10-Q 1 emc-2013331x10q.htm 10-Q EMC-2013.3.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
 
FORM 10-Q 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
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
(Address of principal executive offices)
 
01748
(Zip Code)
(508) 435-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
  
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
  
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of common stock, par value $.01 per share, of the registrant outstanding as of March 31, 2013 was 2,100,840,084.




EMC CORPORATION
 

 
Page No.
 
 
 
 



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


2


PART I
FINANCIAL INFORMATION

Item 1.     FINANCIAL STATEMENTS
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 
March 31,
2013
 
December 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,304,305

 
$
4,714,156

Short-term investments
1,223,463

 
1,421,710

Accounts and notes receivable, less allowance for doubtful accounts of $63,233 and $68,465
2,784,197

 
3,433,389

Inventories
1,180,011

 
1,201,020

Deferred income taxes
978,002

 
941,775

Other current assets
579,030

 
465,305

Total current assets
12,049,008

 
12,177,355

Long-term investments
5,480,292

 
5,259,862

Property, plant and equipment, net
3,170,167

 
3,144,548

Intangible assets, net
1,937,525

 
2,035,340

Goodwill
13,993,912

 
13,839,700

Other assets, net
1,603,353

 
1,611,880

Total assets
$
38,234,257

 
$
38,068,685

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
939,295

 
$
1,040,664

Accrued expenses
2,397,825

 
2,522,059

Income taxes payable
59,167

 
514,302

Convertible debt (See Note 4)
1,653,394

 
1,652,442

Deferred revenue
4,905,977

 
4,574,529

Total current liabilities
9,955,658

 
10,303,996

Income taxes payable
306,424

 
293,105

Deferred revenue
3,201,093

 
2,976,328

Deferred income taxes
548,970

 
574,846

Other liabilities
341,531

 
338,915

Total liabilities
14,353,676

 
14,487,190

Convertible debt (See Note 4)
41,615

 
57,704

Commitments and contingencies (See Note 14)


 


Shareholders’ equity:
 
 
 
Preferred stock, par value $0.01; authorized 25,000 shares; none outstanding

 

Common stock, par value $0.01; authorized 6,000,000 shares; issued and outstanding 2,100,840 and 2,106,959 shares
21,009

 
21,070

Additional paid-in capital
3,448,386

 
3,691,112

Retained earnings
19,433,284

 
18,853,234

Accumulated other comprehensive loss, net
(241,971
)
 
(208,273
)
Total EMC Corporation’s shareholders’ equity
22,660,708

 
22,357,143

Non-controlling interest in VMware, Inc.
1,178,258

 
1,166,648

Total shareholders’ equity
23,838,966

 
23,523,791

Total liabilities and shareholders’ equity
$
38,234,257

 
$
38,068,685

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

3


EMC CORPORATION
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(unaudited)
 
 
For the
Three Months Ended
 
March 31,
2013
 
March 31,
2012
Revenues:
 
 
 
Product sales
$
3,111,936

 
$
3,068,857

Services
2,275,447

 
2,025,521

 
5,387,383

 
5,094,378

Costs and expenses:
 
 
 
Cost of product sales
1,355,985

 
1,301,550

Cost of services
733,573

 
679,611

Research and development
675,564

 
587,817

Selling, general and administrative
1,713,954

 
1,650,197

Restructuring and acquisition-related charges
147,724

 
25,893

Operating income
760,583

 
849,310

Non-operating income (expense):
 
 
 
Investment income
33,163

 
29,452

Interest expense
(20,854
)
 
(18,183
)
Other income (expense), net
(81,878
)
 
(43,690
)
Total non-operating income (expense)
(69,569
)
 
(32,421
)
Income before provision for income taxes
691,014

 
816,889

Income tax provision
76,060

 
190,910

Net income
614,954

 
625,979

Less: Net income attributable to the non-controlling interest in VMware, Inc.
(34,904
)
 
(39,137
)
Net income attributable to EMC Corporation
$
580,050

 
$
586,842

Net income per weighted average share, basic attributable to EMC Corporation common shareholders
$
0.28

 
$
0.28

Net income per weighted average share, diluted attributable to EMC Corporation common shareholders
$
0.26

 
$
0.27

Weighted average shares, basic
2,102,368

 
2,067,828

Weighted average shares, diluted
2,189,410

 
2,201,933

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

4


EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
For the Three Months Ended
 
March 31,
2013
 
March 31,
2012
Net income
$
614,954

 
$
625,979

Other comprehensive income (loss), net of taxes (benefits):
 
 
 
Foreign currency translation adjustments
(31,205
)
 
14,986

Changes in market value of investments:
 
 
 
Changes in unrealized gains (losses), net of taxes (benefits) of $1,451 and $15,718
719

 
26,488

Reclassification adjustment for net losses (gains) realized in net income, net of benefits (taxes) of $(2,104) and $(1,024)
(3,761
)
 
(1,529
)
Net change in market value of investments
(3,042
)
 
24,959

Changes in market value of derivatives:
 
 
 
Changes in market value of derivatives, net of taxes (benefits) of $1,091 and $5,918
5,866

 
10,001

Reclassification adjustment for net losses (gains) included in net income, net of benefits (taxes) of $(768) and $5
(5,374
)
 
33

Net change in the market value of derivatives
492

 
10,034

Other comprehensive income (loss)
(33,755
)
 
49,979

Comprehensive income
581,199

 
675,958

Less: Net income attributable to the non-controlling interest in VMware, Inc.
(34,904
)
 
(39,137
)
Less: Other comprehensive income attributable to the non-controlling interest in VMware, Inc.
57

 
(662
)
Comprehensive income attributable to EMC Corporation
$
546,352

 
$
636,159

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

5


EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
For the Three Months Ended
 
March 31,
2013
 
March 31,
2012
Cash flows from operating activities:
 
 
 
Cash received from customers
$
6,615,763

 
$
6,023,588

Cash paid to suppliers and employees
(4,404,823
)
 
(4,114,849
)
Dividends and interest received
39,080

 
18,483

Interest paid
(1,149
)
 
(1,342
)
Income taxes paid
(536,075
)
 
(237,692
)
Net cash provided by operating activities
1,712,796

 
1,688,188

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(165,356
)
 
(153,631
)
Capitalized software development costs
(105,792
)
 
(105,848
)
Purchases of short- and long-term available-for-sale securities
(1,819,390
)
 
(1,585,822
)
Sales of short- and long-term available-for-sale securities
1,414,234

 
1,439,393

Maturities of short- and long-term available-for-sale securities
387,525

 
273,982

Business acquisitions, net of cash acquired
(184,040
)
 
