10-Q 1 emc-2015930x10q.htm 10-Q 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
 
FORM 10-Q 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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 September 30, 2015 was 1,938,837,339.




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 millions, except per share amounts)
(unaudited)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,324

 
$
6,343

Short-term investments
2,318

 
1,978

Accounts and notes receivable, less allowance for doubtful accounts of $87 and $72
3,134

 
4,413

Inventories
1,224

 
1,276

Deferred income taxes
1,088

 
1,070

Other current assets
649

 
653

Total current assets
13,737

 
15,733

Long-term investments
6,642

 
6,334

Property, plant and equipment, net
3,791

 
3,766

Intangible assets, net
2,239

 
2,125

Goodwill
17,083

 
16,134

Other assets, net
1,853

 
1,767

Total assets
$
45,345

 
$
45,859

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,115

 
$
1,696

Accrued expenses
2,831

 
3,141

Income taxes payable
208

 
852

Short-term debt (See Note 4)
1,970

 

Deferred revenue
6,187

 
6,021

Total current liabilities
12,311

 
11,710

Income taxes payable
380

 
306

Deferred revenue
4,436

 
4,144

Deferred income taxes
317

 
274

Long-term debt (See Note 4)
5,474

 
5,469

Other liabilities
472

 
431

Total liabilities
23,390

 
22,334

Commitments and contingencies (See Note 13)


 


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

 

Common stock, par value $0.01; authorized 6,000 shares; issued and outstanding 1,939 and 1,985 shares
19

 
20

Additional paid-in capital

 

Retained earnings
20,958

 
22,242

Accumulated other comprehensive loss, net
(533
)
 
(366
)
Total EMC Corporation’s shareholders’ equity
20,444

 
21,896

Non-controlling interests
1,511

 
1,629

Total shareholders’ equity
21,955

 
23,525

Total liabilities and shareholders’ equity
$
45,345

 
$
45,859

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

3


EMC CORPORATION
CONSOLIDATED INCOME STATEMENTS
(in millions, except per share amounts)
(unaudited)
 
 
For the
Three Months Ended
 
For the
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Revenues:
 
 
 
 
 
 
 
Product sales
$
3,269

 
$
3,400

 
$
9,399

 
$
9,728

Services
2,810

 
2,632

 
8,290

 
7,663

 
6,079

 
6,032

 
17,689

 
17,391

Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
1,379

 
1,400

 
4,141

 
4,068

Cost of services
995

 
889

 
2,917

 
2,579

Research and development
802

 
767

 
2,372

 
2,239

Selling, general and administrative
2,145

 
1,990

 
6,285

 
5,852

Restructuring and acquisition-related charges
68

 
39

 
226

 
187

Operating income
690

 
947

 
1,748

 
2,466

Non-operating income (expense):
 
 
 
 
 
 
 
Investment income
25

 
29

 
76

 
100

Interest expense
(41
)
 
(40
)
 
(121
)
 
(108
)
Other income (expense), net
22

 
(103
)
 
56

 
(245
)
Total non-operating income (expense)
6

 
(114
)
 
11

 
(253
)
Income before provision for income taxes
696

 
833

 
1,759

 
2,213

Income tax provision
168

 
206

 
420

 
532

Net income
528

 
627

 
1,339

 
1,681

Less: Net income attributable to the non-controlling interest in VMware, Inc.
(48
)
 
(40
)
 
(120
)
 
(113
)
Net income attributable to EMC Corporation
$
480

 
$
587

 
$
1,219

 
$
1,568

 
 
 
 
 
 
 
 
Net income per weighted average share, basic attributable to EMC Corporation common shareholders
$
0.25

 
$
0.29

 
$
0.63

 
$
0.77

Net income per weighted average share, diluted attributable to EMC Corporation common shareholders
$
0.25

 
$
0.28

 
$
0.62

 
$
0.76

 
 
 
 
 
 
 
 
Weighted average shares, basic
1,934

 
2,032

 
1,945

 
2,033

Weighted average shares, diluted
1,948

 
2,057

 
1,963

 
2,065

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.12

 
$
0.12

 
$
0.34

 
$
0.33

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

4


EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Net income
$
528

 
$
627

 
$
1,339

 
$
1,681

Other comprehensive income (loss), net of taxes (benefits):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(52
)
 
(61
)
 
(137
)
 
(57
)
Changes in market value of investments:
 
 
 
 
 
 
 
Changes in unrealized gains (losses), net of taxes (benefits) of $(20), $16, $(7) and $65
(31
)
 
24

 
(10
)
 
107

Reclassification adjustment for net losses (gains) realized in net income, net of benefits (taxes) of $(3), $(5), $(16) and $(11)
(5
)
 
(8
)
 
(26
)
 
(19
)
Net change in market value of investments
(36
)
 
16

 
(36
)
 
88

Changes in market value of derivatives:
 
 
 
 
 
 
 
Changes in unrealized gains (losses), net of taxes (benefits) of $1, $3, $2 and $3
2

 
10

 
11

 
11

Reclassification adjustment for net losses (gains) included in net income, net of benefits (taxes) of $2, $0, $4 and $0
3

 
1

 
(8
)
 
(2
)
Net change in the market value of derivatives
5

 
11

 
3

 
9

Change in actuarial net gain (loss) from pension and other postretirement plans:
 
 
 
 
 
 
 
Recognition of actuarial net gain (loss) from pension and other postretirement plans, net of taxes (benefits)

 
2

 

 
2

Reclassification adjustments for net gains from pension and other postretirement plans, net of taxes (benefits)

 
(1
)
 

 
(1
)
Net change in actuarial gain (loss) from pension and other postretirement plans

 
1

 

 
1

Other comprehensive income (loss)
(83
)
 
(33
)
 
(170
)
 
41

Comprehensive income
445

 
594

 
1,169

 
1,722

Less: Net income attributable to the non-controlling interest in VMware, Inc.
(48
)
 
(40
)
 
(120
)
 
(113
)
Less: Other comprehensive (income) loss attributable to the non-controlling interest in VMware, Inc.
6

 
1

 
3

 

