 

 

   

 

 

 

Total liabilities

     13,480,628        12,431,279   
  

 

 

   

 

 

 

Convertible debt (See Note 4)

     144,862        235,229   

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 2,039,957 and 2,069,246 shares

     20,400        20,692   

Additional paid-in capital

     2,818,523        3,816,681   

Retained earnings

     15,288,575        13,659,284   

Accumulated other comprehensive loss, net

     (220,302     (92,617
  

 

 

   

 

 

 

Total EMC Corporation’s shareholders’ equity

     17,907,196        17,404,040   

Non-controlling interest in VMware, Inc.

     897,985        762,736   
  

 

 

   

 

 

 

Total shareholders’ equity

     18,805,181        18,166,776   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 32,430,671      $ 30,833,284   
  

 

 

   

 

 

 

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

 

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Table of Contents

EMC CORPORATION

CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share amounts)

(unaudited)

 

     For the
Three Months Ended
    For the
Nine Months Ended
 
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Revenues:

        

Product sales

   $ 3,074,367      $ 2,675,925      $ 9,049,610      $ 7,707,958   

Services

     1,905,834        1,536,346        5,383,547        4,418,502   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,980,201        4,212,271        14,433,157        12,126,460   

Costs and expenses:

        

Cost of product sales

     1,269,323        1,194,297        3,917,028        3,513,961   

Cost of services

     644,613        531,000        1,870,526        1,547,807   

Research and development

     548,021        483,264        1,589,020        1,395,922   

Selling, general and administrative

     1,612,914        1,343,325        4,684,534        3,888,260   

Restructuring and acquisition-related charges

     20,302        12,561        68,411        40,902   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     885,028        647,824        2,303,638        1,739,608   

Non-operating income (expense):

        

Investment income

     32,293        40,563        106,506        104,198   

Interest expense

     (44,322     (44,827     (135,777     (132,539

Other expense, net

     (59,799     (5,823     (72,616     (12,714
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense

     (71,828     (10,087     (101,887     (41,055
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     813,200        637,737        2,201,751        1,698,553   

Income tax provision

     171,086        148,663        465,456        381,292   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     642,114        489,074        1,736,295        1,317,261   

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

     (36,465     (16,558     (107,004     (45,825
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

   $ 605,649      $ 472,516      $ 1,629,291      $ 1,271,436   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per weighted average share, basic attributable to EMC Corporation common shareholders

   $ 0.29      $ 0.23      $ 0.79      $ 0.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per weighted average share, diluted attributable to EMC Corporation common shareholders

   $ 0.27      $ 0.22      $ 0.72      $ 0.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares, basic

     2,054,007        2,055,876        2,060,242        2,053,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares, diluted

     2,207,099        2,146,753        2,244,508        2,132,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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EMC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Nine Months Ended  
     September 30,
2011
    September 30,
2010
 

Cash flows from operating activities:

    

Cash received from customers

   $ 15,434,151      $ 12,733,156   

Cash paid to suppliers and employees

     (11,577,038     (9,567,360

Dividends and interest received

     77,706        92,834   

Interest paid

     (54,683     (41,621

Income taxes paid

     (395,539     (180,403
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,484,597        3,036,606   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (601,177     (541,866

Capitalized software development costs

     (342,091     (272,492

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

     (5,589,382     (5,091,454

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

     3,945,683        2,362,878   

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

     877,510        261,631   

Business acquisitions, net of cash acquired

     (536,624     (851,380

Increase in strategic and other related investments

     (459,711     (5,642

Purchase of leasehold interest

     (151,083       
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,856,875     (4,138,325
  

 

 

   

 

 

 

Cash flows from financing activities:

    

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

     501,627        552,846   

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

     285,286        355,846   

EMC repurchase of EMC’s common stock

     (1,899,208     (800,267

EMC purchase of VMware’s common stock

     (342,201     (289,587

VMware repurchase of VMware’s common stock

     (490,916     (285,940

Excess tax benefits from stock-based compensation

     318,717        210,711   

Payment of long-term and short-term obligations

     (1,263     (3,755

Proceeds from long-term and short-term obligations

     1,253        1,116   
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,626,705     (259,030
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     5,455        (1,158
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (993,528     (1,361,907

Cash and cash equivalents at beginning of period

     4,119,138        6,302,499   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,125,610      $ 4,940,592   
  

 

 

   

 

 

 

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

    

Net income

   $ 1,736,295      $ 1,317,261   

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

    

Depreciation and amortization

     1,048,151        862,964   

Non-cash interest expense on convertible debt

     76,398        78,731   

Non-cash restructuring and other special charges

     (2,325     3,114   

Stock-based compensation expense

     613,233        484,141   

Provision for doubtful accounts

     8,525        18,599   

Deferred income taxes, net

     83,657        (41,355

Excess tax benefits from stock-based compensation

     (318,717     (210,711

Other, net

     (28,740     (9,192

Changes in assets and liabilities, net of acquisitions:

    

Accounts and notes receivable

     (56,076     (14,380

Inventories

     (416,898     (55,862

Other assets

     (157,024     (127,401

Accounts payable

     (75,263     (71,839

Accrued expenses

     51,747        (38,343

Income taxes payable

     (13,740     242,244   

Deferred revenue

     1,048,545        602,477   

Other liabilities

     (113,171     (3,842
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 3,484,597      $ 3,036,606   
  

 

 

   

 

 

 

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

 

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Table of Contents

EMC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

For the nine months ended September 30, 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

    39,010        391        501,236                             501,627   

Tax benefit from stock options exercised

                  358,688                             358,688   

Restricted stock grants, cancellations and withholdings, net

    8,894        89        (110,247                          (110,158

Repurchase of common stock

    (77,193     (772     (1,898,436                          (1,899,208

EMC purchase of VMware stock

                  (304,022                   (38,179     (342,201

Stock options issued in business acquisitions

                  3,224                             3,224   

Stock-based compensation

                  629,301                             629,301   

Impact from equity transactions of VMware, Inc.

                  (268,269                   70,203        (198,066

Change in market value of investments

                                (40,665     (3,779     (44,444

Change in market value of derivatives

                                (81,703            (81,703

Translation adjustment

                                (5,317            (5,317

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

                  90,367                             90,367   

Net income

                         1,629,291               107,004        1,736,295   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

    2,039,957      $ 20,400      $ 2,818,523      $ 15,288,575      $ (220,302   $ 897,985      $ 18,805,181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2010:

  

    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, 2010

    2,052,441      $ 20,524      $ 3,875,791      $ 11,759,289      $ (105,722   $ 510,592      $ 16,060,474   

Stock issued through stock option and stock purchase plans

    46,884        469        552,377                             552,846   

Tax benefit from stock options exercised

                  223,807                             223,807   

Restricted stock grants, cancellations and withholdings, net

    4,861        49        (60,126                          (60,077

Repurchase of common stock

    (43,790     (438     (799,829                          (800,267

EMC purchase of VMware stock

                  (255,638                   (33,949     (289,587

Stock options issued in business acquisitions

                  1,841                             1,841   

Stock-based compensation

                  499,731                             499,731   

Impact from equity transactions of VMware, Inc.