(102,105
)
Purchases of strategic and other related investments
(35,203
)
 
(3,864
)
Sales of strategic and other related investments

 
16,950

Joint venture funding
(94,737
)
 

Net cash used in investing activities
(602,759
)
 
(220,945
)
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of EMC’s common stock
42,371

 
180,189

Proceeds from the issuance of VMware’s common stock
67,889

 
111,041

EMC repurchase of EMC’s common stock
(323,458
)
 

EMC purchase of VMware’s common stock
(124,579
)
 
(39,993
)
VMware repurchase of VMware’s common stock
(181,961
)
 

Excess tax benefits from stock-based compensation
33,048

 
106,024

Proceeds (payments) of short- and long-term obligations, net
(5,658
)
 
2,387

Payment of convertible debt

 
(1,699,816
)
Net cash used in financing activities
(492,348
)
 
(1,340,168
)
Effect of exchange rate changes on cash and cash equivalents
(27,540
)
 
11,050

Net increase (decrease) in cash and cash equivalents
590,149

 
138,125

Cash and cash equivalents at beginning of period
4,714,156

 
4,491,604

Cash and cash equivalents at end of period
$
5,304,305

 
$
4,629,729

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Net income
$
614,954

 
$
625,979

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
391,191

 
367,453

Non-cash interest expense on convertible debt
12,245

 
9,323

Non-cash restructuring and other special charges
6,662

 
4,477

Stock-based compensation expense
235,952

 
200,572

Provision for (recovery of) doubtful accounts
(7,913
)
 
9,472

Deferred income taxes, net
(61,662
)
 
(52,320
)
Excess tax benefits from stock-based compensation
(33,048
)
 
(106,024
)
Other, net
5,844

 
(8,987
)
Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts and notes receivable
653,858

 
299,977

Inventories
(46,022
)
 
(96,249
)
Other assets
52,764

 
(19,580
)
Accounts payable
(109,913
)
 
(28,686
)
Accrued expenses
(194,527
)
 
(151,721
)
Income taxes payable
(392,640
)
 
5,538

Deferred revenue
582,435

 
619,761

Other liabilities
2,616

 
9,203

Net cash provided by operating activities
$
1,712,796

 
$
1,688,188

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

6


EMC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
For the three months ended March 31, 2013: 
  
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-controlling
Interest in
VMware
 
Shareholders’
Equity
Shares
 
Par Value
 
 
 
 
 
Balance, January 1, 2013
2,106,959

 
$
21,070

 
$
3,691,112

 
$
18,853,234

 
$
(208,273
)
 
$
1,166,648

 
$
23,523,791

Stock issued through stock option and stock purchase plans
3,354

 
34

 
42,337

 

 

 

 
42,371

Tax benefit from stock options exercised

 

 
44,958

 

 

 

 
44,958

Restricted stock grants, cancellations and withholdings, net
3,175

 
31

 
(38,506
)
 

 

 

 
(38,475
)
Repurchase of common stock
(12,648
)
 
(126
)
 
(307,890
)
 

 

 

 
(308,016
)
EMC purchase of VMware stock

 

 
(95,416
)
 

 

 
(19,458
)
 
(114,874
)
Stock options issued in business acquisitions

 

 
(460
)
 

 

 

 
(460
)
Stock-based compensation

 

 
228,373

 

 

 

 
228,373

Impact from equity transactions of VMware, Inc.

 

 
(131,976
)
 

 

 
(3,779
)
 
(135,755
)
Change in market value of investments

 

 

 

 
(3,105
)
 
63

 
(3,042
)
Change in market value of derivatives

 

 

 

 
612

 
(120
)
 
492

Translation adjustment

 

 

 

 
(31,205
)
 

 
(31,205
)
Convertible debt conversions and warrant settlement

 

 
(235
)
 

 

 

 
(235
)
Reclassification of convertible debt (to)/from mezzanine (Note 4)

 

 
16,089

 

 

 

 
16,089

Net income

 

 

 
580,050

 

 
34,904

 
614,954

Balance, March 31, 2013
2,100,840

 
$
21,009

 
$
3,448,386

 
$
19,433,284

 
$
(241,971
)
 
$
1,178,258

 
$
23,838,966

For the three months ended March 31, 2012:
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-controlling
Interest in
VMware
 
Shareholders’
Equity
Shares
 
Par Value
 
 
 
 
 
Balance, January 1, 2012
2,048,890

 
$
20,489

 
$
3,405,513

 
$
16,120,621

 
$
(235,009
)
 
$
968,089

 
$
20,279,703

Stock issued through stock option and stock purchase plans
15,145

 
152

 
180,037

 

 

 

 
180,189

Tax benefit from stock options exercised

 

 
143,182

 

 

 

 
143,182

Restricted stock grants, cancellations and withholdings, net
3,330

 
33

 
(47,708
)
 

 

 

 
(47,675
)
EMC purchase of VMware stock

 

 
(34,485
)
 

 

 
(5,508
)
 
(39,993
)
Stock-based compensation

 

 
203,043

 

 

 

 
203,043

Impact from equity transactions of VMware, Inc.

 

 
18,991

 

 

 
77,605

 
96,596

Change in market value of investments

 

 

 

 
24,464

 
495

 
24,959

Change in market value of derivatives

 

 

 

 
9,867

 
167

 
10,034

Translation adjustment

 

 

 

 
14,986

 

 
14,986

Convertible debt conversions and warrant settlement
32,345

 
323

 
(1,025
)
 

 

 

 
(702
)
Reclassification of convertible debt (to)/from mezzanine (Note 4)

 

 
15,679

 

 

 

 
15,679

Net income

 

 

 
586,842

 

 
39,137

 
625,979

Balance, March 31, 2012
2,099,710

 
$
20,997

 
$
3,883,227

 
$
16,707,463

 
$
(185,692
)
 