Comprehensive income attributable to EMC Corporation
$
403

 
$
555

 
$
1,052

 
$
1,609

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

5


EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Nine Months Ended
 
September 30,
2015
 
September 30,
2014
Cash flows from operating activities:
 
 
 
Cash received from customers
$
19,375

 
$
19,005

Cash paid to suppliers and employees
(14,894
)
 
(13,868
)
Dividends and interest received
98

 
119

Interest paid
(68
)
 
(67
)
Income taxes paid
(995
)
 
(897
)
Net cash provided by operating activities
3,516

 
4,292

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(671
)
 
(693
)
Capitalized software development costs
(411
)
 
(382
)
Purchases of short- and long-term available-for-sale securities
(5,553
)
 
(7,989
)
Sales of short- and long-term available-for-sale securities
3,389

 
6,396

Maturities of short- and long-term available-for-sale securities
1,465

 
2,135

Business acquisitions, net of cash acquired
(1,304
)
 
(1,771
)
Purchases of strategic and other related investments
(177
)
 
(101
)
Sales of strategic and other related investments
135

 
38

Joint venture funding

 
(163
)
Decrease (increase) in restricted cash
77

 
(76
)
Net cash used in investing activities
(3,050
)
 
(2,606
)
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of EMC’s common stock
293

 
445

Proceeds from the issuance of VMware’s common stock
123

 
158

EMC repurchase of EMC’s common stock
(2,063
)
 
(1,374
)
VMware repurchase of VMware’s common stock
(1,050
)
 
(450
)
Excess tax benefits from stock-based compensation
62

 
85

Payment of long-term obligations

 
(1,665
)
Net proceeds from the issuance of short-term obligations
1,968

 

Dividend payment
(683
)
 
(644
)
Contributions from non-controlling interests
4

 
7

Net cash used in financing activities
(1,346
)
 
(3,438
)
Effect of exchange rate changes on cash and cash equivalents
(139
)
 
(84
)
Net decrease in cash and cash equivalents
(1,019
)
 
(1,836
)
Cash and cash equivalents at beginning of period
6,343

 
7,891

Cash and cash equivalents at end of period
$
5,324

 
$
6,055

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Net income
$
1,339

 
$
1,681

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,423

 
1,370

Non-cash restructuring and other special charges
14

 
14

Stock-based compensation expense
785

 
770

Provision for doubtful accounts
50

 
11

Deferred income taxes, net
(39
)
 
(246
)
Excess tax benefits from stock-based compensation
(62
)
 
(85
)
Gain on previously held interests in strategic investments and joint venture

 
(45
)
Impairment of strategic investment

 
33

Other, net
22

 
20

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts and notes receivable
1,201

 
756

Inventories
(99
)
 
(252
)
Other assets
(92
)
 
169

Accounts payable
(537
)
 
(304
)
Accrued expenses
(434
)
 
(234
)
Income taxes payable
(535
)
 
(122
)
Deferred revenue
450

 
730

Other liabilities
30

 
26

Net cash provided by operating activities
$
3,516

 
$
4,292

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

6


EMC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
(unaudited)

For the nine months ended September 30, 2015: 
  
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-controlling
Interests
 
Shareholders’
Equity
Shares
 
Par Value
 
 
 
 
 
Balance, January 1, 2015
1,985

 
$
20

 
$

 
$
22,242

 
$
(366
)
 
$
1,629

 
$
23,525

Stock issued through stock option and stock purchase plans
18

 

 
293

 

 

 

 
293

Tax benefit from stock options exercised

 

 
33

 

 

 

 
33

Restricted stock grants, cancellations and withholdings, net
12

 

 
(137
)
 

 

 

 
(137
)
Repurchase of common stock
(76
)
 
(1
)
 
(209
)
 
(1,823
)
 

 

 
(2,033
)
Stock options issued in business acquisitions

 

 
1

 

 

 

 
1

Stock-based compensation

 

 
845

 

 

 

 
845

Cash dividends declared

 

 

 
(680
)
 

 

 
(680
)
Impact from equity transactions of non-controlling interests

 

 
(826
)
 

 

 
(235
)
 
(1,061
)
Change in market value of investments

 

 

 

 
(34
)
 
(2
)
 
(36
)
Change in market value of derivatives

 

 

 

 
4

 
(1
)
 
3

Translation adjustment

 

 

 

 
(137
)
 

 
(137
)
Net income

 

 

 
1,219

 

 
120

 
1,339

Balance, September 30, 2015
1,939

 
$
19

 
$

 
$
20,958

 
$
(533
)
 
$
1,511

 
$
21,955


For the nine months ended September 30, 2014:
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-controlling
Interests
 
Shareholders’
Equity
Shares
 
Par Value
 
 
 
 
 
Balance, January 1, 2014
2,020

 
$
20

 
$
1,406

 
$
21,114

 
$
(239
)
 
$
1,485

 
$
23,786

Stock issued through stock option and stock purchase plans
29

 

 
445

 

 

 

 
445

Tax benefit from stock options exercised

 

 
80

 

 

 

 
80

Restricted stock grants, cancellations and withholdings, net
9

 

 
(101
)
 

 

 

 
(101
)
Repurchase of common stock
(52
)
 

 
(1,374
)
 

 

 

 
(1,374
)
Stock options issued in business acquisitions


 

 
33

 

 

 

 
33

Stock-based compensation

 

 
787

 

 

 

 
787

Cash dividends declared

 

 

 
(685
)
 

 

 
(685
)
Impact from equity transactions of non-controlling interests

 

 
(426
)
 

 

 
24

 
(402
)
Actuarial gain on pension plan

 

 

 

 
1

 

 
1

Change in market value of investments

 

 

 

 
88

 

 
88

Change in market value of derivatives


 

 

 

 
9

 

 
9

Translation adjustment

 

 

 

 
(57
)
 

 
(57
)
Convertible debt conversions and warrant settlement

29

 

 

 

 

 

 

Net income

 

 

 
1,568

 

 
113

 
1,681

Balance, September 30, 2014
2,035

 
$
20

 
$
850

 
$
21,997

 
$
(198
)
 