                  (151,539                   177,977        26,438   

Change in market value of investments

                                37,065        1,915        38,980   

Change in market value of derivatives

                                (51,452            (51,452

Translation adjustment

                                (159            (159

Net income

                         1,271,436               45,825        1,317,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2010

    2,060,396      $ 20,604      $ 3,886,415      $ 13,030,725      $ (120,268   $ 702,360      $ 17,519,836   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

EMC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

    For the
Three Months Ended
    For the
Nine Months Ended
 
    September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Net income

  $ 642,114      $ 489,074      $ 1,736,295      $ 1,317,261   

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

       

Foreign currency translation adjustments

    (31,074     30,292        (5,317     (159

Changes in market value of investments, including unrealized gains (losses) and reclassification adjustments to net income, net of taxes (benefits) of $(16,256), $15,481, $(25,533) and $22,785

    (31,195     26,734        (44,444     38,980   

Changes in market value of derivatives, net of taxes (benefits) of $(41,494), $(17,382), $(51,952) and $(29,559)

    (64,748     (31,034     (81,703     (51,452
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    (127,017     25,992        (131,464     (12,631
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    515,097        515,066        1,604,831        1,304,630   

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

    (36,465     (16,558     (107,004     (45,825

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

    312        (1,401     3,779        (1,915
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to EMC Corporation

  $ 478,944      $ 497,107      $ 1,501,606      $ 1,256,890   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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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 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 leading provider of virtualization and cloud infrastructure software solutions.

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, 2010 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2011.

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- and nine-month periods ended September 30, 2011 and 2010.

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 $1.701 billion 1.75% convertible senior notes due 2011 (the “2011 Notes”), our $1.724 billion 1.75% convertible senior notes due 2013 (the “2013 Notes” and, together with the 2011 Notes, the “Notes”) 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 transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011.

 

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In June 2011, the FASB issued new guidance on the presentation of comprehensive income. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011.

In September 2011, the FASB issued new guidance intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary. This new guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011, with early adoption permitted.

We do not believe the adoption of the new guidance above will have an impact on our consolidated financial position, results of operations or cash flows.

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 $898.0 million and $702.4 million as of September 30, 2011 and 2010, respectively. At September 30, 2011, EMC held approximately 80% 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 Nine Months Ended  
     September 30,
2011
    September 30,
2010
 

Net income attributable to EMC Corporation

   $ 1,629,291      $ 1,271,436   

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

    

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

     102,612        123,970   

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

     (370,881     (275,509
  

 

 

   

 

 

 

Net transfers to non-controlling interest

     (268,269     (151,539
  

 

 

   

 

 

 

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

   $ 1,361,022      $ 1,119,897   
  

 

 

   

 

 

 

3.   Business Combinations, Intangibles and Goodwill

During the nine months ended September 30, 2011, we acquired all of the capital stock of NetWitness Corporation, a privately-held, market-leading provider of network security analysis solutions. This acquisition complements and expands our RSA Information Security segment. Additionally, during the nine months ended September 30, 2011, VMware acquired six companies. The aggregate consideration for these seven acquisitions was $539.8 million which consisted of $536.6 million of cash consideration, net of cash acquired and $3.2 million for the fair value of our stock options granted in exchange for the acquirees’ stock options. 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 allocation to goodwill, intangibles and net assets was approximately $375.8 million, $157.1 million and $6.9 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 or nine months ended September 30, 2011 or 2010.

 

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Intangible Assets

Intangible assets, excluding goodwill, as of September 30, 2011 and December 31, 2010 consist of (tables in thousands):

 

     September 30, 2011  
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Book Value  

Purchased technology

   $ 1,620,912       $ (982,625   $ 638,287   

Patents

     224,865         (68,367     156,498   

Software licenses

     88,993         (81,461     7,532   

Trademarks and tradenames

     172,851         (88,916     83,935   

Customer relationships and customer lists

     1,329,774         (560,646     769,128   

In-process research and development

     43,900                43,900   

Leasehold interest

     151,083         (1,442     149,641   

Other

     25,822         (22,776     3,046   
  

 

 

    

 

 

   

 

 

 

Total intangible assets, excluding goodwill

   $ 3,658,200       $ (1,806,233   $ 1,851,967   
  

 

 

    

 

 

   

 

 

 

In the quarter ended June 30, 2011, we, along with three other technology companies, acquired specific patents from Novell, Inc. The purchase price for the patent portfolio was $450.0 million, of which we paid $112.5 million. We assigned the patent portfolio an average life of 10 years, based on average contractual term remaining on the patents we acquired. The cash outflow was included in strategic and other related investments in the investing activities section of the Consolidated Statements of Cash Flows.

In the quarter ended June 30, 2011, VMware closed an agreement to purchase all of the right, title and interest in a ground lease covering the property and improvements located on property adjacent to VMware’s Palo Alto, California campus for $225.0 million. Based upon the respective fair values and preliminary assumptions, $51.9 million of the purchase price was recorded to property, plant and equipment, net on the June 30, 2011 Consolidated Balance Sheet, representing the estimated fair value of the buildings and site improvements. The remaining $173.1 million of the purchase price was recorded to intangible assets, net on the June 30, 2011 Consolidated Balance Sheet, for the fair value of the ground lease and the right to develop additional square footage on the parcel.

In the three months ended September 30, 2011, the gross amount classified to property, plant and equipment, net was increased by $22.0 million to $73.9 million to reflect the final assumptions regarding VMware’s intended use of the existing structures. As a result of this adjustment, the gross amount of the value attributed to the leasehold interest was decreased by the same amount. These adjustments are reflected on the Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and the Consolidated Balance Sheets as of September 30, 2011. Concurrent with the closing of the transaction, VMware entered into an amended and restated ground lease for the related property. The buildings and site improvements will be depreciated from the date they are placed into service through the term of the amended and restated ground lease, and intangible assets will amortize through 2046.

 

     December 31, 2010  
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Book Value  

Purchased technology

   $ 1,509,616       $ (873,095   $ 636,521   

Patents

     62,170         (62,134     36   

Software licenses

     84,583         (72,115     12,468   

Trademarks and tradenames

     171,651         (74,725     96,926   

Customer relationships and customer lists

     1,275,908         (447,411     828,497   

In-process research and development

     43,900                43,900   

Other

     25,632         (19,713     5,919   
  

 

 

    

 

 

   

 

 

 

Total intangible assets, excluding goodwill

   $ 3,173,460       $ (1,549,193   $ 1,624,267   
  

 

 

    

 

 

   

 

 

 

 

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Goodwill

Changes in the carrying amount of goodwill, net, for the nine months ended September 30, 2011 and the year ended December 31, 2010 consist of (tables in thousands):

 

     Nine Months Ended September 30, 2011  
     Information
Storage
    Information
Intelligence
Group
     RSA
Information
Security
    VMware
Virtual
Infrastructure
     Total  

Balance, beginning of the period

   $ 7,029,341      $ 1,467,903       $ 1,663,213      $ 1,612,193       $ 11,772,650   