$
1,079,985

 
$
21,505,980

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

7

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  Basis of Presentation
Company
EMC Corporation (“EMC”) and its subsidiaries develop, deliver and support the Information Technology (“IT”) industry’s broadest range of information infrastructure and virtual infrastructure technologies, solutions and services.
EMC’s Information Infrastructure business provides a foundation for organizations to store, manage, protect, analyze and secure their vast and ever-increasing quantities of information, improve business agility, lower cost of ownership and enhance their competitive advantage within traditional data centers, virtual data centers and cloud-based IT infrastructures. EMC’s Information Infrastructure business comprises three segments – Information Storage, RSA Information Security and Information Intelligence Group.
EMC’s VMware Virtual Infrastructure business, which is represented by EMC’s majority equity stake in VMware, Inc. (“VMware”), is the leader in virtualization infrastructure solutions utilized by organizations to help them transform the way they build, deliver and consume IT resources. VMware’s virtualization infrastructure solutions, which include a suite of products designed to deliver a software-defined data center, run on industry-standard desktop computers and servers and support a wide range of operating system and application environments, as well as networking and storage infrastructures.
General
The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These consolidated financial statements include the accounts of EMC, its wholly owned subsidiaries and VMware, a company majority-owned by EMC. All intercompany transactions have been eliminated.
Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. Accordingly, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2013.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. The interim consolidated financial statements, in the opinion of management, reflect all adjustments necessary to fairly state the results as of and for the three-month periods ended March 31, 2013 and 2012.
Net Income Per Share
Basic net income per weighted average share has been computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per weighted average share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of stock options, restricted stock and restricted stock units, our $1.725 billion 1.75% convertible senior notes due 2013 and associated warrants. Additionally, for purposes of calculating diluted net income per weighted average share, net income is adjusted for the difference between VMware’s reported diluted and basic net income per weighted average share, if any, multiplied by the number of shares of VMware held by EMC.
Reclassifications and Adjustments
Certain prior year amounts have been reclassified to conform with the current year's presentation.
As discussed in Note A to the consolidated financial statements on Form 10-K for the year ended December 31, 2012, we have reflected the correction of an immaterial prior period accounting error identified in the second quarter of 2012 in the statement of shareholders' equity for the three months ended March 31, 2012. The error resulted in an overstatement of our deferred tax liability and an understatement of our additional paid-in capital of $370.6 million at March 31, 2012 which have been revised in these financial statements.

8

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued new guidance which requires companies to present information about reclassification adjustments from accumulated other comprehensive income in their financial statements or footnotes. The adoption of this new accounting guidance in the first quarter of 2013 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In December 2011, the FASB issued guidance enhancing disclosure requirements about the nature of an entity's right to offset and related arrangements associated with its financial instruments and derivative instruments. The guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. In January 2013, the FASB clarified that the scope of this guidance applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement, or similar agreements. The adoption of this new accounting guidance in the first quarter of 2013 did not have a material impact on our consolidated financial position, results of operations or cash flows. 
In March 2013, the FASB issued guidance that requires a parent company to release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This new guidance is effective beginning after December 15, 2013.  We do not anticipate that the adoption of this new guidance will have a material impact on our consolidated financial position, results of operations or cash flows. 

2.  Non-controlling Interest in VMware, Inc.
The non-controlling interests’ share of equity in VMware is reflected as Non-controlling interest in VMware, Inc. in the accompanying consolidated balance sheets and was $1,178.3 million and $1,166.6 million as of March 31, 2013 and December 31, 2012, respectively. At March 31, 2013, EMC held approximately 97% of the combined voting power of VMware’s outstanding common stock and approximately 80% of the economic interest in VMware.
The effect of changes in our ownership interest in VMware on our equity was as follows (table in thousands):
 
For the Three Months Ended
 
March 31,
2013
 
March 31,
2012
Net income attributable to EMC Corporation
$
580,050

 
$
586,842

Transfers (to) from the non-controlling interest in VMware, Inc.:
 
 
 
Increase in EMC Corporation’s additional paid-in-capital for VMware’s equity issuances
35,777

 
61,261

Decrease in EMC Corporation’s additional paid-in-capital for VMware’s other equity activity
(167,753
)
 
(42,270
)
Net transfers (to) from non-controlling interest
(131,976
)
 
18,991

Change from net income attributable to EMC Corporation and transfers from the non-controlling interest in VMware, Inc.
$
448,074

 
$
605,833

3.  Business Combinations, Intangibles and Goodwill

During the three months ended March 31, 2013, VMware acquired a provider of software that optimizes storage performance and utilization in virtual environments. The consideration for this acquisition was $184.5 million, net of cash acquired. The consideration paid was allocated to the fair value of the assets acquired and liabilities assumed based on estimated fair values as of the acquisition date.

The allocation to goodwill, intangibles and net liabilities was approximately $162.3 million, $32.4 million and $10.2 million, respectively. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized. The results of this acquisition have been included in the consolidated financial statements from the date of purchase. Pro forma results of operations have not been presented as the results of the acquired company were not material to our consolidated results of operations for the three months ended March 31, 2013 or 2012.


9

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Intangible Assets
Intangible assets, excluding goodwill, as of March 31, 2013 and December 31, 2012 consist of (tables in thousands): 
 
March 31, 2013
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Book Value
Purchased technology
$
2,234,505

 
$
(1,262,348
)
 
$
972,157

Patents
225,146

 
(90,673
)
 
134,473

Software licenses
96,695

 
(88,542
)
 
8,153

Trademarks and tradenames
172,821

 
(105,622
)
 
67,199

Customer relationships and customer lists
1,367,327

 
(756,562
)
 
610,765

In-process research and development
8,600

 

 
8,600

Leasehold interest
144,811

 
(7,910
)
 
136,901

Other
25,972

 
(26,695
)
 
(723
)
Total intangible assets, excluding goodwill
$
4,275,877

 
$
(2,338,352
)
 
$
1,937,525

 
December 31, 2012
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Book Value
Purchased technology
$
2,233,293

 
$
(1,207,373
)
 
$
1,025,920

Patents
225,146

 
(86,954
)
 
138,192

Software licenses
96,218

 
(87,999
)
 
8,219

Trademarks and tradenames
172,821

 
(101,399
)
 
71,422

Customer relationships and customer lists
1,377,465

 
(723,403
)
 
654,062

Leasehold interest
144,811

 
(6,843
)
 
137,968

Other
25,972

 
(26,415
)
 
(443
)
Total intangible assets, excluding goodwill
$
4,275,726

 
$
(2,240,386
)
 
$
2,035,340

 
Goodwill
Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment, for the three months ended March 31, 2013 and the year ended December 31, 2012 consist of (tables in thousands): 
 
Three Months Ended March 31, 2013
 
Information
Storage
 
Information
Intelligence
Group
 
RSA
Information
Security
 
VMware
Virtual
Infrastructure
 
Total
Balance, beginning of the period
$
7,441,351

 
$
1,484,220

 
$
2,022,406

 
$
2,891,723

 
$
13,839,700

Goodwill resulting from acquisitions

 

 

 
162,334

 
162,334

Finalization of purchase price allocations
270

 
6

 
(1,003
)
 
(7,395
)
 