$
1,622

 
$
24,291

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 manages the Company as part of a federation of businesses: EMC Information Infrastructure, VMware Virtual Infrastructure, Pivotal and Virtustream.
EMC’s Information Infrastructure business provides a foundation for organizations to store, manage, protect, analyze and secure ever-increasing quantities of information, while at the same time improving business agility, lowering cost, and enhancing competitive advantage. EMC’s Information Infrastructure business comprises three segments – Information Storage, Enterprise Content Division and RSA Information Security. The results of Virtustream are currently reported within our Information Storage segment.
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 and services 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.
EMC’s Pivotal business (“Pivotal”) unites strategic technology, people and programs from EMC and VMware and has built a new platform comprised of next-generation data, agile development practices and a cloud independent platform-as-a-service (“PaaS”). These capabilities are made available through Pivotal’s three primary offerings: Pivotal Cloud Foundry, the Pivotal Big Data Suite and Pivotal Labs.
Proposed Transaction with Dell
On October 12, 2015, EMC entered into an Agreement and Plan of Merger (the “Merger Agreement”) among EMC, Denali Holding Inc., a Delaware corporation (“Parent”), Dell Inc., a Delaware corporation, and Universal Acquisition Co., a Delaware corporation and direct wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, among other things and subject to the conditions set forth therein, Merger Sub will merge with and into EMC (the “Merger”), with EMC continuing as the surviving corporation and a wholly owned subsidiary of Parent.
At the effective time of the Merger (“Effective Time”), each share of EMC common stock issued and outstanding will be canceled and converted into the right to receive (i) $24.05 in cash and (ii) a number of shares of common stock of Parent designated as Class V Common Stock, par value $0.01 per share (the “Class V Common Stock”), equal to the quotient obtained by dividing (A) 222,966,450 by (B) the aggregate number of shares of EMC common stock issued and outstanding immediately prior to the Effective Time. The aggregate number of shares of Class V Common Stock issued as Merger Consideration in the transaction is intended to represent 65% of EMC’s economic interest in the approximately 81% of the outstanding shares of VMware currently owned by the EMC, reflecting approximately 53% of the total economic interest in the outstanding shares of VMware. Upon completion of the transaction, Parent will retain the remaining 28% of the total economic interest in the outstanding shares of VMware.  Based on the estimated number of shares of EMC common stock at the closing of the transaction, EMC shareholders are expected to receive approximately 0.111 shares of Class V Common Stock for each share of EMC common stock. 
Under the terms of the Merger Agreement, EMC may solicit alternative acquisition proposals from third parties until 11:59 p.m. on December 11, 2015. The Merger Agreement contains specified termination rights for both Parent and EMC, including that, in general, either party may terminate if the Merger is not consummated on or before December 16, 2016. If EMC terminates the Merger Agreement, we are required to pay Parent a termination fee of $2.5 billion (or, if EMC terminates for a superior proposal prior to December 12, 2015, the termination fee payable by EMC to Parent will be $2 billion). If Parent terminates the Merger Agreement, they are required to pay a termination fee of $4 billion under specified circumstances, and in certain instances, an alternative termination fee of $6 billion.
The transaction is expected to close in mid-2016. The completion of the Merger is subject to certain conditions including EMC shareholder approval, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the receipt of certain other regulatory approvals in various jurisdictions and the effectiveness of the registration statement on Form S-4 to be filed by Parent in connection with the registration of shares of Class V Common Stock issuable in connection with the Merger.

8

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The Merger Agreement contains representations and warranties customary for transactions of this nature. EMC has agreed to various customary covenants and agreements, including, among others, agreements to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. In addition, without the consent of Parent, EMC may not take, authorize, agree or commit to do certain actions outside of the ordinary course of business, including acquiring businesses or incurring capital expenditures above specified thresholds, issuing additional debt facilities and repurchasing outstanding EMC common stock.
Under the terms of the Merger Agreement, EMC is required to provide Parent with access to EMC’s cash to help fund the Merger consideration. At this time, EMC has not finalized its plan to access such cash and has not determined if there would be a need to repatriate cash to meet the requirements of the Merger. To date, we have asserted our overseas cash as indefinitely reinvested; however if these overseas funds are required to be repatriated to the U.S. in accordance with the Merger Agreement, we may be required to accrue and pay U.S. taxes to repatriate these funds.
Other than transaction expenses associated with the proposed Merger, the terms of the Merger Agreement did not impact EMC’s consolidated financial statements as of and for the three and nine months ended September 30, 2015.
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, as well as VMware and Pivotal, companies 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, 2014 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2015.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. The interim consolidated financial statements, in the opinion of management, reflect all adjustments necessary to fairly state the results as of and for the three- and nine-month periods ended September 30, 2015 and 2014.
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, and in the three and nine months ended September 30, 2014, the shares issuable under our $1.725 billion 1.75% convertible senior notes due 2013 (the “2013 Notes”) and the 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.

Investments in 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, equity or fair value method accounting or whether it should be consolidated.

In 2009, Cisco and EMC formed VCE Company LLC (“VCE”), with investments from VMware and Intel. In December 2014, EMC acquired the controlling interest in VCE and, since the date of acquisition, has consolidated VCE’s financial position and results of operations as part of EMC’s consolidated financial statements.

Prior to the acquisition of the controlling interest in VCE, we considered VCE a variable interest entity and accounted for the investment under the equity method with our portion of the gains and losses recognized in other expense, net in the consolidated income statements for the majority of 2014. Our consolidated share of VCE’s losses, based upon our portion of the overall funding, was approximately 65% and 64% for the three and nine months ended September 30, 2014, respectively. During the three and nine months ended September 30, 2014, we recorded $101 million and $261 million, respectively, in net losses from VCE and $207 million and $550 million, respectively, in revenue from sales of product and services to VCE.

9

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Reclassifications

Certain prior year amounts have been reclassified to conform with the current year’s presentation. In April 2015, the Financial Accounting Standards Board (“FASB”) issued updated guidance to clarify the required presentation of debt issuance costs.  The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the related debt liability rather than as an asset. We adopted the guidance during the second quarter of 2015, and accordingly, reclassified the debt issuance costs on our consolidated balance sheets. There was no impact to our consolidated income statements or statements of cash flows.

