10-K 1 emc-2012123110xk.htm FORM 10-K EMC-2012.12.31 10-K



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-K 
 
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number 1-9853
EMC CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts
 
04-2680009
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
176 South Street
Hopkinton, Massachusetts
 
01748
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (508) 435-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 ý 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 ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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
ý
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 Act). Yes ¨ No ý
The aggregate market value of voting stock held by non-affiliates of the registrant was $53,647,086,547 based upon the closing price on the New York Stock Exchange on the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2012).
The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of January 31, 2013 was 2,104,430,304.
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to the specified portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 1, 2013.





EMC CORPORATION
 

 
 
Page No.
 
PART I
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
PART II
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 

 
 
PART III
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
 
PART IV
 
ITEM 15.
 
 
 



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FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual Report on Form 10-K 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, but not limited to, those described in Item 1A of Part I (Risk Factors). The forward-looking statements speak only as of the date of this Annual 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 Annual Report.
 
 
 
 
 
 
 
 
 

PART I

ITEM 1.        BUSINESS
The Opportunity

Throughout this report, we refer to EMC Corporation, together with its subsidiaries, as “EMC”, “we”, “us”, or “the Company.”

Our mission is to lead people and organizations on the journey to hybrid Cloud Computing. Cloud Computing offers a dramatically more efficient computing model that helps transform IT from a cost center to a value-driver. We support a broad range of customers around the world, in every major industry, in the public and private sectors, and of sizes ranging from the Fortune Global 500 to small-sized businesses.

We manage our business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure. As data centers move to a Cloud Computing model, managing information will be central to their operations. EMC Information Infrastructure provides a foundation for organizations to store, manage, protect, analyze and secure their vast and ever-increasing quantities of information, improve business agility, lower cost of ownership and enhance their competitive advantage within traditional data centers, virtual data centers and cloud-based IT infrastructures. Infrastructure for Cloud Computing is much more agile and efficient - this is achieved though virtualization. VMware Virtual Infrastructure, which is represented by EMC's majority equity stake in VMware, Inc. (“VMware”), is the leader in virtualization infrastructure solutions.

EMC was incorporated in Massachusetts in 1979. Our corporate headquarters are located at 176 South Street, Hopkinton, Massachusetts.

EMC’s Strategy, Products and Services

Industry Transformation and Opportunity

The IT industry is in transition. Cloud Computing represents one of the biggest waves of change in IT history - the way IT is built, operated and consumed will change. Cloud Computing will transform IT departments, driving them to seek new infrastructure for their data centers, new partners for their operations and to access information in new ways.

At the same time data growth is exploding: industry experts expect data to grow 50-fold from the beginning of 2010 to 2020. New, powerful cloud infrastructure represents the best platform for organizations to mine through massive quantities of “Big Data,” enabling them to identify new business opportunities or efficiencies in their operations. Big Data promises to transform business.

Finally, one of the biggest obstacles to the adoption of Cloud Computing is Trust. Despite the obvious benefits offered through Cloud Computing, IT leaders remain cautious about how to safely manage the data their businesses rely upon, while doing so in a more open and cloud-connected way.

EMC's strategy and opportunity is to deliver best-of-breed products and services that allow IT departments to move to a Cloud Computing model, analyze vast quantities of Big Data and do so in a safe and trusted way. Whether customers are expanding their traditional data centers or embracing a virtual data center or broader Cloud Computing and IT as a Service models, EMC's broad portfolio aims to meet their needs through every phase from initial assessment to design, delivery and implementation.

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Cloud Computing Transforms IT

The ultimate goal of Cloud Computing is to make IT more agile and, therefore, more responsive to business needs. To do this, the IT infrastructure must be made more efficient, so more of the IT budget can be dedicated to new projects that the business is requesting. This efficiency is achieved first through virtualizing the infrastructure - creating shared pools of network, storage and compute resources that any application can access. Next, through increased automation, the infrastructure can be less dependent on administrators. Automation not only makes things more efficient, it makes things faster and more reliable. The business then can consume IT “as a service” and understand what is being delivered, at what service level and how much it costs.

To drive the maximum efficiency and agility, data centers will increasingly become software-defined data centers. In the software-defined data center, all infrastructure is virtualized and delivered as a service while the control of the data center is largely automated by software. The virtualization platform manages policy and drives automation through integration with intelligent infrastructure systems, providing end-to-end automation and maximizing efficiency and agility.

We believe that most companies will first build a “private cloud” inside their own data center - consolidating, standardizing, virtualizing and then automating much of their existing infrastructure and running many of their existing applications. Over time, we believe there will be a number of “public clouds” delivered by trusted service providers able to run business applications at a lower cost than some IT departments. IT departments will come to rely on both private cloud and public cloud infrastructures for their operations - something called a “hybrid cloud”.

We believe companies will choose EMC to transform their IT for three reasons. We believe we can deliver the greatest improvements in efficiency of the IT infrastructure; we provide IT with a solution that leaves customers in control of their critical data and applications; and, finally, we offer the customer choice - they can retain an open architecture with an ability to run a broad range of applications on their virtual and information infrastructure and to run applications on different infrastructures.

Big Data Transforms Business

The continued growth of data in the digital universe creates a huge challenge for IT departments that must store and manage information - and do so with only an estimated 1.5 fold increase in their staffing by 2020, according to industry experts. But this Big Data also creates huge opportunities for organizations to turn all of this data into insightful information and deliver it to business users in a timely fashion.

Many modern business-critical systems now have been in place for upwards of a decade and have delivered huge increases in productivity as they automate the everyday work of many employees. Many of these business systems have amassed tens or hundreds of terabytes of data - stored, managed and protected in many cases by EMC's storage and security infrastructure. But the biggest growth in data is not occurring in these business systems - it's occurring in unstructured data such as files, videos and web logs. Unstructured data rapidly grows within organizations to petabyte scale and is not suitable to be stored, managed and analyzed by traditional IT systems.

To capitalize on the opportunity that Big Data presents, IT departments must acquire new technology, build new applications and serve insightful information up to business users in a relevant and visually appealing way. This new technology must be designed to operate at petabyte scale - employing a “scale-out” architecture. Software must be able to operate in a massively parallel way to enable vast quantities of data to be ingested and analyzed in a timely fashion. Finally, new business applications must be able to be built rapidly and serve up information so that business users can make informed decisions and take action.

Trust Accelerates Transformation

We believe that the adoption of Cloud Computing and the use of Big Data will be accelerated by an IT organization's ability to demonstrate Trust and security in Big Data assets and the cloud.

Cloud Computing architectures break the physical boundaries that define traditional and increasingly ineffective perimeter-based IT security approaches. While the value of accessing information grows and boundaries around IT environments dissolve, IT security threats are becoming stealthier and more advanced. New, intelligence-driven security approaches must analyze the flow of information to spot anomalies in user behavior and prevent or halt the loss of critical assets. We believe IT must move from an outdated approach of static security to new, dynamic security in order to secure Trust in Cloud Computing models.


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Trusted IT comes from an organization that can anticipate, identify and repel advanced threats and ensure availability of applications, systems and data in the era of Cloud Computing and Big Data.

EMC Information Infrastructure Products and Offerings

Information Storage Segment

EMC offers a comprehensive portfolio of enterprise storage systems and software - including high-end EMC VMAX and mid-tier EMC VNX storage and a portfolio of backup products that support a wide range of enterprise application workloads. EMC's two additional storage families, EMC Isilon and EMC Atmos, are specifically designed to handle vast quantities of unstructured data. As the foundation of an information infrastructure within traditional data centers, virtual data centers and cloud-based IT infrastructures, EMC storage systems can be deployed in storage area networks (SAN), networked attached storage (NAS), unified storage combining NAS and SAN, object storage and/or direct attached storage environments.

Customer adoption of EMC's storage products and offerings in 2012 was driven by storage innovations, new features and capabilities and a focused emphasis on expanding EMC's partner ecosystem. All EMC storage systems leverage the latest Intel processor technology designed to consume less energy than alternative solutions and are optimized for virtual environments. EMC has more than 90 integration points between EMC and VMware products, which is critical to customers managing and optimizing their storage in virtual data centers. VMware and virtualization integration continues to be a key competitive differentiator and enabler for EMC, helping customers realize the potential of transforming their IT to virtual infrastructures.

EMC continues to lead the mid-range storage market with its award-winning EMC VNX unified storage family, which includes the VNX and VNXe. The VNX family was created with simplicity, efficiency, affordability and performance in mind. It simplifies the deployment and management of virtualized applications, such as those from Microsoft and Oracle, as well as virtual desktop infrastructure (VDI) solutions from VMware and Citrix. The VNXe is designed for IT generalists, offering an affordable unified storage platform for smaller businesses with solution-focused software that is designed to be simple to manage, provision and protect.

In 2012, EMC extended our commitment to supporting hybrid cloud infrastructures with the EMC Storage Analytics Suite for VNX, integrating VNX storage intelligence with the analytics capabilities of the VMware vCenter Operations Management Suite - which was jointly developed and is being sold and delivered by EMC and VMware. EMC also released a new version of the VNXe in 2012, offering 50 percent more performance and capacity than the previous version.

In 2012, EMC refreshed the EMC VMAX family, consisting of the VMAX 10K, VMAX 20K and the newest member of the family, the VMAX 40K, thereby defining an entirely new class of storage with industry-leading performance and capacity. EMC also introduced an innovative technology called Federated Tiered Storage (FTS) for the VMAX family. By federating and managing other storage arrays through VMAX, FTS provides customers with an additional tier of storage, while maximizing the value of their existing storage investments - including non-EMC storage arrays. Additionally, to meet the unique needs of service providers and enterprises wanting to offer storage services to their internal clients, EMC introduced the industry's first self-service, enterprise-class delivery platform based on EMC VMAX technology to enable service providers and enterprises to power private, hybrid, and public cloud services.

EMC continues to expand and innovate across its product portfolio to maximize the performance and efficiency benefits of enterprise Flash technology. The systems support the latest in enterprise Flash technology to optimize both performance and efficiency. The EMC FAST (Fully Automated Storage Tiering) Suite enables customers to leverage the performance benefits of Flash technology in an automated and cost-effective fashion. In 2012, EMC created a new Flash Products Division, committed to innovating and bringing the industry's most comprehensive and flexible portfolio of Flash-optimized products to market. With Flash being one of the most powerful enabling technologies driving innovation within the storage market, EMC is focused on extending its lead in the enterprise Flash market, which was established in 2008 with the introduction of the storage industry's first Flash-enabled enterprise storage array. In 2012, EMC introduced a server Flash caching solution called VFcache, previewed its future all-Flash storage array through the acquisition of XtremIO, and continued to innovate our Isilon, VMAX and VNX portfolios to provide hybrid Flash arrays. This comprehensive Flash portfolio is designed to meet the storage performance needs for virtually every customer need and budget.

Through our Backup and Recovery Systems division, EMC seeks to align customers' backup and recovery infrastructures to the transformational initiatives underway at IT organizations around the globe. EMC has a portfolio of next-generation disk-based backup and recovery solutions, which includes EMC Avamar deduplication backup software and system, EMC Data Domain

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deduplication storage systems, EMC NetWorker unified backup and recovery software and EMC Disk Library for mainframe products, among others. During 2012, EMC continued to deepen the level of integration between its backup hardware and software solutions, offering new capabilities through purpose-built backup appliances. In addition, we have increased our focus on tightly integrating our backup and recovery products with enterprise applications from Oracle, SAP and Microsoft and virtual infrastructure from VMware and Microsoft. This highly integrated approach to delivering solutions for backup and recovery, disaster recovery and archiving helps users address challenges associated with exponential data growth, physical-to-virtual migration and Cloud Computing initiatives.

EMC Isilon storage systems simplify and reduce the cost to manage Big Data storage environments by offering an innovative scale-out NAS architecture that enables rapid scaling of both capacity and performance while decreasing the need for management resources. In 2012, EMC introduced new Isilon products with improved security, data protection, interoperability and native integration with the Hadoop Distributed File System (HDFS), a critical component of many Big Data environments. Isilon solutions accelerate Big Data access in areas such as design and simulation, digital media, financial analysis, and enterprise file-based workflows, among other use cases.

Greenplum, the foundation of EMC's Big Data analytics capabilities, continued to strengthen its Unified Analytics Platform in 2012 and expanded the scope of our offerings through the acquisitions of agile software development firm, Pivotal Labs, and database performance and monitoring software company, MoreVRP. 2012 also marked Greenplum's entry into the open-source arena with the launch of several new initiatives. The EMC Greenplum Analytics Workbench, a 1,000-node cluster that provides an environment for validating Apache Hadoop code base at scale, further speeds the development of Hadoop as a revolutionary technology for Big Data. Greenplum continued to expand upon its industry-leading Hadoop distribution, as the first to support virtualized Hadoop environments with VMware Hadoop Virtualized Extension; with the creation of a new deployment and management utility; and with integration with the Spring framework, which boasts hundreds of thousands of users. Greenplum's OpenChorus Project features the release of Greenplum Chorus source code under an Apache open-source license. Partners that support the OpenChorus Project include Actuate, ADVIZOR Solutions, Alpine Data Labs, Gnip, Informatica, Kaggle, Pentaho, Pervasive, SAS, Syncsort and Tableau Software. Finally, Greenplum and Kaggle joined forces to tackle the short supply and heavy demand for data scientists with an integration between the Kaggle data science community and EMC Greenplum Chorus, the platform for data science.

EMC Global Services

EMC Global Services provides strategic guidance and technology expertise to help organizations optimize and transform IT to deliver IT as a Service, unlock the value in Big Data, and secure and protect their information in order to meet their business challenges and maximize the value of their information assets and investments. With more than 15,000 service professionals and support experts worldwide, plus a global network of alliances and partners, EMC Global Services leverages proven methodologies, industry best practices and an extensive knowledge base derived from a lengthy history of working with customers to reduce risk, lower costs and speed time-to-value.

EMC's comprehensive services capabilities enable customer success by addressing the full spectrum of needs across the IT solutions lifecycle - strategize, design, deploy, operate, educate and support - in traditional, virtual and Cloud Computing environments. EMC Global Services offerings include consulting services, technology deployment and integration, managed services, customer support services, and training and certification.

In 2012, we expanded our portfolio of cloud services to help organizations accelerate the adoption, consumption, optimization and management of cloud technologies. The new cloud services align closely with VMware to facilitate joint solutions delivery, and address critical elements of delivering IT as a Service including cloud infrastructure, application modernization and end-user computing. EMC also introduced security and risk management advisory services that enable organizations to build new levels of trust and control for next-generation IT infrastructures. We continued to expand our customers' choice of support management options with the mobile EMC Support Application, and helped a growing number of organizations close a skills gap through EMC training and certification for data center architects, cloud architects and data scientists. We also expanded the EMC Academic Alliance program, which has educated more than 150,000 students in 60+ countries on information storage and management, to more than 1,000 colleges and universities worldwide.

Additionally, EMC introduced new initiatives that will help our channel partners worldwide accelerate their customers' journey to Cloud Computing, including a Cloud Builder practice that enables partners to provide advanced capabilities for the design, deployment, and operation of cloud infrastructures based on EMC technology. Also, a new Cooperative Services joint-delivery model provides service components that partners can incorporate into a larger customer deliverable using proven EMC

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methodologies, best practices and analytical tools, augmenting existing sell-through and partner-enabled delivery models to provide partners with an additional choice of how to bring EMC services to market.

RSA Information Security Segment

RSA, The Security Division of EMC, delivers security, risk and compliance solutions that enable global organizations to safeguard the integrity, confidentiality and availability of sensitive digital information throughout its lifecycle, no matter where it moves, who accesses it or how it is used. RSA offers solutions in Security Management and Compliance, including enterprise governance, risk and compliance, data loss prevention, security information management, continuous network monitoring and fraud protection; and in Identity Management and Protection, including identity assurance and access control, encryption and key management. These technologies enable organizations to discover, classify and place appropriate controls around their data, secure access to the data both inside and outside the network as well as across physical, virtual or cloud infrastructures, and monitor and enforce these measures to prove compliance with security policies and regulations.

In 2012, RSA strengthened its leadership in the information security market through several strategic initiatives, product enhancements and technology partnerships. Among these strategic initiatives was the acquisition of Silver Tail Systems, a leading web fraud detection and security software provider. Silver Tail's Big Data approach to fighting cybercrime will help accelerate RSA's strategy to leverage data analytics and adaptive risk-based controls for broader consumer and enterprise security use cases. RSA also acquired Silicium Security whose endpoint monitoring technology has added vital threat detection and mitigation capabilities to the RSA Advanced Cyber Defense Services.

RSA introduced a number of innovative solutions throughout the year including the aforementioned RSA Advanced Cyber Defense Services which helps commercial and public sector customers with cyber attack preparedness and incident response. Significant product updates were released in 2012 including the RSA Archer GRC platform as well as RSA's flagship risk-based RSA Adaptive Authentication solution that currently helps protect more than 300 million online identities worldwide. RSA also introduced RSA Distributed Credential Protection, a unique innovation from RSA Labs designed to help web portal operators and large enterprises mitigate the risk of stolen passwords and other stored credentials and secrets from cyber attacks. Finally, RSA expanded strategic and technology partnerships with leading consulting company Booz Allen Hamilton, cloud security service provider ZScaler and multiple partners in mobility including Citrix, Good, Juniper and VMware.

Information Intelligence Group Segment

EMC's Information Intelligence Group (IIG) helps global organizations transform their business with software, cloud solutions and services that connect information to work. The division's strategy is comprised of four key elements: supporting the new user in the post-PC era by simplifying the user experience and supporting device mobility; accelerating our customers' journey to the cloud; providing pervasive governance solutions for customers to understand and secure their information; and finally, to help customers transform their business with solutions.

The IIG portfolio is comprised of EMC Documentum xCP for building dynamic business and case management solutions, and can serve as an action engine for Big Data. EMC Captiva for intelligent enterprise capture, EMC Document Sciences for customer communications management, EMC SourceOne Kazeon for eDiscovery, the EMC Documentum platform for creating, managing and deploying business applications and solutions and the EMC OnDemand private cloud deployment model for enterprise-class applications.

In 2012, IIG acquired Syncplicity, a cloud-based file sync and share company, to enrich our collaboration offerings, and expanded our vertical-specific content management solutions. IIG has a rich community of developers and a robust ecosystem of partners for helping customers develop, deploy and integrate comprehensive business solutions. Customers rely on IIG to collaborate, manage, access, distribute and control information securely from anywhere, at any time, from any device.