(8,122
)
Balance, end of the period
$
7,441,621

 
$
1,484,226

 
$
2,021,403

 
$
3,046,662

 
$
13,993,912

 
Year Ended December 31, 2012
 
Information
Storage
 
Information
Intelligence
Group
 
RSA
Information
Security
 
VMware
Virtual
Infrastructure
 
Total
Balance, beginning of the year
$
7,033,965

 
$
1,469,216

 
$
1,849,116

 
$
1,802,673

 
$
12,154,970

Goodwill resulting from acquisitions
437,868

 
15,097

 
179,389

 
1,091,673

 
1,724,027

Tax deduction from exercise of stock options
(7
)
 
(93
)
 

 

 
(100
)
Finalization of purchase price allocations
(1,281
)
 

 
(6,099
)
 
(2,623
)
 
(10,003
)
Goodwill derecognized in divestiture of business
(29,194
)
 

 

 

 
(29,194
)
Balance, end of the year
$
7,441,351

 
$
1,484,220

 
$
2,022,406

 
$
2,891,723

 
$
13,839,700



10

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


4.  Convertible Debt

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

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

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

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

At March 31, 2013, the contingent conversion thresholds on the 2013 Notes were exceeded. As a result, the 2013 Notes continue to be convertible at the option of the holder through June 30, 2013. Accordingly, since the terms of the 2013 Notes require the principal to be settled in cash, we reclassified to the mezzanine from shareholders’ equity the portion of the 2013 Notes attributable to the conversion feature which had not yet been accreted to its face value, and the 2013 Notes were classified as a current liability. Contingencies continue to exist regarding the holders’ ability to convert the 2013 Notes in future quarters. The determination of whether the 2013 Notes are convertible will be performed on a quarterly basis. Consequently, the 2013 Notes might not be convertible in future quarters. Approximately $30.0 million of the 2013 Notes have been converted as of March 31, 2013.

The carrying amount of the 2013 Notes reported in the consolidated balance sheets as of March 31, 2013 was $1,695.0 million and the fair value was $2,534.0 million. The carrying amount of the equity component of the 2013 Notes was $283.5 million at March 31, 2013. As of March 31, 2013, the unamortized discount on the 2013 Notes consists of $41.6 million, which will be fully amortized by December 1, 2013.

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

The following table represents the key components of our interest expense on convertible debt (table in thousands):
 
For the Three Months Ended
 
March 31,
2013
 
March 31,
2012
Contractual interest expense on the coupon
$
7,460

 
$
7,523

Amortization of the discount component recognized as interest expense
15,578

 
14,700

Total interest expense on the convertible debt
$
23,038

 
$
22,223


11

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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

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

The Purchased Options and associated warrants will generally have the effect of increasing the conversion price of the 2013 Notes to approximately $19.55 per share of our common stock, representing an approximate 55% conversion premium based on the closing price of $12.61 per share of our common stock on November 13, 2006, which was the issuance date of the 2013 Notes.
In 2010, EMC entered into interest rate swap contracts with an aggregate notional amount of approximately $900 million. These swaps were designated as cash flow hedges of the semi-annual interest payments of the forecasted issuance of debt in 2011 when our 2011 Notes were scheduled to become due. As such, the unrealized loss on these hedges was recognized in other comprehensive loss. In November 2011, we settled the swaps and replaced them with new interest rate swap contracts for the forecasted issuance of debt in 2012. In April 2012, we settled the swaps and replaced them with new interest rate swap contracts for the forecasted issuance of debt in 2012. Each of these new swaps was deemed as an effective hedge as the notional amounts and other terms matched the underlying hedged item. Losses on the interest rate swap contracts at the time of settlement of $141.0 million in November 2011 and $23.0 million in April 2012 were deferred as they were expected to be realized over the life of the new debt issued under the related interest rate swap contracts and recognized as a component of interest expense in the consolidated income statements.

In June 2012, management changed its forecast date for the issuance of debt from December 31, 2012 to the first quarter of 2014. Consequently, hedge accounting effectively ceased as the terms of the swaps no longer matched the terms of the underlying hedged item resulting in changes in the fair value of the swaps being recorded in the consolidated income statement. The swaps were subsequently re-designated as cash flow hedges and achieved hedge accounting. The change in the forecasted timeframe for the issuance of debt resulted in certain previously-anticipated hedge interest payments no longer being expected to occur within the window covered by the hedge designation. As a result, $39.5 million of accumulated realized losses in other comprehensive income related to these previously-anticipated interest payments were reclassified from other comprehensive income and recognized in the 2012 consolidated income statements.

In July 2012, we settled the interest rate swap contracts and did not replace them. Losses on the interest rate swap contracts at the time of settlement of $45.5 million were deferred as they are expected to be realized over the life of the new debt issued under the related interest rate swap contracts and recognized as a component of interest expense in the consolidated income statements. At March 31, 2013, we had $176.5 million of accumulated realized losses related to the settled swaps in accumulated other comprehensive income.

12

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


5.  Fair Value of Financial Assets and Liabilities
Our fixed income and equity investments are classified as available for sale and recorded at their fair market values. We determine fair value using the following hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Most of our fixed income securities are classified as Level 2, with the exception of some of our U.S. government and agency obligations and our investments in publicly traded equity securities, which are classified as Level 1, and all of our auction rate securities, which are classified as Level 3. In addition, our strategic investments held at cost are classified as Level 3. At March 31, 2013, the vast majority of our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities. In the event observable inputs are not available, we assess other factors to determine the security’s market value, including broker quotes or model valuations. Each month, we perform independent price verifications of all of our fixed income holdings. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair market value.
In general, investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. Our publicly traded equity securities are classified as long-term investments and our strategic investments held at cost are classified as other assets. As a result of the lack of liquidity for auction rate securities, we have classified these as long-term investments as of March 31, 2013 and December 31, 2012. At March 31, 2013 and December 31, 2012, all of our short- and long-term investments, excluding auction rate securities, were recognized at fair value, which was determined based upon observable inputs from our pricing vendors for identical or similar assets. At March 31, 2013 and December 31, 2012, auction rate securities were valued using a discounted cash flow model.
 