Recent Accounting Pronouncements

In September 2015, the FASB issued updated guidance related to simplifying the accounting for measurement period adjustments related to business combinations. The amended guidance eliminates the requirement to retrospectively account for adjustments made during the measurement period. The standard is effective beginning January 1, 2016, with early adoption permitted. We do not expect it to have a material impact on our consolidated financial position, results of operations or cash flows.

In April 2015, the FASB issued guidance to customers about whether a cloud computing arrangement includes software and how to account for that software license. The new guidance does not change the accounting for a customer’s accounting for service contracts. The standard is effective beginning January 1, 2017, with early adoption permitted, and may be applied prospectively or retrospectively. We do not expect it to have a material impact on our consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued a standard on revenue recognition providing a single, comprehensive revenue recognition model for all contracts with customers. The revenue standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard, as amended, is effective beginning January 1, 2018, with early adoption permitted but not earlier than the original effective date of January 1, 2017. The principles may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We are currently evaluating the adoption method options and the impact of the new guidance on our consolidated financial statements.
2.  Non-controlling Interests
The non-controlling interests’ share of equity in VMware is reflected as a component of the non-controlling interests in the accompanying consolidated balance sheets and was $1,406 million and $1,524 million as of September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, EMC held approximately 97% of the combined voting power of VMware’s outstanding common stock and approximately 81% of the economic interest in VMware.
The effect of changes in our ownership interest in VMware on our equity was as follows (table in millions):
 
For the Nine Months Ended
 
September 30,
2015
 
September 30,
2014
Net income attributable to EMC Corporation
$
1,219

 
$
1,568

Transfers (to) from the non-controlling interests in VMware, Inc.:
 
 
 
Increase in EMC Corporation’s additional paid-in-capital for VMware’s equity issuances
60

 
84

Decrease in EMC Corporation’s additional paid-in-capital for VMware’s other equity activity
(886
)
 
(510
)
Net transfers (to) from non-controlling interest
(826
)
 
(426
)
Change from net income attributable to EMC Corporation and transfers from the non-controlling interest in VMware, Inc.
$
393

 
$
1,142


The non-controlling interests’ share of equity in Pivotal is reflected as a component of the non-controlling interests in the accompanying consolidated balance sheets as $105 million at both September 30, 2015 and December 31, 2014. At September 30, 2015, EMC consolidated held approximately 84% of the economic interest in Pivotal. General Electric Company’s (“GE”) interest in Pivotal is in the form of a preferred equity instrument. Consequently, there is no net income attributable to non-controlling interest related to Pivotal on the consolidated income statements. Additionally, due to the terms of the preferred instrument, GE’s non-controlling interest on the consolidated balance sheets is generally not impacted by Pivotal’s equity related activity. The preferred equity instrument is convertible into common shares at GE’s election at any time.

10

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


3.  Business Combinations, Intangibles and Goodwill

Acquisition of Virtustream

On July 9, 2015, EMC acquired all of the outstanding capital stock of Virtustream Group Holdings, Inc. (“Virtustream”), a cloud software and services company that delivers mission-critical enterprise applications in the cloud. This acquisition represents a key element of EMC’s strategy to help customers move applications to cloud-based IT environments. The consideration paid for Virtustream was $1,219 million, net of cash acquired.

The following table summarizes the allocation of the consideration to the fair value of the assets acquired and net liabilities assumed, net of cash acquired (table in millions):
Current assets
$
18

Property, plant and equipment, net

14

Intangible assets:
 
   Purchased technology (weighted-average useful life of 8.6 years)
302

   Customer relationships and customer lists (weighted-average useful life of 12.3 years)
50

   Trademarks and tradenames (weighted-average useful life of 7.6 years)
27

       Total intangible assets, net, excluding goodwill
379

Goodwill
891

Other assets, net
12

       Total assets acquired
1,314

Current liabilities
(27
)
Deferred income taxes
(61
)
Other liabilities
(7
)
       Total net liabilities assumed
(95
)
           Fair value of assets acquired and net liabilities assumed
$
1,219


The total weighted-average amortization period for the intangible assets is 9.0 years. The intangible assets are being amortized over the pattern in which the economic benefits of the intangible assets are being utilized, which in general reflects the cash flows generated from such assets. Goodwill is calculated as the excess of the consideration over the fair value of the net assets, including intangible assets, recognized and is primarily related to expected synergies from the transaction, including complementary products that will enhance our overall product portfolio, which we believe will result in incremental revenue and profitability. The goodwill associated with this acquisition is currently reported within our Information Storage segment. None of the goodwill is deductible for tax purposes. 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 nine months ended September 30, 2015 or 2014.

Other Acquisitions

During the nine months ended September 30, 2015, EMC acquired five businesses, excluding Virtustream, which were not material either individually or in the aggregate to our September 30, 2015 results. Complementing the Information Storage segment, we acquired all of the outstanding capital stock of Renasar Technologies, Inc., a provider of extensible physical middleware, CloudLink, a provider of cloud data security software and Graphite Systems, a developer of server-side flash storage. Complementing our Pivotal segment, we acquired all of the outstanding capital stock of Quickstep Technologies, LLC, a query execution technology developer. VMware acquired all of the outstanding capital stock of Immidio B.V.

The aggregate consideration for these five acquisitions was $89 million which represents cash consideration, net of cash acquired in the third quarter of 2015. The consideration was allocated to the fair value of the assets acquired and liabilities assumed based on estimated fair values as of the respective acquisition dates. The aggregate allocation to goodwill, intangibles, and net liabilities was approximately $64 million, $33 million and $8 million, respectively.

The intangible assets acquired were primarily comprised of purchased developed technology which have a weighted-average amortization period of 3.6 years. Most of our intangible assets are being amortized based upon the pattern in which the economic

11

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


benefits of the intangible assets are being utilized; the remainder are amortized on a straight-line basis. Goodwill is calculated as the excess of the consideration over the fair value of the net assets, including intangible assets, and is primarily related to expected synergies from the transaction. The goodwill is not deductible for U.S. federal income tax purposes. The results of these acquisitions have been included in the consolidated financial statements from the date of purchase. Pro forma results of operations have not been presented as the results of the acquired companies were not material to our consolidated results of operations for the three and nine months ended September 30, 2015 or 2014.