Goodwill resulting from acquisitions

                    187,445        188,395         375,840   

Tax deduction from exercise of stock options

     (73             (95             (168

Finalization of purchase price allocations

     4,038                (1,982     3,273         5,329   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of the period

   $ 7,033,306      $ 1,467,903       $ 1,848,581      $ 1,803,861       $ 12,153,651   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Year Ended December 31, 2010  
     Information
Storage
    Information
Intelligence
Group
    RSA
Information
Security
    VMware
Virtual
Infrastructure
    Total  

Balance, beginning of the year

   $ 5,045,086      $ 1,476,520      $ 1,529,408      $ 1,159,362      $ 9,210,376   

Goodwill resulting from acquisitions

     2,287,712               140,013        178,201        2,605,926   

Tax deduction from exercise of stock options

     (548     (2,424     (1,103            (4,075

Other adjustments

     (275,405                   275,405          

Finalization of purchase price allocations

     (27,504     (6,193     (5,105     (775     (39,577
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of the year

   $ 7,029,341      $ 1,467,903      $ 1,663,213      $ 1,612,193      $ 11,772,650   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other adjustments to goodwill in the year ended December 31, 2010 include the transfer of the goodwill related to the Ionix information technology management business from the Information Storage segment to the VMware Virtual Infrastructure segment. The goodwill transfer related to the common control acquisition of certain software product technology and related capabilities of our Ionix business by VMware. See Note 15 for additional details.

4.   Convertible Debt

In November 2006, we issued our Notes for total gross proceeds of $3.45 billion. The Notes are senior unsecured obligations and rank equally with all other existing and future senior unsecured debt.

The 2011 Notes are currently convertible because we are within three months of their maturity. The holders of the 2013 Notes may convert their 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 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 Notes. Additionally, the 2013 Notes will become convertible during the last three months prior to their maturity.

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 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 Notes will be 62.1978 shares of our common stock per one thousand dollars of principal amount of Notes, which represents a 27.5% conversion premium from the date the Notes were issued and is equivalent to a conversion price of approximately $16.08

 

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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 Notes that elects to convert its Notes in connection with such fundamental change.

At December 31, 2010, the contingent conversion thresholds on the Notes were exceeded. As a result, the Notes became convertible at the option of the holder. Accordingly, since the terms of the Notes require the principal to be settled in cash, we reclassified from Shareholders’ Equity the portion of the Notes attributable to the conversion feature which had not yet been accreted to its face value, and the Notes were classified as a current liability.

At September 30, 2011, the 2011 Notes had less than three months to maturity and are therefore convertible at the option of the holder through November 30, 2011. In addition, based upon the closing price of our common stock for the prescribed measurement period during the three months ended September 30, 2011, 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 December 31, 2011. We reclassified from Shareholders’ Equity the portion of the Notes attributable to the conversion feature which had not yet been accreted to its face value, and the Notes have been 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. Approximately $24.2 million of the Notes have been converted as of September 30, 2011.

The carrying amount reported on the Consolidated Balance Sheet as of September 30, 2011 for our convertible debt was $3,425.8 million and the fair value was $4,707.6 million. The decrease in carrying amount during the nine months ended September 30, 2011 was due to the conversion of shares. The carrying amount of the equity component was $524.2 million at September 30, 2011.

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

 

     For the Three Months Ended  
         September 30,    
2011
         September 30,    
2010
 

Contractual interest expense on the coupon

   $ 15,078       $ 15,094   

Amortization of the discount component recognized as interest expense

     31,045         29,041   
  

 

 

    

 

 

 

Total interest expense on the convertible debt

   $ 46,123       $ 44,135   
  

 

 

    

 

 

 
     For the Nine Months Ended  
     September 30,
2011
     September 30,
2010
 

Contractual interest expense on the coupon

   $ 45,266       $ 45,282   

Amortization of the discount component recognized as interest expense

     90,367         85,128   
  

 

 

    

 

 

 

Total interest expense on the convertible debt

   $ 135,633       $ 130,410   
  

 

 

    

 

 

 

As of September 30, 2011, the unamortized discount on the 2011 Notes consists of $10.8 million which will be fully amortized by December 1, 2011, and the unamortized discount on the 2013 Notes consists of $134.1 million, which will be fully amortized by December 1, 2013. The effective interest rate on the Notes was 5.6% for the three and nine months ended September 30, 2011 and 2010.

In connection with the sale of the 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 Notes upon conversion. The Purchased Options will cover, subject to customary anti-dilution adjustments, approximately 215 million shares of our common stock. Half of the Purchased Options expire on December 1, 2011 and the remaining half of the Purchased Options expire on December 1, 2013. We paid an aggregate amount of $669.1 million of the proceeds from the sale of the Notes for the Purchased Options that was recorded as additional paid-in-capital in Shareholders’ Equity.

 

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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 have expiration dates between February 15, 2012 and March 15, 2012 and the remaining half of the associated warrants have expiration dates between February 18, 2014 and March 18, 2014. 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.

The Purchased Options and associated warrants will generally have the effect of increasing the conversion price of the 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 Notes.

In 2010, we 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 forecasted issuance of debt in 2012 to replace the 2011 Notes. As such, the gain or loss on these hedges is recognized in other comprehensive loss until the underlying exposure is realized.

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 securities, with the exception of some of our U.S. government and agency obligations, which are classified as Level 1 securities, and all of our auction rate securities, which are classified as Level 3. At September 30, 2011, the vast majority of our Level 2 investments 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. Our publicly traded equity securities are classified as Level 1.

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. As a result of the lack of liquidity for auction rate securities, we have classified these as long-term investments as of September 30, 2011 and December 31, 2010. At September 30, 2011 and December 31, 2010, 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 September 30, 2011 and December 31, 2010, auction rate securities were valued using a discounted cash flow model.

 

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The following tables summarize the composition of our short- and long-term investments at September 30, 2011 and December 31, 2010 (tables in thousands):

 

     September 30, 2011  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
(Losses)
    Aggregate
Fair Value
 

U.S. government and agency obligations

   $ 2,294,101       $ 14,889       $ (2,268   $ 2,306,722   

U.S. corporate debt securities

     1,391,063         10,175         (3,595     1,397,643   

High yield corporate debt securities

     448,200         4,549         (27,557     425,192   

Asset-backed securities

     31,411         103         (11     31,503   

Municipal obligations

     775,608         1,953         (479     777,082   

Auction rate securities

     91,350                 (10,259     81,091   

Foreign debt securities

     1,048,249         7,391         (2,600     1,053,040   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed income securities

     6,079,982         39,060         (46,769     6,072,273   

Publicly traded equity securities

     58,205         4,428                62,633   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 6,138,187       $ 43,488       $ (46,769   $ 6,134,906   
  

 

 

    

 

 

    

 

 

   

 

 

 

We held approximately $1.1 billion in foreign debt securities at September 30, 2011. These securities have an average credit rating of AA-, and approximately 6% 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, 2010  
     Amortized
Cost
     Unrealized
Gains
     Unrealized
(Losses)
    Aggregate
Fair Value
 