The following tables summarize the composition of our short- and long-term investments at March 31, 2013 and December 31, 2012 (tables in thousands):
 
March 31, 2013
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
(Losses)
 
Aggregate
Fair Value
U.S. government and agency obligations
$
2,077,989

 
$
8,548

 
$
(1,451
)
 
$
2,085,086

U.S. corporate debt securities
1,512,318

 
8,924

 
(436
)
 
1,520,806

High yield corporate debt securities
496,222

 
33,603

 
(766
)
 
529,059

Asset-backed securities
3,731

 
3

 
(4
)
 
3,730

Municipal obligations
966,539

 
4,799

 
(45
)
 
971,293

Auction rate securities
72,076

 

 
(3,829
)
 
68,247

Foreign debt securities
1,408,091

 
8,092

 
(720
)
 
1,415,463

Total fixed income securities
6,536,966

 
63,969

 
(7,251
)
 
6,593,684

Publicly traded equity securities
70,374

 
40,313

 
(616
)
 
110,071

Total
$
6,607,340

 
$
104,282

 
$
(7,867
)
 
$
6,703,755

We held approximately $1.4 billion in foreign debt securities at March 31, 2013. These securities have an average credit rating of A+, and approximately 5% of these securities are deemed sovereign debt with an average credit rating of AA+. None of the securities deemed sovereign debt are from Greece, Italy, Ireland, Portugal, Spain or Cyprus. Additionally, we have an immaterial amount of exposure to French agencies and financial institutions.

13

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


 
December 31, 2012
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
(Losses)
 
Aggregate
Fair Value
U.S. government and agency obligations
$
2,190,957

 
$
10,225

 
$
(967
)
 
$
2,200,215

U.S. corporate debt securities
1,480,026

 
10,189

 
(509
)
 
1,489,706

High yield corporate debt securities
485,799

 
34,223

 
(800
)
 
519,222

Asset-backed securities
2,115

 
3

 

 
2,118

Municipal obligations
1,032,320

 
3,007

 
(540
)
 
1,034,787

Auction rate securities
73,545

 

 
(3,365
)
 
70,180

Foreign debt securities
1,270,035

 
9,082

 
(255
)
 
1,278,862

Total fixed income securities
6,534,797

 
66,729

 
(6,436
)
 
6,595,090

Publicly traded equity securities
46,665

 
40,548

 
(731
)
 
86,482

Total
$
6,581,462

 
$
107,277

 
$
(7,167
)
 
$
6,681,572


The following tables represent our fair value hierarchy for our financial assets and liabilities measured at fair value as of March 31, 2013 and December 31, 2012 (in thousands):
 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
1,622,174

 
$

 
$

 
$
1,622,174

Cash equivalents
3,225,860

 
456,271

 

 
3,682,131

U.S. government and agency obligations
1,137,609

 
947,477

 

 
2,085,086

U.S. corporate debt securities

 
1,520,806

 

 
1,520,806

High yield corporate debt securities

 
529,059

 

 
529,059

Asset-backed securities

 
3,730

 

 
3,730

Municipal obligations

 
971,293

 

 
971,293

Auction rate securities

 

 
68,247

 
68,247

Foreign debt securities

 
1,415,463

 

 
1,415,463

Publicly traded equity securities
110,071

 

 

 
110,071

Total cash and investments
$
6,095,714

 
$
5,844,099

 
$
68,247

 
$
12,008,060

Other items:
 
 
 
 
 
 
 
Strategic investments held at cost
$

 
$

 
$
325,437

 
$
325,437

Investment in joint venture

 

 
33,226

 
33,226

Convertible debt

 
(2,534,038
)
 

 
(2,534,038
)
Foreign exchange derivative assets

 
22,261

 

 
22,261

Foreign exchange derivative liabilities

 
(40,403
)
 

 
(40,403
)
Commodity derivative assets

 
75

 

 
75



14

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
1,493,843

 
$

 
$

 
$
1,493,843

Cash equivalents
2,898,183

 
362,034

 

 
3,260,217

U.S. government and agency obligations
1,324,919

 
871,290

 

 
2,196,209

U.S. corporate debt securities

 
1,480,450

 

 
1,480,450

High yield corporate debt securities

 
510,412

 

 
510,412

Asset-backed securities

 
2,117

 

 
2,117

Municipal obligations

 
1,022,889

 

 
1,022,889

Auction rate securities

 

 
70,086

 
70,086

Foreign debt securities

 
1,273,023

 

 
1,273,023

Publicly traded equity securities
86,482

 

 

 
86,482

Total cash and investments
$
5,803,427

 
$
5,522,215

 
$
70,086

 
$
11,395,728

Other items:
 
 
 
 
 
 
 
Strategic investments held at cost
$

 
$

 
$
351,855

 
$
351,855

Investment in joint venture

 

 
32,745

 
32,745

Convertible debt

 
(2,665,690
)
 

 
(2,665,690
)
Foreign exchange derivative assets

 
30,189

 

 
30,189

Foreign exchange derivative liabilities

 
(34,590
)
 

 
(34,590
)
Commodity derivative assets

 
(588
)
 

 
(588
)

Our auction rate securities are predominantly rated investment grade and are primarily collateralized by student loans. The underlying loans of all but two of our auction rate securities, with a market value of $16.0 million, have partial guarantees by the U.S. government as part of the Federal Family Education Loan Program (“FFELP”) through the U.S. Department of Education. FFELP guarantees at least 95% of the loans which collateralize the auction rate securities. We believe the quality of the collateral underlying most of our auction rate securities will enable us to recover our principal balance.
To determine the estimated fair value of our investment in auction rate securities, we used a discounted cash flow model using a five year time horizon. As of March 31, 2013, the coupon rates used ranged from 0% to 5% and the discount rate was 1%, which rate represents the rate at which similar FFELP backed securities with a five year time horizon outside of the auction rate securities market were trading at March 31, 2013. The assumptions used in preparing the discounted cash flow model include an incremental discount rate for the lack of liquidity in the market (“liquidity discount margin”) for an estimated period of time. The discount rate we selected was based on AA-rated banks as the majority of our portfolio is invested in student loans where EMC acts as a financier to these lenders. The liquidity discount margin represents an estimate of the additional return an investor would require for the lack of liquidity of these securities over an estimated five year holding period. The rate used for the discount margin was 1% at March 31, 2013 and December 31, 2012 due to the narrowing of credit spreads on AA-rated banks during 2012.
The following table provides a summary of changes in fair value of our Level 3 auction rate securities for the three months ended March 31, 2013 and 2012 (table in thousands):
 
For the Three Months Ended
 
March 31, 2013
 
March 31, 2012
Balance, beginning of the period
$
70,180

 
$
74,687

Calls at par value
(580
)
 
(219
)
Other-than-temporary impairment loss
(889
)
 

(Increase) decrease in previously recognized unrealized losses included in other comprehensive income
(464
)
 
4,026

Balance, end of the period
$
68,247

 
$
78,494

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

15

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



We account for our joint venture LenovoEMC using the fair value method of accounting. To determine the estimated fair value of our investment, we use a discounted cash flow model using a three year time horizon. The discount rate used was 6%, which represents the incremental borrowing rate for a market participant. The assumptions used in preparing the discounted cash flow model include an analysis of estimated Lenovo NAS revenue against a prescribed target as well as consideration of the purchase price put and call features included in the joint venture agreement. The put and call features create a floor and a cap on the fair value of the investment. As such, there is a limit to the impact on the fair value that would result from significant changes in the unobservable inputs.