Intangible Assets
Intangible assets, excluding goodwill, as of September 30, 2015 and December 31, 2014 consist of (tables in millions): 
 
September 30, 2015
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Book Value
Purchased technology
$
3,266

 
$
(1,845
)
 
$
1,421

Patents
225

 
(128
)
 
97

Software licenses
111

 
(94
)
 
17

Trademarks and tradenames
253

 
(151
)
 
102

Customer relationships and customer lists
1,523

 
(1,060
)
 
463

Leasehold interest
152

 
(19
)
 
133

Other
46

 
(40
)
 
6

Total intangible assets, excluding goodwill
$
5,576

 
$
(3,337
)
 
$
2,239

 
December 31, 2014
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Book Value
Purchased technology
$
2,935

 
$
(1,668
)
 
$
1,267

Patents
225

 
(117
)
 
108

Software licenses
108

 
(93
)
 
15

Trademarks and tradenames
226

 
(136
)
 
90

Customer relationships and customer lists
1,473

 
(974
)
 
499

Leasehold interest
152

 
(16
)
 
136

Other
44

 
(34
)
 
10

Total intangible assets, excluding goodwill
$
5,163

 
$
(3,038
)
 
$
2,125

 
Goodwill
Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment, for the nine months ended September 30, 2015 consist of (table in millions): 
 
Nine Months Ended September 30, 2015
 
Information
Storage
 
Enterprise
Content Division
 
RSA
Information
Security
 
Pivotal
 
VMware
Virtual
Infrastructure
 
Total
Balance, beginning of the period
$
8,266

 
$
1,486

 
$
2,203

 
$
171

 
$
4,008

 
$
16,134

Goodwill resulting from acquisitions
935

 

 

 
3

 
17

 
955

Finalization of purchase price allocations and other, net
2

 
(8
)
 

 

 

 
(6
)
Balance, end of the period
$
9,203

 
$
1,478

 
$
2,203

 
$
174

 
$
4,025

 
$
17,083

4.  Debt

Short-Term Debt
On February 27, 2015, we entered into a credit agreement with the lenders named therein, Citibank, N.A., as Administrative Agent, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Syndication Agents, and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC, as Joint Lead Arrangers and Joint Bookrunners (the

12

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


“Credit Agreement”).  The Credit Agreement provides for a $2.5 billion unsecured revolving credit facility to be used for general corporate purposes that is scheduled to mature on February 27, 2020. At our option, subject to certain conditions, any loan under the Credit Agreement will bear interest at a rate equal to, either (i) the LIBOR Rate or (ii) the Base Rate (defined as the highest of (a) the Federal Funds rate plus 0.50%, (b) Citibank, N.A.’s “prime rate” as announced from time to time, or (c) one-month LIBOR plus 1.00%), plus, in each case the Applicable Margin, as defined in the Credit Agreement. The Credit Agreement contains customary representations and warranties, covenants and events of default. We may also, upon the agreement of the existing lenders and/or additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $1.0 billion. In addition, we may request to extend the maturity date of the credit facility, subject to certain conditions, for additional one-year periods. As of September 30, 2015, we were in compliance with customary required covenants and we had not borrowed any funds under the credit facility. At November 6, 2015, we had $600 million borrowed under the credit facility.
On March 23, 2015, we established a short-term debt financing program whereby we may issue short-term unsecured commercial paper notes (“Commercial Paper”). Amounts available under the program may be borrowed, repaid and re-borrowed from time to time, with the aggregate face or principal amount of the notes outstanding at any time not to exceed $2.5 billion. The Commercial Paper will have maturities of up to 397 days from the date of issue. The net proceeds from the issuance of the Commercial Paper are expected to be used for general corporate purposes. As of September 30, 2015, we were in compliance with customary required covenants. At September 30, 2015, we had $1,970 million of Commercial Paper outstanding, with a weighted-average interest rate of 0.24% and maturities ranging from 34 days to 80 days at the time of issuance. Commercial Paper outstanding is presented in short-term debt in the consolidated balance sheets, and the issuances and proceeds of the Commercial Paper are presented on a net basis in the consolidated statement of cash flows due to their short term nature. At November 6, 2015, we had $1,565 million of Commercial Paper outstanding.

Long-Term Debt

In June 2013, we issued $5.5 billion aggregate principal amount of senior notes (collectively, the “Notes”) which pay a fixed rate of interest semi-annually in arrears. The proceeds from the Notes have been used to satisfy the cash payment obligation of the converted 2013 Notes as well as for general corporate purposes including stock repurchases, business acquisitions, dividend payments, working capital needs and other business opportunities. The Notes of each series are senior, unsecured obligations of EMC and are not convertible or exchangeable. Unless previously purchased and canceled, we will repay the Notes of each series at 100% of the principal amount, together with accrued and unpaid interest thereon, at maturity. However, EMC has the right to redeem any or all of the Notes at specified redemption prices. As of September 30, 2015, we were in compliance with all debt covenants, which are customary in nature.

Our long-term debt as of September 30, 2015 was as follows (dollars in millions):
Senior Notes
 
Issued at Discount
to Par
 
Carrying
Value
$2.5 billion 1.875% Notes due 2018
 
99.943
%
 
$
2,499

$2.0 billion 2.650% Notes due 2020
 
99.760
%
 
1,996

$1.0 billion 3.375% Notes due 2023
 
99.925
%
 
1,000

 
 
 
 
$
5,495

Debt issuance costs
 
 
 
(21
)
Net long-term debt
 
 
 
$
5,474


The unamortized discount on the Notes consists of $5 million, which will be fully amortized by June 1, 2023. The effective interest rate on the Notes was 2.55% for both the three and nine months ended September 30, 2015.

Convertible Debt

In November 2006, we issued the 2013 Notes. These 2013 Notes matured and a majority of the noteholders exercised their right to convert the outstanding 2013 Notes as of December 31, 2013. Pursuant to the settlement terms, the majority of the converted 2013 Notes were settled on January 7, 2014. At that time, we paid the noteholders $1.7 billion in cash for the outstanding principal and 35 million shares for the $858 million in excess of the conversion value over the principal amount, as prescribed by the terms of the 2013 Notes.