VMware Virtual and Cloud Infrastructure Products and Offerings

VMware is the leader in virtualization infrastructure solutions utilized by organizations to help transform the way they build, deliver and consume IT resources. VMware virtualization and cloud solutions reflect a pioneering approach to computing that separates application software from the underlying hardware to help achieve improvements in efficiency, agility, availability, flexibility and manageability.  VMware seeks to expand its role as a pioneer of virtualization technologies that simplify IT infrastructure throughout the data center and to the virtual workspace. VMware's broad and proven suite of virtualization technologies address a range of complex IT problems that includes cost and operational inefficiencies, facilitating access to Cloud

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Computing capacity, business continuity, and corporate end-user computing device management. VMware solutions run on industry-standard desktop computers and servers to support a wide range of operating system and application environments, as well as networking and storage infrastructures.

VMware's solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity that can be allocated dynamically, securely and reliably to applications as needed, increasing hardware utilization and reducing spending. The benefits to VMware customers include lower IT costs, cost-effective high availability across a wide range of applications and a more automated and resilient systems infrastructure capable of responding dynamically to variable business demands.

In 2012, VMware released VMware vCloud Suite 5.1, which includes its flagship technology, VMware vSphere. VMware vCloud Suite is the first integrated solution designed to meet the requirements of the software-defined data center ("SDDC") by pooling industry-standard hardware and running compute, networking, storage and management functions in the data center as software-defined services. Additionally, significant updates were made to VMware's portfolio of end-user computing solutions, including VMware View 5.1.

To support VMware's strategy for the software-defined data center, VMware acquired several technology companies in 2012, including DynamicOps, Nicira and Wanova.

Pivotal Initiative

The industry-wide transition to Cloud Computing and the vast quantities of Big Data present a significant opportunity for both VMware and EMC to provide thought and technology leadership, not only at the infrastructure level, but also across the rapidly growing and fast-moving application development and Big Data markets.  To capitalize on this opportunity, in December 2012, VMware and EMC announced the commitment of technology, people and programs from both companies to focus on Big Data Analytics and Cloud Application Platforms under one virtual organization. 

This virtual organization, currently called the Pivotal Initiative, is led by Paul Maritz, Chief Strategist of EMC, and will include most employees and resources working within EMC's Greenplum and Pivotal Labs organizations, VMware's vFabric (including Spring and Gemfire), Cloud Foundry and Cetas organizations, as well as related efforts. 

Markets and Distribution Channels

Markets

EMC targets organizations around the world, in every industry, in the public and private sectors, and of every size ranging from the Fortune Global 500 to small businesses and individual consumers.

Distribution Channels

We market our products through direct sales and through multiple distribution channels. We have a direct sales presence throughout North America, Latin America, Europe, the Middle East, South Africa and the Asia Pacific region. We also have agreements in place with many distributors, systems integrators, resellers, and original equipment manufacturers (“OEMs”). These agreements, subject to certain terms and conditions, enable these companies to market and resell certain EMC systems, software and related services.

In 2012, EMC had a record number of active selling partners contributing revenue to EMC, with balanced performance across all partner sizes, types and maturities. This success can be attributed to having a combination of a broad product portfolio and a program that rewards partners who are trained to effectively position, sell and service EMC products. We announced new initiatives and products to enable our worldwide network of channel partners to accelerate their customers' journey to Cloud Computing. In April, we announced EMC VSPEX Proven Infrastructure - a reference architecture that includes EMC's award-winning storage systems and next-generation backup products, along with best-of-breed virtualization, server and network technology from EMC alliance partners Brocade, Cisco, Citrix, Intel, Microsoft and VMware.  In 2012, partners sold more than 1,300 VSPEX systems.  EMC also began enabling EMC Velocity distributors worldwide with the skills and resources required to assemble multi-vendor solutions that feature EMC's award-winning unified storage systems and next-generation backup solutions. Distributors worldwide are provided with the technical training, proven methodologies and the backing of EMC's Global Services organization so they may assemble EMC VSPEX Proven Infrastructure and other EMC solutions for their reseller partners.

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Also in 2012, EMC announced a series of enhancements to the EMC Velocity Service Provider program to help service provider and reseller partners capture the potential of the cloud services market, differentiate their business in the marketplace, and provide more value to customers. One example is the launch of the Velocity Cloud Builder Practice to enable channel partners to provide advanced capabilities for the design, deployment and operation of cloud infrastructures based on EMC technology. Additionally, in 2012, we revised our Enterprise Select go-to-market program to enable channel partners to sell directly into every market segment, including small- to medium-sized businesses, mid-market and Enterprise. The revisions enable EMC's direct sales representatives to leverage our partner ecosystem by building virtual sales teams comprised of many trusted partner sales representatives to open new selling opportunities in new and existing accounts.

Technology Alliances

EMC engages in numerous alliances with other technology companies to improve the total customer experience with our products and services.

In 2012, Cisco and EMC increased the level of funding for VCE Company LLC (“VCE”). VCE, formed by Cisco and EMC with investments from VMware and Intel, represents a joint venture of four established technology leaders to develop products, services and solutions for a global partner ecosystem in the rapidly growing converged infrastructure and Cloud Computing market. VCE accelerates the adoption of converged infrastructure and cloud-based computing models that reduce the cost of IT while improving time to market and increasing business agility for our customers. Through the Vblock system, VCE delivers the industry's first and only completely integrated IT offering that combines best-of-breed network, compute, storage, management, security and virtualization technologies into a single, fully supported product with end-to-end vendor accountability. VCE accelerates time to production and significantly reduces the large percentage of IT budgets and resources that today are consumed by routine maintenance, interoperability, patch management and other operations. VCE's prepackaged solutions cover horizontal applications, such as unified communications and analytics; vertical industry offerings, such as electronic health record management and HIPAA compliance; and application development environments for deployments, such as virtual desktop infrastructure (VDI) and SAP, allowing organizations to focus on business innovation instead of integrating, validating and managing IT infrastructure.

In 2012, VCE expanded its product portfolio including new Vblock 300 and Vblock 700 updates, Cisco UCS and Nexus updates, the introduction of Vblock Data Protection incorporating EMC VPLEX, EMC RecoverPoint, EMC Data Domain and EMC Avamar into Vblock solution offerings, and support for VMware vCloud Suite 5.1. VCE established strategic alliances with CA technologies and BMC to complement management offerings from VMware, Cisco and EMC. VCE expanded and enhanced the VCE partner program and forged several key agreements incorporating Vblock systems into partners' cloud offerings.

In 2012, EMC expanded its partner ecosystem in markets globally, strengthening existing relationships and forging new ones with global and regional technology and solutions providers. EMC delivered significant technology integration and new EMC Proven solutions and best practices for SAP, Cisco, Brocade, Citrix, Microsoft, Oracle and VMware to help accelerate customers' journey to private, public or hybrid cloud. Building upon a Memorandum of Understanding signed between EMC, VMware and SAP in 2011, EMC delivered SAP HANA appliance solution for in-memory database, working with Cisco as an OEM partner. Additionally, EMC has delivered a virtual stack solution for SAP applications, encapsulating best practices that optimize SAP customer deployments for performance, resilience and manageability, including guidance for virtualizing SAP environments with an emphasis on private and hybrid clouds. EMC introduced new Microsoft offerings to help companies of all sizes enhance the management of virtualized Microsoft applications and Windows environments, including virtualized Microsoft Exchange Server, Microsoft SQL Server and Microsoft SharePoint Server, including support for all product updates delivered by Microsoft in 2012.

In 2012, EMC also launched VSPEX, a solution program for channel partners. EMC partners use VSPEX Tested and Validated private clouds so they can focus on higher value business level solutions for their customers, delivering rapid deployment of critical applications such as SharePoint, Exchange, SQL and Oracle. VSPEX supports the latest operating environments including Windows Server 2012 and vSphere 5.1, and includes full backup and recovery plus stack management via ecosystem partners.

As a core element of EMC's hybrid cloud strategy, EMC continues to establish focused and committed partnerships with service providers around the world to expand the range of options for IT organizations seeking to gain business agility through the efficiency and choice offered by Cloud Computing, without sacrificing trust or control. EMC's commitment to choice in cloud services is evidenced in changes to our Velocity Service Provider Partner program announced in 2012. The program provides focus on increasing sales, marketing, planning and education benefits for our partners with the singular goal of delivering compelling cloud services to the global IT market. We also made available business development and services creation resources to enable partners to develop differentiated offerings built on EMC technology as well as marketing support including market development funds, campaigns, field execution and sales enablement tools. The Velocity Service Provider program is open to cloud service

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providers of all kinds, including telco/cableco, hosters, outsourcers, ISVs, resellers, value added resellers, distributors and enterprises. The program has evolved to enable qualified partner companies to participate and capture cloud opportunities.

Manufacturing and Quality

We conduct operations utilizing a formal, documented quality management system to ensure that our products as well as services satisfy customer needs and expectations. The quality management system also provides the framework for continual improvement of our processes and products. This system is certified to the ISO 9001 International Standard. Several additional ISO 9001 certifications are maintained for sales and service operations worldwide. We have also implemented Lean Six Sigma methodologies to ensure that the quality of our designs, manufacturing, test processes and supplier relationships are continually improved. Our storage systems’ manufacturing and test facilities in Massachusetts, North Carolina and Ireland are certified to the ISO 14001 International Standard for environmental management systems. EMC’s Franklin, Massachusetts, Apex, North Carolina and Cork, Ireland manufacturing facilities have achieved OHSAS 18001 certification, an international standard for facilities with world-class safety and health management systems. We also maintain Support Center Practices certification for our primary customer support centers. These internationally-recognized endorsements of ongoing quality and environmental management are among the highest levels of certifications available.

We maintain a robust Supplier Code of Conduct, actively manage recycling processes for our returned products, have won an Environmental Steward Award and are also certified by the Environmental Protection Agency as a Smartway Transport Partner.

Our hardware products are assembled and tested primarily at our facilities in the United States and Ireland or at global manufacturing service suppliers. We work closely with our suppliers to design, assemble and test product components in accordance with production standards and quality controls established by us. Our software products are designed, developed and tested primarily at our facilities in the United States and abroad. The products are tested to meet our quality standards.

Product Components

We purchase many sophisticated components and products from an approved list of qualified suppliers. Our products utilize industry-standard and semi-custom components and subsystems. Among the most important components that we use are disk drives, solid-state drives, high density memory components, microcontrollers and power supplies. While such components are generally available, we have experienced delivery delays from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements.

Research and Development

We continually enhance our existing products and develop new products to meet changing customer requirements. In 2012, 2011 and 2010, our research and development (“R&D”) expenses totaled $2,559.6 million, $2,149.8 million and $1,888.0 million, respectively. We support our R&D efforts through state-of-the-art development labs worldwide. See Item 2, Properties.

Backlog

We produce our products on the basis of our forecast of near-term demand and maintain inventory in advance of receipt of firm orders from customers. We configure to customer specifications and generally deliver products shortly after receipt of the order. Service engagements are also included in certain orders. Customers generally may reschedule or cancel orders with little or no penalty. We believe that our backlog at any particular time is not meaningful because it is not necessarily indicative of future sales levels.

Competition

We compete with many companies in the markets we serve, including companies that offer a broad spectrum of IT products and services and others that offer specific information storage, protection, security, management and intelligence, data analytics or virtualization products or services. We believe that most of these companies compete based on their market presence, products, service or price. Some of these companies also compete by offering information storage, information governance, security or virtualization-related products or services, together with other IT products or services, at minimal or no additional cost in order to preserve or gain market share.


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We believe that we have a number of competitive advantages over these companies, including product, distribution and service. We believe the advantages in our products include quality, breadth of offerings, performance, functionality, scalability, availability, interoperability, connectivity, time-to-market enhancements and total value of ownership. We believe our advantages in distribution include the world’s largest information infrastructure-focused direct sales force and a broad network of channel partners. We believe our advantages in service include our ability to provide our customers with a full range of expertise before, during and after their purchase of solutions from us or other vendors.

Seasonality

We generally experience the lowest demand for our products and services in the first quarter of the year and the greatest demand for our products and services in the last quarter of the year, which is consistent with the seasonality of the IT industry as a whole.

Intellectual Property

We generally rely on patent, copyright, trademark and trade secret laws and contract rights to establish and maintain our proprietary rights in our technology and products. While our intellectual property rights are important to our success, we believe that our business as a whole is not materially dependent on any particular patent, trademark, license or other intellectual property right.

We have been granted or own by assignment approximately 3,400 patents issued by, and have approximately 2,200 patent applications pending with, the U.S. Patent and Trademark Office, as well as a corresponding number of international patents and patent applications. While the durations of our patents vary, we believe that the durations of our patents are adequate relative to the expected lives of our products.

We have used, registered or applied to register certain trademarks and copyrights in the United States and in other countries. We also license certain technology from third parties for use in our products and processes and license some of our technologies to third parties.

Employees

As of December 31, 2012, we had approximately 60,000 employees worldwide, of which approximately 13,800 were employed by or working on behalf of VMware. None of our domestic employees is represented by a labor union, and we have never suffered an interruption of business as a result of a labor dispute. We consider our relations with our employees to be good.

Financial Information About Segments, Foreign and Domestic Operations and Export Sales

EMC operates its 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.

Sales and marketing operations outside the United States are conducted through sales subsidiaries and branches located principally in Europe, Latin America and the Asia Pacific region. We have five manufacturing facilities: two in Massachusetts, which manufacture storage products and security products for the North American markets; two in Ireland, which manufacture storage products and security products for markets outside of North America; and one in North Carolina, which manufactures storage products for domestic markets. We also utilize contract manufacturers throughout the world to manufacture or assemble our Data Domain, Isilon, Iomega and, in limited amounts, other information infrastructure products. See Note S to the consolidated financial statements for information about revenues by segment and geographic area.

Sustainability

We believe that investing in a sustainable future makes EMC a stronger and healthier company and creates long-term value for our shareholders and other stakeholders. Sustainable business practices create financial value by generating savings from more efficient products and operations, and revenues from leveraging new market opportunities. Incorporating principles of sustainability in our product designs, operations, and decision-making enhances our resilience and agility in the face of global social and environmental events. And our commitment to a healthy future plays an increasingly important role in attracting, retaining and energizing our talent pool.

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EMC's sustainability efforts are founded on three pillars: Sustaining Ecosystems (the environmental dimension), Strengthening Communities (the social dimension) and Delivering Value (the economic dimension). These pillars are built on a foundation of Transformative IT: the transformation of how IT products are designed, produced, used and managed at end of life; how IT services are delivered, secured and consumed; and how information is leveraged to derive new knowledge for business and society.

Our commitment to Sustaining Ecosystems centers upon addressing and reporting on the areas in which our business has the largest impacts - direct or indirect - and the greatest potential to drive change. Accordingly, our top environmental priorities continue to be energy use and climate change, and material use and waste.

Our primary greenhouse gas (“GHG”) emissions arise indirectly from the generation and transmission of electricity needed to run our business and even more, to power our products at customer sites. Therefore, our energy and climate change strategy is focused on increasing energy efficiency in our products as well as our facilities and data centers; supplying technology that enables energy efficient operations in our customers' data centers; engaging with suppliers to reduce emissions in the supply chain; and leveraging the transformative power of technology to reduce global energy demand.

We have set global targets to reduce our energy consumption and GHG emissions with a long-term objective of an absolute reduction of 80% in emissions in accordance with the Intergovernmental Panel on Climate Change's (IPCC's) Fourth Assessment Report recommendations. We achieved our 2012 goal to reduce our GHG intensity 30% per US$M revenue over 2005 and we are working toward goals of a 40% reduction in GHG intensity and in energy consumed per employee. In 2012, we submitted our fifth annual GHG disclosure report to the Carbon Disclosure Project.

Material use and waste is a second major area of impact for the IT industry. We are continuously pursuing opportunities to reduce material used in our products and operations, recycle what cannot be reused, and handle any waste with integrity and responsibility for the environment and human health. We are working with our suppliers and industry peers to identify substitutes for materials that can damage our ecology and human health. For example, we have eliminated the use of leaded solder in our products and reduced brominated flame retardants by greater than 50% in all new printed circuit boards. We are currently working with our suppliers to evaluate alternatives for the use of phthalates, a material of high concern, in our products. We have also identified and qualified a plasticizer for our cable sheathing that is free of halogens, PVCs, and phthalates though demand within the industry is not yet sufficient to mitigate the supply chain risks of switching to this substitute material.

Our global eWaste program offers product take back to all of our customers worldwide to help ensure those products are recycled or disposed of responsibly and in compliance with the law. Our published principles include commitments to avoid shipment of eWaste from OECD to non-OECD countries, and to ensure that no prison, child or forced labor is used in the processing of our eWaste. We are requiring our disposal suppliers to be properly certified by third parties, and in 2012, developed an audit protocol and program, meeting our commitment to complete independent audits of 80% of those suppliers.

EMC has a relatively small operational water footprint, with our primary usage in general building operations such as drinking, cooling and sanitation. However, water is required to generate and transmit the energy we consume, and energy is used to supply the water we use. Our suppliers also use water in their operations to produce the material components in our products. Because water conservation and efficiency activities save energy and help reduce the carbon emissions generated from these activities, we have taken a conscientious approach to conserving this important resource. In our owned and operated facilities, we minimize water use and manage wastewater streams to protect local water quality, and our manufacturing facilities produce no industrial wastewater. In 2012, we submitted our second water disclosure report to the Carbon Disclosure Project.

Environmental and social responsibility within our supply chain is central to our sustainability principles. EMC is committed to establishing and maintaining a world-class supply network in a competitive landscape. We work directly with suppliers in more than 20 countries, and rely indirectly on many more. We believe it is critical that conditions in our global supply chain be fair and legal, and that they protect human health and the environment. In support of these goals, we engage suppliers through our Supply Chain Social and Environmental Responsibility program. Given the complexity of supply chains and supplier relationships, we have different degrees of control and influence on these suppliers. However, we believe we must continually engage with our suppliers to develop a shared mindset and drive positive change throughout our supply chain.

We are advancing social sustainability efforts in our workforce and our communities by cultivating a collaborative and inclusive workplace, and building open and honest relationships with stakeholders. EMC and our employees invest time, talent and funds to support global education initiatives to strengthen educational systems, particularly in the area of science, technology, engineering and math education, and we leverage our technology to digitally preserve and protect cultural treasures for future generations. We

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hold ourselves, our suppliers, and our partners to high standards in protecting human rights and our beliefs, including that freedom of expression is a basic human right, are embodied in our Global Labor and Human Rights Principles.