U.S. government and agency obligations

   $ 1,737,782       $ 11,286       $ (2,674   $ 1,746,394   

U.S. corporate debt securities

     1,239,325         13,608         (1,307     1,251,626   

High yield corporate debt securities

     421,469         18,306         (1,943     437,832   

Asset-backed securities

     34,730         152         (1     34,881   

Municipal obligations

     1,095,338         3,829         (3,266     1,095,901   

Auction rate securities

     155,950                 (9,906     146,044   

Foreign debt securities

     653,251         6,878         (714     659,415   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed income securities

     5,337,845         54,059         (19,811     5,372,093   

Publicly traded equity securities

     22,376         32,448                54,824   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 5,360,221       $ 86,507       $ (19,811   $ 5,426,917   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The following table represents our fair value hierarchy for our financial assets and liabilities measured at fair value as of September 30, 2011 (in thousands):

 

     Level 1      Level 2     Level 3      Total  

Cash

   $ 1,186,959       $      $       $ 1,186,959   

Cash equivalents

     1,838,607         100,044                1,938,651   

U.S. government and agency obligations

     1,277,304         1,029,418                2,306,722   

U.S. corporate debt securities

             1,397,643                1,397,643   

High yield corporate debt securities

             425,192                425,192   

Asset-backed securities

             31,503                31,503   

Municipal obligations

             777,082                777,082   

Auction rate securities

                    81,091         81,091   

Foreign debt securities

             1,053,040                1,053,040   

Publicly traded equity securities

     62,633                        62,633   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total cash and investments

   $ 4,365,503       $ 4,813,922      $ 81,091       $ 9,260,516   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other items:

          

Foreign exchange derivative assets

   $       $ 60,341      $       $ 60,341   

Foreign exchange derivative liabilities

             (58,617             (58,617

Commodity derivative liabilities

             (708             (708

Interest rate swap contracts

             (145,934             (145,934

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 for the forecasted issuance of debt in 2012 to replace the 2011 Notes. As such, the gain or loss on these hedges is recognized in other comprehensive loss until the underlying exposure is realized. As of September 30, 2011, the interest rate swaps have unrealized losses of $145.9 million primarily due to the change in interest rates since the contracts’ inception.

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 $18.4 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. 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 2% at September 30, 2011 compared to 1% at December 31, 2010 due to the widening of credit spreads on AA-rated banks during 2011.

The following table provides a summary of changes in fair value of our Level 3 financial assets for the three and nine months ended September 30, 2011 (table in thousands):

 

     Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 

Balance, beginning of the period

   $ 99,154      $ 146,044   

Calls at par value

     (13,100     (64,600

Decrease in previously recognized unrealized losses included in other comprehensive income

     (4,963     (353
  

 

 

   

 

 

 

Balance, end of the period

   $ 81,091      $ 81,091   
  

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Investment Gains and Losses

Unrealized losses on investments at September 30, 2011 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

   $ 747,809       $ (2,122   $ 6,491       $ (146   $ 754,300       $ (2,268

U.S. corporate debt securities

     549,667         (3,595                    549,667         (3,595

High yield corporate debt securities

     306,934         (27,557                    306,934         (27,557

Asset-backed securities

     7,047         (10     5         (1     7,052         (11

Municipal obligations

     304,076         (472     8,147         (7     312,223         (479

Auction rate securities

                    81,091         (10,259     81,091         (10,259

Foreign debt securities

     326,419         (2,600                    326,419         (2,600
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 2,241,952       $ (36,356   $ 95,734       $ (10,413   $ 2,337,686       $ (46,769
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of September 30, 2011, 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 September 30, 2011, 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.

During the three months ended June 30, 2011, a realized gain of $56.0 million was recorded in other expense, net on the Consolidated Income Statements for the sale of VMware’s investment in Terremark Worldwide, Inc.

Contractual Maturities

The contractual maturities of fixed income securities held at September 30, 2011 are as follows (table in thousands):

 

     September 30, 2011  
     Amortized
Cost Basis
     Aggregate
Fair Value
 

Due within one year

   $ 1,602,305       $ 1,604,979   

Due after 1 year through 5 years

     3,661,373         3,678,241   

Due after 5 years through 10 years

     356,779         346,741   

Due after 10 years

     459,525         442,312   
  

 

 

    

 

 

 

Total

   $ 6,079,982       $ 6,072,273   
  

 

 

    

 

 

 

Short-term investments on the Consolidated Balance Sheet include $30.6 million of variable rate demand notes, which have contractual maturities ranging from 2013 through 2045, and are not classified within investments due within one year above.

6.  Inventories

Inventories consist of (table in thousands):

 

     September 30,
2011
     December 31,
2010
 

Work-in-process

   $ 555,343       $ 508,426   

Finished goods

     548,800         347,979   
  

 

 

    

 

 

 
   $ 1,104,143       $ 856,405   
  

 

 

    

 

 

 

 

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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 September 30, 2011 were as follows (table in thousands):

 

Year

   Contractual Amounts
Due Under Leases
 

Due within one year

   $ 106,198   

Due within two years

     90,288   

Due within three years

     74,466   

Thereafter

     2,302   
  

 

 

 

Total

     273,254   

Less amounts representing interest

     (6,362
  

 

 

 

Present value

     266,892   

Current portion (included in accounts and notes receivable)

     94,111   
  

 

 

 

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

   $ 172,781   
  

 

 

 

Subsequent to September 30, 2011, we sold $12.2 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 September 30, 2011, 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 nine months ended September 30, 2011 and 2010 (table in thousands):

 

     September 30,
2011
    September 30,
2010
 

Balance, beginning of the period

   $ 44,661      $ 40,200   

Recoveries

     (27,539     (20,991

Provisions

     10,066        22,084   
  

 

 

   

 

 

 

Balance, end of the period

   $ 27,188      $ 41,293   
  

 

 

   

 

 

 

Gross lease receivables totaled $273.3 million and $221.4 million as of September 30, 2011 and 2010, respectively, before the allowance. The components of these balances were individually evaluated for impairment.

 

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8.  Property, Plant and Equipment

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

 

     September 30,
2011
    December 31,
2010
 

Furniture and fixtures

   $ 166,214      $ 156,644   

Equipment

     4,618,877        4,112,000   

Buildings and improvements

     1,728,750        1,617,154   

Land

     117,500        115,899   

Building construction in progress

     50,138        70,114   
  

 

 

   

 

 

 
     6,681,479        6,071,811   

Accumulated depreciation

     (3,925,476     (3,543,379
  

 

 

   

 

 

 
   $ 2,756,003      $ 2,528,432   
  

 

 

   

 

 

 

Building construction in progress at September 30, 2011 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 September 30, 2011, we have contributed $242.9 million in funding and $10.0 million in stock-based compensation to VCE since inception and own approximately 58% of VCE’s outstanding equity. In October 2011, EMC contributed an additional $94.7 million 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. As of September 30, 2011, we have recorded net accumulated losses from VCE of $182.5 million since inception, of which $50.2 million and $138.7 million were recorded in the three and nine months ended September 30, 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 $67.2 million as of September 30, 2011, which is included in other current assets in the Consolidated Balance Sheets.