13

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


With respect to the conversion value in excess of the principal amount of the 2013 Notes converted, we elected to settle the excess with 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 actual conversion rate for the 2013 Notes was 62.6978 shares of our common stock per one thousand dollars of principal amount of 2013 Notes, which represents a 26.5% conversion premium from the date the 2013 Notes were issued and is equivalent to a conversion price of approximately $15.95 per share of our common stock.
In connection with the issuance of the 2013 Notes, we entered into separate convertible note hedge transactions with respect to our common stock (the “Purchased Options”). The Purchased Options allowed 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 2013 Notes upon conversion. We exercised 108 million of the purchased options in conjunction with the planned settlements of the 2013 Notes and received 35 million shares of net settlement on January 7, 2014, representing the excess conversion value of the options. 

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 million from the sale of the associated warrants. Upon exercise, the value of the warrants was required to be settled in shares. Approximately half of the associated warrants were exercised in 2012 and the remaining 109 million associated warrants were exercised between February 18, 2014 and March 17, 2014 and were settled with 29 million shares of our common stock.

The Purchased Options and associated warrants had the effect of increasing the conversion price of the 2013 Notes to approximately $19.31 per share of our common stock, representing an approximate 53% 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.
Interest Rate Swap Contracts
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. In 2012, the interest rate swap contracts were settled and accumulated losses of $176 million were deferred as they were expected to be realized over the life of the new debt issued under the related interest rate swap contracts. The accumulated realized losses related to the settled swaps included in accumulated other comprehensive income are being realized over the remaining life of the ten year Notes. During the three and nine months ended September 30, 2015, $6 million and $17 million, respectively, in losses were reclassified from other comprehensive income and recognized as interest expense in the consolidated income statements.
5.  Fair Value of Financial Assets and Liabilities
Our fixed income and equity investments are classified as available for sale and recorded at their fair market values. We determine fair value using the following hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Most of our fixed income securities are classified as Level 2, with the exception of some of our U.S. government and agency obligations and our investments in publicly traded equity securities, which are classified as Level 1, and all of our auction rate securities, which are classified as Level 3. In addition, our strategic investments held at cost are classified as Level 3. At September 30, 2015, 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.

14

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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 September 30, 2015 and December 31, 2014. At September 30, 2015 and December 31, 2014, all of our short- and long-term investments, excluding auction rate securities, were recognized at fair value, which was determined based upon observable inputs from our pricing vendors for identical or similar assets. At September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014 (tables in millions):
 
September 30, 2015
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
(Losses)
 
Aggregate
Fair Value
U.S. government and agency obligations
$
2,376

 
$
5

 
$
(1
)
 
$
2,380

U.S. corporate debt securities
2,549

 
4

 
(5
)
 
2,548

High yield corporate debt securities
370

 
2

 
(22
)
 
350

Asset-backed securities
30

 

 

 
30

Municipal obligations
850

 
2

 

 
852

Auction rate securities
27

 

 
(2
)
 
25

Foreign debt securities
2,559

 
3

 
(8
)
 
2,554

Total fixed income securities
8,761

 
16

 
(38
)
 
8,739

Publicly traded equity securities
178

 
52

 
(9
)
 
221

Total
$
8,939

 
$
68

 
$
(47
)
 
$
8,960

 
December 31, 2014
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
(Losses)
 
Aggregate
Fair Value
U.S. government and agency obligations
$
1,951

 
$
2

 
$
(2
)
 
$
1,951

U.S. corporate debt securities
1,998

 
1

 
(4
)
 
1,995

High yield corporate debt securities
570

 
9

 
(16
)
 
563

Asset-backed securities
53

 

 

 
53

Municipal obligations
948

 
2

 

 
950

Auction rate securities
29

 

 
(2
)
 
27

Foreign debt securities
2,566

 
2

 
(4
)
 
2,564

Total fixed income securities
8,115

 
16

 
(28
)
 
8,103

Publicly traded equity securities
117

 
103

 
(11
)
 
209

Total
$
8,232

 
$
119

 
$
(39
)
 
$
8,312


We held approximately $2,554 million in foreign debt securities at September 30, 2015. These securities have an average credit rating of A+, and approximately 4% of these securities are deemed sovereign debt with an average credit rating of AA+. None of the securities deemed sovereign debt are from Argentina, Greece, Italy, Ireland, Portugal, Spain, Cyprus or Puerto Rico.


15

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following tables represent our fair value hierarchy for our financial assets and liabilities measured at fair value as of September 30, 2015 and December 31, 2014 (tables in millions):
 
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
1,643

 
$

 
$

 
$
1,643

Cash equivalents
3,264

 
417

 

 
3,681

U.S. government and agency obligations
1,404

 
976

 

 
2,380

U.S. corporate debt securities

 
2,548

 

 
2,548

High yield corporate debt securities

 
350

 

 
350

Asset-backed securities

 
30

 

 
30

Municipal obligations

 
852

 

 
852

Auction rate securities

 

 
25

 
25

Foreign debt securities

 
2,554

 

 
2,554

Publicly traded equity securities
221

 

 

 
221

Total cash and investments
$
6,532

 
$
7,727

 
$
25

 
$
14,284

Other items:
 
 
 
 
 
 
 
Strategic investments held at cost
$

 
$

 
$
382

 
$
382

Investment in joint venture

 

 
38

 
38

Long-term debt carried at discounted cost

 
(5,514
)
 

 
(5,514
)
Foreign exchange derivative assets

 
49

 

 
49

Foreign exchange derivative liabilities

 
(47
)
 

 
(47
)
Commodity derivative liabilities

 
(4
)
 

 
(4
)
 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
2,022

 
$

 
$

 
$
2,022

Cash equivalents
3,710

 
611

 

 
4,321

U.S. government and agency obligations
1,141

 
810

 

 
1,951

U.S. corporate debt securities

 
1,995

 

 
1,995

High yield corporate debt securities

 
563

 

 
563

Asset-backed securities

 
53

 

 
53

Municipal obligations

 
950

 

 
950

Auction rate securities

 

 
27

 
27

Foreign debt securities

 
2,564

 

 
2,564

Publicly traded equity securities
209

 

 

 
209

Total cash and investments
$
7,082

 
$
7,546

 
$
27

 
$
14,655

Other items:
 
 
 
 
 
 
 
Strategic investments held at cost
$

 
$

 
$
333

 
$
333

Investment in joint venture

 

 
37

 
37

Long-term debt carried at discounted cost


 
(5,544
)
 

 
(5,544
)
Foreign exchange derivative assets

 
44

 

 
44

Foreign exchange derivative liabilities

 
(71
)
 

 
(71
)
Commodity derivative assets

 
12

 

 
12


Our auction rate securities are predominantly rated investment grade and are primarily collateralized by student loans. The underlying loans of all but one of our auction rate securities, with a market value of $6 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.