We actively engage with internal and external stakeholders to help improve our performance and sustainability reporting. In 2012, we continued our dialogue with key stakeholders and published our annual sustainability report “Transformation with Purpose” which is based upon the Global Reporting Initiative framework and incorporated feedback from our multi-stakeholder forum.

EMC is proud to have been listed in the 2012 Dow Jones Sustainability Index for North America for the second consecutive year.

Please see EMC's most current sustainability report for more information about EMC's sustainability initiatives and performance.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on or through our website at www.emc.com as soon as reasonably practicable after such reports are filed with, or furnished to, the Securities and Exchange Commission (the SEC). The SEC also maintains a website, www.sec.gov, that contains reports and other information regarding issuers that file electronically with the SEC. Copies of our (i) Corporate Governance Guidelines, (ii) charters for the Audit Committee, Leadership and Compensation Committee, Corporate Governance and Nominating Committee, Mergers and Acquisitions Committee and Finance Committee and (iii) Business Conduct Guidelines (code of business conduct and ethics) are available at www.emc.com/corporate/investor-relations/governance/corporate-governance.htm. Copies will be provided to any shareholder upon request. Please go to www.emc.com/corporate/investor-relations/index.htm to submit an electronic request, or send a written request to EMC Investor Relations, 176 South Street, Hopkinton, MA 01748. None of the information posted on our website is incorporated by reference into this Annual Report.

ITEM 1A.    RISK FACTORS
The risk factors that appear below could materially affect our business, financial condition and results of operations. The risks and uncertainties described below are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies.

Our business could be materially adversely affected as a result of general economic and market conditions.

We are subject to the effects of general global economic and market conditions that are beyond our control. If these conditions remain challenging or deteriorate, our business, results of operations or financial condition could be materially adversely affected. Possible consequences from macroeconomic global challenges such as the debt crisis in certain countries in the European Union or slowing economies in parts of Asia, or the impact of continuing uncertainty associated with the budget “sequestration” in the United States government on our business, including insolvency of key suppliers resulting in product delays, inability of customers to obtain credit to finance purchases of our products, customer insolvencies, increased risk that customers may delay payments, fail to pay or default on credit extended to them, and counterparty failures negatively impacting our treasury operations, could have a material adverse effect on our results of operations or financial condition.

Our business could be materially adversely affected as a result of a lessening demand in the information technology market.

Our revenue and profitability depend on the overall demand for our products and services. Delays or reductions in IT spending could materially adversely affect demand for our products and services which could result in decreased revenues or earnings.

Our customers operate in a variety of sectors and across many geographies. Any adverse effects to such markets could materially adversely affect demand for our products and services which could result in decreased revenues or earnings.

Competitive pricing, sales volume, mix and component costs could materially adversely affect our revenues, gross margins and earnings.

Our gross margins are impacted by a variety of factors, including competitive pricing, component and product design costs as well as the volume and relative mixture of product and services revenues. Increased component costs, increased pricing pressures,

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the relative and varying rates of increases or decreases in component costs and product price, changes in product and services revenue mixture or decreased volume could have a material adverse effect on our revenues, gross margins or earnings.

The costs of third-party components comprise a significant portion of our product costs. While we generally have been able to manage our component and product design costs, we may have difficulty managing such costs if supplies of certain components become limited or component prices increase. Any such limitation could result in an increase in our component costs. An increase in component or design costs relative to our product prices could have a material adverse effect on our gross margins and earnings. Moreover, certain competitors may have advantages due to vertical integration of their supply chain, which may include disk drives, microprocessors, memory components and servers.

The markets in which we do business are highly competitive, and we may encounter aggressive price competition for all of our products and services from numerous companies globally. There also has been and may continue to be a willingness on the part of certain competitors to reduce prices or provide information infrastructure and virtual infrastructure products or services, together with other IT products or services, at minimal or no additional cost in order to preserve or gain market share. Such price competition may result in pressure on our product and service prices, and reductions in product and service prices may have a material adverse effect on our revenues, gross margins and earnings.

If our suppliers are not able to meet our requirements, we could have decreased revenues and earnings.

We purchase or license many sophisticated components and products from one or a limited number of qualified suppliers, including some of our competitors. These components and products include flash drives, disk drives, high density memory components, power supplies and software developed and maintained by third parties. We have experienced delivery delays from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. Natural disasters have also in the past and may continue to impact our ability to procure certain components in a timely fashion. Current or future social and environmental regulations or critical issues, such as those relating to the sourcing of conflict minerals from the Democratic Republic of the Congo or the need to eliminate environmentally sensitive materials from our products, could restrict the supply of resources used in production or increase our costs. If any of our suppliers were to cancel or materially change contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell certain products cost-effectively or on a timely basis, if at all, and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition. Additionally, we periodically transition our product line to incorporate new technologies. The importance of transitioning our customers smoothly to new technologies, along with our historically uneven pattern of quarterly sales, intensifies the risk that the failure of a supplier to meet our quality or delivery requirements will have a material adverse impact on our revenues and earnings. An economic crisis may also negatively affect our suppliers’ solvency, which could, in turn, result in product delays or otherwise materially adversely affect our business, results of operations or financial condition.

Our financial performance is impacted by the financial performance of VMware.

Because we consolidate VMware’s financial results in our results of operations, our financial performance will be impacted by the financial performance of VMware. VMware’s financial performance may be affected by a number of factors, including, but not limited to:

general economic conditions in their domestic and international markets and the effect that these conditions have on VMware’s customers’ capital budgets and the availability of funding for software purchases;
fluctuations in demand, adoption rates, sales cycles and pricing levels for VMware’s products and services;
fluctuations in foreign currency exchange rates;
changes in customers’ budgets for information technology purchases and in the timing of their purchasing decisions;
VMware’s ability to compete with existing or increased competition;
the timing of recognizing revenues in any given quarter, which, as a result of software revenue recognition policies, can be affected by a number of factors, including product announcements, beta programs and product promotions that can cause revenue recognition of certain orders to be deferred until future products to which customers are entitled become available;
the sale of VMware’s products in the timeframes anticipated, including the number and size of orders in each quarter;

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VMware’s ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer demand, certification requirements and technical requirements;
the introduction of new pricing and packaging models for VMware’s product offerings;
the timing of the announcement or release of upgrades or new products by VMware or by its competitors;
VMware’s ability to maintain scalable internal systems for reporting, order processing, license fulfillment, product delivery, purchasing, billing and general accounting, among other functions;
VMware’s ability to control costs, including its operating expenses;
changes to VMware’s effective tax rate;
the increasing scale of VMware’s business and its effect on VMware’s ability to maintain historical rates of growth;
VMware’s ability to attract and retain highly skilled employees, particularly those with relevant experience in software development and sales;
VMware’s ability to conform to emerging industry standards and to technological developments by its competitors and customers;
renewal rates for enterprise license agreements, or ELA’s, as original ELA terms expire;
the timing and amount of software development costs that may be capitalized beginning when technological feasibility has been established and ending when the product is available for general release;
unplanned events that could affect market perception of the quality or cost-effectiveness of VMware’s products and solutions; and
the recoverability of benefits from goodwill and acquired intangible assets and the potential impairment of these assets.

Our stock price is volatile and may be affected by the trading price of VMware Class A common stock.

Our stock price, like that of other technology companies, is subject to significant volatility because of factors such as:

the announcement of acquisitions, new products, services or technological innovations by us or our competitors;
quarterly variations in our operating results;
changes in revenue or earnings estimates by the investment community; and
speculation in the press or investment community.

The trading price of our common stock has been and likely will continue to be affected by various factors related to VMware, including:

the trading price for VMware Class A common stock;
actions taken or statements made by us, VMware, or others concerning our relationship with VMware; and
factors impacting the performance of VMware, including those discussed in the prior risk factor.

In addition, although we own a majority of VMware and consolidate their results, our stock price may not reflect our pro rata ownership interest of VMware.

We may be unable to keep pace with rapid industry, technological and market changes.

The markets in which we compete are characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing needs of customers. There can be no assurance that our existing products will be properly positioned in the market or that we will be able to introduce new or enhanced products into the market on a timely basis, or at all. We spend a considerable amount of money on research and development and introduce new products from time to time. There can be no assurance that enhancements to existing products and solutions or new products and solutions will receive customer acceptance. As competition in the IT industry increases, it may become increasingly difficult for us to maintain a technological advantage and to leverage that advantage toward increased revenues and profits. In addition, there can be no assurance that our vision of enabling hybrid Cloud Computing, Big Data and Trust through infrastructure and application transformation will be accepted or validated in the marketplace.


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Risks associated with the development and introduction of new products include delays in development and changes in data storage, networking virtualization, infrastructure management, information security and operating system technologies which could require us to modify existing products. Risks inherent in the transition to new products include:

the difficulty in forecasting customer preferences or demand accurately;
the inability to expand production capacity to meet demand for new products;
the inability to successfully manage the interoperability and transition from older products;
the impact of customers’ demand for new products on the products being replaced, thereby causing a decline in sales of existing products and an excessive, obsolete supply of inventory; and
delays in initial shipments of new products.

Further risks inherent in new product introductions include the uncertainty of price-performance relative to products of competitors, competitors’ responses to the introductions and the desire by customers to evaluate new products for extended periods of time. Our failure to introduce new or enhanced products on a timely basis, keep pace with rapid industry, technological or market changes or effectively manage the transitions to new products or new technologies could have a material adverse effect on our business, results of operations or financial condition.

The markets we serve are highly competitive, and we may be unable to compete effectively.

We compete with many companies in the markets we serve, certain of which offer a broad spectrum of IT products and services and others which offer specific information storage, protection, security, management, virtualization and intelligence products or services. Some of these companies (whether independently or by establishing alliances) may have substantially greater financial, marketing and technological resources, larger distribution capabilities, earlier access to customers and greater opportunity to address customers’ various IT requirements than us. In addition, as the IT industry consolidates, companies may improve their competitive position and ability to compete against us. We compete on the basis of our products’ features, performance and price as well as our services. Our failure to compete on any of these bases could affect demand for our products or services, which could have a material adverse effect on our business, results of operations or financial condition.

Companies may develop new technologies or products in advance of us or establish business models or technologies disruptive to us. Our business may be materially adversely affected by the announcement or introduction of new products, including hardware and software products and services by our competitors, and the implementation of effective marketing or sales strategies by our competitors. The material adverse effect to our business could include a decrease in demand for our products and services and an increase in the length of our sales cycle due to customers taking longer to compare products and services and to complete their purchases.

We may have difficulty managing operations.

Our future operating results will depend on our overall ability to manage operations, which includes, among other things:

retaining and hiring, as required, the appropriate number of qualified employees;
managing, protecting and enhancing, as appropriate, our infrastructure, including but not limited to, our information systems (and such systems’ ability to protect confidential information residing on the systems) and internal controls;
accurately forecasting revenues;
training our sales force to sell effectively, given the breadth of our offerings;
successfully integrating new acquisitions;
managing inventory levels, including minimizing excess and obsolete inventory, while maintaining sufficient inventory to meet customer demands;
controlling expenses;
managing our manufacturing capacity, real estate facilities and other assets;
meeting our sustainability goals; and
executing on our plans.


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An unexpected decline in revenues without a corresponding and timely reduction in expenses or a failure to manage other aspects of our operations could have a material adverse effect on our business, results of operations or financial condition.

Our investment portfolio could experience a decline in market value which could adversely affect our financial results.

We held $6.6 billion in short- and long-term investments as of December 31, 2012. The investments are invested primarily in investment grade debt securities, and we limit the amount of investment with any one issuer. A further deterioration in the economy, including a tightening of credit markets, increased defaults by issuers, or significant volatility in interest rates, including the downgrade of U.S. government debt, could cause the investments to decline in value or could impact the liquidity of the portfolio. If market conditions deteriorate significantly, our results of operations or financial condition could be materially adversely affected.

Our business may suffer if we are unable to retain or attract key personnel.

Our business depends to a significant extent on the continued service of senior management and other key employees, the development of additional management personnel and the hiring of new qualified employees. There can be no assurance that we will be successful in retaining existing personnel or recruiting new personnel. The loss of one or more key or other employees, our inability to attract additional qualified employees or the delay in hiring key personnel could have a material adverse effect on our business, results of operations or financial condition.

Our quarterly revenues and earnings could be materially adversely affected by uneven sales patterns and changing purchasing behaviors.

Our quarterly sales have historically reflected an uneven pattern in which a disproportionate percentage of a quarter’s total sales occur in the last month and weeks and days of each quarter. This pattern makes prediction of revenues, earnings and working capital for each financial period especially difficult and uncertain and increases the risk of unanticipated variations in quarterly results and financial condition. We believe this uneven sales pattern is a result of many factors including:

the relative dollar amount of our product and services offerings in relation to many of our customers’ budgets, resulting in long lead times for customers’ budgetary approval, which tends to be given late in a quarter;
the tendency of customers to wait until late in a quarter to commit to purchase in the hope of obtaining more favorable pricing from one or more competitors seeking their business;
the fourth-quarter influence of customers spending their remaining capital budget authorization prior to new budget constraints in the first nine months of the following year; and
seasonal influences.

Our uneven sales pattern also makes it extremely difficult to predict near-term demand and adjust manufacturing capacity or our supply chain accordingly. If predicted demand is substantially greater than orders, there will be excess inventory. Alternatively, if orders substantially exceed predicted demand, the ability to assemble, test and ship orders received in the last weeks and days of each quarter may be limited, which could materially adversely affect quarterly revenues and earnings.

In addition, our revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and our backlog at any particular time is not necessarily indicative of future sales levels. This is because:

we assemble our products on the basis of our forecast of near-term demand and maintain inventory in advance of receipt of firm orders from customers;
we generally ship products shortly after receipt of the order; and
customers may generally reschedule or cancel orders with little or no penalty.

Loss of infrastructure, due to factors such as an information systems failure, loss of public utilities, natural disasters or extreme weather conditions, could impact our ability to book orders or ship products in a timely manner. Delays in product shipping or an unexpected decline in revenues without a corresponding and timely slowdown in expenses, could intensify the impact of these factors on our business, results of operations and financial condition.


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In addition, unanticipated changes in our customers’ purchasing behaviors such as customers taking longer to negotiate and complete their purchases or making smaller, incremental purchases based on their current needs, also make the prediction of revenues, earnings and working capital for each financial period difficult and uncertain and increase the risk of unanticipated variations in our quarterly results and financial condition.

Risks associated with our distribution channels may materially adversely affect our financial results.

In addition to our direct sales force, we have agreements in place with many distributors, systems integrators, resellers and original equipment manufacturers to market and sell our products and services. We derive a significant percentage of our revenues from such distribution channels. Our financial results could be materially adversely affected if our contracts with channel partners were terminated, if our relationship with channel partners were to deteriorate, if the financial condition of our channel partners were to weaken, if our channel partners were not able to timely and effectively implement their planned actions or if the level of demand for our channel partners’ products and services were to decrease. In addition, as our market opportunities change, we may have an increased reliance on channel partners, which may negatively impact our gross margins. There can be no assurance that we will be successful in maintaining or expanding these channels. If we are not successful, we may lose sales opportunities, customers and market share. Furthermore, the partial reliance on channel partners may materially reduce the visibility to our management of potential customers and demand for products and services, thereby making it more difficult to accurately forecast such demand. In addition, there can be no assurance that our channel partners will not develop, market or sell products or services or acquire other companies that develop, market or sell products or services in competition with us in the future.

In addition, as we focus on new market opportunities and additional customers through our various distribution channels, including small-to-medium sized businesses, we may be required to provide different levels of service and support than we typically provided in the past. We may have difficulty managing directly or indirectly through our channels these different service and support requirements and may be required to incur substantial costs to provide such services which may adversely affect our business, results of operations or financial condition.

Due to the global nature of our business, political, economic or regulatory changes or other factors in a specific country or region could impair our international operations, future revenue or financial condition.

A substantial portion of our revenues is derived from sales outside the United States including, increasingly, in rapid growth markets such as Brazil, Russia, India and China. In addition, a substantial portion of our products is manufactured outside of the United States. Accordingly, our future results could be materially adversely affected by a variety of factors relating to our operations outside the United States, including, among others, the following:

changes in foreign currency exchange rates;
changes in a specific country’s or region’s economic conditions;
political or social unrest;
trade restrictions;
import or export licensing requirements;
the overlap of different tax structures or changes in international tax laws;
changes in regulatory requirements;
difficulties in staffing and managing international operations;
stringent privacy policies in some foreign countries;
compliance with a variety of foreign laws and regulations; and
longer payment cycles in certain countries.

Foreign operations, particularly in those countries with developing economies, are also subject to risks of violations of laws prohibiting improper payments and bribery, including the U.S. Foreign Corrupt Practices Act and similar regulations in foreign jurisdictions. Although we implement policies and procedures designed to ensure compliance with these laws, our employees, contractors and agents may take actions in violation of our policies. Any such violations, even if prohibited by our policies, could subject us to civil or criminal penalties or otherwise have an adverse effect on our business and reputation.


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In addition, we hold a significant portion of our cash and investments in our international subsidiaries. Potential regulations could impact our ability to transfer the cash and investments to the United States. Should we desire to repatriate cash, we may incur a significant tax obligation.

We operate a Venezuelan sales subsidiary in which the Bolivar is the functional currency. Due to limitations in accessing the dollar at the official exchange rate, we have utilized an implied currency rate derived from actively traded bonds in order to translate the foreign currency denominated balance sheet. This rate is analogous to the “System for Transactions in Foreign Currency Securities” or SITME rate. Our operations in Venezuela include U.S. dollar-denominated assets and liabilities which we remeasure to Bolivars. The remeasurement may result in transaction gains or losses. We have used either the official exchange rate or implied exchange rate to remeasure these balances based upon the expected rate at which we believe the items will be settled. As a result of continued hyper-inflation in Venezuela, effective in 2010, we modified the functional currency to be the U.S. dollar. As a result of this change, Bolivar-denominated transactions will be subject to exchange gains and losses that may impact our earnings. While we do not believe this change will have a material impact on our financial position, results of operations or cash flows, these items could be adversely affected if there is a significant change in exchange rates.

Cybersecurity breaches could expose us to liability, damage our reputation, compromise our ability to conduct business, require us to incur significant costs or otherwise adversely affect our financial results.

We retain sensitive data, including intellectual property, proprietary business information and personally identifiable information, in our secure data centers and on our networks. We face a number of threats to our data centers and networks of unauthorized access, security breaches and other system disruptions. It is critical to our business strategy that our infrastructure remains secure and is perceived by customers and partners to be secure. Despite our security measures, our infrastructure may be vulnerable to attacks by hackers or other disruptive problems, such as the sophisticated cyber attack on our RSA division that we disclosed in March 2011. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of our, our customers’, our business partners’ or our employees’ intellectual property, proprietary business information or personally identifiable information. In addition, we have outsourced a number of our business functions to third party contractors, and any breach of their security systems could adversely affect us.