 

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10.  Accrued Expenses

Accrued expenses consist of (table in thousands):

 

     September 30,
2011
     December 31,
2010
 

Salaries and benefits

   $ 863,668       $ 884,243   

Product warranties

     248,975         236,131   

Restructuring, current

     50,569         61,933   

Derivatives

     205,259         36,879   

Other

     988,977         870,849   
  

 

 

    

 

 

 
   $ 2,357,448       $ 2,090,035   
  

 

 

    

 

 

 

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 and nine months ended September 30, 2011 and 2010 (table in thousands):

 

     For the Three Months
Ended
    For the Nine Months
Ended
 
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Balance, beginning of the period

   $ 248,395      $ 249,090      $ 236,131      $ 271,594   

Provision

     42,535        28,155        130,775        86,897   

Amounts charged to the accrual

     (41,955     (37,726     (117,931     (118,972
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of the period

   $ 248,975      $ 239,519      $ 248,975      $ 239,519   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 21.0% and 21.1% for the three and nine months ended September 30, 2011, respectively. Our effective income tax rates were 23.3% and 22.4% for the three and nine months ended September 30, 2010, 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 and nine months ended September 30, 2011 and 2010, 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.

Our effective income tax rate decreased in the three and nine months ended September 30, 2011 from the three and nine months ended September 30, 2010 due primarily to an increase in benefit from favorable discrete tax items and the reenactment of the U.S. federal research and development (“R&D”) tax credit which occurred during the fourth quarter of 2010, partially offset by a reduction of the mix of income attributable to foreign versus domestic jurisdictions and non-deductible permanent differences.

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

 

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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.

At December 31, 2010, we reasonably anticipated that up to $41.4 million of individually-insignificant unrecognized tax positions may be recognized within one year. During the nine months ended September 30, 2011, net reductions in uncertain tax positions of $17.1 million were recognized for the resolution of the U.S. federal tax audit for tax years 2007 and 2008.

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     For the Nine Months Ended  
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Numerator:

        

Net income attributable to EMC Corporation

   $ 605,649      $ 472,516      $ 1,629,291      $ 1,271,436   

Incremental dilution from VMware

     (3,233     (2,365     (11,178     (6,302
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income – dilution attributable to EMC Corporation

   $ 602,416      $ 470,151      $ 1,618,113      $ 1,265,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted average shares, basic

     2,054,007        2,055,876        2,060,242        2,053,026   

Weighted common stock equivalents

     46,629        48,764        55,418        48,639   

Assumed conversion of the Notes and associated warrants

     106,463        42,113        128,848        31,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares, diluted

     2,207,099        2,146,753        2,244,508        2,132,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Concurrent with the issuance of the 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. We also include the impact of the sold warrants in our diluted earnings per share calculation when the average stock price exceeds the exercise price.

Restricted stock units and options to acquire shares of our common stock in the amount of 17.6 million and 15.4 million for the three and nine months ended September 30, 2011, respectively, and 57.1 million and 64.5 million for the three and nine months ended September 30, 2010, 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 191.2 million shares at a total cost of $3.6 billion, leaving a remaining balance of 58.8 million shares authorized for future repurchases. For the nine months ended September 30, 2011, we spent $1,899.2 million to repurchase 77.2 million shares of our common stock. We plan to spend up to $2.0 billion in 2011 on common stock repurchases.

 

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Accumulated Other Comprehensive Loss

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

 

     September 30,
2011
    December 31,
2010
 

Foreign currency translation adjustments

   $ (12,300   $ (6,983

Unrealized losses on temporarily impaired investments, net of tax benefits of $(16,732) and $(7,278)

     (30,037     (12,533

Unrealized gains on investments, net of taxes of $16,605 and $32,684

     26,883        53,823   

Unrealized losses on derivatives, net of tax benefits of $(55,355) and $(3,403)

     (87,637     (5,934

Recognition of actuarial net loss from pension and other postretirement plans, net of tax benefits of $(70,388) and $(70,388)

     (117,058     (117,058
  

 

 

   

 

 

 
     (220,149     (88,685

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

     (153     (3,932
  

 

 

   

 

 

 
   $ (220,302   $ (92,617
  

 

 

   

 

 

 

13.  Restructuring and Acquisition-Related Charges

For the three and nine months ended September 30, 2011, we incurred restructuring and acquisition-related charges of $20.3 million and $68.4 million, respectively. For the three and nine months ended September 30, 2010, we incurred restructuring and acquisition-related charges of $12.6 million and $40.9 million, respectively. For the three and nine months ended September 30, 2011, we incurred $16.9 million and $58.1 million, respectively, of restructuring charges, primarily related to our current year restructuring programs and $3.4 million and $10.3 million, respectively, of charges in connection with acquisitions for financial advisory, legal and accounting services. For the three and nine months ended September 30, 2010, we incurred $9.7 million and $35.4 million, respectively, of restructuring charges, primarily related to our 2008 restructuring program and $2.9 million and $5.5 million, respectively, of charges in connection with acquisitions for financial advisory, legal and accounting services.

In the third, second and first quarters of 2011, we implemented separate restructuring programs to create further operational efficiencies which will result in a workforce reduction of 208, 205 and 33 positions, respectively. 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 2011. For the three and nine months ended September 30, 2011, we recognized $1.9 million and $24.3 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.

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

Three Months Ended September 30, 2011

 

September 30, September 30, September 30, September 30,
2011 Programs                           

Category

   Balance as of
June 30,
2011
     2011
Charges
     Utilization     Balance as of
September 30,
2011
 

Workforce reductions

   $ 14,967       $ 14,734       $ (6,703   $ 22,998   

Consolidation of excess facilities

     324         528                852   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,291       $ 15,262       $ (6,703   $ 23,850   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

September 30, September 30, September 30, September 30,
Other Programs                           

Category

   Balance as of
June 30,
2011
     2011
Charges
     Utilization     Balance as of
September 30,
2011
 

Workforce reductions

   $ 21,595       $ 243       $ (7,029   $ 14,809   

Consolidation of excess facilities and other contractual obligations

     35,062         1,376         (4,123     32,315   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 56,657       $ 1,619       $ (11,152   $ 47,124   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Nine Months Ended September 30, 2011

 

September 30,0 September 30,0 September 30,0 September 30,0
2011 Programs                           
      Balance as of
December 31,
2010
     2011
Charges
     Utilization     Balance as of
September 30,
2011
 

Category

          

Workforce reductions

   $       $ 34,160       $ (11,162   $ 22,998   

Consolidation of excess facilities

             1,212         (360     852   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $       $ 35,372       $ (11,522   $ 23,850   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

September 30,0 September 30,0 September 30,0 September 30,0
Other Programs                          

Category

   Balance as of
December 31,
2010
     2011
Charges
    Utilization     Balance as of
September 30,
2011
 

Workforce reductions

   $ 53,946       $ (408   $ (38,729   $ 14,809   

Consolidation of excess facilities and other contractual obligations

     27,818         23,114        (18,617     32,315   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 81,764       $ 22,706      $ (57,346   $ 47,124   
  

 

 

    

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2010

 

000000000000 000000000000 000000000000 000000000000

Category

   Balance as of
June 30,

2010
     2010
Charges
     Utilization     Balance as of
September 30,
2010
 

Workforce reductions

   $ 36,676       $ 5,286       $ (14,806   $ 27,156   

Consolidation of excess facilities and other contractual obligations

     33,652         4,407         (7,218     30,841   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 70,328       $ 9,693       $ (22,024   $ 57,997   
  

 

 

    

 

 

    

 

 

   

 

 

 

Nine Months Ended September 30, 2010

 

September 30,0 September 30,0 September 30,0 September 30,0

Category

   Balance as of
December 31,
2009
     2010
Charges
     Utilization     Balance as of
September 30,
2010
 

Workforce reductions

   $ 87,238       $ 6,008       $ (66,090   $ 27,156   

Consolidation of excess facilities and other contractual obligations

     18,522         29,377         (17,058     30,841   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 105,760       $ 35,385       $ (83,148   $ 57,997   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 September 30, 2011, 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 September 30, 2011, 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

 

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high profile organizations. At September 30, 2011, we had a remaining reserve of $59.0 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, including those identified below, 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 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.