16

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


To determine the estimated fair value of our investment in auction rate securities, we use a discounted cash flow model using a five year time horizon. As of September 30, 2015, the coupon rates used ranged from 0% to 2% 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 September 30, 2015. 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 both September 30, 2015 and December 31, 2014 due to the narrowing of credit spreads on AA-rated banks during 2014 and into 2015.
 
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.

During the three and nine months ended September 30, 2015 and 2014, there were no material changes to the fair value of our auction rate securities.

EMC has a 49% ownership percentage of LenovoEMC Limited, a joint venture with Lenovo that was formed in 2012. We account for our LenovoEMC joint venture using the fair value method of accounting. To determine the estimated fair value at inception of our investment, we used a discounted cash flow model using a three year time horizon, and utilized a discount rate of 6%, which represented 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. We had no changes to the assumptions utilized in the fair value calculation in the third quarter of 2015 and there were no material changes to the fair value of this joint venture during the three and nine months ended September 30, 2015 and 2014.

The carrying value of the strategic investments held at cost were accounted for under the cost method. As part of our quarterly impairment review, we perform a fair value calculation of our strategic investments held at cost using the most currently available information. 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 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 September 30, 2015 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows (table in millions):
 
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
$
321

 
$
(1
)
 
$

 
$

 
$
321

 
$
(1
)
U.S. corporate debt securities
1,103

 
(5
)
 

 

 
1,103

 
(5
)
High yield corporate debt securities
239

 
(17
)
 
30

 
(5
)
 
269

 
(22
)
Auction rate securities

 

 
25

 
(2
)
 
25

 
(2
)
Foreign debt securities
1,220

 
(8
)
 

 

 
1,220

 
(8
)
Publicly traded equity securities
2

 
(1
)
 
19

 
(8
)
 
21

 
(9
)
Total
$
2,885

 
$
(32
)
 
$
74

 
$
(15
)
 
$
2,959

 
$
(47
)

17

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


For all of our securities for which the amortized cost basis was greater than the fair value at September 30, 2015, 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 and the time to maturity.
Contractual Maturities
The contractual maturities of fixed income securities held at September 30, 2015 are as follows (table in millions):
 
September 30, 2015
 
Amortized
Cost Basis
 
Aggregate
Fair Value
Due within one year
$
2,302

 
$
2,303

Due after 1 year through 5 years
5,618

 
5,617

Due after 5 years through 10 years
523

 
503

Due after 10 years
318

 
316

Total
$
8,761

 
$
8,739


Short-term investments on the consolidated balance sheet include $15 million in variable rate notes which have contractual maturities in 2015, and are not classified within investments due within one year above.
6.  Inventories
Inventories consist of (table in millions):
 
September 30,
2015
 
December 31,
2014
Work-in-process
$
580

 
$
627

Finished goods
644

 
649

 
$
1,224

 
$
1,276

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 September 30, 2015 were as follows (table in millions):
Year
Contractual Amounts
Due Under Leases
Due within one year
$
65

Due within two years
45

Due within three years
31

Thereafter
1

Total
142

Less: Amounts representing interest
5

Present value
137

Current portion (included in accounts and notes receivable)
62

Long-term portion (included in other assets, net)
$
75

Subsequent to September 30, 2015, we sold $23 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

18

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account.
In the event we determine that a lease may not be paid, we include in our allowance an amount for the outstanding balance related to the lease receivable. As of September 30, 2015, amounts from lease receivables past due for more than 90 days were not significant.
During the three and nine months ended September 30, 2015 and 2014, there were no material changes to our allowance for credit losses related to lease receivables.
 
Gross lease receivables totaled $142 million and $233 million as of September 30, 2015 and December 31, 2014, respectively, before the allowance. The components of these balances were individually evaluated for impairment and included in our allowance determination as necessary.
8.  Property, Plant and Equipment
Property, plant and equipment consist of (table in millions):
 
September 30,
2015
 
December 31,
2014
Furniture and fixtures
$
280

 
$
255

Equipment and software
7,305

 
6,684

Buildings and improvements
2,357

 
2,308

Land
170

 
162

Building construction in progress
68

 
134

 
10,180

 
9,543

Accumulated depreciation
(6,389
)
 
(5,777
)
 
$
3,791

 
$
3,766

Building construction in progress at September 30, 2015 includes $39 million for facilities not yet placed in service that we are holding for future use.
9.  Accrued Expenses
Accrued expenses consist of (table in millions):
 
September 30,
2015
 
December 31,
2014
Salaries and benefits
$
1,075

 
$
1,251

Product warranties
180

 
207

Dividends payable (see Note 11)
232

 
237

Partner rebates
204

 
235

Restructuring, current (See Note 12)
162

 
123

Derivatives
51

 
75

Other
927

 
1,013

 
$
2,831

 
$
3,141


19

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Product Warranties
Systems sales include a standard product warranty. At the time of the sale, we accrue for systems’ warranty costs. The initial systems’ warranty accrual is based upon our historical experience, expected future costs and specific identification of systems’ requirements. Upon sale or expiration of the initial warranty, we may sell additional maintenance contracts to our customers. Revenue from these additional maintenance contracts is included in deferred revenue and recognized ratably over the service period. The following represents the activity in our warranty accrual for the three and nine months ended September 30, 2015 and 2014 (table in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Balance, beginning of the period
$
189

 
$
254

 
$
207

 
$
286

Provision
32

 
32

 
109

 
107

Amounts charged against the accrual
(41
)
 
(59
)
 
(136
)
 
(166
)
Balance, end of the period
$
180

 
$
227

 
$
180

 
$
227

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.
10.  Income Taxes

Our effective income tax rates were 24.1% and 23.9% for the three and nine months ended September 30, 2015, respectively. Our effective income tax rates were 24.7% and 24.0% for the three and nine months ended September 30, 2014, 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 and nine months ended September 30, 2015, 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 state taxes. 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. For the three and nine months ended September 30, 2014, 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 state taxes. On December 19, 2014, the Tax Increase Prevention Act was signed into law. Some of the provisions were retroactive to January 1, 2014 including an extension of the U.S. federal tax credit for increasing research activities through December 31, 2014. Our effective income tax rates for the three and nine months ended September 30, 2015 and 2014 do not reflect any federal tax credit for increasing research activities.