A cybersecurity breach could negatively affect our reputation as a trusted provider of information infrastructure by adversely affecting the market’s perception of the security or reliability of our products or services. In addition, a cyber attack could result in other negative consequences, including remediation costs, disruption of internal operations, increased cybersecurity protection costs, lost revenues or litigation.

Undetected problems in our products could directly impair our financial results.

If flaws in design, production, assembly or testing of our products (by us or our suppliers) were to occur, we could experience a rate of failure in our products that would result in substantial repair, replacement or service costs and potential damage to our reputation. Continued improvement in manufacturing capabilities, control of material and manufacturing quality and costs and product testing are critical factors in our future growth. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations or financial condition.

Our business could be materially adversely affected as a result of the risks associated with alliances.

We have alliances, such as our VCE joint venture, with leading information technology companies, some of whom may be our competitors in other areas, and we plan to continue our strategy of developing key alliances in order to expand our reach into markets. There can be no assurance that we will be successful in our ongoing strategic alliances or that we will be able to find further suitable business relationships as we develop new products and strategies. Any failure to continue or expand such relationships could have a material adverse effect on our business, results of operations or financial condition.

There can be no assurance that companies with which we have strategic alliances, certain of which have substantially greater financial, marketing or technological resources than us, will not develop or market products in competition with us in the future, discontinue their alliances with us or form alliances with our competitors.


19



Our business may suffer if we cannot protect our intellectual property.

We generally rely upon patent, copyright, trademark and trade secret laws and contract rights in the United States and in other countries to establish and maintain our proprietary rights in our technology and products. However, there can be no assurance that any of our proprietary rights will not be challenged, invalidated or circumvented. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, there can be no assurance that we will be able to adequately protect our proprietary technology against unauthorized third-party copying or use, which could adversely affect our competitive position. Further, there can be no assurance that we will be able to obtain licenses to any technology that we may require to conduct our business or that, if obtainable, such technology can be licensed at a reasonable cost.

From time to time, we receive notices from third parties claiming infringement by our products of third-party patent or other intellectual property rights. Responding to any such claim, regardless of its merit, could be time-consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products or a successful claim of infringement against us requiring us to pay royalties to a third party, and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.

In addition, although we believe we have adequate security measures, if our intellectual property or other sensitive data is misappropriated, we could suffer monetary and other losses and reputational harm, which could materially adversely affect our business, results of operations or financial condition. In the past, VMware has been made aware of public postings by hackers of portions of their source code.

We may become involved in litigation that may materially adversely affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, there can be no assurance that the results of any of these actions will not have a material adverse effect on our business, results of operations or financial condition.

Issues arising during the upgrade of our enterprise resource planning system could affect our operating results and ability to manage our business effectively.

We are in the process of upgrading our enterprise resource planning, or ERP, computer system to enhance operating efficiencies and provide more effective management of our business operations. While one phase of our upgrade was implemented in the third quarter of 2012, we still have further planned phases to our upgrade. The upgrade could cause substantial business interruption that could adversely impact our operating results. We are investing significant financial and personnel resources into this project. However, there is no assurance that the design will meet our current and future business needs or that it will operate as designed. We are heavily dependent on such computer systems, and any significant failure or delay in the system upgrade, if encountered, could cause a substantial interruption to our business and additional expense which could result in an adverse impact on our operating results, cash flows and financial condition.

We may have exposure to additional income tax liabilities.

As a multinational corporation, we are subject to income taxes in both the United States and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file and changes to tax laws. From time to time, we are subject to income tax audits. While we believe we have complied with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed with additional taxes, there could be a material adverse effect on our results of operations or financial condition.

As part of the current Administration's ongoing budget negotiations, President Obama and House of Representatives and Senate committees have called for a comprehensive tax reform, which might change certain U.S. tax rules for U.S. corporations doing business outside the United States. While the scope of future changes differs among various tax proposals and remains unclear, proposed changes might include limiting the ability of U.S. corporations to deduct certain expenses attributable to offshore

20



earnings, modifying the foreign tax credit rules and taxing currently certain transfers of intangibles offshore. The enactment of some or all of these proposals could increase the Company’s effective tax rate and adversely affect our profitability.

During 2010, the IRS announced and finalized Schedule UTP, Uncertain Tax Positions Statement. This schedule is an annual disclosure of certain federal UTPs, ranked in order of magnitude which includes “a concise description of the tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the Service of the identity of the tax position.” As a result of this disclosure, the amount of taxes we would have to pay in the future could increase.

Changes in regulations could materially adversely affect us.

Our business, results of operations or financial condition could be materially adversely affected if laws, regulations or standards relating to us or our products are newly implemented or changed. In addition, our compliance with existing regulations may have a material adverse impact on us. Under applicable federal securities laws, including the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal control structure and procedures for financial reporting. Should we or our independent auditors determine that we have material weaknesses in our internal controls, our results of operations or financial condition may be materially adversely affected or our stock price may decline. In March 2010, President Obama signed into law a comprehensive health care reform package. We cannot currently determine the impact that such legislation could have on our business, results of operations or financial condition.

Changes in generally accepted accounting principles may materially adversely affect us.

From time to time, the Financial Accounting Standards Board (“FASB”) promulgates new accounting principles that could have a material adverse impact on our results of operations or financial condition. The FASB is currently contemplating a number of new accounting pronouncements which, if approved, could materially change our reported results. Such changes could have a material adverse impact on our results of operations and financial position.

Our business could be materially adversely affected as a result of the risks associated with acquisitions, investments and joint ventures.

As part of our business strategy, we seek to acquire businesses that offer complementary products, services or technologies. These acquisitions are accompanied by the risks commonly encountered in an acquisition of a business, which may include, among other things:

the effect of the acquisition on our financial and strategic position and reputation;
the failure of an acquired business to further our strategies;
the failure of the acquisition to result in expected benefits, which may include benefits relating to enhanced revenues, technology, human resources, cost savings, operating efficiencies and other synergies;
the difficulty and cost of integrating the acquired business, including costs and delays in implementing common systems and procedures and costs and delays caused by communication difficulties or geographic distances between the two companies’ sites;
the assumption of known or unknown liabilities of the acquired business, including litigation-related liability;
the potential impairment of acquired assets;
the lack of experience in new markets, products or technologies or the initial dependence on unfamiliar supply or distribution partners;
the diversion of our management’s attention from other business concerns;
the impairment of relationships with customers or suppliers of the acquired business or our customers or suppliers;
the recoverability of benefits from goodwill and intangible assets and the potential impairment of these assets;
the potential loss of key employees of the acquired company; and
the potential incompatibility of business cultures.

These factors could have a material adverse effect on our business, results of operations or financial condition. To the extent that we issue shares of our common stock or other rights to purchase our common stock in connection with any future acquisition,

21



existing shareholders may experience dilution. Additionally, regardless of the form of consideration issued, acquisitions could negatively impact our net income and our earnings per share.

In addition to the risks commonly encountered in the acquisition of a business as described above, we may also experience risks relating to the challenges and costs of closing a transaction or failing to close an announced transaction. Further, the risks described above may be exacerbated as a result of managing multiple acquisitions at the same time.

We also seek to invest in businesses that offer complementary products, services or technologies and to, from time time, create new joint ventures or alliances. These investments and ventures are accompanied by risks similar to those encountered in an acquisition of a business.

Our pension plan assets are subject to market volatility.

We have a noncontributory defined benefit pension plan assumed as part of our Data General acquisition. The plan’s assets are invested in common stocks, bonds and cash. The expected long-term rate of return on the plan’s assets was 6.75%. This rate represents the average of the expected long-term rates of return weighted by the plan’s assets as of December 31, 2012. We continue to gradually shift the asset allocation to lower the percentage of investment in equity securities and increase the percentage of investments in long-duration fixed-income securities. The effect of such change could result in a reduction in the long-term rate of return on plan assets and an increase in future pension expense. As of December 31, 2012, the ten-year historical rate of return on plan assets was 8.4%, and the inception to date return on plan assets was 9.9%. In 2012, we experienced an 13.7% gain on plan assets. Should we not achieve the expected rate of return on the plan’s assets or if the plan experiences a decline in the fair value of its assets, we may be required to contribute assets to the plan which could materially adversely affect our results of operations or financial condition.

Our business could be materially adversely affected by changes in regulations or standards regarding energy use of our products.

We continually seek ways to increase the energy efficiency of our products. Recent analyses have estimated the amount of global carbon emissions that are due to information technology products. As a result, governmental and non-governmental organizations have turned their attention to development of regulations and standards to drive technological improvements and reduce such amount of carbon emissions. There is a risk that the development of these standards will not fully address the complexity of the technology developed by the IT industry or will favor certain technological approaches. Depending on the regulations or standards that are ultimately adopted, compliance could materially adversely affect our business, results of operations or financial condition.

Our business could be materially adversely affected as a result of war, acts of terrorism, natural disasters or climate change.

Terrorist acts, acts of war, natural disasters, or the direct and indirect effects of climate change (such as sea level rise, increased storm severity, drought, flooding, wildfires, pandemics, and social unrest from resource depletion and rising food prices) may cause damage or disruption to our employees, facilities, customers, partners, suppliers, distributors and resellers, which could have a material adverse effect on our business, results of operations or financial condition. Such events may also cause damage or disruption to transportation and communication systems and to our ability to manage logistics in such an environment, including receipt of components and distribution of products.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

22



ITEM 2.        PROPERTIES
As of December 31, 2012, we owned or leased the facilities described below:
 
Location
 
Approximate Sq. Ft.*
 
Principal Use(s)
 
Principal Segment(s)
Hopkinton, MA
 
owned:
 
1,681,000

 
executive and administrative offices, R&D, customer service, sales and marketing
 
Information Storage, Information Intelligence Group
Franklin, MA
 
owned:
leased:
 
922,000
288,000

 
manufacturing
 
Information Storage
Bedford, MA
 
leased:
 
328,000

 
R&D, customer service, sales, administrative offices and marketing
 
RSA Information Security
Apex, NC
 
owned:
 
390,000

 
manufacturing
 
Information Storage
Palo Alto, CA
 
owned:
leased:
 
1,458,000
184,000

 
executive and administrative offices, R&D, sales, marketing and data center
 
VMware Virtual Infrastructure
Other North American Locations
 
owned:
leased:
 
1,215,000
4,451,000

 
executive and administrative offices, sales, customer service, R&D, data center and marketing
 
**
Asia Pacific
 
leased:
 
2,638,000

 
sales, marketing, customer service, R&D, data center and administrative offices
 
**
Cork, Ireland
 
owned:
leased:
 
588,000
136,000

 
manufacturing, customer service, R&D, administrative offices, sales and marketing
 
**
Europe, Middle East and Africa (excluding Cork, Ireland)
 
owned:
leased:
 
35,000
1,593,000

 
sales, manufacturing, customer service, R&D, data center, marketing and administrative offices
 
**
Latin America
 
leased:
 
179,000

 
sales, customer service and marketing
 
**
 
*
Of the total square feet owned and leased, approximately 364,000 square feet was vacant, approximately 112,000 square feet was leased or subleased to non-EMC businesses and approximately 1,016,000 square feet were under construction for various VMware projects.
**
All segments of our business generally utilize these facilities.

We also own land in Massachusetts and Ireland for possible future expansion purposes. We believe our existing facilities are suitable and adequate for our present purposes. For further information regarding our lease obligations, see Note N to the consolidated financial statements.

ITEM 3.        LEGAL PROCEEDINGS

See Note N to the consolidated financial statements.

ITEM 4.        MINE SAFETY DISCLOSURES

Not applicable.

23



EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name
Age
Position
Joseph M. Tucci
65
Chairman and Chief Executive Officer
William J. Teuber, Jr.  
61
Vice Chairman
Jeremy Burton
45
Executive Vice President, Product Operations and Marketing
Arthur W. Coviello, Jr.  
59
Executive Chairman, RSA, the Security Division of EMC
Paul T. Dacier
55
Executive Vice President and General Counsel
Richard R. Devenuti
54
President, Information Intelligence Group
Howard D. Elias
55
President and Chief Operating Officer, Global Enterprise Services
David I. Goulden
53
President, Chief Operating Officer and Chief Financial Officer
ML Krakauer
56
Executive Vice President, Human Resources
Paul Maritz
57
Chief Strategist
William F. Scannell
50
President, Global Sales and Customer Operations
Harry L. You
53
Executive Vice President

Joseph M. Tucci has been the Chairman of the Board of Directors since January 2006 and has been Chief Executive Officer and a Director since January 2001. He served as President from January 2000 to July 2012. He also served as Chief Operating Officer from January 2000 to January 2001. Prior to joining EMC, Mr. Tucci served as Deputy Chief Executive Officer of Getronics N.V., an information technology services company, from June 1999 through December 1999 and as Chairman of the Board and Chief Executive Officer of Wang Global, an information technology services company, from December 1993 to June 1999. Mr. Tucci is the Chairman of the Board of Directors of VMware and a director of Paychex, Inc., a provider of payroll, human resources and benefits outsourcing solutions.

William J. Teuber, Jr. has been our Vice Chairman since May 2006. In this role, Mr. Teuber assists the Chairman and Chief Executive Officer in the day-to-day management of EMC. From 2006 to July 2012, he oversaw EMC Customer Operations, our global sales and distribution organization where he was responsible for driving EMC's growth and market leadership worldwide. Mr. Teuber served as our Vice Chairman and Chief Financial Officer from May 2006 to August 2006 and as Executive Vice President and Chief Financial Officer from November 2001 to May 2006. Mr. Teuber joined EMC in 1995. Prior to serving as our Chief Financial Officer, he served as our Controller. Mr. Teuber is a director of Popular, Inc., a diversified financial services company.

Jeremy Burton has been our Executive Vice President, Product Operations and Marketing since July 2012. Mr. Burton joined EMC in March 2010 as our Chief Marketing Officer. Prior to joining EMC, Mr. Burton was President and Chief Executive Officer of Serena Software, Inc., a global independent software company. Previously, Mr. Burton was Group President of the Security and Data Management Business Unit of Symantec Corporation, a provider of security, storage and systems management solutions, where he was responsible for the company’s $2 billion Enterprise Security product line. Prior to that role, he served as Executive Vice President of the Data Management Group at VERITAS Software Corporation (now a part of Symantec) where he was responsible for the company’s backup and archiving products. He also served as VERITAS’ Chief Marketing Officer. Earlier in his career, Mr. Burton spent nearly a decade at Oracle Corporation, a large enterprise software company, ultimately in the role of Senior Vice President of Product and Services Marketing.

Arthur W. Coviello, Jr. has been our Executive Chairman, RSA, the Security Division of EMC, since February 2011. Mr. Coviello served as our Executive Vice President and President of RSA from September 2006 to February 2011. Prior to joining EMC, Mr. Coviello served as Chief Executive Officer of RSA Security Inc. from January 2000 to September 2006 and as acting Chief Financial Officer of RSA Security from December 2005 to May 2006. He served as President of RSA Security from March 1999 to September 2006. Mr. Coviello joined RSA in 1995. Mr. Coviello is a director of EnerNOC, Inc., a provider of demand response systems for energy conservation.

Paul T. Dacier has been our Executive Vice President and General Counsel since May 2006. Mr. Dacier served as Senior Vice President and General Counsel from February 2000 to May 2006 and joined EMC in 1990 as Corporate Counsel. Mr. Dacier is a director of AerCap Holdings N.V., a global aircraft leasing company.


24



Richard R. Devenuti has been our President, Information Intelligence Group, since October 2010. Mr. Devenuti served as chief operating officer of the Information Intelligence Group division from July 2008 to October 2010. Prior to joining EMC, Mr. Devenuti spent 19 years at Microsoft Corporation, a manufacturer of software products for computing devices, most recently as its Senior Vice President of Microsoft Services and IT. Prior to joining Microsoft, Mr. Devenuti spent four years at Deloitte as a senior accountant. Mr. Devenuti is a director of St. Jude Medical, Inc., a global cardiovascular medical devices company, and Convergys Corporation, a global relationship management company.

Howard D. Elias has been our President and Chief Operating Officer, Global Enterprise Services since January 2013 and was our President and Chief Operating Officer, EMC Information Infrastructure and Cloud Services from September 2009 to January 2013. Previously, Mr. Elias served as President, EMC Global Services and EMC Ionix from September 2007 to September 2009. Mr. Elias served as our Executive Vice President, Global Services and Resource Management Software Group from May 2006 to September 2007 and served as our Executive Vice President, Global Marketing and Corporate Development from January 2006 to May 2006. He served as Executive Vice President, Corporate Marketing, Office of Technology and New Business Development from January 2004 to January 2006. Prior to joining EMC, Mr. Elias served in various capacities at Hewlett-Packard Company, a provider of information technology products, services and solutions for enterprise customers, most recently as Senior Vice President of Business Management and Operations in the Enterprise Systems Group. Mr. Elias is a director of Gannett Company, Inc., an international news and information company.

David I. Goulden has been our President and Chief Operating Officer since July 2012. In this role, he oversees EMC's business units as well as Global Sales and Customer Operations, Global Services, Global Marketing and G&A functions. Mr. Goulden has been our Chief Financial Officer since August 2006. Prior to this, Mr. Goulden served as Executive Vice President and Chief Financial Officer from August 2006 to July 2012 and served as our Executive Vice President, Customer Operations from April 2004 to August 2006. He served as Executive Vice President, Customer Solutions and Marketing and New Business Development from November 2003 to April 2004. Prior to joining EMC in 2002, Mr. Goulden served in various capacities at Getronics N.V., an information technology services company, most recently as a member of the Board of Management, President and Chief Operating Officer for the Americas and Asia Pacific. Mr. Goulden is a director of VMware.

ML Krakauer has been our Executive Vice President, Human Resources since April 2012. Ms. Krakauer served as Chief Operating Officer, Technical Solutions and Services from April 2011 to April 2012. She joined EMC as Senior Vice President, Technical Solutions and Services in September 2008. Prior to joining EMC, she held multiple executive leadership roles at Hewlett-Packard Company. Before joining Hewlett-Packard, she was at Compaq, Digital Equipment and other technology companies.