The following table provides a summary of changes in fair value of our LenovoEMC joint venture for the three months ended March 31, 2013 and 2012 (table in thousands):
 
For the Three Months Ended
 
March 31, 2013
 
March 31, 2012
Balance, beginning of the period
$
32,745

 
$

Realized gain included in other income (expense)
481

 

Balance, end of period
$
33,226

 
$

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

Investment Losses

Unrealized losses on investments at March 31, 2013 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows (table in thousands):
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
U.S. government and agency obligations
$
254,486

 
$
(1,235
)
 
$
9,295

 
$
(216
)
 
$
263,781

 
$
(1,451
)
U.S. corporate debt securities
273,100

 
(436
)
 

 

 
273,100

 
(436
)
High yield corporate debt securities
43,943

 
(673
)
 
164

 
(93
)
 
44,107

 
(766
)
Asset-backed securities
2,666

 
(4
)
 
6

 

 
2,672

 
(4
)
Municipal obligations
24,624

 
(33
)
 
9,587

 
(12
)
 
34,211

 
(45
)
Auction rate securities

 

 
68,247

 
(3,829
)
 
68,247

 
(3,829
)
Foreign debt securities
298,632

 
(720
)
 

 

 
298,632

 
(720
)
Publicly traded equity securities
1,315

 
(616
)
 

 

 
1,315

 
(616
)
Total
$
898,766

 
$
(3,717
)
 
$
87,299

 
$
(4,150
)
 
$
986,065

 
$
(7,867
)
For all of our securities for which the amortized cost basis was greater than the fair value at March 31, 2013, 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.

16

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Contractual Maturities
The contractual maturities of fixed income securities held at March 31, 2013 are as follows (table in thousands):
 
March 31, 2013
 
Amortized
Cost Basis
 
Aggregate
Fair Value
Due within one year
$
1,220,229

 
$
1,223,463

Due after 1 year through 5 years
4,423,210

 
4,450,632

Due after 5 years through 10 years
484,206

 
511,333

Due after 10 years
409,321

 
408,256

Total
$
6,536,966

 
$
6,593,684


6.  Inventories
Inventories consist of (table in thousands):
 
March 31,
2013
 
December 31,
2012
Work-in-process
$
612,423

 
$
605,534

Finished goods
567,588

 
595,486

 
$
1,180,011

 
$
1,201,020

7.  Accounts and Notes Receivable and Allowance for Credit Losses
Accounts and notes receivable are recorded at cost. The portion of our notes receivable due in one year or less are included in accounts and notes receivable and the long-term portion is included in other assets, net on the consolidated balance sheets. Lease receivables arise from sales-type leases of products. We typically sell, without recourse, the contractual right to the lease payment stream and assets under lease to third parties. For certain customers, we retain the lease.
The contractual amounts due under the leases we retained as of March 31, 2013 were as follows (table in thousands):
Year
Contractual Amounts
Due Under Leases
Due within one year
$
91,116

Due within two years
64,952

Due within three years
55,644

Thereafter
682

Total
212,394

Less amounts representing interest
(6,681
)
Present value
205,713

Current portion (included in accounts and notes receivable)
89,050

Long-term portion (included in other assets, net)
$
116,663

Subsequent to March 31, 2013, we sold $35.7 million of these notes to third parties without recourse.
We maintain an allowance for credit losses on our accounts and notes receivable. The allowance is based on the credit worthiness of our customers, including an assessment of the customer’s financial position, operating performance and their ability to meet their contractual obligation. We assess the credit scores for our customers each quarter. In addition, we consider our historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account.
In the event we determine that a lease may not be paid, we include in our allowance an amount for the outstanding balance related to the lease receivable. As of March 31, 2013, amounts from lease receivables past due for more than 90 days were not significant.

17

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following table presents the activity of our allowance for credit losses related to lease receivables for the three months ended March 31, 2013 and 2012 (table in thousands):
 
March 31,
2013
 
March 31,
2012
Balance, beginning of the period
$
16,777

 
$
24,247

Recoveries
(5,404
)
 
(11,758
)
Provisions
5,885

 
8,559

Balance, end of the period
$
17,258

 
$
21,048

 
Gross lease receivables totaled $212.4 million and $328.8 million as of March 31, 2013 and December 31, 2012, respectively, before the allowance. The components of these balances were individually evaluated for impairment.
8.  Property, Plant and Equipment
Property, plant and equipment consist of (table in thousands):
 
March 31,
2013
 
December 31,
2012
Furniture and fixtures
$
203,983

 
$
197,429

Equipment and software
5,442,443

 
5,345,314

Buildings and improvements
1,898,946

 
1,872,559

Land
120,656

 
120,654

Building construction in progress
232,892

 
196,891

 
7,898,920

 
7,732,847

Accumulated depreciation
(4,728,753
)
 
(4,588,299
)
 
$
3,170,167

 
$
3,144,548

Building construction in progress at March 31, 2013 includes $73.6 million for facilities not yet placed in service that we are holding for future use.
9.  Joint Ventures
We make investments in joint ventures. For each joint venture investment we consider the facts and circumstances in order to determine whether it qualifies for cost accounting, equity accounting, fair value method accounting or whether it should be consolidated.
VCE Company LLC

In 2009, Cisco and EMC formed VCE Company LLC (“VCE”), with investments from VMware and Intel. VCE, through Vblock infrastructure platforms, delivers an integrated IT offering that combines network, computing, storage, management, security and virtualization technologies for converged infrastructures and cloud based computing models. As of March 31, 2013, we have contributed $780.8 million in funding and $14.5 million in stock-based compensation to VCE since inception and own approximately 58% of VCE’s outstanding equity.
  
We consider VCE a variable interest entity. Authoritative guidance related to variable interest entities states that the primary beneficiary of a variable interest entity must have both of the following characteristics: (a) the power to direct the activities of a variable interest entity that most significantly will impact the entity’s economic performance; and (b) the obligation to absorb losses that could be potentially significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Since the power to direct the activities of VCE which most significantly impact its economic performance are determined by its board of directors, which is comprised of equal representation of EMC and Cisco, and all significant decisions require the approval of the minority shareholders, we have determined we are not the primary beneficiary, and as such we account for the investment under the equity method.