We have received three derivative demand letters sent on behalf of purported EMC shareholders. The letters refer to a now-settled civil action in which EMC was named as a defendant and in which the United States (acting through the Civil Division of the Department of Justice (DoJ)) intervened. The civil action involved allegations concerning EMC’s compliance with the terms and conditions of certain agreements pursuant to which we sold products and services to the federal government and EMC’s fee arrangements with partners and systems integrators in federal government transactions. EMC reached a settlement of all claims asserted in this action effective as of May 4, 2010, without any admission of liability or wrongdoing. The derivative demand letters contend that the existence of the civil action serves as evidence that certain EMC officers and directors failed to exercise due care and/or failed to oversee compliance with certain federal laws.

The matters relating to the demand letters were referred to a Special Committee of independent directors of the Board of Directors, which investigated and made a determination regarding such allegations. At the conclusion of their investigation, the Special Committee determined in good faith that commencing or maintaining derivative proceedings based on the allegations would not be in the best interests of EMC. In October 2009, one of the purported shareholders filed a complaint in the Superior Court for Middlesex County in Massachusetts alleging claims for breach of fiduciary duty against EMC directors and certain officers based on the same allegations set forth in the demand letter. In May 2010, another purported shareholder filed a complaint in the same court making virtually identical allegations. In September 2011, the court entered a judgment of dismissal with prejudice as to both pending actions.

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. R&D 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.

In April 2010, VMware acquired certain software product technology and expertise from the EMC Information Infrastructure segment’s Ionix information technology management business for cash consideration of $175.0 million. EMC retained the Ionix

 

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EMC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

brand and will continue to offer customers the products acquired by VMware, pursuant to the ongoing reseller agreement between EMC and VMware. In the three and nine months ended September 30, 2011, $1.9 million and $14.4 million, respectively, of contingent amounts were paid to EMC in accordance with the asset purchase agreement. These payments were recorded by VMware as a reduction to the capital contribution from EMC. As of September 30, 2011, all contingent payments under the agreement had been made. The acquisition of the Ionix net assets and related capabilities was accounted for as a business combination between entities under common control. We did not revise our segment presentation for prior periods, as the historical impact of the acquired business was not material to the VMware Virtual Infrastructure segment.

Our segment information for the three and nine months ended September 30, 2011 and 2010 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:

             

September 30, 2011

             

Revenues:

             

Product revenues

  $ 2,462,722      $ 53,056      $ 115,685      $ 2,631,463      $ 442,904      $      $ 3,074,367   

Services revenues

    1,190,340        118,398        99,215        1,407,953        497,881               1,905,834   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated revenues

    3,653,062        171,454        214,900        4,039,416        940,785               4,980,201   

Cost of sales

    1,580,155        63,008        69,664        1,712,827        130,683        70,426        1,913,936   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 2,072,907      $ 108,446      $ 145,236        2,326,589        810,102        (70,426     3,066,265   
 

 

 

   

 

 

   

 

 

         

Gross profit percentage

    56.7     63.3     67.6     57.6     86.1            61.6

Research and development

          316,380        148,576        83,065        548,021   

Selling, general and administrative

          1,099,329        368,187        145,398        1,612,914   

Restructuring and acquisition-related charges

                        20,302        20,302   
       

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

          1,415,709        516,763        248,765        2,181,237   
       

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

          910,880        293,339        (319,191     885,028   

Other income (expense), net

          (43,223     197        (28,802     (71,828
       

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

          867,657        293,536        (347,993     813,200   

Income tax provision

          237,936        22,949        (89,799     171,086   
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          629,721        270,587        (258,194     642,114   

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

                 (54,622     18,157        (36,465
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

        $ 629,721      $ 215,965      $ (240,037   $ 605,649   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

24


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:

             

September 30, 2010

             

Revenues:

             

Product revenues

  $ 2,172,875      $ 59,078      $ 102,442      $ 2,334,395      $ 341,530      $      $ 2,675,925   

Services revenues

    966,414        116,713        83,290        1,166,417        369,929               1,536,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated revenues

    3,139,289        175,791        185,732        3,500,812        711,459               4,212,271   

Cost of sales

    1,434,431        66,495        54,968        1,555,894        108,654        60,749        1,725,297   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 1,704,858      $ 109,296      $ 130,764        1,944,918        602,805        (60,749     2,486,974   
 

 

 

   

 

 

   

 

 

         

Gross profit percentage

    54.3     62.2     70.4     55.6     84.7            59.0

Research and development

          279,404        129,924        73,936        483,264   

Selling, general and administrative

          936,316        288,682        118,327        1,343,325   

Restructuring and acquisition-related charges

                        12,561        12,561   
       

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

          1,215,720        418,606        204,824        1,839,150   
       

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

          729,198        184,199        (265,573     647,824   

Other income (expense), net

          14,865        2,013        (26,965     (10,087
       

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

          744,063        186,212        (292,538     637,737   

Income tax provision

          201,643        25,192        (78,172     148,663   
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          542,420        161,020        (214,366     489,074   

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

                 (31,475     14,917        (16,558
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

        $ 542,420      $ 129,545      $ (199,449   $ 472,516   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

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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  

Nine Months Ended:

             

September 30, 2011

             

Revenues:

             

Product revenues

  $ 7,275,194      $ 142,655      $ 305,138      $ 7,722,987      $ 1,326,623      $      $ 9,049,610   

Services revenues

    3,367,229        358,456        280,150        4,005,835        1,377,712               5,383,547   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated revenues

    10,642,423        501,111        585,288        11,728,822        2,704,335               14,433,157   

Cost of sales

    4,722,584        187,306        277,817        5,187,707        390,438        209,409        5,787,554   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 5,919,839      $ 313,805      $ 307,471        6,541,115        2,313,897        (209,409     8,645,603   
 

 

 

   

 

 

   

 

 

         