Paul Maritz has been our Chief Strategist since September 2012. Prior to that, Mr. Maritz was Chief Executive Officer of VMware, Inc. from July 2008 to August 2012 and President from July 2008 to January 2011. Prior to joining VMware, he was President of EMC’s Cloud Infrastructure and Services Division after EMC acquired Pi Corporation ("Pi") in February 2008. Mr. Maritz was a founder of Pi and served as its Chief Executive Officer. Pi was a software company focused on building cloud-based solutions. Before founding Pi, he spent 14 years working at Microsoft Corporation, where he served as a member of the five-person Executive Committee that managed the overall company. As Vice President of the Platform Strategy and Developer Group, among other roles, he oversaw the development and marketing of System Software Products (including Windows 95, Windows NT and Windows 2000), Development Tools (Visual Studio) and Database Products (SQL Server) and the complete Office and Exchange Product Lines. Prior to Microsoft, he spent five years working at Intel Corporation as a software and tools developer. Mr. Maritz is a director of VMware.

William F. Scannell has been our President, Global Sales and Customer Operations since July 2012. He is responsible for driving EMC's global growth and continued market leadership by delivering and supporting the full range of EMC products, services and solutions to organizations in established and new markets around the world. Mr. Scannell was Executive Vice President, Americas and EMEA Sales from March 2011 to July 2012, in which role he oversaw customer operations in the Americas and EMEA, and he was Executive Vice President, Americas from August 2010 to March 2011. He served as Executive Vice President, Sales Americas and Global Sales Programs from March 2007 to August 2011. Mr. Scannell joined EMC in 1986 and has held various positions including Senior Vice President, Worldwide Sales and Vice President, North America Regional Sales.

Harry L. You has been our Executive Vice President since February 2008. In this role, Mr. You oversees EMC’s corporate strategy and new business development. Prior to joining EMC, Mr. You served as Chief Executive Officer of BearingPoint, Inc., a management and technology consulting firm, from March 2005 to December 2007 and as BearingPoint’s Interim Chief Financial Officer from July 2005 to October 2006. From 2004 to 2005, Mr. You was Executive Vice President and Chief Financial Officer of Oracle Corporation, a large enterprise software company, and from 2001 to 2004, he was the Chief Financial Officer of Accenture

25



Ltd, a global management consulting, technology services and outsourcing company. Mr. You is a director of Korn/Ferry International, a global executive recruiting company.
 _____________________________
EMC, EMC Proven, EMC RecoverPoint, Archer, Atmos, Avamar, Captiva, Data Domain, Document Sciences, Documentum, FAST, Greenplum, Greenplum Chorus, Ionix, Isilon, Kazeon, NetWitness, NetWorker, RSA, RSA Security, SecurID, SourceOne, Syncplicity, Symmetrix, Vblock, Velocity, VMAX, VNX, VNXe, VPLEX and VSPEX are either registered trademarks or trademarks of EMC Corporation in the United States and other countries. VMware, VMware vCloud, VMware View, vCenter, vSphere, Cloud Foundry and Gemfire are registered trademarks or trademarks of VMware, Inc. in the United States and/or other jurisdictions. Iomega is a registered trademark of Iomega Corporation. Other trademarks are either registered trademarks or trademarks of their respective owners.



26



PART II

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock, par value $.01 per share, trades on the New York Stock Exchange under the symbol EMC.
The following table sets forth the range of high and low sales prices of our common stock on the New York Stock Exchange for the past two years during the fiscal periods shown.
 
Fiscal 2012
 
High        
 
Low        
First Quarter
 
$
30.00

 
$
21.60

Second Quarter
 
29.98

 
22.77

Third Quarter
 
28.18

 
22.79

Fourth Quarter
 
27.89

 
23.24

 
Fiscal 2011
 
High        
 
Low        
First Quarter
 
$
27.59

 
$
22.84

Second Quarter
 
28.72

 
25.39

Third Quarter
 
28.24

 
19.84

Fourth Quarter
 
25.13

 
20.00

We had 10,423 holders of record of our common stock as of February 26, 2013.
We have never paid cash dividends on our common stock. While subject to periodic review, the current policy of our Board of Directors is to retain cash and investments primarily to provide funds for our future growth. Additionally, we use cash to repurchase our common stock.
ISSUER PURCHASES OF EQUITY SECURITIES IN THE FOURTH QUARTER OF 2012
 
Period
 
Total Number
of Shares
Purchased(1)
 
Average
Price
Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
October 1, 2012 – October 31, 2012
 
985,256

  
$
24.09

 
824,400

 
38,004,739

November 1, 2012 – November 30, 2012
 
5,870,405

  
24.46

 
5,821,033

 
32,183,706

December 1, 2012 – December 31, 2012
 
5,119,624

  
25.15

 
5,078,382

 
27,105,324

Total
 
11,975,285

(2) 
$
24.73

 
11,723,815

 
27,105,324

 
(1)
Except as noted in note (2), all shares were purchased in open-market transactions pursuant to our previously announced authorization by our Board of Directors in April 2008 to repurchase 250.0 million shares of our common stock. This repurchase authorization does not have a fixed termination date.
(2)
Includes an aggregate of 251,470 shares withheld from employees for the payment of taxes.

27



ITEM 6.        SELECTED CONSOLIDATED FINANCIAL DATA
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
 
  
 
Year Ended December 31,
2012(1)
 
2011(2)
 
2010(4)
 
2009(5)
 
2008(6)
Summary of Operations:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
21,713,902

 
$
20,007,588

 
$
17,015,126

 
$
14,025,910

 
$
14,876,163

Operating income
 
3,963,874

 
3,442,439

 
2,683,286

 
1,414,275

 
1,568,936

Net income attributable to EMC Corporation
 
2,732,613

 
2,461,337

 
1,899,995

 
1,088,077

 
1,275,104

Net income attributable to EMC Corporation per weighted average share, basic
 
$
1.31

 
$
1.20

 
$
0.92

 
$
0.54

 
$
0.62

Net income attributable to EMC Corporation per weighted average share, diluted
 
$
1.23

 
$
1.10

 
$
0.88

 
$
0.53

 
$
0.61

Weighted average shares, basic
 
2,093,372

 
2,055,536

 
2,055,959

 
2,022,371

 
2,048,506

Weighted average shares, diluted
 
2,205,639

 
2,229,113

 
2,147,931

 
2,055,146

 
2,079,853

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
1,904,613

 
$
1,326,013

 
$
405,308

 
$
5,390,135

 
$
5,446,593

Total assets
 
38,068,685

 
34,469,267

 
30,833,284

 
26,812,003

 
23,874,575

Current obligations(3)
 
1,652,442

 
3,304,974

 
3,214,771

 

 

Long-term obligations
 

 

 

 
3,100,290

 
2,991,943

Total shareholders’ equity
 
23,523,791

 
20,279,703

 
18,633,925

 
16,560,088

 
14,110,353

 
(1)
In 2012, EMC acquired all of the outstanding shares of 17 companies (see Note C to the consolidated financial statements).
(2)
In 2011, EMC acquired all of the outstanding shares of 7 companies (see Note C to the consolidated financial statements).
(3)
Current obligations relate to the convertible debt and notes converted and payable, which were classified as current at December 31, 2011 and 2010. Current obligations relate to the convertible debt at December 31, 2012 (see Note E to the consolidated financial statements).
(4)
In 2010, EMC acquired all of the outstanding shares of 10 companies (see Note C to the consolidated financial statements).
(5)
In 2009, EMC acquired all of the outstanding shares of 5 companies.
(6)
In 2008, EMC acquired all of the outstanding shares of 12 companies.


28



ITEM 7.        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 Annual Report on Form 10-K.
All dollar amounts expressed numerically in this MD&A are in millions.
Certain tables may not add up due to rounding.

INTRODUCTION
We manage our business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure.
EMC Information Infrastructure
Our EMC Information Infrastructure business consists of three segments: Information Storage, Information Intelligence and RSA Information Security. The objective for our EMC Information Infrastructure business is to simultaneously increase our market share, invest in the business and grow our earnings per share at a rate faster than the rate at which we grow our revenue. During 2012, we continued to innovate and invest in expanding our total addressable market through internal research and development (“R&D”) and acquisitions. Our continued investment in new technologies and solutions is reflected in our roadmap for 2013, with numerous innovations, refreshes and brand-new products. We have developed a product portfolio with customers' current and future needs in mind which will continue to evolve as the largest transformation in Information Technology (“IT”) history is creating enormous opportunities in Cloud Computing, Big Data and Trust.
Cloud Computing leverages an on-demand, self-managed, virtualized infrastructure to deliver IT as a Service in a more efficient, flexible and cost-effective manner. While the fundamental transition to Cloud Computing architectures is gaining traction, customers are increasingly recognizing that their ability to compete is tied to the efficiency, flexibility and agility of their IT operations and that transitioning to a cloud-based architecture will be a key component to their success. We believe our offerings are well-suited to capitalize on this trend as it unfolds over the next several years. Big Data, which is a primary contributor to the pace of overall data growth, refers to the large repositories of corporate and external data, including unstructured information created by new applications (e.g. medical, entertainment, energy and geophysical), social media and other web repositories. It is triggering new approaches for our customers to derive business insight and create new opportunities to expand revenues. The successful transition to a model that leverages Cloud Computing and Big Data is dependent upon both the right infrastructure and the ability to build Trust into that infrastructure. The ability for customers to have and offer Trusted IT is a valuable competitive advantage. We believe we are well-positioned in this market to continue assisting our customers in storing, managing and unlocking the value contained within their information and to enable them to leverage our data-centric approach to security to take full advantage of Cloud Computing and Big Data.
Our go to market model, where we continue to leverage our direct sales force and services organization, as well as our channel and services partners and service providers, positions us well to help customers transition to Cloud Computing and benefit from Big Data. We offer three alternatives to help our customers transition to cloud architectures and leverage Big Data: our best of breed infrastructure components, proven infrastructure through VSPEX and converged infrastructure with Vblock from VCE Company LLC, our joint venture with Cisco, and other investors VMware and Intel. Our service provider program is another important part of our strategy to get our customers to the public cloud. Additionally, in December 2012, we announced the Pivotal Initiative (“Pivotal”) with VMware, to which both companies plan to commit technology, people and programs from both companies. Pivotal will focus on Big Data Analytics and Cloud Application Platforms in 2013.
VMware Virtual Infrastructure
VMware’s financial focus is on long-term revenue growth to generate free cash flows to fund its expansion of industry segment share and evolve its virtualization-based products for data centers, end-user devices and Cloud Computing through a combination of internal development and acquisitions. VMware expects to grow its business by building long-term relationships with its customers through the adoption of enterprise license agreements (“ELAs”). Additionally, VMware has made, and expects to continue to consider strategic business acquisitions in the future.
In January 2013, VMware announced a realignment of their strategy to refocus their resources and investments in support of three growth priorities that focus on their core opportunities as a provider of virtualization technologies that simplify IT infrastructure: the software-defined data center, the hybrid cloud and end-user computing. The software-defined data center ("SDDC") is where increasingly infrastructure is virtualized and delivered as a service, and the control of this data center is entirely

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automated by software. To further this vision, in the third quarter of 2012, VMware released the VMware vCloud Suite, which is the first integrated solution designed to meet the requirements of the SDDC by pooling industry-standard hardware and running compute, networking, storage and management functions in the data center as software-defined services. For the SDDC, VMware plans to continue to invest in the development and delivery of innovations in networking, security, storage and management as they continue to roll out and enhance the features of their vCloud Suite. For the hybrid cloud, VMware plans to focus on expanding their capabilities to deliver enterprise-class cloud services that are complementary to private clouds in order to enhance their customer's flexibility to run applications on and off premise, as they choose on a compatible, high-quality, secure and resilient hybrid cloud platform. For end-user computing, they plan to enhance their offerings to enable a virtual workspace for both existing PC environments and emerging mobile devices in a secure enterprise environment.
On a consolidated basis, our vision, strategy and roadmap allowed us to leverage our strengths through 2012 and position us to capitalize on the evolving trends of Cloud Computing and Big Data and Trust in 2013. As a result, we believe we will grow faster than the markets we serve in 2013 while simultaneously investing in the business and growing earnings per share at a rate faster than the rate at which we will grow our revenue.

RESULTS OF OPERATIONS
Revenues
The following table presents revenue by our segments:
 
 
 
 
 
 
 
 
Percentage Change
2012
 
2011
 
2010
 
2012 vs 2011
 
2011 vs 2010
Information Storage
 
$
15,589.4

 
$
14,755.2

 
$
12,699.1

 
5.7
 %
 
16.2
 %
Information Intelligence Group
 
640.2

 
661.4

 
735.9

 
(3.2
)
 
(10.1
)
RSA Information Security
 
888.7

 
828.2

 
729.4

 
7.3

 
13.5

VMware Virtual Infrastructure
 
4,595.6

 
3,762.9

 
2,850.7

 
22.1

 
32.0

Total revenues
 
$
21,713.9

 
$
20,007.6

 
$
17,015.1

 
8.5
 %
 
17.6
 %

Consolidated product revenues increased 3.7% to $13,060.5 in 2012. 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 in 2012 was due to a continued higher demand for our portfolio of offerings to address the storage, data analysis 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 2.6% to $10,362.8 in 2012. Within the networked storage platforms portfolio, which includes our high-end and mid-tier platform products, product revenues increased 5.7%. Within the high-end of the Information Storage segment, product revenues increased 0.8%, primarily due to demand for our scale-out block solution, VMAX, which was refreshed in the second quarter of 2012, as customers continue to purchase VMAX for mission-critical data sets needing to scale. Within the mid-tier of the Information Storage segment, which includes VNX family, Backup and Recovery Systems, EMC Isilon and EMC Atmos, product revenues increased 9.3% in 2012 due to continued performance across each of our mid-tier product groups. Our VNX family, which includes VNX and VNXe, plays an important role in our storage platform because of its simplicity and efficiency with a rich feature set on a unified platform. Within our Backup and Recovery Systems products, deduplication solutions continue to be in demand and our purpose-built back up appliance, Data Domain and our Avamar product delivered strong growth for the year in 2012. Our scale-out file offering from EMC Isilon continues to benefit from the acquisition synergies as it delivers strong revenue growth in new markets while continuing rapid growth in its more traditional verticals. The EMC Atmos object-storage solution ended 2012 with great momentum. Finally, our EMC Greenplum analytics database combined with their Hadoop implementation drove very strong year-over-year growth.

The VMware Virtual Infrastructure segment’s product revenues increased 13.3% to $2,084.6 in 2012. VMware’s license revenues increased in 2012 primarily due to continued demand for its product offerings. ELAs comprised between one-quarter and one-third of their overall sales during 2012 and 2011, with the balance represented by non-ELA, or transactional business. In 2012, their overall sales growth rate declined compared to 2011, with the growth rate in transactional sales lower than the growth rate in ELAs.

The RSA Information Security segment’s product revenues decreased 6.5% to $412.3 in 2012. The decrease in product revenues was primarily due to the effects of slower global employment growth, especially in Europe and Asia, which negatively impacted

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our Identity and Data Protection business as well as lingering effects from the prior year remediation of tokens which disrupted the normal renewal cycles.

The Information Intelligence Group segment’s product revenues decreased 4.1% to $200.8 in 2012. The year-over-year decrease in product revenues was primarily attributable to changing customer demand, particularly in the first quarter of 2012. The Information Intelligence Group segment continues to innovate, creating solutions that we believe will be easier to deploy, easier to use and more aligned with customer needs.

Consolidated product revenues increased 15.6% to $12,590.7 in 2011. The consolidated product revenues increase was primarily driven by the Information Storage and the VMware Virtual Infrastructure segments’ product revenues. The Information Storage segment’s product revenues increased 14.5% to $10,100.5 in 2011. The VMware Virtual Infrastructure segment’s product revenues increased 31.5% to $1,840.1 in 2011. The RSA Information Security segment’s product revenues increased 10.2% to $440.8 in 2011. The increase in product revenues in each of these segments in 2011 was primarily attributable to continued higher demand for our portfolio of offerings to address the storage, virtualization and security 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 Intelligence Group segment’s product revenues decreased 22.2% to $209.3 in 2011 primarily due to changing customer demand.

Consolidated services revenues increased 16.7% to $8,653.4 in 2012. The consolidated services revenues increase was primarily driven by the Information Storage and the VMware Virtual Infrastructure segments’ services revenues resulting from increased demand for maintenance-related services. In addition, we continue to provide expertise to customers on effective ways to enable Cloud Computing and to leverage their Big Data assets.

The Information Storage segment’s services revenues increased 12.3% to $5,226.6 in 2012. The increase in services revenues was primarily attributable to higher demand for maintenance-related services associated with a larger installed base as well as increased maintenance renewals. In addition, there has been a growing demand for professional services as we assist with customers' transitions to cloud architectures, transforming IT infrastructures and virtualizing mission-critical applications also contributed to the increase in services revenues.

The VMware Virtual Infrastructure segment’s services revenues increased 30.6% to $2,511.0 in 2012. The increase in services revenues was primarily attributable to growth in VMware’s software maintenance revenues. In 2012, 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 driven by the growth in their license sales and installed base.

The RSA Information Security segment’s services revenues increased 23.0% to $476.5 in 2012. Services revenues increased due to an increase in maintenance revenues and professional services resulting from continued demand for support from our installed base. The Information Intelligence Group segment’s services revenues decreased 2.8% to $439.4 in 2012.

Consolidated services revenues increased 21.1% to $7,416.8 in 2011. The consolidated services revenues increase was primarily driven by the Information Storage and the VMware Virtual Infrastructure segments’ services revenues. The Information Storage segment’s services revenues increased 20.1% to $4,654.7 in 2011. The VMware Virtual Infrastructure segment’s services revenues increased 32.5% to $1,922.7 in 2011. The RSA Information Security segment’s services revenues increased 17.7% to $387.4 in 2011. The Information Intelligence Group segment’s services revenues decreased 3.2% to $452.0 in 2011. Services revenues increased across the Information Storage, VMware Virtual Infrastructure and RSA Information Security segments due to an increase in maintenance and professional services resulting from continued demand for support from our installed base.


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Consolidated revenues by geography were as follows:
 
 
 
 
 
 
 
 
Percentage Change
2012
 
2011
 
2010
 
2012 vs 2011
 
2011 vs 2010
United States
 
$
11,510.2

 
$
10,549.6

 
$
9,152.4

 
9.1
%
 
15.3
%
Europe, Middle East and Africa
 
5,908.2

 
5,667.6

 
4,942.1

 
4.2
%
 
14.7
%
Asia Pacific
 
3,016.5

 
2,639.4

 
1,965.2

 
14.3
%
 
34.3
%
Latin America, Mexico and Canada
 
1,279.0

 
1,151.0

 
955.5

 
11.1
%
 
20.5
%
Revenues increased in 2012 compared to 2011 and in 2011 compared to 2010 in all of our markets due to greater demand for our products and services offerings.
Changes in exchange rates impacted the total revenue increase by 1.1% in 2012 compared to 2011. The impact of the change in rates was most significant in the Euro zone and Latin America markets, and in particular, Brazil. Changes in exchange rates contributed 1.5% to the overall revenue increase in 2011 compared to 2010. The impact of the change in rates was most significant in the Asia Pacific markets, primarily Australia and Japan, Canada and Brazil, partially offset by the Euro and the pound sterling.
Costs and Expenses
The following table presents our costs and expenses, other income and net income attributable to EMC Corporation.
  