Our effective income tax rate decreased in the three months ended September 30, 2015 from the three months ended September 30, 2014 due primarily to a decrease in tax contingency reserves and lower state taxes partially offset by a lower tax rate differential for international jurisdictions. There were also differences in discrete items, the net impact of which is immaterial. Our effective income tax rate for the nine months ended September 30, 2015 was consistent with our effective income tax rate for the nine months ended September 30, 2014.

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. In the third quarter of 2012, the IRS commenced a federal income tax audit for the tax years 2009 and 2010, which is expected to be completed in late 2015. In the first quarter of 2015, the IRS commenced a federal income tax audit for the tax year 2011, which is still in the early stage for information gathering. 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 2005. 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 consolidated balance sheets. We anticipate that several of these audits may be finalized within the next twelve 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 consolidated results of operations or financial position.

20

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


11.  Shareholders’ Equity
The reconciliation from basic to diluted earnings per share for both the numerators and denominators is as follows (table in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Numerator:
 
 
 
 
 
 
 
Net income attributable to EMC Corporation
$
480

 
$
587

 
$
1,219

 
$
1,568

Incremental dilution from VMware
(1
)
 
(1
)
 
(3
)
 
(4
)
Net income – dilution attributable to EMC Corporation
$
479

 
$
586

 
$
1,216

 
$
1,564

Denominator:
 
 
 
 
 
 
 
Weighted average shares, basic
1,934

 
2,032

 
1,945

 
2,033

Weighted common stock equivalents
14

 
25

 
18

 
26

Assumed conversion of the 2013 Notes and associated warrants

 

 

 
6

Weighted average shares, diluted
1,948

 
2,057

 
1,963

 
2,065

Due to the cash settlement feature of the principal amount of the 2013 Notes, we only included the impact of the premium feature in our diluted earnings per share calculation when the 2013 Notes were convertible due to maturity or when the average stock price exceeded the conversion price of the 2013 Notes.
Concurrent with the issuance of the 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. Approximately half of the associated warrants were exercised in 2012 and the remaining 109 million warrants were exercised between February 18, 2014 and March 17, 2014 and were settled with 29 million shares of our common stock. As such, we included the impact of the remaining outstanding sold warrants in our diluted earnings per share calculation during the nine months ended September 30, 2014.
Restricted stock awards, restricted stock units and options to acquire shares of our common stock in the amount of 19 million and 7 million for the three and nine months ended September 30, 2015, respectively, and 3 million for the nine months ended September 30, 2014, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. There were minimal antidilutive restricted stock awards, restricted stock units and options to acquire shares of our common stock excluded from the calculation of diluted earnings per share for the three months ended September 30, 2014. 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.
Repurchase of Common Stock
We utilize both authorized and unissued shares (including repurchased shares) for all issuances under our equity plans. Our Board of Directors authorized the repurchase of 250 million shares of our common stock in February 2013 and an additional 250 million shares of our common stock in December 2014. For the nine months ended September 30, 2015, we spent $2.0 billion to repurchase 76 million shares of our common stock. Of the 500 million shares authorized for repurchase, we have repurchased 277 million shares at a total cost of $7.4 billion, leaving a remaining balance of 223 million shares authorized for future repurchases. 

VMware’s Board of Directors authorized the repurchase of $1.0 billion of VMware’s Class A common stock in January 2015. All shares repurchased under VMware’s stock repurchase programs are retired. For the nine months ended September 30, 2015, VMware spent $1,050 million to repurchase 13 million shares of their common stock. Of the $1.0 billion authorized for repurchase, VMware has a remaining balance of $910 million authorized for future repurchases.

Cash Dividend on Common Stock

In May 2013, our Board of Directors approved the initiation of a quarterly cash dividend to EMC shareholders of $0.10 per share of common stock and in April 2014, our Board of Directors increased the dividend to $0.115 per share of common stock.

21

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Our Board of Directors declared the following dividends during 2015 and 2014:
Declaration Date
 
Dividend Per Share
 
Record Date
 
Total Amount (in millions)
 
Payment Date
2015:
February 27, 2015
 
$
0.115

 
April 1, 2015
 
$
229

 
April 23, 2015
May 20, 2015
 
$
0.115

 
July 1, 2015
 
$
226

 
July 23, 2015
July 30, 2015
 
$
0.115

 
October 1, 2015
 
$
229

 
October 23, 2015
 
 
 
 
 
 
 
 
 
2014:

February 6, 2014
 
$
0.10

 
April 1, 2014
 
$
209

 
April 23, 2014
April 17, 2014
 
$
0.115

 
July 1, 2014
 
$
237

 
July 23, 2014
July 30, 2014
 
$
0.115

 
October 1, 2014
 
$
239

 
October 23, 2014
December 9, 2014
 
$
0.115

 
January 2, 2015
 
$
234

 
January 23, 2015
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss), which is presented net of tax, for the nine months ended September 30, 2015 and 2014 consist of the following (tables in millions):
 
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 2014(a)
$
(187
)
 
$
49

 
$
(99
)
 
$
(126
)
 
$
(3
)
 
$
(366
)
Other comprehensive income (loss) before reclassifications
(137
)
 
(10
)
 
11

 

 
3

 
(133
)
Net losses (gains) reclassified from accumulated other comprehensive income

 
(26
)
 
(8
)