Gross profit percentage

    55.6     62.6     52.5     55.8     85.6            59.9

Research and development

          932,581        412,575        243,864        1,589,020   

Selling, general and administrative

          3,179,639        1,057,615        447,280        4,684,534   

Restructuring and acquisition-related charges

                        68,411        68,411   
       

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

          4,112,220        1,470,190        759,555        6,341,965   
       

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

          2,428,895        843,707        (968,964     2,303,638   

Other income (expense), net

          (76,169     4,466        (30,184     (101,887
       

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

          2,352,726        848,173        (999,148     2,201,751   

Income tax provision

          620,453        103,711        (258,708     465,456   
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          1,732,273        744,462        (740,440     1,736,295   

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

                 (151,612     44,608        (107,004
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

        $ 1,732,273      $ 592,850      $ (695,832   $ 1,629,291   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

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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  

Nine Months Ended:

             

September 30, 2010

             

Revenues:

             

Product revenues

  $ 6,267,044      $ 185,069      $ 279,132      $ 6,731,245      $ 976,713      $      $ 7,707,958   

Services revenues

    2,790,262        347,320        241,404        3,378,986        1,039,516               4,418,502   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated revenues

    9,057,306        532,389        520,536        10,110,231        2,016,229               12,126,460   

Cost of sales

    4,222,546        191,825        160,748        4,575,119        306,673        179,976        5,061,768   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 4,834,760      $ 340,564      $ 359,788        5,535,112        1,709,556        (179,976     7,064,692   
 

 

 

   

 

 

   

 

 

         

Gross profit percentage

    53.4     64.0     69.1     54.7     84.8            58.3

Research and development

          834,854        352,138        208,930        1,395,922   

Selling, general and administrative

          2,717,978        811,551        358,731        3,888,260   

Restructuring and acquisition-related charges

                        40,902        40,902   
       

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

          3,552,832        1,163,689        608,563        5,325,084   
       

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

          1,982,280        545,867        (788,539     1,739,608   

Other income (expense), net

          46,712        (8,130     (79,637     (41,055
       

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

          2,028,992        537,737        (868,176     1,698,553   

Income tax provision

          515,849        95,887        (230,444     381,292   
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          1,513,143        441,850        (637,732     1,317,261   

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

                 (85,372     39,547        (45,825
       

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

        $ 1,513,143      $ 356,478      $ (598,185   $ 1,271,436   
       

 

 

   

 

 

   

 

 

   

 

 

 

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      For the Nine Months Ended  
     September 30,
2011
     September 30,
2010
     September 30,
2011
     September 30,
2010
 

United States

   $ 2,674,626       $ 2,292,790       $ 7,552,800       $ 6,558,393   

Europe, Middle East and Africa

     1,355,474         1,178,927         4,149,828         3,504,869   

Asia Pacific and Japan

     695,443         508,504         1,944,808         1,413,684   

Latin America, Mexico and Canada

     254,658         232,050         785,721         649,514   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,980,201       $ 4,212,271       $ 14,433,157       $ 12,126,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

No country other than the United States accounted for 10% or more of revenues during the three and nine months ended September 30, 2011 or 2010.

Long-lived assets, excluding financial instruments, deferred tax assets, goodwill and intangible assets, in the United States were $3,393.1 million at September 30, 2011 and $2,936.8 million at December 31, 2010. Internationally, long-lived assets, excluding financial instruments and deferred tax assets, were $584.9 million at September 30, 2011 and $600.3 million at December 31, 2010. 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 September 30, 2011 or December 31, 2010.

 

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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 Group 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 2011, we will continue to innovate and invest in expanding our total addressable market opportunity through internal research and development (“R&D”) efforts and acquisitions to capitalize on the continued growth of enterprise data. Because of these investments and our focus on providing customers with the technology to transform their Information Technology (“IT”) infrastructures and applications, we believe we are well-positioned in the largest IT transformation in history which is creating enormous opportunities in Cloud Computing and Big Data. 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 still gaining traction, customers recognize that their ability to compete is increasingly tied to the efficiency and agility of their IT operations and that transitioning to cloud architectures to increase their efficiencies and make them more flexible and agile 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 investments we made in 2010 by acquiring Isilon and Greenplum, as well as our internally developed Atmos offering, we believe we are well-positioned in this market to continue assisting our customers in unlocking the value contained within this information. To help customers in transitioning to Cloud Computing and benefitting from Big Data, we are leveraging our own services organization, as well as our channel and services partners and service providers. Additionally, momentum continues to build at VCE Company LLC, our joint venture with Cisco and other investors VMware and Intel, which offers the Vblock converged infrastructure product for building out cloud data centers.

Our focus on Cloud Computing and Big Data combined with our portfolio of differentiated solutions within these secular trends, our disciplined operational execution and control and deepening of our relationships with partners continue to drive our success. As a result, we continue to believe we will grow faster than the markets we serve and increase our 2011 earnings at a rate faster than the rate at which we will grow our revenue, as well as reinforce our position as the provider of choice for enterprise data, cloud infrastructure and Big Data solutions in the next year and beyond.

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 in 2009 of VMware vSphere and VMware View 4, VMware has introduced more products that build on the vSphere foundation including in the third quarter of 2011, 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 and/or extend its strategy to deliver solutions that can be hosted at customer data centers or at service providers.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - (Continued)

 

RESULTS OF OPERATIONS

Revenues

The following tables present revenue by our segments:

 

     For the Three Months Ended         
     September 30,
2011
     September 30,
2010
     $ Change     % Change  

Information Storage

   $ 3,653.1       $ 3,139.3       $ 513.8        16.4

Information Intelligence Group

     171.5         175.8         (4.3     (2.4

RSA Information Security

     214.9         185.7         29.2        15.7   

VMware Virtual Infrastructure

     940.8         711.5         229.3        32.2   
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 4,980.2       $ 4,212.3       $ 767.9        18.2
  

 

 

    

 

 

    

 

 

   

 

     For the Nine Months Ended         
     September 30,
2011
     September 30,
2010
     $ Change     % Change  

Information Storage

   $ 10,642.4       $ 9,057.3       $ 1,585.1        17.5

Information Intelligence Group

     501.1         532.4         (31.3     (5.9

RSA Information Security

     585.3         520.5         64.8        12.4   

VMware Virtual Infrastructure

     2,704.3         2,016.2         688.1        34.1   
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 14,433.2       $ 12,126.5       $ 2,306.7        19.0
  

 

 

    

 

 

    

 

 

   

Consolidated product revenues increased 14.9% and 17.4% to $3,074.4 and $9,049.6 for the three and nine months ended September 30, 2011, respectively. The consolidated product revenues increase was primarily driven by the Information Storage and the 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 13.3% and 16.1% to $2,462.7 and $7,275.2 for the three and nine months ended September 30, 2011, respectively. Within the high-end of the Information Storage segment, product revenues increased 7.0% and 15.7% for the three and nine months ended September 30, 2011, respectively, primarily due to VMAX system sales and upgrades as customers continue to purchase VMAX for mission critical data sets and business applications as well as for new use cases. 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 27.8% and 25.1% for the three and nine months ended September 30, 2011, respectively, due to strong performance across each of our mid-tier product groups. Our newly launched VNX family, which started shipping at the end of February, has been well received by the market and accounted for more than 80% of our Unified mid-tier product revenue in the third quarter, which includes VNX, VNXe, Celerra and CLARiiON. Within our back-up and recovery systems division, Data Domain growth continued to benefit from being owned by EMC which in turn helped drive growth in Avamar and NetWorker. Finally, our Big Data storage and data analytics products continued to grow faster than the market with EMC Isilon, EMC Greenplum and EMC Atmos up over 100% in the three months ended September 30, 2011.