Our portion of VCE’s gains and losses is recognized in other income (expense), net, in the consolidated income statements. Our consolidated share of VCE’s losses, based upon our portion of the overall funding, was approximately 63.2% for the three months ended March 31, 2013 and 2012. As of March 31, 2013, we have recorded net accumulated losses from VCE of $566.9

18

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


million since inception, of which $68.7 million and $55.5 million were recorded in the three months ended March 31, 2013 and 2012, respectively.

We recognized $74.1 million and $70.3 million in revenue from sales of product and services to VCE during the three months ended March 31, 2013 and 2012, respectively. We perform certain administrative services, pursuant to an administrative services agreement, on behalf of VCE and we pay certain operating expenses on behalf of VCE. Accordingly, we had a receivable from VCE related to the administrative services agreement of $40.7 million and $44.3 million as of March 31, 2013 and December 31, 2012, respectively, included in other current assets in the consolidated balance sheets.
LenovoEMC Joint Venture
In the fourth quarter of 2012, EMC and Lenovo formed a joint venture, LenovoEMC Limited, to provide NAS systems to small- and medium-sized businesses and distributed enterprise sites. EMC has a 49% ownership percentage of the joint venture and we have elected to account for the investment using the fair value method of accounting. The fair value of our investment in the joint venture was $33.2 million as of March 31, 2013 and is included in other assets, net on the consolidated balance sheet.

10.  Accrued Expenses
Accrued expenses consist of (table in thousands):
 
March 31,
2013
 
December 31,
2012
Salaries and benefits
$
876,798

 
$
1,018,289

Product warranties
282,573

 
277,862

Partner rebates
156,707

 
187,413

Restructuring, current (See Note 13)
130,281

 
75,567

Derivatives
41,812

 
40,279

Other
909,654

 
922,649

 
$
2,397,825

 
$
2,522,059

Product Warranties
Systems sales include a standard product warranty. At the time of the sale, we accrue for systems’ warranty costs. The initial systems’ warranty accrual is based upon our historical experience, expected future costs and specific identification of systems’ requirements. Upon sale or expiration of the initial warranty, we may sell additional maintenance contracts to our customers. Revenue from these additional maintenance contracts is included in deferred revenue and recognized ratably over the service period. The following represents the activity in our warranty accrual for the three months ended March 31, 2013 and 2012 (table in thousands):
 
For the
Three Months Ended
 
March 31,
2013
 
March 31,
2012
Balance, beginning of the period
$
277,862

 
$
254,554

Provision
44,628

 
48,253

Amounts charged to the accrual
(39,917
)
 
(39,626
)
Balance, end of the period
$
282,573

 
$
263,181

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


19

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


11.  Income Taxes

Our effective income tax rates were 11.0% and 23.4% for the three months ended March 31, 2013 and 2012, respectively. Our effective income tax rate is based upon estimated income before provision for income taxes for the year, composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for potential tax consequences, benefits and/or resolutions of tax audits or other tax contingencies. For the three months ended March 31, 2013, the effective income tax rate varied from the statutory income tax rate principally as a result of the mix of income attributable to foreign versus domestic jurisdictions and the federal tax credit for increasing research activities. 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 the 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 income rate. 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 income tax provision for the three months ended March 31, 2013 included the estimated federal tax credit for increasing research activities for the full year 2012 as well as the three months ended March 31, 2013, which reduced our effective tax rate for the quarter. For the three months ended March 31, 2012, the effective income tax rate varied from the statutory income tax rate principally as a result of the mix of income attributable to foreign versus domestic jurisdictions.

Our effective income tax rate decreased in the three months ended March 31, 2013 from the three months ended March 31, 2012 due primarily to the retroactive renewal of the U.S. federal tax credit for increasing research activities which reduced our effective income tax rate by approximately 10.9% for the three months ended March 31, 2013. There were also differences in the mix of income attributable to foreign versus domestic jurisdictions, change in tax contingency reserves and discrete items, the net impact of which is immaterial.

We are routinely under audit by the Internal Revenue Service (the “IRS”). We have concluded all U.S. federal income tax matters for years through 2008. The IRS commenced a federal income tax audit for the tax years 2009 and 2010 in the third quarter of 2012. The current federal income tax audit is in the early stage for information gathering and it is not expected to be completed until 2015. We also have income tax audits in process in numerous state, local and international jurisdictions. In our international jurisdictions that comprise a significant portion of our operations, the years that may be examined vary, with the earliest year being 2003. Based on the timing and outcome of examinations of EMC, the result of the expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing authorities, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in our statement of financial position. We anticipate that several of these audits may be finalized within the next 12 months. While we expect the amount of unrecognized tax benefits to change in the next twelve months, we do not expect the change to have a significant impact on our results of operations or financial position.
12.  Stockholders’ Equity
The reconciliation from basic to diluted earnings per share for both the numerators and denominators is as follows (table in thousands):
 
For the Three Months Ended
 
March 31,
2013
 
March 31,
2012
Numerator:
 
 
 
Net income attributable to EMC Corporation
$
580,050

 
$
586,842

Incremental dilution from VMware
(1,485
)
 
(2,891
)
Net income – dilution attributable to EMC Corporation
$
578,565

 
$
583,951

Denominator:
 
 
 
Weighted average shares, basic
2,102,368

 
2,067,828

Weighted common stock equivalents
30,397

 
45,606

        Assumed conversion of the 2013 Notes and associated warrants
56,645

 
88,499

Weighted average shares, diluted
2,189,410

 
2,201,933

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

20

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Concurrent with the issuance of the 2011 Notes and 2013 Notes, we also entered into separate transactions in which we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 215 million shares of our common stock at an exercise price of approximately $19.55 per share of our common stock. Half of the associated warrants were exercised during the three months ended March 31, 2013. We include the impact of the remaining outstanding sold warrants in our diluted earnings per share calculation when the average stock price exceeds the exercise price.
Restricted stock awards, restricted stock units and options to acquire 3.1 million and 4.6 million of our common stock for the three months ended March 31, 2013 and 2012, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive. The incremental dilution from VMware represents the impact of VMware’s dilutive securities on EMC’s consolidated diluted net income per share and is calculated by multiplying the difference between VMware’s basic and diluted earnings per share by the number of VMware shares owned by EMC.
Repurchases of Common Stock
We utilize both authorized and unissued shares (including repurchased shares) for all issuances under our equity plans. In 2008, our Board of Directors authorized the repurchase of 250.0 million shares of our common stock. For the three months ended March 31, 2013, we spent $308.0 million to repurchase 12.6 million shares of our common stock. Of the 250.0 million shares authorized for repurchase, we have repurchased 235.5 million shares at a total cost of $4.7 billion, leaving a remaining balance of 14.5 million shares authorized for future repurchases. In February 2013, our Board of Directors authorized the repurchase of an additional 250.0 million shares of our common stock. We plan to spend up to $1.0 billion in 2013 on common stock repurchases.
 