 
 
 
 
 
 
 
Percentage Change
  
 
2012
 
2011
 
2010
 
2012 vs 2011
 
2011 vs 2010
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
Information Storage
 
$
6,650.1

 
$
6,428.7

 
$
5,851.4

 
3.4
 %
 
9.9
%
Information Intelligence Group
 
208.2

 
236.6

 
243.2

 
(12.0
)
 
(2.8
)
RSA Information Security
 
284.5

 
357.7

 
221.6

 
(20.5
)
 
61.4

VMware Virtual Infrastructure
 
542.9

 
533.3

 
425.3

 
1.8

 
25.4

Corporate reconciling items
 
389.8

 
282.3

 
242.7

 
38.1

 
16.3

Total cost of revenue
 
8,075.5

 
7,838.6

 
6,984.1

 
3.0

 
12.2

Gross margins:
 
 
 
 
 
 
 
 
 
 
Information Storage
 
8,939.3

 
8,326.5

 
6,890.7

 
7.4

 
20.9

Information Intelligence Group
 
432.0

 
424.7

 
449.7

 
1.7

 
(5.5
)
RSA Information Security
 
604.3

 
470.5

 
507.8

 
28.4

 
(7.3
)
VMware Virtual Infrastructure
 
4,052.7

 
3,229.5

 
2,425.5

 
25.5

 
33.1

Corporate reconciling items
 
(389.8
)
 
(282.3
)
 
(242.7
)
 
38.1

 
16.3

Total gross margin
 
13,638.4

 
12,168.9

 
10,031.0

 
12.1

 
21.3

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Research and development(1)
 
2,559.6

 
2,149.8

 
1,888.0

 
19.1

 
13.9

Selling, general and administrative(2)
 
7,004.3

 
6,479.4

 
5,375.3

 
8.1

 
20.5

Restructuring and acquisition-related charges
 
110.6

 
97.3

 
84.4

 
13.7

 
15.3

Total operating expenses
 
9,674.5

 
8,726.5

 
7,347.7

 
10.9

 
18.8

Operating income
 
3,963.9

 
3,442.4

 
2,683.3

 
15.1

 
28.3

Investment income, interest expense and other expenses, net
 
(160.3
)
 
(193.2
)
 
(75.3
)
 
(17.0
)
 
156.6

Income before income taxes
 
3,803.6

 
3,249.3

 
2,608.0

 
17.1

 
24.6

Income tax provision
 
917.6

 
640.4

 
638.3

 
43.3

 
0.3

Net income
 
2,886.0

 
2,608.9

 
1,969.7

 
10.6

 
32.5

Less: Net income attributable to the non-controlling interest in VMware, Inc.
 
(153.4
)
 
(147.5
)
 
(69.7
)
 
4.0

 
111.6

Net income attributable to EMC Corporation
 
$
2,732.6

 
$
2,461.3

 
$
1,900.0

 
11.0
 %
 
29.5
%
 
(1)
Amount includes corporate reconciling items of $337.9, $322.6 and $287.4 for the years ended December 31, 2012, 2011 and 2010, respectively.
(2)
Amount includes corporate reconciling items of $640.4, $606.4 and $477.5 for the years ended December 31, 2012, 2011 and 2010, respectively.

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Gross Margins
Our gross margin percentages were 62.8%, 60.8% and 59.0% in 2012, 2011 and 2010, respectively. The increase in the gross margin percentage in 2012 compared to 2011 was attributable to the VMware Virtual Infrastructure segment, which increased overall gross margins by 149 basis points, the RSA Information Security segment, which increased overall gross margins by 47 basis points, the Information Storage segment, which increased overall gross margins by 46 basis points and the Information Intelligence Group segment, which increased overall gross margins by 10 basis points. The increase in corporate reconciling items, consisting of stock-based compensation, acquisition-related intangible asset amortization, restructuring and acquisition-related charges and amortization of VMware's capitalized software from prior periods, decreased the consolidated gross margin percentage by 53 basis points. The increase in the gross margin percentage in 2011 compared to 2010 was attributable to the VMware Virtual Infrastructure segment, which increased overall gross margins by 140 basis points, the Information Storage segment, which increased overall gross margins by 126 basis points, partially offset by the RSA Information Security segment, which decreased overall gross margins by 53 basis points, and the Information Intelligence Group segment, which decreased overall gross margins by 4 basis points. The increase in corporate reconciling items, consisting of stock-based compensation, acquisition-related intangible asset amortization and restructuring and acquisition-related charges, decreased the consolidated gross margin percentage by 22 basis points.

For segment reporting purposes, stock-based compensation, acquisition-related intangible asset amortization, restructuring and acquisition-related charges and amortization of VMware's capitalized software from prior periods are recognized as corporate expenses and are not allocated among our various operating segments. The increase of $107.5 in the corporate reconciling items in 2012 was attributable to a $61.5 increase in amortization of VMware's capitalized software from prior periods, a $41.9 increase in intangible asset amortization expense and a $1.8 increase in stock-based compensation expense. The $41.9 increase in intangible asset amortization expense is due to a larger intangible asset balance resulting from business acquisitions. The increase of $39.7 in the corporate reconciling items in 2011 was attributable to a $25.4 increase in intangible asset amortization expense and a $15.0 increase in stock-based compensation expense. The $15.0 increase in stock-based compensation expense was primarily attributable to the full-year impact of options exchanged in the acquisition of Isilon, which was acquired in the fourth quarter of 2010.
The gross margin percentages for the Information Storage segment were 57.3%, 56.4% and 54.1% in 2012, 2011 and 2010, respectively. The increase in gross margin percentage in 2012 compared to 2011 was primarily attributable to improved product gross margins driven by a shift in mix towards higher margin products and higher sales volume. The increase in gross margin percentage in 2011 compared to 2010 was primarily attributable to improved product and service gross margins driven by a shift in mix towards higher margin products and services, higher sales volume and an improved cost structure.
The gross margin percentages for the VMware Virtual Infrastructure segment were 88.2%, 85.8% and 85.1% in 2012, 2011 and 2010, respectively. The increase in gross margin percentage in 2012 compared to 2011 was primarily attributable to improvements in services margins due to growth in maintenance revenue as well as improved license margins resulting from decreased software capitalized amortization expense. The increase in gross margin percentage in 2011 compared to 2010 was primarily attributable to improved license gross margins resulting from decreased software capitalization amortization expense due to VMware's go-to-market strategy and the timing of products reaching technological feasibility.
The gross margin percentages for the RSA Information Security segment were 68.0%, 56.8% and 69.6% in 2012, 2011 and 2010, respectively. The increase in the gross margin percentage in 2012 compared to 2011 and the decrease in gross margin percentage in 2011 compared to 2010 was due to an increase in product margins primarily due to the one-time impact of RSA remediation associated with working with customers to implement remediation programs which negatively impacted gross margin in 2011, as well as a release of the residual reserve, which positively impacted gross margins in 2012.
The gross margin percentages for the Information Intelligence Group segment were 67.5%, 64.2% and 64.9% in 2012, 2011 and 2010, respectively. The increase in gross margin percentage in 2012 compared to 2011 was attributable to a continued containment of fixed costs and services margin improvement. The decrease in gross margin percentage in 2011 compared to 2010 was attributable to an increase in the mix of service revenue as a percentage of total revenue, slightly offset by an increase in service gross margins.
Research and Development

As a percentage of revenues, R&D expenses were 11.8%, 10.7% and 11.1% in 2012, 2011 and 2010, respectively. R&D expenses increased $409.8 in 2012 primarily due to an increase in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions, infrastructure costs and depreciation expense. Personnel-related costs increased by $354.5, infrastructure costs increased by $15.2 and depreciation expense increased by $11.3. Also increasing these

33



costs was a decrease in capitalized software development costs of $23.2. R&D expenses increased $261.8 in 2011 primarily due to an increase in personnel-related costs, including stock-based compensation, infrastructure costs, depreciation expense and travel costs, partially offset by greater levels of software capitalization. Personnel-related costs increased by $274.0, infrastructure costs increased by $20.5, depreciation expense increased by $13.0 and travel costs increased by $10.0. Capitalized software development costs, which reduce R&D expense, increased by $73.6.

Corporate reconciling items within R&D, which consist of stock-based compensation and acquisition-related intangible asset amortization, increased $15.3 and $35.2 to $337.9 and $322.6 in 2012 and 2011, respectively. Stock-based compensation expense increased $25.5 and $40.5 in 2012 and 2011, respectively. Acquisition-related intangible asset amortization decreased $6.4 and $7.1 in 2012 and 2011, respectively. The increase in stock-based compensation expense in 2012 was primarily driven by VMware's issuance of restricted stock in connection with the acquisition of Nicira in the third quarter of 2012. The increase in stock-based compensation expense in 2011 was primarily driven by EMC's issuance of stock options in connection with the acquisition of Isilon in the fourth quarter of 2010.

R&D expenses within EMC’s Information Infrastructure business, as a percentage of EMC’s Information Infrastructure business revenues, were 8.4%, 7.6% and 7.9% in 2012, 2011 and 2010, respectively. R&D expenses increased $206.0 in 2012 primarily due to an increase in personnel-related costs, depreciation expense, business development costs and travel costs. Personnel-related costs increased by $221.3, depreciation expense increased by $15.1, business development costs increased by $17.0 and travel costs increased by $5.6. Partially offsetting these increased costs was a increase in capitalized software development costs of $49.5. R&D expenses increased $116.5 in 2011 primarily due to increases in personnel-related costs, depreciation expense, travel costs and infrastructure costs. Personnel-related costs increased by $124.8, depreciation expense increased by $17.8, travel costs increased by $6.1 and infrastructure costs increased by $4.2. Partially offsetting these increased costs was an increase in capitalized software development costs of $60.4.

R&D expenses within the VMware Virtual Infrastructure business, as a percentage of VMware’s revenues, were 16.9%, 15.6% and 16.8% in 2012, 2011 and 2010, respectively. R&D expenses increased $188.4 in 2012 largely due to an increase in personnel-related costs of $110.2 and to a decrease in VMware’s capitalized software development costs of approximately $74.0 in 2012, primarily due to a change in VMware's go-to-market strategy and the timing of products reaching technological feasibility. R&D expenses increased $110.1 in 2011 largely due to increases in personnel-related costs of $106.9. This increase was partially offset by increases in VMware’s capitalized software development costs of approximately $13.3 in 2011, primarily due to the timing of products reaching technological feasibility. Following the release of vSphere 5 and the comprehensive suite of cloud infrastructure technologies in the third quarter of 2011, VMware determined that its go-to-market strategy had changed from single solutions to product suite solutions. As a result of this change in strategy, and the related increased importance of interoperability between VMware’s products, the length of time between achieving technological feasibility and general release to customers significantly decreased. For future releases, VMware expects its products to be available for general release soon after technological feasibility has been established. Given that the majority of VMware’s product offerings are expected to be suites or to have key components that interoperate with VMware’s other product offerings, the costs incurred subsequent to achievement of technological feasibility are expected to be immaterial in future periods.

Selling, General and Administrative

As a percentage of revenues, selling, general and administrative (“SG&A”) expenses were 32.3%, 32.4% and 31.6% in 2012, 2011 and 2010, respectively. SG&A expenses increased by $524.9 in 2012 primarily due to increases in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions, commissions, business development costs, infrastructure costs and depreciation expense. Personnel-related costs increased by $248.6, commissions increased by $131.3, business development costs increased by $67.4, infrastructure costs increased by $29.9 and depreciation expense increased by $22.1 in 2012. SG&A expenses increased by $1,104.1 in 2011 from 2010 primarily due to increases in personnel-related costs, travel costs, commissions, infrastructure costs and depreciation expense. Personnel-related costs increased by $768.0, travel costs increased by $61.8, commissions increased by $51.9, infrastructure costs increased by $43.8 and depreciation expense increased by $29.7 in 2011.

Corporate reconciling items within SG&A, which consist of stock-based compensation and acquisition-related intangible asset amortization increased $34.1 to $640.4 in 2012 and increased $128.9 to $606.4 in 2011. In 2012, stock-based compensation expense increased $56.9, somewhat offset by decreases in intangible asset amortization of $12.7. Stock-based compensation expense increased in 2012 primarily due to VMware's issuance of restricted stock in connection with the acquisition of Nicira. In 2011, intangible asset amortization increased $38.2 and stock-based compensation expense increased $95.6. Stock-based compensation expense increased in 2011 primarily due to the Isilon acquisition.

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SG&A expenses within EMC’s Information Infrastructure business, as a percentage of EMC’s Information Infrastructure business revenues, were 26.7%, 27.0% and 26.4% in 2012, 2011 and 2010, respectively. SG&A expenses increased $172.3 in 2012 primarily due to increases in personnel-related costs, commissions, business development costs, infrastructure costs and depreciation expense. Personnel-related costs increased slightly due to careful discretionary spending exceeding increases in salary resulting from strategic hiring and business acquisitions. Personnel-related costs increased by $2.7, commissions increased by $100.8, business development costs increased $14.9, infrastructure costs increased by $12.9 and depreciation expense increased by $34.4 in 2012. SG&A expenses increased $655.1 in 2011 primarily due to increases in personnel-related costs, travel costs, commissions, infrastructure costs and depreciation. Personnel-related costs increased by $435.4, travel costs increased by $45.8, commissions increased by $28.7, infrastructure costs increased by $21.2 and depreciation expense increased by $20.7 in 2011.

SG&A expenses within the VMware Virtual Infrastructure business, as a percentage of VMware’s revenues, were 39.2%, 39.4% and 40.7% in 2012, 2011 and 2010, respectively. SG&A expenses increased $318.6 in 2012 primarily due to growth in personnel-related expenses driven by incremental headcount and by higher commission expense due to increased sales volume as well as an increase in the costs of marketing programs. SG&A as a percentage of revenues decreased in 2012 compared to 2011 due to the increase in revenue outpacing the increase in costs during the period. SG&A expenses increased $320.0 in 2011. The increase in SG&A expenses in 2011 was primarily the result of growth in personnel-related expenses driven by incremental headcount and by higher commission expense due to increased sales volume.
Restructuring and Acquisition-Related Charges
In 2012, 2011 and 2010, we incurred restructuring and acquisition-related charges of $110.6, $97.3 and $84.4, respectively. In 2012, we incurred $100.9 of restructuring charges, primarily related to our current year restructuring programs and $9.7 of charges in connection with acquisitions for financial, advisory, legal and accounting services. In 2011, we incurred $86.0 of restructuring charges, of which $63.2 primarily related to our 2011 restructuring programs and $11.3 of charges in connection with acquisitions for financial, advisory, legal and accounting services. In 2010, we incurred $76.7 of restructuring charges, of which $37.8 primarily related to our 2010 restructuring program and $7.7 of charges in connection with acquisitions for financial, advisory, legal and accounting services.
During 2012, we implemented separate restructuring programs to create further operational efficiencies which will result in a workforce reduction of 1,163 positions. The actions impacted 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 within a year of the start of each program.
During 2011, we implemented separate restructuring programs to create further operational efficiencies which resulted in a workforce reduction of 787 positions and the vacation of certain facilities. These actions impacted positions around the globe covering our Information Storage, RSA Information Security and Information Intelligence Group segments. All of these actions were completed by the end of 2012.
During 2010, we implemented a restructuring program to create further operational efficiencies which resulted in a workforce reduction of approximately 400 positions. These actions impacted positions around the globe covering our Information Storage, RSA Information Security and Information Intelligence Group segments. All of these actions were completed by the end of 2011.
During 2012, 2011 and 2010, we recognized $20.8, $26.1 and $31.6, respectively, of lease termination costs for facilities vacated and other contractual obligations in the respective periods as part of all of our restructuring programs. These costs are expected to be utilized by the end of 2015. The remaining cash portion owed for these programs in 2013 is approximately $11.7, plus an additional $12.3 over the period from 2013 and beyond.
Investment Income
Investment income was $115.0, $129.2 and $142.5 in 2012, 2011 and 2010, respectively. Investment income decreased in 2012 and 2011 primarily due to a decrease in coupon income. Net realized gains were $9.3, $10.1 and $15.8 in 2012, 2011 and 2010, respectively.
Interest Expense
Interest expense was $78.9, $170.5 and $178.3 in 2012, 2011 and 2010, respectively. Interest expense consists primarily of interest on the $1,725 1.75% convertible senior notes due 2011 (the “2011 Notes”), and our $1,725 1.75% convertible senior notes due 2013 (the “2013 Notes” and, together with the 2011 Notes, the “Notes”) which we issued in November 2006. Included in interest expense are non-cash interest charges related to amortization of the debt discount attributable to the conversion feature of $60.6, $115.9 and $114.5 in 2012, 2011 and 2010, respectively. The decrease in interest expense from 2011 to 2012 is due to the

35



settlement of the 2011 Notes in the first quarter of 2012. We are accreting our Notes to their stated values over their terms. See Note E to the consolidated financial statements.
Other Income (Expense), Net
Other income (expense), net was $(196.3), $(152.0) and $(39.5) in 2012, 2011 and 2010, respectively. Our 2012 other income (expense), net primarily consists of our consolidated share of the losses from our converged infrastructure joint venture, VCE Company LLC, of $244.9 and losses on interest rate swaps, partially offset by our net gains from the sale of strategic investments including a non-recurring gain on our investment in XtremIO of $31.6 as well as the divestiture of a business. Our 2011 other income (expense), net primarily consists of our consolidated share of the losses from VCE of $209.2, partially offset by the non-recurring gain on the sale of VMware's investment in Terremark Worldwide, Inc. of $56.0. Other income (expense), net in 2010 was primarily attributable to our consolidated share of the losses from VCE of $42.8.