The VMware Virtual Infrastructure segment’s product revenues increased 29.7% and 35.8% to $442.9 and $1,326.6 for the three and nine months ended September 30, 2011, respectively. VMware’s license revenues increased in the third quarter and first nine months of 2011 primarily due to strong global demand for vSphere. For both the three and nine months ended September 30, 2011, VMware observed an increase in the volume of ELAs as compared with the respective periods in 2010 due to growing customer interest as well as strong renewals from existing ELA customers.

The Information Intelligence Group segment’s product revenues declined 10.2% and 22.9% to $53.1 and $142.7 for the three and nine months ended September 30, 2011, respectively. The decrease in product revenues was primarily attributable to changing

 

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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.

The RSA Information Security segment’s product revenues increased 12.9% and 9.3% to $115.7 and $305.1 for the three and nine months ended September 30, 2011, respectively. The increase in product revenues was primarily attributable to increased demand for our Security Management and Compliance products. The growth for the nine months ended September 30, 2011 was less than the growth for the three months ended September 30, 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.

Consolidated services revenues increased 24.0% and 21.8% to $1,905.8 and $5,383.5 for the three and nine months ended September 30, 2011, respectively. The consolidated services revenues increase was primarily driven by the Information Storage and the VMware Virtual Infrastructure segments’ services revenues where we continue to provide expertise to customers on the most effective ways to enable Cloud Computing and to leverage their Big Data assets.

The Information Storage segment’s services revenues increased 23.2% and 20.7% to $1,190.3 and $3,367.2 for the three and nine months ended September 30, 2011, respectively. The increase in services revenues was primarily attributable to higher demand for maintenance-related services, which correlates to the increased sales in storage products. 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 34.6% and 32.5% to $497.9 and $1,377.7 for the three and nine months ended September 30, 2011, respectively. The increase in services revenues was primarily attributable to growth in VMware’s software maintenance revenues. In the first nine months of 2011, services 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, including consulting and customer training, driven by the growth in their license sales and installed base.

The Information Intelligence Group segment’s services revenues increased 1.4% and 3.2% to $118.4 and $358.5 for the three and nine months ended September 30, 2011, respectively. The increase in services revenues was primarily attributable to higher demand for professional services. The RSA Information Security segment’s services revenues increased 19.1% and 16.1% to $99.2 and $280.2 for the three and nine months ended September 30, 2011, respectively. Services revenues increased due to an increase in professional services and maintenance revenues resulting from continued demand for support from our installed base.

Consolidated revenues by geography were as follows:

 

     For the Three Months Ended      % Change  
     September 30,
2011
     September 30,
2010
    

United States

   $ 2,674.6       $ 2,292.8         16.7

Europe, Middle East and Africa

     1,355.5         1,178.9         15.0   

Asia Pacific and Japan

     695.4         508.5         36.8   

Latin America, Mexico and Canada

     254.7         232.1         9.7   
  

 

 

    

 

 

    

Total revenues

   $ 4,980.2       $ 4,212.3         18.2
  

 

 

    

 

 

    

 

     For the Nine Months Ended         
     September 30,
2011
     September 30,
2010
     % Change  

United States

   $ 7,552.8       $ 6,558.4         15.2

Europe, Middle East and Africa

     4,149.8         3,504.9         18.4   

Asia Pacific and Japan

     1,944.8         1,413.7         37.6   

Latin America, Mexico and Canada

     785.7         649.5         21.0   
  

 

 

    

 

 

    

Total revenues

   $ 14,433.2       $ 12,126.5         19.0
  

 

 

    

 

 

    

Revenues increased for the three and nine months ended September 30, 2011 compared to the same periods in 2010 in all of our markets due to greater demand for our products and services offerings.

 

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Changes in exchange rates contributed 1.7% and 2.1% to the overall revenue increase for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010. The impact of the change in rates was most significant in the Euro zone and Asia Pacific markets, primarily Australia and Japan, for the three and nine months ended September 30, 2011.

Costs and Expenses

The following tables present our costs and expenses, other income and net income attributable to EMC Corporation:

 

     For the Three Months Ended        
     September 30,
2011
    September 30,
2010
    $
Change
    %
Change
 

Cost of revenue:

       

Information Storage

  $ 1,580.2      $ 1,434.4      $ 145.8        10.2

Information Intelligence Group

    63.0        66.5        (3.5     (5.3

RSA Information Security

    69.7        55.0        14.7        26.7   

VMware Virtual Infrastructure

    130.7        108.7        22.0        20.2   

Corporate reconciling items

    70.4        60.7        9.7        16.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    1,913.9        1,725.3        188.6        10.9   

Gross margins:

       

Information Storage

    2,072.9        1,704.9        368.0        21.6   

Information Intelligence Group

    108.4        109.3        (0.9     (0.8

RSA Information Security

    145.2        130.8        14.4        11.0   

VMware Virtual Infrastructure

    810.1        602.8        207.3        34.4   

Corporate reconciling items

    (70.4     (60.7     (9.7     16.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross margin

    3,066.3        2,487.0        579.3        23.3   

Operating expenses:

       

Research and development (1)

    548.0        483.3        64.7        13.4   

Selling, general and administrative (2)

    1,612.9        1,343.3        269.6        20.1   

Restructuring and acquisition-related charges

    20.3        12.6        7.7        61.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    2,181.2        1,839.2        342.0        18.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    885.0        647.8        237.2        36.6   

Investment income, interest expense and other expenses

    (71.8     (10.1     (61.7     610.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    813.2        637.7        175.5        27.5   

Income tax provision

    171.1        148.7        22.4        15.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    642.1        489.1        153.0        31.3   

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

    (36.5     (16.6     (19.9     119.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to EMC Corporation

  $ 605.6      $ 472.5      $ 133.1        28.2
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the Nine Months Ended        
    September 30,
2011
    September 30,
2010
    $
Change
    %
Change
 

Cost of revenue:

       

Information Storage

  $ 4,722.6      $ 4,222.5      $ 500.1        11.8

Information Intelligence Group

    187.3        191.8        (4.5     (2.3

RSA Information Security

    277.8        160.7        117.1        72.9   

VMware Virtual Infrastructure

    390.4        306.7        83.7        27.3   

Corporate reconciling items

    209.4        180.0        29.4        16.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    5,787.6        5,061.8        725.8        14.3   

Gross margins:

       

Information Storage

    5,919.8        4,834.8        1,085.0        22.4   

Information Intelligence Group

    313.8        340.6        (26.8     (7.9

RSA Information Security

    307.5        359.8        (52.3     (14.5

VMware Virtual Infrastructure

    2,313.9        1,709.6        604.3        35.3   

Corporate reconciling items

    (209.4     (180.0     (29.4     16.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross margin

    8,645.6        7,064.7        1,580.9        22.4   

Operating expenses:

       

Research and development (3)

    1,589.0        1,395.9        193.1        13.8