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss), which is presented net of tax, consist of the following (table in thousands):
 
Foreign Currency Translation Adjustments
 
Unrealized Net Gains on Investments
 
Unrealized Net Losses on Derivatives
 
Recognition of Actuarial Net Loss from Pension and Other Postretirement Plans
 
Accumulated Other Comprehensive Income Attributable to the Non-controlling Interest in VMware, Inc.
 
Total
Balance as of December 31, 2012(a)
$
(8,786
)
 
$
63,485

 
$
(108,645
)
 
$
(153,172
)
 
$
(1,155
)
 
$
(208,273
)
Other comprehensive income before reclassifications
(31,205
)
 
719

 
5,866

 

 
57

 
(24,563
)
Net losses (gains) reclassified from accumulated other comprehensive income

 
(3,761
)
 
(5,374
)
 

 

 
(9,135
)
Net current period other comprehensive income
(31,205
)
 
(3,042
)
 
492

 

 
57

 
(33,698
)
Balance at March 31, 2013(b)
$
(39,991
)
 
$
60,443

 
$
(108,153
)
 
$
(153,172
)
 
$
(1,098
)
 
$
(241,971
)

(a)
Net of taxes (benefits) of $36.6 million for unrealized net gains on investments, $(67.2) million for unrealized net losses on derivatives and $(87.3) million for actuarial net loss on pension plans.
(b)
Net of taxes (benefits) of $36.0 million for unrealized net gains on investments, $(66.9) million for unrealized net losses on derivatives and $(87.3) million for actuarial net loss on pension plans.


21

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended March 31, 2013 are as follows (table in thousands):
Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Impacted Line Item on
Consolidated Income Statements
Net gain on investments:
 
$
5,865

 
Investment income
 
 
(2,104
)
 
Provision for income tax
Net of tax
 
$
3,761

 
 
 
 
 
 
 
Net gain on derivatives:
 
 
 
 
Foreign exchange contracts
 
$
10,021

 
Product sales revenue
Foreign exchange contracts
 
(3,879
)
 
Cost of product sales
Total net gain on derivatives before tax
 
6,142

 
 
 
 
(768
)
 
Provision for income tax
Net of tax
 
$
5,374

 
 

13.  Restructuring and Acquisition-Related Charges

For the three months ended March 31, 2013 and 2012, we incurred restructuring and acquisition-related charges of $147.7 million and $25.9 million, respectively. For the three months ended March 31, 2013, EMC incurred $81.7 million of restructuring charges, primarily related to our current year restructuring programs and $1.9 million of charges in connection with acquisitions for financial advisory, legal and accounting services. For the three months ended March 31, 2013, VMware incurred $53.8 million of restructuring charges related to workforce reductions as part of its current year restructuring program, $9.0 million of impairment charges related to its business realignment and $1.3 million of charges in connection with acquisitions for financial advisory, legal and accounting services. For the three months ended March 31, 2012, we incurred $24.2 million of restructuring charges, primarily related to our 2012 restructuring programs and $1.7 million of costs in connection with acquisitions for financial advisory, legal and accounting services.

In the first quarter of 2013, EMC implemented restructuring programs to create further operational efficiencies which will result in a workforce reduction of 1,004 positions. The actions will impact positions around the globe covering our Information Storage, RSA Information Security and Information Intelligence Group segments, and is expected to result in a total charge of approximately $80.0 million, with total cash payments associated with the plan expected to be approximately $73.0 million. All of these actions are expected to be completed within a year of the start of each program.

In the first quarter of 2013, VMware implemented a plan to streamline its operations in order to focus its business on strategic areas it has determined to be most compelling. The plan includes the elimination of approximately 800 positions across all major functional groups and geographies, and is expected to result in a charge in the range of $60.0 million to $65.0 million, of which $53.8 million was recognized during the three months ended March 31, 2013. Additionally, VMware exited and is planning to exit certain lines of business and consolidate facilities, which is expected to result in a total charge, including asset impairments, in the range of $15.0 million to $25.0 million, of which $9.0 million was recognized during the three months ended March 31, 2013. All of these actions are expected to be completed by the end of 2013. The total cash expenditures associated with the plan are expected to be in the range of $60.0 million to $75.0 million. The associated cash payments are expected to be paid out primarily through the end of 2013.

During 2012, we implemented separate restructuring programs to create further operational efficiencies which resulted in a workforce reduction of 1,163 positions, of which 298 positions were identified in the three months ended March 31, 2012. 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 by the end of 2013.

For the three months ended March 31, 2013 and 2012, we recognized $7.1 million and $3.7 million, respectively, of lease termination costs for facilities vacated in the period in accordance with our plan as part of all of our restructuring programs and for costs associated with terminating other contractual obligations. These costs are expected to be utilized by the end of 2015.
 

22

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The activity for the restructuring programs is presented below (tables in thousands):
Three Months Ended March 31, 2013:
2013 EMC Programs
 
 
 
 
 
 
 
Category
Balance as of
December 31,
2012
 
2013
Charges
 
Utilization
 
Balance as of March 31, 2013
Workforce reductions
$

 
$
79,409

 
$
(13,515
)
 
$
65,894

Consolidation of excess facilities and other contractual obligations

 

 

 

Total
$

 
$
79,409

 
$
(13,515
)
 
$
65,894

2013 VMware Programs
 
 
 
 
 
 
 
Category
Balance as of
December 31,
2012
 
2013
Charges
 
Utilization
 
Balance as of March 31, 2013
Workforce reductions
$

 
$
53,847

 
$
(28,062
)
 
$
25,785

Consolidation of excess facilities and other contractual obligations

 

 

 

Total
$

 
$
53,847

 
$
(28,062
)
 
$
25,785

Other EMC Programs
 
 
 
 
 
 
 
Category
Balance as of
December 31,
2012
 
Adjustments to the Provision
 
Utilization
 
Balance as of March 31, 2013
Workforce reductions
$
62,962

 
$
(4,878
)
 
$
(12,233
)
 
$
45,851

Consolidation of excess facilities and other contractual obligations
28,427

 
7,130

 
(5,377
)
 
30,180

Total
$
91,389

 
$
2,252

 
$
(17,610
)
 
$
76,031

Three Months Ended March 31, 2012:
2012 EMC Programs
 
 
 
 
 
 
 
Category
Balance as of
December 31,
2011
 
2012
Charges
 
Utilization
 
Balance as of March 31, 2012
Workforce reductions
$