The VCE joint venture is accounted for under the equity method and our consolidated share of VCE's losses is based upon our portion of the overall funding, which was approximately 63.2%, and represents our share of the net losses of the joint venture net of equity accounting adjustments. The losses recognized from the joint venture exclude our consolidated revenues and gross margins from sales of products and services to VCE, and any additional related selling expenses.  See Note J to the consolidated financial statements.
Provision for Income Taxes

Our effective income tax rate was 24.1%, 19.7% and 24.5% in 2012, 2011 and 2010, respectively. The effective income tax rate is based upon the income for the year, the composition of the income in different countries, effect of tax law changes and adjustments, if any, for the potential tax consequences, benefits or resolutions of audits or other tax contingencies. 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 tax rate may be adversely affected by earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated in countries where we have higher statutory tax rates.

In 2012, the lower aggregate income tax rate in foreign jurisdictions reduced our effective rate by 13.6 percentage points compared to our statutory federal tax rate of 35.0%. The net effect of tax credits, state taxes, non-deductible permanent differences, prior year true up adjustments, change in tax contingency reserves and other items collectively increased the rate by 2.7 percentage points.

In 2011, the lower aggregate income tax rate in foreign jurisdictions reduced our effective rate by 14.4 percentage points compared to our statutory federal tax rate of 35.0%. The net effect of tax credits, state taxes, non-deductible permanent differences, resolution of income tax audits and reversal of reserves associated with the expiration of statutes of limitations and other items collectively decreased the rate by 0.9 percentage points.

In 2010, the lower aggregate income tax rate in foreign jurisdictions reduced our effective rate by 12.2 percentage points compared to our statutory federal tax rate of 35.0%. In 2010, we effected a plan to reorganize our international operations by transferring certain assets of Isilon, Archer Technologies and Bus-Tech entities into a single EMC international holding company. As a result of this reorganization, we incurred an income tax charge which negatively impacted our effective tax rate by 3.2 percentage points. In 2010, we also had a reduction in our valuation allowance which arose from the utilization of a certain subsidiary's foreign net operating loss carryforwards resulting in a benefit to our effective tax rate of 0.6 percentage points. The net effect of tax credits, state taxes, non-deductible permanent differences, resolution of income tax audits and elimination of reserves associated with the expiration of statutes of limitations and other items collectively decreased the rate by 0.9 percentage points.

The effective tax rate increased from 2011 to 2012 by 4.4%, from 19.7% to 24.1%, respectively. This increase was principally attributable to the federal tax credit for increasing research activities as well as a decrease in unrecognized tax benefits as a result of various tax audit closures recorded in 2011 with no comparable amounts in 2012. The effective tax rate decreased from 2010 to 2011 by 4.8%, from 24.5% to 19.7%, respectively. This decrease was principally attributable to a higher amount of income earned in foreign jurisdictions during 2011, which was largely due to how certain expenses are allocated to our world-wide subsidiaries. Additionally, the decrease was attributable to the reorganization of our international operations during 2010, and the favorable resolution of income tax audits during 2011, which was partially offset by a decrease in our U.S. tax credits and an increase in other differences.

36




On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Some of the provisions were retroactive to January 1, 2012 including an extension of the U.S. federal tax credit for increasing research activities through December 31, 2013. Because the extension was enacted after December 31, 2012, our 2012 effective tax rate does not reflect our estimated 2012 federal tax credit for increasing research activities even though it will be reported on our 2012 federal income tax returns. Had the extension been enacted prior to January 1, 2013, our overall tax provision would have been approximately $66.5 lower reducing our effective tax rate from 24.1% to 22.4%. We expect that our income tax provision for the first quarter of 2013 will include the estimated 2012 federal tax credit for increasing research activities as a discrete tax benefit which will reduce our effective tax rate for the quarter and to a lesser extent our annual effective tax rate for 2013.

During the second quarter of 2012, we determined that since VMware's initial public offering in 2007, we have incorrectly recorded deferred tax liabilities on the gains and losses associated with changes in the non-controlling interest. These deferred tax liabilities were recorded as a reduction to additional paid-in capital and therefore had no impact on our previously reported consolidated income statements. The error resulted in an overstatement of our deferred tax liability and an understatement of our additional paid-in capital of $352.6 in our December 31, 2011 consolidated balance sheet. These corrections did not impact our income tax provision in any current or prior period. See Note A to the consolidated financial statements.
Non-controlling Interest in VMware, Inc.
The net income attributable to the non-controlling interest in VMware was $153.4, $147.5 and $69.7 in 2012, 2011 and 2010, respectively. The increases year over year were due to increases in VMware’s net income and increases in the weighted average percentage ownership by the non-controlling interest in VMware. VMware’s reported net income was $745.7, $723.9 and $357.4 in 2012, 2011 and 2010, respectively. The weighted-average non-controlling interest in VMware was approximately 20.3%, 20.4% and 19.5% in 2012, 2011 and 2010, respectively. In the first quarter of 2010, we announced a stock purchase program of VMware’s Class A common stock to maintain an approximately 80% majority ownership in VMware over the long term. As of December 31, 2012, we have purchased approximately 14.0 million shares for $1,099.1.
Financial Condition
Cash provided by operating activities was $6,262.4, $5,668.8 and $4,548.8 for 2012, 2011 and 2010, respectively. Cash received from customers was $22,584.8, $21,144.7 and $17,585.4 in 2012, 2011 and 2010, respectively. The increase in cash received from customers from 2010 to 2011 and from 2011 to 2012 was attributable to an increase in sales volume and higher cash proceeds from the sale of multi-year maintenance contracts, which are typically billed and paid in advance of services being rendered. Cash paid to suppliers and employees was $16,018.5, $15,218.7 and $12,830.7 in 2012, 2011 and 2010, respectively. The increase in cash paid to suppliers and employees from 2010 to 2011 and from 2011 to 2012 was primarily due to a general growth in the business to support the increased revenue base. Income taxes paid was $374.4, $323.1 and $232.1 in 2012, 2011 and 2010, respectively. These payments are comprised of estimated taxes for the current year, extension payments for the prior year and refunds or payments associated with income tax filings and tax audits.

Cash used in investing activities was $3,905.1, $3,543.5 and $6,476.0 in 2012, 2011 and 2010, respectively. Cash used for business acquisitions, net of cash acquired, was $2,135.8, $536.6 and $3,194.6 in 2012, 2011 and 2010, respectively. The increase in cash used from 2011 to 2012 was due to an increase in acquisition activity with EMC and VMware collectively acquiring seventeen companies during 2012, including the acquisition of Nicira for $1,099.6, compared to the acquisition of seven businesses during 2011. In 2010, we acquired ten companies including the acquisition of Isilon for $2,301.1 net of cash acquired. Net cash used for strategic and other related investments was $46.5 and $300.5 in 2012 and 2011, respectively, and net cash provided by strategic and other related investments was $123.9 in 2010. In 2011, cash used for strategic and other related investments included $112.5 spent on the purchase of patents from Novell. During 2012, we provided funding of $227.9 to our joint ventures, VCE Company LLC, Canopy, our joint venture with Atos, and LenovoEMC, our joint venture with Lenovo Group Limited. In 2011 and 2010, we provided VCE funding of $383.2 and $29.6, respectively. During 2011, VMware purchased a leasehold interest for $151.1. During 2012, we received $58.1 in cash proceeds from the divestiture of our Iomega business. Capital additions were $819.2, $801.4 and $745.4 in 2012, 2011 and 2010, respectively. Capitalized software development costs were $419.1, $442.3 and $363.0 in 2012, 2011 and 2010, respectively. The decrease in 2012 compared to 2011 was primarily attributable to VMware's change in its go-to-market strategy, somewhat offset by EMC Information Infrastructure's efforts on its software development activities. The increase in 2011 was primarily attributable to EMC Information Infrastructure’s software development activities. Net purchases of investments were $314.8, $928.4 and $2,267.3 in 2012, 2011 and 2010, respectively. This activity varies from period to period based upon our cash collections, cash requirements and maturity dates of our investments.
Cash used in financing activities was $2,149.0, $1,718.5 and $243.8 in 2012, 2011 and 2010, respectively. In 2012, we spent $1,699.8 for payment of our convertible debt. In 2012 , 2011 and 2010, cash used to repurchase 27.1 million, 81.8 and 52.7 million

37



shares of EMC common stock was $684.6, $2,000.0 and $999.9, respectively. Additionally, in 2012, 2011 and 2010, cash used to purchase 3.4 million, 4.6 million and 6.0 million shares of VMware common stock was $290.3, $400.0 and $399.2, respectively. In 2012, 2011 and 2010, VMware spent $467.5, $526.2 and $338.5 to repurchase 5.1 million, 6.0 million and 4.9 million shares of its common stock, respectively. We generated $813.4, $1,011.0 and $1,212.0 in 2012, 2011 and 2010, respectively, from the exercise of stock options and the purchase of shares within the employee stock plans. We generated $260.7, $361.6 and $281.9 in 2012, 2011 and 2010, respectively, of excess tax benefits from stock-based compensation. In 2012 and 2011, we spent $69.9 and $141.0, respectively, on the settlement of interest rate contracts.
We expect to continue to generate positive cash flows from operations and to use cash generated by operations as our primary source of liquidity. We believe that existing cash and cash equivalents, together with any cash generated from operations, will be sufficient to meet normal operating requirements for the next twelve months.

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

The remaining $1,710.1 of the 2013 Notes is due in November 2013. Based upon the closing price of our common stock for the prescribed measurement period during the three months ended December 31, 2012, the contingent conversion thresholds on the 2013 Notes were exceeded. As a result, the 2013 Notes are convertible at the option of the holder through March 31, 2013. Upon conversion, we are obligated to pay cash up to the principal amount of the debt converted. We have the option to settle any conversion value in excess of the principal amount with cash, shares of our common stock, or a combination thereof. Approximately $14.9 of the 2013 Notes have been converted as of December 31, 2012.
In connection with the issuance 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. We paid an aggregate amount of $669.1 of the proceeds from the sale of the Notes for the Purchased Options that was recorded as additional paid-in-capital in shareholders’ equity. In the fourth quarter of 2011, we exercised 107.5 million of the Purchased Options in conjunction with the planned settlements of the 2011 Notes, and we received 29.5 million shares of net settlement on January 9, 2012, representing the excess conversion value of the options. The remaining 107.5 million of the Purchased Options expire on December 1, 2013.

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

We have available for use a credit line of $50.0 in the United States. As of December 31, 2012, we had no borrowings outstanding on the line of credit. The credit line bears interest at the bank’s base rate and requires us, upon utilization of the credit line, to meet certain financial covenants with respect to limitations on losses. In the event the covenants are not met, the lender may require us to provide collateral to secure the outstanding balance. At December 31, 2012, we were in compliance with the covenants. As of December 31, 2012, the aggregate amount of liabilities of our subsidiaries was approximately $5,884.5.

At December 31, 2012, our total cash, cash equivalents, and short-term and long-term investments were $11,395.7. This balance includes approximately $4,630.8 held by VMware, of which $2,996.7 is held overseas, and $2,743.8 held by EMC in overseas entities. If these overseas funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

38



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

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). EMC uses certain non-GAAP financial measures, which exclude stock-based compensation, amortization of intangible assets, restructuring and acquisition-related charges, amortization of VMware's capitalized software from prior periods, infrequently occurring gains, losses, benefits and charges, and special tax items to measure its gross margin, operating margin, net income and diluted earnings per share for purposes of managing our business. In addition, the benefit of the U.S. research and development (“R&D”) tax credit for 2012 is included in the non-GAAP results for the fourth quarter of 2012. EMC also assesses its financial performance by measuring its free cash flow which is also a non-GAAP financial measure. Free cash flow is defined as net cash provided by operating activities, less additions to property, plant and equipment and capitalized software development costs. These non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of EMC’s financial performance or liquidity prepared in accordance with GAAP. EMC’s non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how EMC defines its non-GAAP financial measures.

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

Our non-GAAP operating results for the three months and year ended December 31, 2012 and 2011 were as follows:
 
 
For the Three Months Ended
 
For the Year Ended
 
 
December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
Gross margin
 
$
3,990.6

 
$
3,595.8

 
$
14,000.6

 
$
12,516.1

Gross margin percentage
 
66.2
%
 
64.5
%
 
64.5
%
 
62.6
%
Operating income
 
1,656.2

 
1,467.8

 
5,397.1

 
4,784.0

Operating income percentage
 
27.5
%
 
26.3
%
 
24.9
%
 
23.9
%
Income tax provision
 
358.3

 
253.4

 
1,233.5

 
949.3

Net income attributable to EMC
 
1,193.6

 
1,065.2

 
3,759.5

 
3,380.5

Diluted earnings per share attributable to EMC
 
$
0.54

 
$
0.49

 
$
1.70

 
$
1.51

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

The reconciliation of the above financial measures from GAAP to non-GAAP is as follows:
 
 
For the Three Months Ended December 31, 2012
 
 
GAAP
 
Stock-based
compensation
 
Intangible
asset
amortization
 
Restructuring
and
acquisition-
related
charges
 
Amortization of VMware's capitalized software from prior periods
 
Special tax charge
 
R&D tax credit
 
Non-GAAP
Gross margin
 
$
3,890.2

 
$
30.8

 
$
57.1

 
$

 
$
12.5

 
$

 
$

 
$
3,990.6

Operating income
 
1,268.6

 
246.9

 
98.1

 
30.0

 
12.5

 

 

 
1,656.2

Income tax provision
 
327.0

 
68.8

 
29.1

 
7.3

 
4.1

 
(11.5
)
 
(66.5
)
 
358.3

Net income attributable to EMC
 
869.9

 
159.6

 
63.9

 
22.7

 
6.7

 
10.7

 
60.0

 
1,193.6

Diluted earnings per share attributable to EMC
 
$
0.39

 
$
0.07

 
$
0.03

 
$
0.01

 
$

 
$
0.01

 
$
0.03

 
$
0.54


39



 
 
For the Three Months Ended December 31, 2011
 
 
GAAP
 
Stock-based
compensation
 
Intangible
asset
amortization
 
Restructuring
and
acquisition-
related
charges
 
Non-GAAP
Gross margin
 
$
3,523.3

 
$
31.7

 
$
40.8

 
$

 
$
3,595.8

Operating income
 
1,138.8

 
213.9

 
86.2

 
28.9

 
1,467.8

Income tax provision
 
174.9

 
47.6

 
27.3

 
3.7

 
253.4

Net income attributable to EMC
 
832.0

 
151.8

 
56.1

 
25.2

 
1,065.2

Diluted earnings per share attributable to EMC
 
$
0.38

 
$
0.07

 
$
0.03

 
$
0.01

 
$
0.49

 
 
For the Twelve Months Ended December 31, 2012
 
 
GAAP
 
Stock-based
compensation
 
Intangible
asset
amortization
 
Restructuring
and
acquisition-
related
charges
 
Amortization of VMware's capitalized software from prior periods
 
RSA special charge (release)
 
Loss on interest rate swaps
 
Gain on strategic investment
 
Special tax charge
 
R&D tax credit
 
Non-GAAP
Gross margin
 
$
13,638.4

 
$
125.5

 
$
199.1

 
$

 
$
61.5

 
$
(23.8
)
 
$

 
$

 
$

 
$

 
$
14,000.6

Operating income
 
3,963.9

 
920.3

 
364.7

 
110.6

 
61.5

 
(23.8
)
 

 

 

 

 
$
5,397.1

Income tax provision
 
917.6

 
230.5

 
112.7

 
21.5

 
19.9

 
(5.7
)
 
15.0

 

 
(11.5
)
 
(66.5
)
 
1,233.5

Net income attributable to EMC
 
2,732.6

 
622.5

 
237.6

 
88.3

 
33.0

 
(18.1
)
 
24.5

 
(31.6
)
 
10.7

 
60.0

 
3,759.5

Diluted earnings per share attributable to EMC
 
$
1.23

 
$
0.28

 
$
0.11

 
$
0.04

 
$
0.02

 
$
(0.01
)
 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.03

 
$
1.70

 
 
For the Twelve Months Ended December 31, 2011
 
 
GAAP
 
Stock-based
compensation
 
Intangible
asset
amortization
 
Restructuring
and
acquisition-
related
charges
 
RSA special charge (release)
 
Gain on strategic investment
 
Non-GAAP
Gross margin
 
$
12,168.9

 
$
123.7

 
$
157.2

 
$

 
$
66.3

 
$

 
$
12,516.1

Operating income
 
3,442.4

 
836.2

 
341.8

 
97.3

 
66.3

 

 
4,784

Income tax provision
 
640.4

 
194.6

 
107.9

 
15.9

 
10.1

 
(19.6
)
 
949.3

Net income attributable to EMC
 
2,461.3

 
587

 
223.9

 
80.9

 
56.2

 
(28.9
)
 
3,380.5

Diluted earnings per share attributable to EMC
 
$
1.10

 
$
0.26

 
$
0.10

 
$
0.04

 
$
0.03

 
$
(0.01
)
 
$
1.51

We also monitor our ability to generate free cash flow in relationship to our non-GAAP net income attributable to EMC over comparable periods. For the year ended December 31, 2012, our free cash flow was $5,024.2, an increase of 14% compared to the free cash flow generated for the year ended December 31, 2011. The free cash flow for the twelve months ended December 31, 2012 exceeded our non-GAAP net income attributable to EMC by $1,264.7. EMC uses free cash flow, among other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalized software development costs. Management believes that information regarding free cash flow provides investors with an important perspective on the cash available to make strategic acquisitions and investments, fund joint ventures, repurchase shares, service debt and fund ongoing operations. As free cash flow is not a measure of liquidity calculated in accordance with GAAP, free cash flow should be considered in addition to, but not as a substitute for, the analysis provided in the statements of cash flows.


40



The reconciliation of the above free cash flow from GAAP to non-GAAP is as follows:
 
 
For the Three Months Ended
 
For the Year Ended
 
 
December 31,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
Cash Flow from Operations
 
$
1,899.3

 
$
2,184.2

 
$
6,262.4

 
$
5,668.8

Capital Expenditures
 
(295.7
)
 
(200.2
)
 
(819.2
)
 
(801.4
)
Capitalized Software Development Costs
 
(103.3
)
 
(100.3
)
 
(419.1
)
 
(442.3
)
Free Cash Flow
 
$
1,500.4

 
$
1,883.8

 
$
5,024.2

 
$
4,425.1


Free cash flow represents a non-GAAP measure related to operating cash flows. In contrast, our GAAP measures of cash flow consist of three components. These are cash flows provided by operating activities of $6,262.4 and $5,668.8 for the years ended December 31, 2012 and 2011, respectively, cash used in investing activities of $3,905.1 and $3,543.5 for the years ended December 31, 2012 and 2011, respectively, and net cash used in financing activities of $2,149.0 and $1,718.5 for the years ended December 31, 2012 and 2011, respectively.

All of the foregoing non-GAAP financial measures have limitations. Specifically, the non-GAAP financial measures that exclude the items noted above do not include all items of income and expense that affect EMC’s operations or cash flows. Further, these non-GAAP financial measures are not prepared in accordance with GAAP, may not be comparable to non-GAAP financial measures used by other companies and do not reflect any benefit that such items may confer on EMC. Management compensates for these limitations by also considering EMC’s financial results as determined in accordance with GAAP.
Investments
The following table summarizes the composition of our investments at December 31, 2012:
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
(Losses)
 
Aggregate
Fair Value
U.S. government and agency obligations
 
$
2,187.0

 
$
10.2

 
$
(1.0
)
 
$
2,196.2

U.S. corporate debt securities
 
1,470.8

 
10.2

 
(0.5
)
 
1,480.5

High yield corporate debt securities
 
477.0

 
34.2

 
(0.8
)
 
510.4

Asset-backed securities
 
2.1

 

 

 
2.1

Municipal obligations
 
1,020.4

 
3.0

 
(0.5
)
 
1,022.9

Auction rate securities
 
73.5

 

 
(3.4
)
 
70.1

Foreign debt securities
 
1,264.2

 
9.1

 
(0.3
)
 
1,273.0

Total fixed income securities
 
6,494.9

 
66.7

 
(6.4
)
 
6,555.2

Publicly traded equity securities
 
48.5

 
38.7

 
(0.7
)
 
86.5

Total
 
$
6,543.4

 
$
105.4

 
$
(7.2
)
 
$
6,641.7

Our fixed income and equity investments are classified as available for sale and recorded at their fair market values. At December 31, 2012, with the exception of our auction rate securities, the vast majority of our investments were priced by third-party 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.
For all of our securities where the amortized cost basis was greater than the fair value at December 31, 2012, we have concluded that currently we neither plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating, third party guarantees and the time to maturity.

41



Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments
Contractual Obligations
We have various contractual obligations impacting our liquidity. The following represents our contractual obligations as of December 31, 2012:
 
 
Payments Due By Period
 
 
Total
 
Less than 1 year
 
1-2 years*
 
3-4 years**
 
More than
4 years
Operating leases
 
$
1,675.7

 
$
284.5

 
$
448.1

 
$
247.7

 
$
695.4

Convertible debt
 
1,710.1

 
1,710.1

 

 

 

Product warranty obligations
 
277.9

 

 

 

 

Other long-term obligations, including notes payable and current portion of long-term obligations and post retirement obligations
 
338.9

 
153.3

 
1.3

 
0.7

 
1.0

Purchase orders
 
2,370.3

 

 

 

 

Uncertain tax positions and related interest
 
304.9

 

 

 

 

Total
 
$
6,677.8

 
$
2,147.9

 
$
449.3

 
$
248.5

 
$
696.4

 
*
Includes payments from January 1, 2014 through December 31, 2015.
**
Includes payments from January 1, 2016 through December 31, 2017.
As of December 31, 2012, we had $277.9 of product warranty obligations, $182.7 of long-term post retirement obligations, $2,370.3 of purchase orders and $304.9 of liabilities for uncertain tax positions. We are not able to provide a reasonably reliable estimate of the timing of future payments relating to these obligations. The purchase orders are for manufacturing and non-manufacturing related goods and services. While the purchase orders are generally cancellable without penalty, certain vendor agreements provide for percentage-based cancellation fees or minimum restocking charges based on the nature of the product or service. Our operating leases are primarily for office space around the world. We believe leasing such space in most cases is more cost-effective than purchasing real estate.
The convertible debt pertains to the 2013 Notes. The holders of the 2013 Notes may convert their 2013 Notes at their option on any day prior to the close of business on the scheduled trading day immediately preceding September 1, 2013 only under the following circumstances: (1) during the five business-day period after any five consecutive trading-day period (the “measurement period”) in which the price per 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.
Based upon the closing price of our common stock for the prescribed measurement period during the three months ended December 31, 2012, the contingent conversion threshold on the 2013 Notes was exceeded. As a result, the 2013 Notes are convertible at the option of the holder through March 31, 2013. Accordingly, since the terms of the 2013 Notes require the principal to be settled in cash, we reclassified from equity the portion of the 2013 Notes attributable to the conversion feature which had not yet been accreted to its face value and the 2013 Notes have been classified as a current liability. For the holders to be able to continue to convert the 2013 Notes, our closing stock price must exceed $20.90 for 20 out of the last 30 trading days of each future quarter.
We have no other off-balance sheet arrangements.

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Guarantees and Indemnification Obligations
EMC’s subsidiaries have entered into arrangements with financial institutions for such institutions to provide guarantees for rent, taxes, insurance, leases, performance bonds, bid bonds and customs duties aggregating $151.0 as of December 31, 2012. The guarantees vary in length of time. In connection with these arrangements, we have agreed to guarantee substantially all of the guarantees provided by these financial institutions. EMC and certain of its subsidiaries have also entered into arrangements with financial institutions in order to facilitate the management of currency risk. EMC has agreed to guarantee the obligations of its subsidiaries under these arrangements.
We enter into agreements in the ordinary course of business with, among others, customers, resellers, joint ventures, OEMs, systems integrators and distributors. Most of these agreements require us to indemnify the other party against third-party claims alleging that an EMC product infringes a patent and/or copyright. Certain agreements in which we grant limited licenses to specific EMC-trademarks require us to indemnify the other party against third-party claims alleging that the use of the licensed trademark infringes a third-party trademark. Certain of these agreements require us to indemnify the other party against certain claims relating to the loss or processing of data, to real or tangible personal property damage, personal injury or the acts or omissions of EMC, its employees, agents or representatives. In addition, from time to time, we have made certain guarantees regarding the performance of our systems to our customers. We have also made certain guarantees for obligations of affiliated third parties.
We have agreements with certain vendors, financial institutions, lessors and service providers pursuant to which we have agreed to indemnify the other party for specified matters, such as acts and omissions of EMC, its employees, agents or representatives.
We have procurement or license agreements with respect to technology that is used in our products and agreements in which we obtain rights to a product from an OEM. Under some of these agreements, we have agreed to indemnify the supplier for certain claims that may be brought against such party with respect to our acts or omissions relating to the supplied products or technologies.
We have agreed to indemnify the directors, executive officers and certain other officers of EMC and our subsidiaries, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or officer.
In connection with certain acquisitions, we have agreed to indemnify the current and former directors, officers and employees of the acquired company in accordance with the acquired company’s by-laws and charter in effect immediately prior to the acquisition or in accordance with indemnification or similar agreements entered into by the acquired company and such persons. In a substantial majority of instances, we have maintained the acquired company’s directors’ and officers’ insurance, which should enable us to recover a portion of any future amounts paid. These indemnities vary in length of time.
Based upon our historical experience and information known as of December 31, 2012, we believe our liability on the above guarantees and indemnities at December 31, 2012 is not material.
Pension
We have a noncontributory defined benefit pension plan that was assumed as part of the Data General acquisition, which covers substantially all former Data General employees located in the United States. This plan has been frozen resulting in employees no longer accruing pension benefits for future services. The assets for this defined benefit plan are invested in common stocks and bonds. The market related value of the plan's assets is based upon the assets' fair value. The expected long-term rate of return on assets for the year ended December 31, 2012 remains at 6.75%. The Company has begun to shift, and may continue to shift in the future, its asset allocation to lower the percentage of investments in equity securities and increase the percentage of investments in long-duration fixed-income securities. The effect of such a change could result in a reduction to the long-term rate of return on plan assets and an increase in future pension expense consistent with the sensitivity described below. The actual long-term rate of return for the ten years ended December 31, 2012 was 8.40%. Based upon current market conditions, the expected long-term rate of return for 2013 will be 6.75%. A 25 basis point change in the expected long-term rate of return on the plans' assets would have approximately a $1.1 impact on the 2013 pension expense.
As of December 31, 2012, the pension plan had a $231.5 unrecognized actuarial loss that will be expensed over the average future working lifetime of active participants. For the year ended December 31, 2012, the discount rate to determine the benefit obligation was 3.71%. The discount rate selected was based on highly rated long-term bond indices and yield curves that match the duration of the plan's benefit obligations. The bond indices and yield curve analyses reflect high quality bond yields in effect at December 31, 2012. The discount rate reflects the rate at which the pension benefits could be effectively settled. A 25 basis point change in the discount rate would have approximately a $0.4 impact on the 2013 pension expense.

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Critical Accounting Policies
Our consolidated financial statements are based on the selection and application of generally accepted accounting principles which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. We believe that the areas set forth below may involve a higher degree of judgment and complexity in their application than our other accounting policies and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. Our significant accounting policies are presented within Note A to the consolidated financial statements.
Revenue Recognition
The application of the appropriate guidance within the Accounting Standards Codification to our revenue is dependent upon the specific transaction and whether the sale or lease includes information systems, including hardware storage and hardware-related devices, software, including required storage operating systems and optional value-added software application programs, and services, including installation, professional, software and hardware maintenance and training, or a combination of these items. As our business evolves, the mix of products and services sold will impact the timing of when revenue and related costs are recognized. Additionally, revenue recognition involves judgments, including estimates of fair value and selling price in arrangements with multiples deliverables, assessments of expected returns and the likelihood of nonpayment. We analyze various factors, including a review of specific transactions, the credit-worthiness of our customers, our historical experience and market and economic conditions. Changes in judgments on these factors could materially impact the timing and amount of revenue and costs recognized. Should market or economic conditions deteriorate, our actual return experience could exceed our estimate.
Warranty Costs
We accrue for systems warranty costs at the time of shipment. We estimate systems warranty costs based upon historical experience, specific identification of system requirements and projected costs to service items under warranty. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs. To the extent that our actual systems warranty costs differed from our estimates by 5 percent, consolidated pre-tax income would have increased/decreased by approximately $13.9 and $12.7 in 2012 and 2011, respectively.
Asset Valuation
Asset valuation includes assessing the recorded value of certain assets, including accounts and notes receivable, investments, inventories, goodwill and other intangible assets. We use a variety of factors to assess valuation, depending upon the asset.
Accounts and notes receivable are evaluated based upon the credit-worthiness of our customers, our historical experience, the age of the receivable and current market and economic conditions. Should current market and economic conditions deteriorate, our actual bad debt experience could exceed our estimate.
The market value of our short- and long-term investments is based primarily upon the listed price of the security. At December 31, 2012, with the exception of our auction rate securities, the vast majority of our 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 such as market transactions involving identical or comparable securities. In the event observable inputs are not available, we assess other factors to determine the security’s market value, including broker quotes or model valuations. Each month, we perform independent price verifications of all of our fixed income holdings. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair market value. In the event the fair market values that we determine are not accurate or we are unable to liquidate our investments in a timely manner, we may not realize the recorded value of our investments. We hold investments whose market values are below our cost. The determination of whether unrealized losses on investments are other-than-temporary is based upon the type of investments held, market conditions, financial condition and near-term prospects of the issuers, the time to maturity, length of the impairment, magnitude of the impairment and ability and intent to hold the investment to maturity. Should current market and economic conditions deteriorate, our ability to recover the cost of our investments may be impaired.
The recoverability of inventories is based upon the types and our levels of inventory held, forecasted demand, pricing, competition and changes in technology. Should current market and economic conditions deteriorate, our actual recovery could be less than our estimate.

44



Other intangible assets are evaluated based upon the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any of these factors could materially impact the value of the asset. We perform an assessment of the recoverability of goodwill, at least annually, in the fourth quarter of each year. Our assessment is performed at the reporting unit level which, for certain of our operating segments, is one step below our segment level. We employ both qualitative and quantitative tests of our goodwill. For several of our reporting units, we performed a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary and determined there was no impairment. For other reporting units we evaluated goodwill using a quantitative model. For all of our goodwill assessments we determined that there was sufficient market value above the carrying value of those reporting units so that we would not expect any near term changes in the operating results that would trigger an impairment. The determination of relevant comparable industry companies impacts our assessment of fair value. Should the operating performance of our reporting units change in comparison to these companies or should the valuation of these companies change, this could impact our assessment of the fair value of the reporting units. Our discounted cash flow analyses factor in assumptions on revenue and expense growth rates. These estimates are based upon our historical experience and projections of future activity, factoring in customer demand, changes in technology and a cost structure necessary to achieve the related revenues. Additionally, these discounted cash flow analyses factor in expected amounts of working capital and weighted average cost of capital. Changes in judgments on any of these factors could materially impact the value of the reporting unit.
Restructuring Charges
We recognized restructuring charges in 2012, 2011, 2010 and prior years. The restructuring charges include, among other items, estimated employee termination benefit costs, subletting leased facilities and the cost of terminating various contracts. The amount of the actual obligations may be different than our estimates due to various factors, including market conditions, negotiations with third parties and finalization of severance agreements with employees. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.
Accounting for Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is more likely than not, do not establish a valuation allowance. In the event that actual results differ from these estimates, our provision for income taxes could be materially impacted.
Accounting for Stock-Based Compensation
For our share-based payment awards, we make estimates and assumptions to determine the underlying value of stock options, including volatility, expected life and forfeiture rates. Additionally, for awards which are performance-based, we make estimates as to the probability of the underlying performance being achieved. Changes to these estimates and assumptions may have a significant impact on the value and timing of stock-based compensation expense recognized, which could have a material impact on our consolidated financial statements.


45



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk, primarily from changes in foreign exchange rates, interest rates and credit risk. To manage the volatility relating to foreign exchange risk, we enter into various derivative transactions pursuant to our policies to hedge against known or forecasted market exposures.
Foreign Exchange Risk Management
As a multinational corporation, we are exposed to changes in foreign exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the U.S. dollar, will be reported in U.S. dollars at the applicable exchange rate. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated daily rates. The primary foreign currency denominated transactions include revenue and expenses and the resultant accounts receivable and accounts payable balances are reflected on our balance sheet. Therefore, the change in the value of the U.S. dollar as compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. We enter into derivative contracts with the sole objective of decreasing the volatility of the impact of currency fluctuations. These exposures may change over time and could have a material adverse impact on our financial results. Historically, our primary exposure has related to sales denominated in the euro, the Japanese yen and the pound sterling. Additionally, we have exposure to emerging market economies, particularly in Latin America and Southeast Asia. We use foreign currency forward and option contracts to manage the risk of exchange rate fluctuations. In all cases, we use these derivative instruments to reduce our foreign exchange risk by essentially creating offsetting market exposures. The success of the hedging program depends on our forecasts of transaction activity in the various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses. The instruments we hold are not leveraged and are not held for trading or speculative purposes.
We have performed sensitivity analyses as of December 31, 2012, 2011 and 2010 based on scenarios in which market spot rates are hypothetically changed in order to produce a potential net exposure loss. The hypothetical change is based on a 10 percent strengthening or weakening in the U.S. dollar, whereby all other variables are held constant. The analyses include all of our foreign currency contracts outstanding as of December 31 for each year, as well as the offsetting underlying exposures. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign exchange loss of $19.4 million, $30.6 million and $3.6 million at December 31, 2012, 2011 and 2010, respectively.
Interest Rate Risk
We maintain an investment portfolio consisting of debt and equity securities of various types and maturities. The investments are classified as available-for-sale and are all denominated in U.S. dollars. These securities are recorded on the consolidated balance sheets at market value, with any unrealized gain or temporary non-credit related loss recorded in other comprehensive loss. These instruments are not leveraged and are not held for trading purposes.
We employ a Historical Value-At-Risk calculation to calculate value-at-risk for changes in interest rates for our combined investment portfolios. This model assumes that the relationships among market rates and prices that have been observed daily over the last 180 days are valid for estimating risk over the next trading day. This model measures the potential loss in fair value that could arise from changes in interest rates, using a 95% confidence level and assuming a one-day holding period. The value-at-risk on the debt portion of the investment portfolio was $3.3 million as of December 31, 2012 and $4.0 million as of December 31, 2011. The average, high and low value-at-risk amounts for 2012 and 2011 were as follows (in millions):
 
 
Average
 
High
 
Low
2012
 
$
3.3

 
$
5.5

 
$
2.3

2011
 
$
4.0

 
$
5.2

 
$
3.1

The average value represents an average of the quarter-end values. The high and low valuations represent the highest and lowest values of the quarterly amounts.
Credit Risk
Financial instruments that potentially subject us to concentration of credit risk consist principally of bank deposits, money market investments, short- and long-term investments, accounts and notes receivable, and foreign currency exchange contracts. Deposits held with banks in the United States may exceed the amount of FDIC insurance provided on such deposits. Deposits held with banks outside the United States generally do not benefit from FDIC insurance. The majority of our day-to-day banking operations globally are maintained with Citibank. We believe that Citibank’s position as a primary clearing bank, coupled with

46



the substantial monitoring of their daily liquidity, both by their internal processes and by the Federal Reserve and the FDIC, mitigate some of our risk.
Our money market investments are placed with money market funds that are 2a-7 qualified. Rule 2a-7, adopted by the SEC under the Investment Company Act of 1940, establishes strict standards for quality, diversity and maturity, the objective of which is to maintain a constant net asset value of a dollar. We limit our investments in money market funds to those that are primarily associated with large, money center financial institutions and limit our exposure to Prime funds. Our short- and long-term investments are invested primarily in investment grade securities, and we limit the amount of our investment in any single issuer and institution. Due to the European financial crisis, in the fourth quarter of 2011, we took steps to limit exposure to investments and financial institutions in this region.
We provide credit to customers in the normal course of business. Credit is extended to new customers based upon checks of credit references, credit scores and industry reputation. Credit is extended to existing customers based on prior payment history and demonstrated financial stability. The credit risk associated with accounts and notes receivables is generally limited due to the large number of customers and their broad dispersion over many different industries and geographic areas. We establish an allowance for the estimated uncollectible portion of our accounts and notes receivable. The allowance was $72.3 million and $64.7 million at December 31, 2012 and 2011, respectively. We customarily sell the notes receivable we derive from our leasing activity. Generally, we do not retain any recourse on the sale of these notes. Our sales are generally dispersed to a large number of customers, minimizing the reliance on any particular customer or group of customers.
The counterparties to our foreign currency exchange contracts consist of a number of major financial institutions. In addition to limiting the amount of contracts we enter into with any one party, we monitor the credit quality of the counterparties on an ongoing basis.
We purchase or license many sophisticated components and products from one or a limited number of qualified suppliers. If any of our suppliers were to cancel or materially change contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose customer orders. We attempt to minimize this risk by finding alternative suppliers or maintaining adequate inventory levels to meet our forecasted needs.



47



ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EMC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE