Item 1. FINANCIAL STATEMENTS
EMC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
9,354
|
|
|
$
|
6,549
|
|
|
Short-term investments
|
2,407
|
|
|
2,726
|
|
|
Accounts and notes receivable, less allowance for doubtful accounts of $89 and $90
|
2,896
|
|
|
3,977
|
|
|
Inventories
|
1,243
|
|
|
1,245
|
|
|
Other current assets
|
650
|
|
|
566
|
|
|
Total current assets
|
16,550
|
|
|
15,063
|
|
|
Long-term investments
|
4,387
|
|
|
5,508
|
|
|
Property, plant and equipment, net
|
3,725
|
|
|
3,850
|
|
|
Intangible assets, net
|
1,998
|
|
|
2,149
|
|
|
Goodwill
|
17,137
|
|
|
17,090
|
|
|
Deferred income taxes
|
1,169
|
|
|
1,164
|
|
|
Other assets, net
|
1,779
|
|
|
1,788
|
|
|
Total assets
|
$
|
46,745
|
|
|
$
|
46,612
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
1,158
|
|
|
$
|
1,644
|
|
|
Accrued expenses
|
2,739
|
|
|
3,123
|
|
|
Income taxes payable
|
285
|
|
|
609
|
|
|
Short-term debt (See Note 4)
|
800
|
|
|
1,299
|
|
|
Deferred revenue
|
6,421
|
|
|
6,210
|
|
|
Total current liabilities
|
11,403
|
|
|
12,885
|
|
|
Income taxes payable
|
487
|
|
|
461
|
|
|
Deferred revenue
|
4,750
|
|
|
4,592
|
|
|
Long-term debt (See Note 4)
|
5,479
|
|
|
5,475
|
|
|
Other liabilities
|
471
|
|
|
480
|
|
|
Total liabilities
|
22,590
|
|
|
23,893
|
|
|
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 1,957 and 1,943 shares
|
20
|
|
|
19
|
|
|
Additional paid-in capital
|
—
|
|
|
—
|
|
|
Retained earnings
|
22,679
|
|
|
21,700
|
|
|
Accumulated other comprehensive loss, net
|
(561
|
)
|
|
(579
|
)
|
|
Total EMC Corporation’s shareholders’ equity
|
22,138
|
|
|
21,140
|
|
|
Non-controlling interests
|
2,017
|
|
|
1,579
|
|
|
Total shareholders’ equity
|
24,155
|
|
|
22,719
|
|
|
Total liabilities and shareholders’ equity
|
$
|
46,745
|
|
|
$
|
46,612
|
|
The accompanying notes are an integral part of the consolidated financial statements.
EMC CORPORATION
CONSOLIDATED INCOME STATEMENTS
(in millions, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
For the
Six Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
June 30,
2016
|
|
June 30,
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
3,161
|
|
|
$
|
3,225
|
|
|
$
|
5,843
|
|
|
$
|
6,130
|
|
|
Services
|
2,856
|
|
|
2,772
|
|
|
5,649
|
|
|
5,480
|
|
|
|
6,017
|
|
|
5,997
|
|
|
11,492
|
|
|
11,610
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of product sales
|
1,307
|
|
|
1,433
|
|
|
2,557
|
|
|
2,762
|
|
|
Cost of services
|
974
|
|
|
977
|
|
|
1,939
|
|
|
1,922
|
|
|
Research and development
|
821
|
|
|
782
|
|
|
1,635
|
|
|
1,570
|
|
|
Selling, general and administrative
|
2,034
|
|
|
2,102
|
|
|
4,021
|
|
|
4,139
|
|
|
Restructuring and acquisition-related charges
|
(1
|
)
|
|
23
|
|
|
48
|
|
|
158
|
|
|
Operating income
|
882
|
|
|
680
|
|
|
1,292
|
|
|
1,059
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
Investment income
|
26
|
|
|
26
|
|
|
39
|
|
|
51
|
|
|
Interest expense
|
(42
|
)
|
|
(41
|
)
|
|
(84
|
)
|
|
(81
|
)
|
|
Other income (expense), net
|
(14
|
)
|
|
24
|
|
|
(9
|
)
|
|
34
|
|
|
Total non-operating income (expense)
|
(30
|
)
|
|
9
|
|
|
(54
|
)
|
|
4
|
|
|
Income before provision for income taxes
|
852
|
|
|
689
|
|
|
1,238
|
|
|
1,063
|
|
|
Income tax provision
|
222
|
|
|
170
|
|
|
311
|
|
|
252
|
|
|
Net income
|
630
|
|
|
519
|
|
|
927
|
|
|
811
|
|
|
Less: Net income attributable to the non-controlling interests
|
(49
|
)
|
|
(32
|
)
|
|
(78
|
)
|
|
(72
|
)
|
|
Net income attributable to EMC Corporation
|
$
|
581
|
|
|
$
|
487
|
|
|
$
|
849
|
|
|
$
|
739
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted average share, basic attributable to EMC Corporation common shareholders
|
$
|
0.30
|
|
|
$
|
0.25
|
|
|
$
|
0.43
|
|
|
$
|
0.38
|
|
|
Net income per weighted average share, diluted attributable to EMC Corporation common shareholders
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
$
|
0.43
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
1,955
|
|
|
1,927
|
|
|
1,952
|
|
|
1,950
|
|
|
Weighted average shares, diluted
|
1,973
|
|
|
1,947
|
|
|
1,969
|
|
|
1,971
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.23
|
|
|
$
|
0.23
|
|
The accompanying notes are an integral part of the consolidated financial statements.
EMC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
June 30,
2016
|
|
June 30,
2015
|
|
Net income
|
$
|
630
|
|
|
$
|
519
|
|
|
$
|
927
|
|
|
$
|
811
|
|
|
Other comprehensive income (loss), net of taxes (benefits):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(24
|
)
|
|
18
|
|
|
(21
|
)
|
|
(86
|
)
|
|
Changes in market value of investments:
|
|
|
|
|
|
|
|
|
Changes in unrealized gains, net of taxes of $6, $0, $18 and $12
|
12
|
|
|
1
|
|
|
32
|
|
|
20
|
|
|
Reclassification adjustment for net gains realized in net income, net of benefits (taxes) of $2, $(7), $2 and $(13)
|
2
|
|
|
(13
|
)
|
|
4
|
|
|
(21
|
)
|
|
Net change in market value of investments
|
14
|
|
|
(12
|
)
|
|
36
|
|
|
(1
|
)
|
|
Changes in market value of derivatives:
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses), net of taxes (benefits) of $2, $(2), $1 and $1
|
4
|
|
|
(5
|
)
|
|
—
|
|
|
9
|
|
|
Reclassification adjustment for net losses (gains) included in net income, net of benefits of $2, $2, $4 and $2
|
5
|
|
|
—
|
|
|
9
|
|
|
(11
|
)
|
|
Net change in the market value of derivatives
|
9
|
|
|
(5
|
)
|
|
9
|
|
|
(2
|
)
|
|
Other comprehensive income (loss)
|
(1
|
)
|
|
1
|
|
|
24
|
|
|
(89
|
)
|
|
Comprehensive income
|
629
|
|
|
520
|
|
|
951
|
|
|
722
|
|
|
Less: Net income attributable to the non-controlling interests
|
(49
|
)
|
|
(32
|
)
|
|
(78
|
)
|
|
(72
|
)
|
|
Less: Other comprehensive income attributable to the non-controlling interests
|
(2
|
)
|
|
(2
|
)
|
|
(6
|
)
|
|
(3
|
)
|
|
Comprehensive income attributable to EMC Corporation
|
$
|
578
|
|
|
$
|
486
|
|
|
$
|
867
|
|
|
$
|
647
|
|
The accompanying notes are an integral part of the consolidated financial statements.
|
EMC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
Cash received from customers
|
$
|
12,953
|
|
|
$
|
13,137
|
|
|
Cash paid to suppliers and employees
|
(9,749
|
)
|
|
(10,076
|
)
|
|
Dividends and interest received
|
57
|
|
|
68
|
|
|
Interest paid
|
(72
|
)
|
|
(67
|
)
|
|
Income taxes paid
|
(649
|
)
|
|
(949
|
)
|
|
Net cash provided by operating activities
|
2,540
|
|
|
2,113
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Additions to property, plant and equipment
|
(299
|
)
|
|
(449
|
)
|
|
Capitalized software development costs
|
(310
|
)
|
|
(262
|
)
|
|
Purchases of short- and long-term available-for-sale securities
|
(2,458
|
)
|
|
(4,212
|
)
|
|
Sales of short- and long-term available-for-sale securities
|
2,140
|
|
|
2,667
|
|
|
Maturities of short- and long-term available-for-sale securities
|
1,771
|
|
|
913
|
|
|
Business acquisitions, net of cash acquired
|
(59
|
)
|
|
(61
|
)
|
|
Purchases of strategic and other related investments
|
(25
|
)
|
|
(160
|
)
|
|
Sales of strategic and other related investments
|
41
|
|
|
109
|
|
|
Increase in restricted cash
|
(4
|
)
|
|
—
|
|
|
Net cash provided by (used in) investing activities
|
797
|
|
|
(1,455
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from the issuance of EMC’s common stock
|
144
|
|
|
170
|
|
|
Proceeds from the issuance of VMware’s common stock
|
52
|
|
|
69
|
|
|
EMC repurchase of EMC’s common stock
|
—
|
|
|
(2,063
|
)
|
|
VMware repurchase of VMware’s common stock
|
—
|
|
|
(850
|
)
|
|
Excess tax benefits from stock-based compensation
|
9
|
|
|
54
|
|
|
Net proceeds (payments) for the issuance of short-term obligations
|
(503
|
)
|
|
1,948
|
|
|
Dividend payment
|
(453
|
)
|
|
(456
|
)
|
|
Contributions from non-controlling interests
|
233
|
|
|
4
|
|
|
Net cash used in financing activities
|
(518
|
)
|
|
(1,124
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(14
|
)
|
|
(74
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
2,805
|
|
|
(540
|
)
|
|
Cash and cash equivalents at beginning of period
|
6,549
|
|
|
6,343
|
|
|
Cash and cash equivalents at end of period
|
$
|
9,354
|
|
|
$
|
5,803
|
|
|
Reconciliation of net income to net cash provided by operating activities:
|
|
|
|
|
Net income
|
$
|
927
|
|
|
$
|
811
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
985
|
|
|
942
|
|
|
Non-cash restructuring and other special charges
|
3
|
|
|
13
|
|
|
Stock-based compensation expense
|
607
|
|
|
502
|
|
|
Provision for doubtful accounts
|
9
|
|
|
25
|
|
|
Deferred income taxes, net
|
(29
|
)
|
|
(48
|
)
|
|
Excess tax benefits from stock-based compensation
|
(9
|
)
|
|
(54
|
)
|
|
Impairment of joint venture
|
39
|
|
|
—
|
|
|
Other, net
|
17
|
|
|
18
|
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
Accounts and notes receivable
|
1,077
|
|
|
1,017
|
|
|
Inventories
|
(103
|
)
|
|
(45
|
)
|
|
Other assets
|
(76
|
)
|
|
(3
|
)
|
|
Accounts payable
|
(501
|
)
|
|
(443
|
)
|
|
Accrued expenses
|
(460
|
)
|
|
(480
|
)
|
|
Income taxes payable
|
(325
|
)
|
|
(650
|
)
|
|
Deferred revenue
|
389
|
|
|
509
|
|
|
Other liabilities
|
(10
|
)
|
|
(1
|
)
|
|
Net cash provided by operating activities
|
$
|
2,540
|
|
|
$
|
2,113
|
|
The accompanying notes are an integral part of the consolidated financial statements.
EMC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
(unaudited)
For the six months ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Non-controlling
Interests
|
|
Shareholders’
Equity
|
|
Shares
|
|
Par Value
|
|
|
|
|
|
|
Balance, January 1, 2016
|
1,943
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
21,700
|
|
|
$
|
(579
|
)
|
|
$
|
1,579
|
|
|
$
|
22,719
|
|
|
Stock issued through stock option and stock purchase plans
|
8
|
|
|
1
|
|
|
144
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
145
|
|
|
Tax benefit from stock options exercised
|
—
|
|
|
—
|
|
|
(24
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24
|
)
|
|
Restricted stock grants, cancellations and withholdings, net
|
4
|
|
|
—
|
|
|
(45
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(45
|
)
|
|
Reversal of reclass of previously repurchased common stock
|
—
|
|
|
—
|
|
|
(590
|
)
|
|
590
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation
|
2
|
|
|
—
|
|
|
660
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
660
|
|
|
Cash dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
(460
|
)
|
|
—
|
|
|
—
|
|
|
(460
|
)
|
|
Impact from equity transactions of non-controlling interests
|
—
|
|
|
—
|
|
|
(145
|
)
|
|
—
|
|
|
—
|
|
|
354
|
|
|
209
|
|
|
Change in market value of investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
6
|
|
|
36
|
|
|
Change in market value of derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
Translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21
|
)
|
|
—
|
|
|
(21
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
849
|
|
|
—
|
|
|
78
|
|
|
927
|
|
|
Balance, June 30, 2016
|
1,957
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
22,679
|
|
|
$
|
(561
|
)
|
|
$
|
2,017
|
|
|
$
|
24,155
|
|
For the six months ended
June 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
|
10
|
|
|
—
|
|
|
170
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
170
|
|
|
Tax benefit from stock options exercised
|
—
|
|
|
—
|
|
|
43
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43
|
|
|
Restricted stock grants, cancellations and withholdings, net
|
6
|
|
|
—
|
|
|
(71
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(71
|
)
|
|
Repurchase of common stock
|
(76
|
)
|
|
(1
|
)
|
|
(20
|
)
|
|
(2,012
|
)
|
|
—
|
|
|
—
|
|
|
(2,033
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
560
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
560
|
|
|
Cash dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
(453
|
)
|
|
—
|
|
|
—
|
|
|
(453
|
)
|
|
Impact from equity transactions of non-controlling interests
|
—
|
|
|
—
|
|
|
(682
|
)
|
|
—
|
|
|
—
|
|
|
(219
|
)
|
|
(901
|
)
|
|
Change in market value of investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
4
|
|
|
(1
|
)
|
|
Change in market value of derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
Translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(86
|
)
|
|
—
|
|
|
(86
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
739
|
|
|
—
|
|
|
72
|
|
|
811
|
|
|
Balance, June 30, 2015
|
1,925
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
20,516
|
|
|
$
|
(458
|
)
|
|
$
|
1,485
|
|
|
$
|
21,562
|
|
The accompanying notes are an integral part of the consolidated financial statements.
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Company
EMC Corporation (“EMC” or “the Company”) 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 a leader in virtualization and cloud infrastructure solutions that enable businesses to transform the way they build, deliver and consume IT resources in a manner that is based on their specific needs. 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, servers and mobile devices 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 fabrics, application fabrics and a cloud independent platform-as-a-service (“PaaS”) to support Big and Fast Data applications. On top of this platform is the Company’s agile development services business. 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 (“Denali”), Dell Inc., a Delaware corporation (“Dell”), and Universal Acquisition Co., a Delaware corporation and direct wholly owned subsidiary of Denali (“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 Denali.
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 Denali 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 EMC, reflecting approximately
53%
of the total economic interest in the outstanding shares of VMware. Upon completion of the transaction, Denali 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 outstanding 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.
The Merger Agreement contains specified termination rights for both Denali and EMC, including that, in general, either party may terminate the agreement if the Merger is not consummated on or before December 16, 2016. If EMC terminates the Merger Agreement, EMC is required to pay Denali a termination fee of
$2.5 billion
. If Denali 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 during the third quarter of 2016. The completion of the Merger is subject to certain conditions including EMC shareholder approval, 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 Denali in connection with the registration of shares of Class V Common Stock issuable in connection with the Merger. The registration statement on Form S-4 was declared effective on June 6, 2016 and EMC shareholders approved the Merger Agreement at a Special Meeting of Shareholders which was held on July 19, 2016.
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 Denali, 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 Denali with access to EMC’s cash to help fund the Merger consideration. If there is a need to transfer cash to the U.S. in order to meet the requirements of the Merger, EMC does not expect that taxes and other costs incurred would be material.
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 six months ended
June 30, 2016
.
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, 2015
which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2016.
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
six
-month periods ended
June 30, 2016
and
2015
.
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. 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.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance related to stock-based compensation which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard is effective beginning January 1, 2017, with early application permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued a standard on leases which amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires modified retrospective adoption and is effective beginning January 1, 2019, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
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
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
$1,678 million
and
$1,481 million
as of
June 30, 2016
and
December 31, 2015
, respectively. At
June 30, 2016
, EMC held approximately
97%
of the combined voting power of VMware’s outstanding common stock and approximately
81%
of the economic interest in VMware.
GE’s interest in Pivotal is in the form of a preferred equity instrument. Consequently, there is no net income attributable to the GE 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. In May 2016, Pivotal sold an additional
$233 million
of preferred equity instruments to GE, Ford and Microsoft, with similar terms as the initial GE preferred instrument.
The portion of the results of operations of Pivotal allocable to its other owners, along with the interest in the net assets of Pivotal attributable to those other owners are shown as a reduction of net income attributable to EMC shareholders and as a component of non-controlling interests on EMC’s consolidated balance sheets, respectively. 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
$339 million
and
$98 million
as of
June 30, 2016
and
December 31, 2015
, respectively. At
June 30, 2016
, EMC consolidated held approximately
78%
of the economic interest in Pivotal.
The effect of changes in our ownership interest in VMware and Pivotal on our equity was as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
Net income attributable to EMC Corporation
|
$
|
849
|
|
|
$
|
739
|
|
|
Transfers (to) from the non-controlling interests:
|
|
|
|
|
Increase in EMC Corporation’s additional paid-in-capital for VMware and Pivotal equity issuances
|
21
|
|
|
29
|
|
|
Decrease in EMC Corporation’s additional paid-in-capital for VMware’s and Pivotal’s other equity activity
|
(166
|
)
|
|
(711
|
)
|
|
Net transfers to non-controlling interest
|
(145
|
)
|
|
(682
|
)
|
|
Change from net income attributable to EMC Corporation and transfers from the non-controlling interests
|
$
|
704
|
|
|
$
|
57
|
|
3. Business Combinations, Intangibles and Goodwill
During the three months ended
June 30, 2016
, VMware acquired all of the remaining outstanding shares of Arkin Net, Inc. (“Arkin”), a provider of software-defined data center security and operations, as part of a strategy to accelerate customers’ adoption of VMware NSX and software-defined data centers, for
$67 million
of cash, net of liabilities assumed. 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 preliminary aggregate allocation to goodwill, intangibles and net assets was approximately
$38 million
,
$26 million
and
$3 million
, respectively. The intangible assets acquired were primarily comprised of purchased technology which have an amortization period of
four
to
five
years. The proforma financial information assuming the acquisition had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the current year, were not material for disclosure purposes. During the six months ended June 30, 2016, Pivotal acquired two businesses, which were not material either individually or in the aggregate to the June 30, 2016 results.
Most of our intangible assets are being amortized based upon the pattern in which the economic 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 expected to be deductible for U.S. federal income tax purposes.
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible Assets
Intangible assets, excluding goodwill, as of
June 30, 2016
and
December 31, 2015
consist of (tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book Value
|
|
Purchased technology
|
$
|
3,298
|
|
|
$
|
(2,017
|
)
|
|
$
|
1,281
|
|
|
Patents
|
225
|
|
|
(139
|
)
|
|
86
|
|
|
Software licenses
|
115
|
|
|
(94
|
)
|
|
21
|
|
|
Trademarks and tradenames
|
254
|
|
|
(168
|
)
|
|
86
|
|
|
Customer relationships and customer lists
|
1,524
|
|
|
(1,131
|
)
|
|
393
|
|
|
Leasehold interest
|
152
|
|
|
(23
|
)
|
|
129
|
|
|
Other
|
46
|
|
|
(44
|
)
|
|
2
|
|
|
Total intangible assets, excluding goodwill
|
$
|
5,614
|
|
|
$
|
(3,616
|
)
|
|
$
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book Value
|
|
Purchased technology
|
$
|
3,272
|
|
|
$
|
(1,903
|
)
|
|
$
|
1,369
|
|
|
Patents
|
225
|
|
|
(132
|
)
|
|
93
|
|
|
Software licenses
|
112
|
|
|
(94
|
)
|
|
18
|
|
|
Trademarks and tradenames
|
254
|
|
|
(157
|
)
|
|
97
|
|
|
Customer relationships and customer lists
|
1,523
|
|
|
(1,087
|
)
|
|
436
|
|
|
Leasehold interest
|
152
|
|
|
(20
|
)
|
|
132
|
|
|
Other
|
46
|
|
|
(42
|
)
|
|
4
|
|
|
Total intangible assets, excluding goodwill
|
$
|
5,584
|
|
|
$
|
(3,435
|
)
|
|
$
|
2,149
|
|
Goodwill
Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment, for the
six
months ended
June 30, 2016
consist of (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
Information
Storage
|
|
Enterprise
Content Division
|
|
RSA
Information
Security
|
|
Pivotal
|
|
VMware
Virtual
Infrastructure
|
|
Total
|
|
Balance, beginning of the period
|
$
|
9,185
|
|
|
$
|
1,478
|
|
|
$
|
2,203
|
|
|
$
|
187
|
|
|
$
|
4,037
|
|
|
$
|
17,090
|
|
|
Goodwill resulting from acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
38
|
|
|
47
|
|
|
Balance, end of the period
|
$
|
9,185
|
|
|
$
|
1,478
|
|
|
$
|
2,203
|
|
|
$
|
196
|
|
|
$
|
4,075
|
|
|
$
|
17,137
|
|
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 “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,
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
for additional one-year periods. As of
June 30, 2016
, we were in compliance with customary required covenants. At
June 30, 2016
, we had
no
funds borrowed and at December 31, 2015, we had
$600 million
outstanding under the credit facility. Amounts outstanding under the credit facility are presented in short-term debt in the consolidated balance sheets with the issuances and proceeds presented on a net basis in the consolidated statement of cash flows due to their short term nature. At August 8, 2016, we had
$900 million
outstanding 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
June 30, 2016
, we were in compliance with customary required covenants. At
June 30, 2016
, we had $
800 million
of Commercial Paper outstanding, with a weighted-average interest rate of
0.81%
and maturities ranging from
8
days to
29
days at the time of issuance. At December 31, 2015, we had $
699 million
of Commercial Paper outstanding. 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 August 8, 2016, we had
no
Commercial Paper outstanding.
Long-Term Debt
During 2013, we issued
$5.5 billion
of Notes which pay a fixed rate of interest semi-annually in arrears. The proceeds from the Notes were used to repay the
$1.725 billion
1.75%
convertible senior notes due 2013 as well as for general corporate purposes including stock repurchases, dividend payments, business acquisitions, 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
June 30, 2016
, we were in compliance with all debt covenants, which are customary in nature.
Our long-term debt as of
June 30, 2016
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
|
%
|
|
1,997
|
|
|
$1.0 billion 3.375% Notes due 2023
|
|
99.925
|
%
|
|
1,000
|
|
|
|
|
|
|
$
|
5,496
|
|
|
Debt issuance costs
|
|
|
|
(17
|
)
|
|
Net long-term debt
|
|
|
|
$
|
5,479
|
|
The unamortized discount on the Notes consists of
$4 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
six
months ended
June 30, 2016
.
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
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
securities, which are classified as Level 3. In addition, our strategic investments held at cost are classified as Level 3. At
June 30, 2016
, 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
December 31, 2015
. During the three months ended June 30, 2016, EMC sold all of our auction rate securities. At
June 30, 2016
and
December 31, 2015
, 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
December 31, 2015
, 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
June 30, 2016
and
December 31, 2015
(tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
(Losses)
|
|
Aggregate
Fair Value
|
|
U.S. government and agency obligations
|
$
|
1,639
|
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
$
|
1,646
|
|
|
U.S. corporate debt securities
|
2,172
|
|
|
14
|
|
|
—
|
|
|
2,186
|
|
|
High yield corporate debt securities
|
68
|
|
|
1
|
|
|
(2
|
)
|
|
67
|
|
|
Asset-backed securities
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Municipal obligations
|
517
|
|
|
—
|
|
|
—
|
|
|
517
|
|
|
Foreign debt securities
|
2,236
|
|
|
11
|
|
|
—
|
|
|
2,247
|
|
|
Total fixed income securities
|
6,640
|
|
|
34
|
|
|
(3
|
)
|
|
6,671
|
|
|
Publicly traded equity securities
|
113
|
|
|
18
|
|
|
(8
|
)
|
|
123
|
|
|
Total
|
$
|
6,753
|
|
|
$
|
52
|
|
|
$
|
(11
|
)
|
|
$
|
6,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
(Losses)
|
|
Aggregate
Fair Value
|
|
U.S. government and agency obligations
|
$
|
2,449
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
2,441
|
|
|
U.S. corporate debt securities
|
2,257
|
|
|
1
|
|
|
(10
|
)
|
|
2,248
|
|
|
High yield corporate debt securities
|
307
|
|
|
2
|
|
|
(22
|
)
|
|
287
|
|
|
Asset-backed securities
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
Municipal obligations
|
731
|
|
|
1
|
|
|
—
|
|
|
732
|
|
|
Auction rate securities
|
27
|
|
|
—
|
|
|
(2
|
)
|
|
25
|
|
|
Foreign debt securities
|
2,332
|
|
|
—
|
|
|
(9
|
)
|
|
2,323
|
|
|
Total fixed income securities
|
8,123
|
|
|
4
|
|
|
(51
|
)
|
|
8,076
|
|
|
Publicly traded equity securities
|
126
|
|
|
40
|
|
|
(8
|
)
|
|
158
|
|
|
Total
|
$
|
8,249
|
|
|
$
|
44
|
|
|
$
|
(59
|
)
|
|
$
|
8,234
|
|
We held approximately
$2,247 million
in foreign debt securities at
June 30, 2016
. 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.
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
June 30, 2016
and
December 31, 2015
(tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash
|
$
|
2,284
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,284
|
|
|
Cash equivalents
|
6,560
|
|
|
510
|
|
|
—
|
|
|
7,070
|
|
|
U.S. government and agency obligations
|
1,005
|
|
|
641
|
|
|
—
|
|
|
1,646
|
|
|
U.S. corporate debt securities
|
—
|
|
|
2,186
|
|
|
—
|
|
|
2,186
|
|
|
High yield corporate debt securities
|
—
|
|
|
67
|
|
|
—
|
|
|
67
|
|
|
Asset-backed securities
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
|
Municipal obligations
|
—
|
|
|
517
|
|
|
—
|
|
|
517
|
|
|
Foreign debt securities
|
—
|
|
|
2,247
|
|
|
—
|
|
|
2,247
|
|
|
Publicly traded equity securities
|
123
|
|
|
—
|
|
|
—
|
|
|
123
|
|
|
Total cash and investments
|
$
|
9,972
|
|
|
$
|
6,176
|
|
|
$
|
—
|
|
|
$
|
16,148
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
Strategic investments held at cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
404
|
|
|
$
|
404
|
|
|
Long-term debt carried at discounted cost
|
—
|
|
|
(5,281
|
)
|
|
—
|
|
|
(5,281
|
)
|
|
Foreign exchange derivative assets
|
—
|
|
|
45
|
|
|
—
|
|
|
45
|
|
|
Foreign exchange derivative liabilities
|
—
|
|
|
(61
|
)
|
|
—
|
|
|
(61
|
)
|
|
Commodity derivative liabilities
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash
|
$
|
2,095
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,095
|
|
|
Cash equivalents
|
3,861
|
|
|
593
|
|
|
—
|
|
|
4,454
|
|
|
U.S. government and agency obligations
|
1,495
|
|
|
946
|
|
|
—
|
|
|
2,441
|
|
|
U.S. corporate debt securities
|
—
|
|
|
2,248
|
|
|
—
|
|
|
2,248
|
|
|
High yield corporate debt securities
|
—
|
|
|
287
|
|
|
—
|
|
|
287
|
|
|
Asset-backed securities
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
|
Municipal obligations
|
—
|
|
|
732
|
|
|
—
|
|
|
732
|
|
|
Auction rate securities
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
|
Foreign debt securities
|
—
|
|
|
2,323
|
|
|
—
|
|
|
2,323
|
|
|
Publicly traded equity securities
|
158
|
|
|
—
|
|
|
—
|
|
|
158
|
|
|
Total cash and investments
|
$
|
7,609
|
|
|
$
|
7,149
|
|
|
$
|
25
|
|
|
$
|
14,783
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
Strategic investments held at cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
384
|
|
|
$
|
384
|
|
|
Investment in joint venture
|
—
|
|
|
—
|
|
|
39
|
|
|
39
|
|
|
Long-term debt carried at discounted cost
|
—
|
|
|
(4,999
|
)
|
|
—
|
|
|
(4,999
|
)
|
|
Foreign exchange derivative assets
|
—
|
|
|
39
|
|
|
—
|
|
|
39
|
|
|
Foreign exchange derivative liabilities
|
—
|
|
|
(78
|
)
|
|
—
|
|
|
(78
|
)
|
|
Commodity derivative liabilities
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
EMC had a
49%
ownership percentage of LenovoEMC Limited, a joint venture with Lenovo that was formed in 2012. During the three months ended June 30, 2016, EMC and Lenovo entered into an agreement to terminate the joint venture. Accordingly, EMC recognized an impairment loss of
$39 million
which is reflected in other income (expense), net on the consolidated income statements.
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
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
June 30, 2016
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
|
$
|
128
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
128
|
|
|
$
|
(1
|
)
|
|
High yield corporate debt securities
|
20
|
|
|
(1
|
)
|
|
15
|
|
|
(1
|
)
|
|
35
|
|
|
(2
|
)
|
|
Publicly traded equity securities
|
2
|
|
|
(1
|
)
|
|
2
|
|
|
(7
|
)
|
|
4
|
|
|
(8
|
)
|
|
Total
|
$
|
150
|
|
|
$
|
(3
|
)
|
|
$
|
17
|
|
|
$
|
(8
|
)
|
|
$
|
167
|
|
|
$
|
(11
|
)
|
For all of our securities for which the amortized cost basis was greater than the fair value at
June 30, 2016
, 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
June 30, 2016
are as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Amortized
Cost Basis
|
|
Aggregate
Fair Value
|
|
Due within one year
|
$
|
2,378
|
|
|
$
|
2,379
|
|
|
Due after 1 year through 5 years
|
3,910
|
|
|
3,938
|
|
|
Due after 5 years through 10 years
|
162
|
|
|
163
|
|
|
Due after 10 years
|
190
|
|
|
191
|
|
|
Total
|
$
|
6,640
|
|
|
$
|
6,671
|
|
Short-term investments on the consolidated balance sheet include
$28 million
in variable rate notes which have contractual maturities in
2016
, and are not classified within investments due within one year above.
6. Inventories
Inventories consist of (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Work-in-process
|
$
|
676
|
|
|
$
|
592
|
|
|
Finished goods
|
567
|
|
|
653
|
|
|
|
$
|
1,243
|
|
|
$
|
1,245
|
|
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.
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The contractual amounts due under the leases we retained as of
June 30, 2016
were as follows (table in millions):
|
|
|
|
|
|
|
|
Year
|
Contractual Amounts
Due Under Leases
|
|
Due within one year
|
$
|
72
|
|
|
Due within two years
|
49
|
|
|
Due within three years
|
38
|
|
|
Thereafter
|
3
|
|
|
Total
|
162
|
|
|
Less: Amounts representing interest
|
7
|
|
|
Present value
|
155
|
|
|
Current portion (included in accounts and notes receivable)
|
68
|
|
|
Long-term portion (included in other assets, net)
|
$
|
87
|
|
Subsequent to
June 30, 2016
, we sold
$3 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
June 30, 2016
, amounts from lease receivables past due for more than
90
days were not significant.
During the
three
and
six
months ended
June 30, 2016
and
2015
, there were
no material changes
to our allowance for credit losses related to lease receivables. Gross lease receivables totaled
$162 million
and
$154 million
as of
June 30, 2016
and
December 31, 2015
, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Furniture and fixtures
|
$
|
283
|
|
|
$
|
283
|
|
|
Equipment and software
|
7,439
|
|
|
7,378
|
|
|
Buildings and improvements
|
2,401
|
|
|
2,373
|
|
|
Land
|
172
|
|
|
171
|
|
|
Building construction in progress
|
106
|
|
|
83
|
|
|
|
10,401
|
|
|
10,288
|
|
|
Accumulated depreciation
|
(6,676
|
)
|
|
(6,438
|
)
|
|
|
$
|
3,725
|
|
|
$
|
3,850
|
|
Property, plant and equipment at
June 30, 2016
includes
$66 million
for facilities not yet placed in service that we are holding for future use.
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Accrued Expenses
Accrued expenses consist of (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Salaries and benefits
|
$
|
1,037
|
|
|
$
|
1,189
|
|
|
Product warranties
|
136
|
|
|
172
|
|
|
Dividends payable (see Note 11)
|
242
|
|
|
234
|
|
|
Partner rebates
|
204
|
|
|
221
|
|
|
Restructuring, current (See Note 12)
|
153
|
|
|
333
|
|
|
Derivatives
|
73
|
|
|
82
|
|
|
Other
|
894
|
|
|
892
|
|
|
|
$
|
2,739
|
|
|
$
|
3,123
|
|
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
six
months ended
June 30, 2016
and
2015
(table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
June 30,
2016
|
|
June 30,
2015
|
|
Balance, beginning of the period
|
$
|
151
|
|
|
$
|
188
|
|
|
$
|
172
|
|
|
$
|
207
|
|
|
Provision
|
26
|
|
|
44
|
|
|
51
|
|
|
77
|
|
|
Amounts charged against the accrual
|
(41
|
)
|
|
(43
|
)
|
|
(87
|
)
|
|
(95
|
)
|
|
Balance, end of the period
|
$
|
136
|
|
|
$
|
189
|
|
|
$
|
136
|
|
|
$
|
189
|
|
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
26.1%
and
25.1%
for the
three
and
six
months ended
June 30, 2016
, respectively. Our effective income tax rates were
24.6%
and
23.7%
for the
three
and
six
months ended
June 30, 2015
, 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 six months ended June 30, 2016, 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 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 provision for income taxes from foreign operations has been earned by our Irish subsidiaries. For the three and six months ended June 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. 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. On December 18, 2015, the Consolidated Appropriations Act, 2016 was signed into law. Some of the provisions were retroactive to January 1, 2015 including a permanent extension of the U.S. federal tax credit for increasing research activities. Our effective income tax rates for the three and six months ended June 30, 2015 do not reflect any federal tax credit for increasing research activities.
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our effective income tax rate increased in the three and six months ended June 30, 2016 from the three and six months ended June 30, 2015 due primarily to a lower tax rate differential for international jurisdictions. There were also differences in 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. In the third quarter of 2012, the IRS commenced a federal income tax audit for the tax years 2009 and 2010. The IRS completed their field audit for the tax years 2009 and 2010 and issued Revenue Agent Reports (“RARs”) in the first quarter of 2016. We disagree with certain proposed adjustments and have filed a formal protest to the IRS Appeals Division. In the first quarter of 2015, the IRS commenced a federal income tax audit for the tax year 2011, which is still ongoing. 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 2004. 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 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.
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 Six Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
June 30,
2016
|
|
June 30,
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to EMC Corporation
|
$
|
581
|
|
|
$
|
487
|
|
|
$
|
849
|
|
|
$
|
739
|
|
|
Incremental dilution from VMware
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
Net income – dilution attributable to EMC Corporation
|
$
|
580
|
|
|
$
|
486
|
|
|
$
|
848
|
|
|
$
|
737
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
1,955
|
|
|
1,927
|
|
|
1,952
|
|
|
1,950
|
|
|
Weighted common stock equivalents
|
18
|
|
|
20
|
|
|
17
|
|
|
21
|
|
|
Weighted average shares, diluted
|
1,973
|
|
|
1,947
|
|
|
1,969
|
|
|
1,971
|
|
Restricted stock awards, restricted stock units and options to acquire shares of our common stock in the amount of
1 million
for the
six
months ended
June 30, 2016
and
1 million
for both the
three
and
six
months ended
June 30, 2015
, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. 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 December 2014. For the
six
months ended
June 30, 2016
, we did not repurchase any shares of our common stock. Of the
250 million
shares authorized for repurchase, we have repurchased
27 million
shares to-date at a total cost of
$715 million
, leaving a remaining balance of
223 million
shares authorized for future repurchases.
During April 2016, VMware’s Board of Directors authorized the repurchase of up to an aggregate of
$1.2 billion
of VMware’s Class A common stock through the end of 2016, which includes the amount remaining from VMware’s previous stock repurchase authorization announced on January 27, 2015, which was
$835 million
as of June 30, 2016. All shares repurchased under VMware’s stock repurchase programs are retired. For the
six
months ended
June 30, 2016
, VMware did not repurchase any shares of its Class A common stock as it was subject to a number of legal and regulatory constraints resulting from the Merger Agreement, which impacted the timing and ability to execute repurchases of VMware’s shares.
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash Dividend on Common Stock
EMC pays a quarterly dividend of
$0.115
per share of common stock to EMC shareholders, subject to the approval of our Board of Directors. Our Board of Directors declared the following dividends during
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend Per Share
|
|
Record Date
|
|
Total Amount (in millions)
|
|
Payment Date
|
|
2016:
|
|
February 11, 2016
|
|
$
|
0.115
|
|
|
April 1, 2016
|
|
$
|
229
|
|
|
April 22, 2016
|
|
May 12, 2016
|
|
$
|
0.115
|
|
|
July 1, 2016
|
|
$
|
231
|
|
|
July 22, 2016
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
December 17, 2015
|
|
$
|
0.115
|
|
|
January 4, 2016
|
|
$
|
230
|
|
|
January 22, 2016
|
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss), which is presented net of tax, for the
six
months ended
June 30, 2016
and
2015
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 2015
(a)
|
$
|
(356
|
)
|
|
$
|
(10
|
)
|
|
$
|
(89
|
)
|
|
$
|
(125
|
)
|
|
$
|
1
|
|
|
$
|
(579
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(21
|
)
|
|
32
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
5
|
|
|
Net losses (gains) reclassified from accumulated other comprehensive income
|
—
|
|
|
4
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
Net current period other comprehensive income (loss)
|
(21
|
)
|
|
36
|
|
|
9
|
|
|
—
|
|
|
(6
|
)
|
|
18
|
|
|
Balance as of June 30, 2016
(b)
|
$
|
(377
|
)
|
|
$
|
26
|
|
|
$
|
(80
|
)
|
|
$
|
(125
|
)
|
|
$
|
(5
|
)
|
|
$
|
(561
|
)
|
__________________
|
|
|
|
(a)
|
Net of taxes (benefits) of
$(5) million
for unrealized net gains on investments,
$(56) million
for unrealized net losses on derivatives and
$(71) million
for actuarial net loss on pension plans.
|
|
|
|
|
(b)
|
Net of taxes (benefits) of
$15 million
for unrealized net gains on investments,
$(51) million
for unrealized net losses on derivatives and
$(71) million
for actuarial net loss on pension plans
.
|
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
(86
|
)
|
|
20
|
|
|
9
|
|
|
—
|
|
|
(3
|
)
|
|
(60
|
)
|
|
Net losses (gains) reclassified from accumulated other comprehensive income
|
—
|
|
|
(21
|
)
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
|
Net current period other comprehensive income (loss)
|
(86
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
—
|
|
|
(3
|
)
|
|
(92
|
)
|
|
Balance as of June 30, 2015
(b)
|
$
|
(273
|
)
|
|
$
|
48
|
|
|
$
|
(101
|
)
|
|
$
|
(126
|
)
|
|
$
|
(6
|
)
|
|
$
|
(458
|
)
|
__________________
|
|
|
|
(a)
|
Net of taxes (benefits) of
$31 million
for unrealized net gains on investments,
$(64) million
for unrealized net losses on derivatives and
$(70) million
for actuarial net loss on pension plans.
|
|
|
|
|
(b)
|
Net of taxes (benefits) of
$31 million
for unrealized net gains on investments,
$(61) million
for unrealized net losses on derivatives and
$(70) million
for actuarial net loss on pension plans.
|
The amounts reclassified out of accumulated other comprehensive income (loss) for the
three
and
six
months ended
June 30, 2016
and
2015
are as follows (tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
Accumulated Other Comprehensive Income Components
|
|
June 30, 2016
|
|
June 30, 2015
|
|
Impacted Line Item on
Consolidated Income Statements
|
|
Net (loss) gain on investments:
|
|
$
|
(4
|
)
|
|
$
|
20
|
|
|
Investment income
|
|
|
|
2
|
|
|
(7
|
)
|
|
Provision for income tax
|
|
Net of tax
|
|
$
|
(2
|
)
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on derivatives:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
Product sales revenue
|
|
Foreign exchange contracts
|
|
—
|
|
|
3
|
|
|
Cost of product sales
|
|
Interest rate swap
|
|
(5
|
)
|
|
(6
|
)
|
|
Other interest expense
|
|
Total net (loss) gain on derivatives before tax
|
|
(7
|
)
|
|
(2
|
)
|
|
|
|
|
|
2
|
|
|
2
|
|
|
Provision for income tax
|
|
Net of tax
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
Accumulated Other Comprehensive Income Components
|
|
June 30, 2016
|
|
June 30, 2015
|
|
Impacted Line Item on
Consolidated Income Statements
|
|
Net (loss) gain on investments:
|
|
$
|
(6
|
)
|
|
$
|
34
|
|
|
Investment income
|
|
|
|
2
|
|
|
(13
|
)
|
|
Provision for income tax
|
|
Net of tax
|
|
$
|
(4
|
)
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on derivatives:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(2
|
)
|
|
$
|
21
|
|
|
Product sales revenue
|
|
Foreign exchange contracts
|
|
—
|
|
|
(1
|
)
|
|
Cost of product sales
|
|
Interest rate swap
|
|
(11
|
)
|
|
(11
|
)
|
|
Other interest expense
|
|
Total net (loss) gain on derivatives before tax
|
|
(13
|
)
|
|
9
|
|
|
|
|
|
|
4
|
|
|
2
|
|
|
Provision for income tax
|
|
Net of tax
|
|
$
|
(9
|
)
|
|
$
|
11
|
|
|
|
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Restructuring and Acquisition-Related Charges
For the
three
months ended
June 30, 2016
, we recorded a restructuring and acquisition-related credit of
$1 million
and for the
six
months ended
June 30, 2016
, we incurred restructuring and acquisition-related charges of
$48 million
. For the
three
and
six
months ended
June 30, 2015
, we incurred restructuring and acquisition-related charges of
$23 million
and
$158 million
, respectively.
For the
three
and
six
months ended
June 30, 2016
, EMC recorded a
$1 million
credit and a
$6 million
credit, respectively, related to our prior restructuring programs. For the
three
months ended
June 30, 2016
, VMware incurred a
$1 million
credit related to its restructuring programs. For the
six
months ended
June 30, 2016
, VMware incurred
$52 million
of restructuring charges, primarily related to its current year restructuring program. Additionally, for the
three
and
six
months ended
June 30, 2016
, VMware incurred
$1 million
and
$2 million
, respectively, of charges in connection with acquisitions for financial, advisory, legal and accounting services.
For the
three
and
six
months ended
June 30, 2015
, EMC incurred
$23 million
and
$133 million
, respectively, of restructuring charges, primarily related to our
2015
restructuring programs, and
$2 million
and
$3 million
, respectively, of charges in connection with acquisitions for financial, advisory, legal and accounting services. For the
three
months ended
June 30, 2015
, VMware recognized a credit of
$2 million
related to its restructuring program and for the
six
months ended
June 30, 2015
, VMware incurred
$21 million
of restructuring charges, primarily related to its 2015 program. For the
six
months ended
June 30, 2015
, VMware incurred
$1 million
of charges in connection with acquisitions for financial, advisory, legal and accounting services.
In the first quarter of 2016, VMware approved a plan to streamline its operations, with plans to reinvest the associated savings in field, technical and support resources associated with growth products. As a result, approximately
800
positions at VMware were eliminated during the
six
months ended
June 30, 2016
. Actions relating to VMware’s plan were substantially completed by June 30, 2016.
In the first and second quarters of
2015
, EMC implemented restructuring programs to create further operational efficiencies which resulted in a workforce reduction of approximately
1,320
and
160
positions, respectively. The actions impacted positions around the globe covering our Information Storage, RSA Information Security, Enterprise Content Division and Pivotal segments. All of these actions were completed within a year of the start of the program. In the first quarter of
2015
, VMware eliminated approximately
350
positions across all major functional groups and geographies to streamline its operations. All of these actions were completed within a year of the start of the program.
For the
three
and
six
months ended
June 30, 2016
, we recognized
$5 million
and
$10 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. For the
three
and
six
months ended
June 30, 2015
, we recognized
$10 million
and
$16 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 accruals are expected to be utilized by the end of 2022.
The activity for the restructuring programs is presented below (tables in millions):
Three Months Ended June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
March 31,
2016
|
|
Adjustments to the Provision
|
|
Utilization
|
|
Balance as of June 30, 2016
|
|
Workforce reductions
|
$
|
213
|
|
|
$
|
(6
|
)
|
|
$
|
(67
|
)
|
|
$
|
140
|
|
|
Consolidation of excess facilities and other contractual obligations
|
22
|
|
|
5
|
|
|
(5
|
)
|
|
22
|
|
|
Total
|
$
|
235
|
|
|
$
|
(1
|
)
|
|
$
|
(72
|
)
|
|
$
|
162
|
|
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
March 31,
2016
|
|
Adjustments
to the
Provision
|
|
Utilization
|
|
Balance as of June 30, 2016
|
|
Workforce reductions
|
$
|
27
|
|
|
$
|
(1
|
)
|
|
$
|
(24
|
)
|
|
$
|
2
|
|
|
Consolidation of excess facilities and other contractual obligations
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Total
|
$
|
30
|
|
|
$
|
(1
|
)
|
|
$
|
(24
|
)
|
|
$
|
5
|
|
Six Months Ended June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
December 31,
2015
|
|
Adjustments to the Provision
|
|
Utilization
|
|
Balance as of June 30, 2016
|
|
Workforce reductions
|
$
|
322
|
|
|
$
|
(16
|
)
|
|
$
|
(166
|
)
|
|
$
|
140
|
|
|
Consolidation of excess facilities and other contractual obligations
|
20
|
|
|
10
|
|
|
(8
|
)
|
|
22
|
|
|
Total
|
$
|
342
|
|
|
$
|
(6
|
)
|
|
$
|
(174
|
)
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
December 31,
2015
|
|
2016
Charges
|
|
Utilization
|
|
Balance as of June 30, 2016
|
|
Workforce reductions
|
$
|
3
|
|
|
$
|
49
|
|
|
$
|
(50
|
)
|
|
$
|
2
|
|
|
Consolidation of excess facilities and other contractual obligations
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
Total
|
$
|
3
|
|
|
$
|
52
|
|
|
$
|
(50
|
)
|
|
$
|
5
|
|
Three Months Ended June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 EMC Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
March 31,
2015
|
|
2015
Charges
|
|
Utilization
|
|
Balance as of June 30, 2015
|
|
Workforce reductions
|
$
|
96
|
|
|
$
|
17
|
|
|
$
|
(24
|
)
|
|
$
|
89
|
|
|
Consolidation of excess facilities and other contractual obligations
|
6
|
|
|
10
|
|
|
(4
|
)
|
|
12
|
|
|
Total
|
$
|
102
|
|
|
$
|
27
|
|
|
$
|
(28
|
)
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other EMC Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
March 31,
2015
|
|
Adjustments to the Provision
|
|
Utilization
|
|
Balance as of June 30, 2015
|
|
Workforce reductions
|
$
|
61
|
|
|
$
|
(4
|
)
|
|
$
|
(14
|
)
|
|
$
|
43
|
|
|
Consolidation of excess facilities and other contractual obligations
|
14
|
|
|
—
|
|
|
(1
|
)
|
|
13
|
|
|
Total
|
$
|
75
|
|
|
$
|
(4
|
)
|
|
$
|
(15
|
)
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
March 31,
2015
|
|
Adjustments
to the
Provision
|
|
Utilization
|
|
Balance as of June 30, 2015
|
|
Workforce reductions
|
$
|
16
|
|
|
$
|
(2
|
)
|
|
$
|
(12
|
)
|
|
$
|
2
|
|
|
Consolidation of excess facilities and other contractual obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
16
|
|
|
$
|
(2
|
)
|
|
$
|
(12
|
)
|
|
$
|
2
|
|
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Six Months Ended June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 EMC Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
December 31,
2014
|
|
2015
Charges
|
|
Utilization
|
|
Balance as of June 30, 2015
|
|
Workforce reductions
|
$
|
—
|
|
|
$
|
123
|
|
|
$
|
(34
|
)
|
|
$
|
89
|
|
|
Consolidation of excess facilities and other contractual obligations
|
—
|
|
|
16
|
|
|
(4
|
)
|
|
12
|
|
|
Total
|
$
|
—
|
|
|
$
|
139
|
|
|
$
|
(38
|
)
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other EMC Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
December 31,
2014
|
|
Adjustments to the Provision
|
|
Utilization
|
|
Balance as of June 30, 2015
|
|
Workforce reductions
|
$
|
102
|
|
|
$
|
(6
|
)
|
|
$
|
(53
|
)
|
|
$
|
43
|
|
|
Consolidation of excess facilities and other contractual obligations
|
19
|
|
|
—
|
|
|
(6
|
)
|
|
13
|
|
|
Total
|
$
|
121
|
|
|
$
|
(6
|
)
|
|
$
|
(59
|
)
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware Programs
|
|
|
|
|
|
|
|
|
Category
|
Balance as of
December 31,
2014
|
|
2015
Charges
|
|
Utilization
|
|
Balance as of June 30, 2015
|
|
Workforce reductions
|
$
|
8
|
|
|
$
|
21
|
|
|
$
|
(27
|
)
|
|
$
|
2
|
|
|
Consolidation of excess facilities and other contractual obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
8
|
|
|
$
|
21
|
|
|
$
|
(27
|
)
|
|
$
|
2
|
|
13. Commitments and Contingencies
Litigation
We are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, product liability, employment, benefits and securities matters. As required by authoritative guidance, we have estimated the amount of probable losses that may result from all currently pending matters, and such amounts are reflected in our consolidated financial statements. These recorded amounts are not material to our consolidated financial position or results of operations and no additional material losses related to these pending matters are reasonably possible. While it is not possible to predict the outcome of these matters with certainty, we do not expect the results of any of these actions to have a material adverse effect on our business, results of operations or financial condition. Because litigation is inherently unpredictable, however, the actual amounts of loss may prove to be larger or smaller than the amounts reflected in our consolidated financial statements, and we could incur judgments or enter into settlements of claims that could adversely affect our operating results or cash flows in a particular period.
Merger-Related Litigation
As of August 8, 2016, fifteen putative shareholder class action lawsuits challenging the Merger have been filed, of which thirteen were filed purportedly on behalf of Company shareholders and two purportedly on behalf of VMware shareholders. The lawsuits name various combinations of the Company, its current and former directors, VMware, certain of VMware’s directors, Denali, Dell and Merger Sub, among others, as defendants. The fifteen lawsuits seek, among other things, injunctive relief enjoining the Merger, rescission of the Merger if consummated, an award of fees and costs and/or an award of monetary damages. The suits are captioned as follows:
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
Case
|
Court
|
Filing Date
|
|
1.
|
IBEW Local No. 129 Benefit Fund v. Tucci
,
Civ. No. 1584-3130-BLS1
|
Mass. Superior Court, Suffolk County
|
10/15/2015
|
|
2.
|
Barrett v. Tucci
,
Civ. No. 15-6023-A
|
Mass. Superior Court, Middlesex County
|
10/16/2015
|
|
3.
|
Graulich v. Tucci
,
Civ. No. 1584-3169-BLS1
|
Mass. Superior Court, Suffolk County
|
10/19/2015
|
|
4.
|
Vassallo v. EMC Corp.
,
Civ. No. 1584-3173-BLS1
|
Mass. Superior Court, Suffolk County
|
10/19/2015
|
|
5.
|
City of Miami Police Relief & Pension Fund v. Tucci
,
Civ. No. 1584-3174-BLS1
|
Mass. Superior Court, Suffolk County
|
10/19/2015
|
|
6.
|
Lasker v. EMC Corp.
,
Civ. No. 1584-3214-BLS1
|
Mass. Superior Court, Suffolk County
|
10/23/2015
|
|
7.
|
Walsh v. EMC Corp.
,
Civ. No. 15-13654
|
U.S. District Court,
District of Massachusetts
|
10/27/2015
|
|
8.
|
Local Union No. 373 U.A. Pension Plan v. EMC Corp.
,
Civ. No. 1584-3253-BLS1
|
Mass. Superior Court, Suffolk County
|
10/28/2015
|
|
9.
|
City of Lakeland Emps.’ Pension & Ret. Fund v. Tucci
,
Civ. No. 1584-3269-BLS1
|
Mass. Superior Court, Suffolk County
|
10/28/2015
|
|
10.
|
Ma v. Tucci
,
Civ. No. 1584-3281-BLS1
|
Mass. Superior Court, Suffolk County
|
10/29/2015
|
|
11.
|
Stull v. EMC Corp.
,
Civ. No. 15-13692
|
U.S. District Court,
District of Massachusetts
|
10/30/2015
|
|
12.
|
Jacobs v. EMC Corp.
,
Civ. No. 15-6318-H
|
Mass. Superior Court, Middlesex County
|
11/12/2015
|
|
13.
|
Ford v. VMware, Inc.
,
C.A. No. 11714-VCL
|
Delaware Chancery Court
|
11/17/2015
|
|
14.
|
Pancake v. EMC Corp.
,
Civ. No. 16-10040
|
U.S. District Court,
District of Massachusetts
|
1/11/2016
|
|
15.
|
Booth Family Trust v. EMC Corp.
,
Civ. No. 16-10114
|
U.S. District Court,
District of Massachusetts
|
1/26/2016
|
Of the thirteen lawsuits filed purportedly on behalf of Company shareholders, nine were filed in Massachusetts state court, and four in the United States District Court for the District of Massachusetts. Eleven of the lawsuits initially advanced substantially the same allegations that the Merger Agreement was adopted in violation of the fiduciary duties of the Company’s directors. Certain of those lawsuits also alleged that the Company, Denali, Dell, Merger Sub, Silver Lake Partners, LLC, and/or MSD Partners, LLC aided and abetted the alleged breaches of fiduciary duty by the directors.
On November 5, 2015, pursuant to a motion made by the Company and its directors, the nine lawsuits then pending in state court in Massachusetts were consolidated with and into the first-filed of those actions,
IBEW Local No. 129 Benefit Fund v. Joseph M. Tucci, et al.
That action, brought in the Business Litigation Session of the Suffolk County Superior Court, named as defendants the Company and each member of its Board of Directors (as constituted as of October 12, 2015), Denali, Dell and Merger Sub.
The Company and its directors moved to dismiss the amended complaint in the
IBEW
matter pursuant to provisions of the Massachusetts Business Corporation Act, M.G.L. c. 156D, § 7.40
et
seq.
, and Rules 12(b)(6) and 23.1 of the Massachusetts Rules of Civil Procedure, on the basis that the complaint asserts a derivative action on behalf of the Company and should be dismissed for failure to make the requisite pre-suit demand on the Company. On December 7, 2015 the Court granted this motion and on December 24, 2015 the court entered judgment dismissing each of the consolidated actions. On January 21, 2016, three of the plaintiffs served notice that they will appeal this judgment. On April 29, 2016, the appeal was docketed in the Massachusetts Appeals Court as case number 2016-P-0595. On May 2, 2016, the appellants filed an application for direct appellate review in the Massachusetts Supreme Judicial Court as Direct Appellate Review No. DAR-24347. That application was granted on June 23, 2016, and the appeal is now pending in the Massachusetts Supreme Judicial Court as case number SJC-12137.
On January 11, 2016, following the state court judgment and a motion by the Company and its directors to stay or dismiss the two lawsuits then pending in the United States District Court for the District of Massachusetts, the plaintiffs in those cases amended their complaints to eliminate the initial claims based on Massachusetts state law and substitute allegations that the preliminary
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
proxy statement/prospectus dated December 14, 2015 omits and/or misrepresents material information and that such omissions and misrepresentations constitute violations of Section 14(a) of, and Rule 14a-9 under, the Securities Exchange Act of 1934. Two additional lawsuits were later filed in the same court advancing substantially the same proxy-disclosure-based allegations. On June 17, 2016, the parties filed a stipulation and proposed order requesting that the court dismiss all four actions with prejudice as to the named plaintiffs and retain jurisdiction to determine plaintiffs’ counsel’s application for an award of attorneys’ fees and reimbursement of expenses.
Of the two lawsuits filed purportedly on behalf of VMware shareholders, one was filed in Middlesex County Superior Court in Massachusetts, and the other in Delaware Chancery Court. Both generally allege that the Company, in its capacity as the majority shareholder of VMware, and individual defendants who are directors of the Company, VMware, or both, breached their fiduciary duties to minority shareholders of VMware in connection with the Merger. Both further allege that various combinations of defendants aided and abetted these alleged breaches of fiduciary duties. The Company, VMware, Denali, Dell, Merger Sub, and other defendants have served or filed motions to dismiss the operative complaints in both actions.
The outcome of these lawsuits is uncertain, and additional lawsuits may be brought or additional claims advanced concerning the Merger. An adverse judgment for monetary damages could have an adverse effect on the Company’s operations. A preliminary injunction could delay or jeopardize the completion of the Merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the Merger.
14. Segment Information
We manage the Company as a federation of businesses: EMC Information Infrastructure, VMware Virtual Infrastructure, Pivotal and Virtustream. EMC Information Infrastructure operates in
three
segments: Information Storage, Enterprise Content Division and RSA Information Security, while VMware Virtual Infrastructure and Pivotal each operate as single segments. The results of Virtustream are currently reported within our Information Storage segment.
Our management measures are designed to assess performance of these reporting segments excluding certain items. As a result, the corporate reconciling items are used to capture the items excluded from the segment operating performance measures, including stock-based compensation expense, intangible asset amortization expense, restructuring charges and acquisition and other related charges. Additionally, in certain instances, infrequently occurring items are also excluded or included from the measures used by management in assessing segment performance. Research and development expenses, selling, general and administrative expenses and restructuring and acquisition-related charges associated with the EMC Information Infrastructure business are not allocated to the segments within the EMC Information Infrastructure business, as they are managed centrally at the EMC Information Infrastructure business level. EMC Information Infrastructure and Pivotal have not been allocated non-operating income (expense), net and income tax provision as these costs are managed centrally at the EMC corporate level. Accordingly, for the
three
segments within the EMC Information Infrastructure business, gross profit is the segment operating performance measure, while for Pivotal, operating income is the operating performance measure. The VMware Virtual Infrastructure within EMC amounts represent the revenues and expenses of VMware as reflected within EMC’s consolidated financial statements.
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our segment information for the
three
and
six
months ended
June 30, 2016
and
2015
is as follows (tables in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC Information Infrastructure
|
|
|
|
|
|
|
|
|
Information
Storage
|
|
Enterprise Content Division
|
|
RSA
Information
Security
|
|
EMC
Information
Infrastructure
|
|
Pivotal
|
|
EMC Information Infrastructure plus Pivotal
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
$
|
2,362
|
|
|
$
|
42
|
|
|
$
|
91
|
|
|
$
|
2,495
|
|
|
$
|
32
|
|
|
$
|
2,527
|
|
|
Services revenues
|
1,507
|
|
|
106
|
|
|
135
|
|
|
1,748
|
|
|
64
|
|
|
1,812
|
|
|
Total consolidated revenues
|
3,869
|
|
|
148
|
|
|
226
|
|
|
4,243
|
|
|
96
|
|
|
4,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
2,087
|
|
|
$
|
106
|
|
|
$
|
147
|
|
|
$
|
2,340
|
|
|
$
|
46
|
|
|
$
|
2,386
|
|
|
Gross profit percentage
|
53.9
|
%
|
|
71.4
|
%
|
|
64.8
|
%
|
|
55.1
|
%
|
|
48.4
|
%
|
|
55.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
|
|
|
|
378
|
|
|
35
|
|
|
413
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
1,132
|
|
|
57
|
|
|
1,189
|
|
|
Restructuring and acquisition-related charges
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total operating expenses
|
|
|
|
|
|
|
1,510
|
|
|
92
|
|
|
1,602
|
|
|
Operating income (expense)
|
|
|
|
|
|
|
$
|
830
|
|
|
$
|
(46
|
)
|
|
$
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC
Information
Infrastructure plus Pivotal
|
|
VMware
Virtual
Infrastructure
|
|
Corp
Reconciling
Items
|
|
Consolidated
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product revenues
|
$
|
2,527
|
|
|
$
|
634
|
|
|
$
|
—
|
|
|
$
|
3,161
|
|
|
Services revenues
|
1,812
|
|
|
1,044
|
|
|
—
|
|
|
2,856
|
|
|
Total consolidated revenues
|
4,339
|
|
|
1,678
|
|
|
—
|
|
|
6,017
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
2,386
|
|
|
$
|
1,456
|
|
|
$
|
(106
|
)
|
|
$
|
3,736
|
|
|
Gross profit percentage
|
55.0
|
%
|
|
86.8
|
%
|
|
—
|
%
|
|
62.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
413
|
|
|
283
|
|
|
125
|
|
|
821
|
|
|
Selling, general and administrative
|
1,189
|
|
|
670
|
|
|
175
|
|
|
2,034
|
|
|
Restructuring and acquisition-related charges
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Total operating expenses
|
1,602
|
|
|
953
|
|
|
299
|
|
|
2,854
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (expense)
|
784
|
|
|
503
|
|
|
(405
|
)
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense), net
|
(7
|
)
|
|
16
|
|
|
(39
|
)
|
|
(30
|
)
|
|
Income tax provision (benefit)
|
221
|
|
|
109
|
|
|
(108
|
)
|
|
222
|
|
|
Net income
|
556
|
|
|
410
|
|
|
(336
|
)
|
|
630
|
|
|
Net income attributable to the non-controlling interests
|
2
|
|
|
(80
|
)
|
|
29
|
|
|
(49
|
)
|
|
Net income attributable to EMC Corporation
|
$
|
558
|
|
|
$
|
330
|
|
|
$
|
(307
|
)
|
|
$
|
581
|
|
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC Information Infrastructure
|
|
|
|
|
|
|
|
|
Information
Storage
|
|
Enterprise Content Division
|
|
RSA
Information
Security
|
|
EMC
Information
Infrastructure
|
|
Pivotal
|
|
EMC Information Infrastructure plus Pivotal
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
$
|
2,509
|
|
|
$
|
40
|
|
|
$
|
97
|
|
|
$
|
2,646
|
|
|
$
|
20
|
|
|
$
|
2,666
|
|
|
Services revenues
|
1,519
|
|
|
115
|
|
|
141
|
|
|
1,775
|
|
|
44
|
|
|
1,819
|
|
|
Total consolidated revenues
|
4,028
|
|
|
155
|
|
|
238
|
|
|
4,421
|
|
|
64
|
|
|
4,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
2,092
|
|
|
$
|
105
|
|
|
$
|
158
|
|
|
$
|
2,355
|
|
|
$
|
26
|
|
|
$
|
2,381
|
|
|
Gross profit percentage
|
51.9
|
%
|
|
67.8
|
%
|
|
66.6
|
%
|
|
53.3
|
%
|
|
40.0
|
%
|
|
53.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
|
|
|
|
398
|
|
|
25
|
|
|
423
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
1,201
|
|
|
53
|
|
|
1,254
|
|
|
Restructuring and acquisition-related charges
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total operating expenses
|
|
|
|
|
|
|
1,599
|
|
|
78
|
|
|
1,677
|
|
|
Operating income (expense)
|
|
|
|
|
|
|
$
|
756
|
|
|
$
|
(52
|
)
|
|
$
|
704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC
Information
Infrastructure plus Pivotal
|
|
VMware
Virtual
Infrastructure
|
|
Corp
Reconciling
Items
|
|
Consolidated
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product revenues
|
$
|
2,666
|
|
|
$
|
635
|
|
|
$
|
(76
|
)
|
|
$
|
3,225
|
|
|
Services revenues
|
1,819
|
|
|
953
|
|
|
—
|
|
|
2,772
|
|
|
Total consolidated revenues
|
4,485
|
|
|
1,588
|
|
|
(76
|
)
|
|
5,997
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
2,381
|
|
|
$
|
1,381
|
|
|
$
|
(175
|
)
|
|
$
|
3,587
|
|
|
Gross profit percentage
|
53.1
|
%
|
|
87.0
|
%
|
|
—
|
%
|
|
59.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
423
|
|
|
267
|
|
|
92
|
|
|
782
|
|
|
Selling, general and administrative
|
1,254
|
|
|
640
|
|
|
208
|
|
|
2,102
|
|
|
Restructuring and acquisition-related charges
|
—
|
|
|
—
|
|
|
23
|
|
|
23
|
|
|
Total operating expenses
|
1,677
|
|
|
907
|
|
|
323
|
|
|
2,907
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (expense)
|
704
|
|
|
474
|
|
|
(498
|
)
|
|
680
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense), net
|
18
|
|
|
11
|
|
|
(20
|
)
|
|
9
|
|
|
Income tax provision (benefit)
|
183
|
|
|
107
|
|
|
(120
|
)
|
|
170
|
|
|
Net income
|
539
|
|
|
378
|
|
|
(398
|
)
|
|
519
|
|
|
Net income attributable to the non-controlling interests
|
—
|
|
|
(72
|
)
|
|
40
|
|
|
(32
|
)
|
|
Net income attributable to EMC Corporation
|
$
|
539
|
|
|
$
|
306
|
|
|
$
|
(358
|
)
|
|
$
|
487
|
|
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC Information Infrastructure
|
|
|
|
|
|
|
|
|
Information
Storage
|
|
Enterprise Content Division
|
|
RSA
Information
Security
|
|
EMC
Information
Infrastructure
|
|
Pivotal
|
|
EMC Information Infrastructure plus Pivotal
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
$
|
4,322
|
|
|
$
|
71
|
|
|
$
|
186
|
|
|
$
|
4,579
|
|
|
$
|
59
|
|
|
$
|
4,638
|
|
|
Services revenues
|
2,994
|
|
|
210
|
|
|
269
|
|
|
3,473
|
|
|
120
|
|
|
3,593
|
|
|
Total consolidated revenues
|
7,316
|
|
|
281
|
|
|
455
|
|
|
8,052
|
|
|
179
|
|
|
8,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
3,797
|
|
|
$
|
197
|
|
|
$
|
298
|
|
|
$
|
4,292
|
|
|
$
|
81
|
|
|
$
|
4,373
|
|
|
Gross profit percentage
|
51.9
|
%
|
|
69.8
|
%
|
|
65.6
|
%
|
|
53.3
|
%
|
|
45.0
|
%
|
|
53.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
|
|
|
|
756
|
|
|
69
|
|
|
825
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
2,216
|
|
|
115
|
|
|
2,331
|
|
|
Restructuring and acquisition-related charges
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total operating expenses
|
|
|
|
|
|
|
2,972
|
|
|
184
|
|
|
3,156
|
|
|
Operating income (expense)
|
|
|
|
|
|
|
$
|
1,320
|
|
|
$
|
(103
|
)
|
|
$
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC
Information
Infrastructure plus Pivotal
|
|
VMware
Virtual
Infrastructure
|
|
Corp
Reconciling
Items
|
|
Consolidated
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product revenues
|
$
|
4,638
|
|
|
$
|
1,205
|
|
|
$
|
—
|
|
|
$
|
5,843
|
|
|
Services revenues
|
3,593
|
|
|
2,056
|
|
|
—
|
|
|
5,649
|
|
|
Total consolidated revenues
|
8,231
|
|
|
3,261
|
|
|
—
|
|
|
11,492
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
4,373
|
|
|
$
|
2,828
|
|
|
$
|
(205
|
)
|
|
$
|
6,996
|
|
|
Gross profit percentage
|
53.1
|
%
|
|
86.7
|
%
|
|
—
|
%
|
|
60.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
825
|
|
|
566
|
|
|
244
|
|
|
1,635
|
|
|
Selling, general and administrative
|
2,331
|
|
|
1,313
|
|
|
377
|
|
|
4,021
|
|
|
Restructuring and acquisition-related charges
|
—
|
|
|
—
|
|
|
48
|
|
|
48
|
|
|
Total operating expenses
|
3,156
|
|
|
1,879
|
|
|
669
|
|
|
5,704
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (expense)
|
1,217
|
|
|
949
|
|
|
(874
|
)
|
|
1,292
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense), net
|
(22
|
)
|
|
25
|
|
|
(57
|
)
|
|
(54
|
)
|
|
Income tax provision (benefit)
|
296
|
|
|
237
|
|
|
(222
|
)
|
|
311
|
|
|
Net income
|
899
|
|
|
737
|
|
|
(709
|
)
|
|
927
|
|
|
Net income attributable to the non-controlling interests
|
4
|
|
|
(148
|
)
|
|
66
|
|
|
(78
|
)
|
|
Net income attributable to EMC Corporation
|
$
|
903
|
|
|
$
|
589
|
|
|
$
|
(643
|
)
|
|
$
|
849
|
|
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC Information Infrastructure
|
|
|
|
|
|
|
|
|
Information
Storage
|
|
Enterprise Content Division
|
|
RSA
Information
Security
|
|
EMC
Information
Infrastructure
|
|
Pivotal
|
|
EMC Information Infrastructure plus Pivotal
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
$
|
4,688
|
|
|
$
|
67
|
|
|
$
|
197
|
|
|
$
|
4,952
|
|
|
$
|
36
|
|
|
$
|
4,988
|
|
|
Services revenues
|
3,003
|
|
|
226
|
|
|
289
|
|
|
3,518
|
|
|
82
|
|
|
3,600
|
|
|
Total consolidated revenues
|
7,691
|
|
|
293
|
|
|
486
|
|
|
8,470
|
|
|
118
|
|
|
8,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
3,943
|
|
|
$
|
195
|
|
|
$
|
323
|
|
|
$
|
4,461
|
|
|
$
|
47
|
|
|
$
|
4,508
|
|
|
Gross profit percentage
|
51.3
|
%
|
|
66.5
|
%
|
|
66.6
|
%
|
|
52.7
|
%
|
|
40.1
|
%
|
|
52.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
|
|
|
|
822
|
|
|
52
|
|
|
874
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
2,371
|
|
|
101
|
|
|
2,472
|
|
|
Restructuring and acquisition-related charges
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total operating expenses
|
|
|
|
|
|
|
3,193
|
|
|
153
|
|
|
3,346
|
|
|
Operating income (expense)
|
|
|
|
|
|
|
$
|
1,268
|
|
|
$
|
(106
|
)
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC
Information
Infrastructure plus Pivotal
|
|
VMware
Virtual
Infrastructure
|
|
Corp
Reconciling
Items
|
|
Consolidated
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product revenues
|
$
|
4,988
|
|
|
$
|
1,218
|
|
|
$
|
(76
|
)
|
|
$
|
6,130
|
|
|
Services revenues
|
3,600
|
|
|
1,880
|
|
|
—
|
|
|
5,480
|
|
|
Total consolidated revenues
|
8,588
|
|
|
3,098
|
|
|
(76
|
)
|
|
11,610
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
4,508
|
|
|
$
|
2,692
|
|
|
$
|
(274
|
)
|
|
$
|
6,926
|
|
|
Gross profit percentage
|
52.5
|
%
|
|
86.9
|
%
|
|
—
|
%
|
|
59.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
874
|
|
|
514
|
|
|
182
|
|
|
1,570
|
|
|
Selling, general and administrative
|
2,472
|
|
|
1,245
|
|
|
422
|
|
|
4,139
|
|
|
Restructuring and acquisition-related charges
|
—
|
|
|
—
|
|
|
158
|
|
|
158
|
|
|
Total operating expenses
|
3,346
|
|
|
1,759
|
|
|
762
|
|
|
5,867
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (expense)
|
1,162
|
|
|
933
|
|
|
(1,036
|
)
|
|
1,059
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense), net
|
4
|
|
|
20
|
|
|
(20
|
)
|
|
4
|
|
|
Income tax provision (benefit)
|
309
|
|
|
196
|
|
|
(253
|
)
|
|
252
|
|
|
Net income
|
857
|
|
|
757
|
|
|
(803
|
)
|
|
811
|
|
|
Net income attributable to the non-controlling interests
|
—
|
|
|
(146
|
)
|
|
74
|
|
|
(72
|
)
|
|
Net income attributable to EMC Corporation
|
$
|
857
|
|
|
$
|
611
|
|
|
$
|
(729
|
)
|
|
$
|
739
|
|
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our revenues are attributed to the geographic areas according to the location of the customers. Revenues by geographic area are included in the following table (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
June 30,
2016
|
|
June 30,
2015
|
|
United States
|
$
|
3,289
|
|
|
$
|
3,270
|
|
|
$
|
6,186
|
|
|
$
|
6,284
|
|
|
Europe, Middle East and Africa
|
1,673
|
|
|
1,623
|
|
|
3,210
|
|
|
3,181
|
|
|
Asia Pacific and Japan
|
762
|
|
|
795
|
|
|
1,502
|
|
|
1,524
|
|
|
Latin America, Mexico and Canada
|
293
|
|
|
309
|
|
|
594
|
|
|
621
|
|
|
Total
|
$
|
6,017
|
|
|
$
|
5,997
|
|
|
$
|
11,492
|
|
|
$
|
11,610
|
|
No
country other than the United States accounted for 10% or more of revenues during the
three
and
six
months ended
June 30, 2016
or
2015
.
Long-lived assets, excluding financial instruments, deferred tax assets, goodwill and intangible assets, in the United States were
$4,387 million
at
June 30, 2016
and
$4,584 million
at
December 31, 2015
. Internationally, long-lived assets, excluding financial instruments, deferred tax assets, goodwill and intangible assets, were
$1,118 million
at
June 30, 2016
and
$1,053 million
at
December 31, 2015
.
No
country other than the United States accounted for 10% or more of total long-lived assets, excluding financial instruments and deferred tax assets, at
June 30, 2016
or
December 31, 2015
.
|
|
|
|
Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements and should also be read in conjunction with the risk factors set forth in Item 1A of Part II. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof.
|
Certain tables may not add or recalculate due to rounding.
INTRODUCTION
We manage our company as a federation of businesses to capitalize on the emerging and rapidly growing trends of cloud computing, Big Data, mobile, social networking and security. Our federated businesses include EMC Information Infrastructure, Pivotal, VMware Virtual Infrastructure and Virtustream.
To capitalize on these trends and align our businesses effectively, we have developed a market growth strategy that has four main pillars: our best-in class products and solutions, our continued focus on cloud services for both on and off premise implementations, a coordinated go-to-market approach led by a federation go-to-market organization and our leadership team and global talent. We believe these pillars enable us to become a more trusted partner to our customers as they embark on their digital transformation and transition to the hybrid cloud, and to drive the overall revenue and growth opportunity of EMC Information Infrastructure and the faster growth opportunities of VMware Virtual Infrastructure, Pivotal and Virtustream.
Under our federation model, each of the businesses operates independently to build its own ecosystem and culture, operate with greater speed and agility and offer customers technology solutions that are free from vendor lock-in. At the same time, our businesses are strategically aligned in the mission to lead customers and partners through unprecedented transformational shifts occurring in IT. We believe this ability to draw on resources from across the federation to offer tightly integrated solutions that can be rapidly deployed while retaining choice for customers seeking flexibility is a distinct competitive advantage.
In the second quarter of 2015, we initiated a cost reduction and business transformation program to better align our expenses and improve the operations of our federation of businesses. This program is primarily in response to increased pressure on our traditional storage businesses and accordingly, the vast majority of this program is focused on our EMC Information Infrastructure segment. The goal of this cost reduction and business transformation program is to reduce our current annual cost base by $850 million. We expect the $850 million reduction in our annual cost base to be achieved in 2017. As part of this cost reduction plan, in the fourth quarter of 2015, we approved a restructuring plan which consisted of a reduction in force which was substantially completed by the end of the first quarter of 2016 and will be fully completed by the end of 2016.
Proposed Transaction with Dell
On October 12, 2015, EMC and Denali Holding Inc. (“Denali”), the parent company of Dell Inc. (“Dell”), signed a definitive agreement (“Merger Agreement”) under which Denali will acquire EMC Corporation, with VMware remaining a publicly-traded company. The combined company will be a leader in numerous high-growth areas of the $2 trillion information technology market, with a complementary portfolio, sales team and research and development (“R&D”) organization across four globally recognized technology franchises – servers, storage, virtualization and PCs – and brings together strong capabilities in the fast growing areas of the industry, including converged infrastructure, digital transformation, software-defined data center, hybrid cloud, mobile and security. On July 19, 2016, EMC shareholders approved the Merger Agreement at a Special Meeting of Shareholders.
For additional information related to the Merger Agreement, please refer to the Proxy Statement on Schedule 14A which was declared effective by the Securities and Exchange Commission (“SEC”) on June 6, 2016, which includes the full text of the Merger Agreement included as Annex A.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
EMC Information Infrastructure
Our EMC Information Infrastructure business consists of three segments: Information Storage, Enterprise Content Division, formerly known as Information Intelligence Group, and RSA Information Security. The objective for our EMC Information Infrastructure business is to simultaneously increase our market share through our strong portfolio of offerings while investing in the business. During the first and second quarters of 2016, we continued to invest in expanding our total addressable market through increased internal R&D and through business acquisitions, with a focus on flash, Big Data storage, software-defined storage and converged infrastructure to facilitate the enablement of hybrid cloud infrastructures. We have developed a product portfolio to address customer needs that enables the adoption of hybrid cloud approaches as most enterprises and organizations embark on IT transformation initiatives incorporating both new and traditional storage architectures including converged infrastructure, cloud services, Flash, storage sharing, and software-defined and software-managed architectures. Our go-to market model, where we continue to leverage our direct sales force and services organization, as well as our channel and services partners and service providers, positions us well to help enable customers to transition to cloud computing and benefit from Big Data in the most advantageous manner for their businesses.
Pivotal
Pivotal is focused on building a platform comprising the next generation of data fabrics, application fabrics and a cloud independent platform-as-a-service (“PaaS”) to support cloud computing and Big and Fast Data Applications. The foundation of our technology platform, Pivotal Cloud Foundry (“Pivotal CF”), continues to gain momentum as an open platform for developing and operating new cloud applications that can be run on multiple leading private and public clouds, in addition to our own, and not lock a customer into any one cloud in particular. It continues to enable developers to produce next generation applications and user experiences as well as transform existing applications to operate with greater speed at lower costs. On top of this platform, Pivotal will continue to offer its own suite of big and fast data capabilities, the Big Data Suite (“BDS”), featuring game changing innovations that use Hadoop Distributed File System (“HDFS”) and scalar processing technologies. Additionally, its agile development services business, Pivotal Labs, continues to help existing customers and digital era startups build industrial-strength applications with more agility, more speed, and better quality. Pivotal is becoming an increasingly important factor in our cross-federation solutions, which offer a combination of products, converged infrastructure and services that provide a unique value proposition to customers, positioning the business for rapid growth in the future.
VMware Virtual Infrastructure
VMware is a leader in virtualization and cloud infrastructure solutions utilized by organizations to help transform the way they build, deliver and consume IT resources. VMware develops and markets its product and service offerings within three main product groups and allows organizations to leverage synergies and manage IT resources across complex multi-cloud, multi-device environments. These three product groups include: SDDC or Software-Defined Data Center, Hybrid Cloud Computing and End-User Computing.
VMware generally sells its solutions using enterprise agreements (“EAs”) or as part of its non-EA, transactional, business. EAs are comprehensive volume license offerings, offered both directly by VMware and through certain channel partners that also provide for multi-year maintenance and support.
Historically, the majority of VMware license sales have been from VMware vSphere which is included in its compute product category within its SDDC product group. However, the market for VMware’s compute products is reaching maturity and VMware vSphere license sales have been declining. As the transformation of the IT industry continues, VMware expects that its growth of license sales within the SDDC product group will be increasingly derived from sales of its newer products and services solutions across its SDDC portfolio. VMware’s cloud strategy has three components: (i) continue to expand beyond compute virtualization in the private cloud, (ii) extend the private cloud into the public cloud, and (iii) connect and secure endpoints across a range of public clouds. VMware’s AirWatch business model includes an on-premise solution that it offers through the sale of perpetual licenses and an off-premise solution that it offers as software-as-a-service. AirWatch products and services continued to contribute to the growth of its end-user computing product group during the three and six months ended June 30, 2016.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
RESULTS OF OPERATIONS
Revenues
The following tables present total revenue by our segments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
$ Change
|
|
% Change
|
|
Information Storage
|
$
|
3,869
|
|
|
$
|
4,028
|
|
|
$
|
(159
|
)
|
|
(4
|
)%
|
|
Enterprise Content Division
|
148
|
|
|
155
|
|
|
(7
|
)
|
|
(4
|
)%
|
|
RSA Information Security
|
226
|
|
|
238
|
|
|
(12
|
)
|
|
(5
|
)%
|
|
Pivotal
|
96
|
|
|
64
|
|
|
32
|
|
|
49
|
%
|
|
VMware Virtual Infrastructure
|
1,678
|
|
|
1,588
|
|
|
90
|
|
|
6
|
%
|
|
Corporate reconciling items
|
—
|
|
|
(76
|
)
|
|
76
|
|
|
(100
|
)%
|
|
Total consolidated revenues
|
$
|
6,017
|
|
|
$
|
5,997
|
|
|
$
|
20
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
$ Change
|
|
% Change
|
|
Information Storage
|
$
|
7,316
|
|
|
$
|
7,691
|
|
|
$
|
(375
|
)
|
|
(5
|
)%
|
|
Enterprise Content Division
|
281
|
|
|
293
|
|
|
(12
|
)
|
|
(4
|
)%
|
|
RSA Information Security
|
455
|
|
|
486
|
|
|
(31
|
)
|
|
(7
|
)%
|
|
Pivotal
|
179
|
|
|
118
|
|
|
61
|
|
|
52
|
%
|
|
VMware Virtual Infrastructure
|
3,261
|
|
|
3,098
|
|
|
163
|
|
|
5
|
%
|
|
Corporate reconciling items
|
—
|
|
|
(76
|
)
|
|
76
|
|
|
(100
|
)%
|
|
Total consolidated revenues
|
$
|
11,492
|
|
|
$
|
11,610
|
|
|
$
|
(118
|
)
|
|
(1
|
)%
|
Consolidated product revenues
decreased
2%
and
5%
to
$3,161 million
and
$5,843 million
for the
three
and
six
months ended
June 30, 2016
, respectively. The decrease was primarily driven by the decrease in product revenue in the Information Storage segment. Our Information Storage business continues to be negatively impacted by the rapidly changing IT macro environment where our customers are changing their buying patterns and needs. Additionally, during the first quarter of 2016, our business results were again negatively impacted by currency fluctuations.
The Information Storage segment’s product revenues
decreased
6%
and
8%
to
$2,362 million
and
$4,322 million
for the
three
and
six
months ended
June 30, 2016
, respectively. This decrease was primarily driven by declines in our traditional high-end and mid-tier storage product sales as customers continue to purchase these product categories primarily to cover short-term needs as they begin to drive digital transformation of their IT infrastructures. Additionally, product revenues during the first quarter of 2016 were negatively impacted by foreign currency fluctuations. Product revenues during both the three and six months ended June 30, 2016 were negatively impacted by higher than expected unshipped orders at June 30, 2016 as customers remained cautious about their transactional spend and placed their orders very late in the quarter. The decrease in our traditional product revenues for the three and six months ended June 30, 2016 was partially offset by growth in product revenues from our newer storage technologies, which include our all-flash XIO and VMAX, Isilon scale-out file, Data Domain purpose built backup appliance, Converged Infrastructure, and Software-Defined Storage products.
The Pivotal segment’s product revenues
increased
60%
and
66%
to
$32 million
and
$59 million
for the
three
and
six
months ended
June 30, 2016
, respectively, primarily due to a significant increase in subscription orders in the current and prior year for Pivotal CF and BDS which earn revenue over time rather than upfront. Pivotal is benefiting from the transition to next-gen applications by the enterprise and continues to expand the number of customers adopting Pivotal CF.
The VMware Virtual Infrastructure segment’s product revenues remained flat and decreased
1%
to
$634 million
and
$1,205 million
for the
three
and
six
months ended
June 30, 2016
, respectively. While VMware experienced increased sales in its emerging products, including NSX and VSAN, as well as its vCAN offering, its license revenue growth rate was negatively impacted by certain factors, including lower license sales of its core compute products and increased growth derived from its hybrid cloud and SaaS offerings. Perpetual license revenues that are part of a multi-year arrangement are generally recognized upon delivery of the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
underlying license using the residual method, whereas revenues derived from our hybrid cloud and SaaS offerings are recognized over a period of time.
The RSA Information Security segment’s product revenues
decreased
6%
to
$91 million
and
$186 million
for the
three
and
six
months ended
June 30, 2016
, respectively, primarily resulting from declines in non-strategic products. Security remains a high customer priority and RSA is increasingly focused on the rapidly growing security analytics and next generation identity management solution as well as extending its market leadership in governance, risk and compliance (“GRC”) which enables them to help customers secure their cloud-based IT environments.
The Enterprise Content Division segment’s product revenues
increased
6%
to
$42 million
and
$71 million
for the
three
and
six
months ended
June 30, 2016
, respectively, due to growth in license sales. This business continues to innovate to meet customers’ demand for technologies that work seamlessly in mobile cloud environments.
Included in EMC’s 2015 consolidated product revenues is the VMware GSA settlement charge. During the second quarter of 2015, VMware reached an agreement with the Department of Justice (“DOJ”) and the General Services Administration (“GSA”) to pay $76 million to resolve allegations that VMware’s government sales practices between 2006 and 2013 had violated the federal False Claims Act. The settlement was paid and recorded as a reduction to product revenues during the three and six months ended June 30, 2015 and included in corporate reconciling items as noted above.
Consolidated services revenues
increased
3%
to
$2,856 million
and $
5,649 million
for the
three
and
six
months ended
June 30, 2016
, respectively. The consolidated services revenues increase was primarily driven by Pivotal and VMware Virtual Infrastructure segments’ services revenues resulting from increased revenue associated with maintenance services.
The Information Storage segment’s services revenues decreased by 1% to
$1,507 million
and were flat at $2,994 million for the
three
and
six
months ended
June 30, 2016
, respectively. Higher revenue associated with maintenance services due to a larger installed base as well as an increase in renewals associated with aforementioned customer caution on transactional spend was offset by decreased demand for professional services associated with lower product sales.
The Pivotal segment’s services revenues
increased
44%
and
46%
to
$64 million
and
$120 million
for the
three
and
six
months ended
June 30, 2016
, respectively. Services revenues increased primarily due to increases in professional services revenues resulting from continued strong demand for our Pivotal Labs services.
The VMware Virtual Infrastructure segment’s services revenues
increased
10%
and
9%
to
$1,044 million
and
$2,056 million
for the
three
and
six
months ended
June 30, 2016
, respectively. The increase in services revenues was primarily attributable to growth in VMware’s software maintenance revenues which benefited from renewals of software maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with new software license sales.
The RSA Information Security segment’s services revenues
decreased
4%
and
7%
to
$135 million
and
$269 million
for the
three
and
six
months ended
June 30, 2016
, respectively. Services revenues decreased primarily due to a decrease in professional services.
The Enterprise Content Division segment’s services revenues
decreased
8%
and
7%
to
$106 million
and
$210 million
for the
three
and
six
months ended
June 30, 2016
, respectively. Services revenues decreased primarily due to a decrease in software-as-a-service and professional services.
Consolidated revenues by geography were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
% Change
|
|
|
|
|
United States
|
$
|
3,289
|
|
|
$
|
3,270
|
|
|
1
|
%
|
|
|
Europe, Middle East and Africa
|
1,673
|
|
|
1,623
|
|
|
3
|
%
|
|
|
Asia Pacific and Japan
|
762
|
|
|
795
|
|
|
(4
|
)%
|
|
|
Latin America, Mexico and Canada
|
293
|
|
|
309
|
|
|
(5
|
)%
|
|
|
Total revenues
|
$
|
6,017
|
|
|
$
|
5,997
|
|
|
—
|
%
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
% Change
|
|
|
|
|
United States
|
$
|
6,186
|
|
|
$
|
6,284
|
|
|
(2
|
)%
|
|
|
Europe, Middle East and Africa
|
3,210
|
|
|
3,181
|
|
|
1
|
%
|
|
|
Asia Pacific and Japan
|
1,502
|
|
|
1,524
|
|
|
(1
|
)%
|
|
|
Latin America, Mexico and Canada
|
594
|
|
|
621
|
|
|
(4
|
)%
|
|
|
Total revenues
|
$
|
11,492
|
|
|
$
|
11,610
|
|
|
(1
|
)%
|
Revenues increased in the
three
months ended June 30, 2016 compared to the same period in 2015 in the United States, and decreased in the
six
months ended June 30, 2016 compared to the same period in 2015. Revenues increased in the
three
and
six
months ended
June 30, 2016
compared to the same periods in
2015
in Europe, Middle East and Africa. Revenues decreased in the
three
and
six
months ended
June 30, 2016
compared to the same periods in
2015
in Asia Pacific and Japan and in Latin America, Mexico and Canada.
Changes in exchange rates did not significantly impact consolidated revenues for the
three
months ended June 30, 2016, and negatively impacted consolidated revenue growth by
1%
for the
six
months ended
June 30, 2016
. Exchange rates in Europe and Latin America had the most significant impact on EMC’s consolidated growth rate. The negative impact of the changes in rates was the most significant for the euro and British pound.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Costs and Expenses
The following tables present our costs and expenses, operating income and net income attributable to EMC Corporation (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
Information Storage
|
$
|
1,782
|
|
|
$
|
1,936
|
|
|
$
|
(154
|
)
|
|
(8
|
)%
|
|
|
Enterprise Content Division
|
42
|
|
|
50
|
|
|
(8
|
)
|
|
(15
|
)%
|
|
|
RSA Information Security
|
79
|
|
|
80
|
|
|
(1
|
)
|
|
—
|
%
|
|
|
Pivotal
|
50
|
|
|
38
|
|
|
12
|
|
|
28
|
%
|
|
|
VMware Virtual Infrastructure
|
222
|
|
|
207
|
|
|
15
|
|
|
7
|
%
|
|
|
Corporate reconciling items
|
106
|
|
|
99
|
|
|
7
|
|
|
6
|
%
|
|
|
Total cost of revenue
|
2,281
|
|
|
2,410
|
|
|
(129
|
)
|
|
(5
|
)%
|
|
|
Gross margins:
|
|
|
|
|
|
|
|
|
|
Information Storage
|
2,087
|
|
|
2,092
|
|
|
(5
|
)
|
|
—
|
%
|
|
|
Enterprise Content Division
|
106
|
|
|
105
|
|
|
1
|
|
|
1
|
%
|
|
|
RSA Information Security
|
147
|
|
|
158
|
|
|
(11
|
)
|
|
(7
|
)%
|
|
|
Pivotal
|
46
|
|
|
26
|
|
|
20
|
|
|
80
|
%
|
|
|
VMware Virtual Infrastructure
|
1,456
|
|
|
1,381
|
|
|
75
|
|
|
5
|
%
|
|
|
Corporate reconciling items
|
(106
|
)
|
|
(175
|
)
|
|
69
|
|
|
(40
|
)%
|
|
|
Total gross margin
|
3,736
|
|
|
3,587
|
|
|
149
|
|
|
4
|
%
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
(1)
|
821
|
|
|
782
|
|
|
39
|
|
|
5
|
%
|
|
|
Selling, general and administrative
(2)
|
2,034
|
|
|
2,102
|
|
|
(68
|
)
|
|
(3
|
)%
|
|
|
Restructuring and acquisition-related charges
|
(1
|
)
|
|
23
|
|
|
(24
|
)
|
|
(106
|
)%
|
|
|
Total operating expenses
|
2,854
|
|
|
2,907
|
|
|
(53
|
)
|
|
(2
|
)%
|
|
|
Operating income
|
882
|
|
|
680
|
|
|
202
|
|
|
30
|
%
|
|
|
Investment income, interest expense and other expenses, net
|
(30
|
)
|
|
9
|
|
|
(39
|
)
|
|
(412
|
)%
|
|
|
Income before provision for income taxes
|
852
|
|
|
689
|
|
|
163
|
|
|
24
|
%
|
|
|
Income tax provision
|
222
|
|
|
170
|
|
|
52
|
|
|
31
|
%
|
|
|
Net income
|
630
|
|
|
519
|
|
|
111
|
|
|
21
|
%
|
|
|
Less: Net income attributable to the non-controlling interests
|
(49
|
)
|
|
(32
|
)
|
|
(17
|
)
|
|
50
|
%
|
|
|
Net income attributable to EMC Corporation
|
$
|
581
|
|
|
$
|
487
|
|
|
$
|
94
|
|
|
19
|
%
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
Information Storage
|
$
|
3,519
|
|
|
$
|
3,748
|
|
|
$
|
(229
|
)
|
|
(6
|
)%
|
|
|
Enterprise Content Division
|
84
|
|
|
98
|
|
|
(14
|
)
|
|
(13
|
)%
|
|
|
RSA Information Security
|
157
|
|
|
163
|
|
|
(6
|
)
|
|
(4
|
)%
|
|
|
Pivotal
|
98
|
|
|
71
|
|
|
27
|
|
|
40
|
%
|
|
|
VMware Virtual Infrastructure
|
433
|
|
|
406
|
|
|
27
|
|
|
6
|
%
|
|
|
Corporate reconciling items
|
205
|
|
|
198
|
|
|
7
|
|
|
3
|
%
|
|
|
Total cost of revenue
|
4,496
|
|
|
4,684
|
|
|
(188
|
)
|
|
(4
|
)%
|
|
|
Gross margins:
|
|
|
|
|
|
|
|
|
|
Information Storage
|
3,797
|
|
|
3,943
|
|
|
(146
|
)
|
|
(4
|
)%
|
|
|
Enterprise Content Division
|
197
|
|
|
195
|
|
|
2
|
|
|
1
|
%
|
|
|
RSA Information Security
|
298
|
|
|
323
|
|
|
(25
|
)
|
|
(8
|
)%
|
|
|
Pivotal
|
81
|
|
|
47
|
|
|
34
|
|
|
71
|
%
|
|
|
VMware Virtual Infrastructure
|
2,828
|
|
|
2,692
|
|
|
136
|
|
|
5
|
%
|
|
|
Corporate reconciling items
|
(205
|
)
|
|
(274
|
)
|
|
69
|
|
|
(25
|
)%
|
|
|
Total gross margin
|
6,996
|
|
|
6,926
|
|
|
70
|
|
|
1
|
%
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
(3)
|
1,635
|
|
|
1,570
|
|
|
65
|
|
|
4
|
%
|
|
|
Selling, general and administrative
(4)
|
4,021
|
|
|
4,139
|
|
|
(118
|
)
|
|
(3
|
)%
|
|
|
Restructuring and acquisition-related charges
|
48
|
|
|
158
|
|
|
(110
|
)
|
|
(70
|
)%
|
|
|
Total operating expenses
|
5,704
|
|
|
5,867
|
|
|
(163
|
)
|
|
(3
|
)%
|
|
|
Operating income
|
1,292
|
|
|
1,059
|
|
|
233
|
|
|
22
|
%
|
|
|
Investment income, interest expense and other expenses, net
|
(54
|
)
|
|
4
|
|
|
(58
|
)
|
|
(1,460
|
)%
|
|
|
Income before provision for income taxes
|
1,238
|
|
|
1,063
|
|
|
175
|
|
|
17
|
%
|
|
|
Income tax provision
|
311
|
|
|
252
|
|
|
59
|
|
|
23
|
%
|
|
|
Net income
|
927
|
|
|
811
|
|
|
116
|
|
|
14
|
%
|
|
|
Less: Net income attributable to the non-controlling interests
|
(78
|
)
|
|
(72
|
)
|
|
(6
|
)
|
|
9
|
%
|
|
|
Net income attributable to EMC Corporation
|
$
|
849
|
|
|
$
|
739
|
|
|
$
|
110
|
|
|
15
|
%
|
___________
|
|
|
|
(1)
|
Amount includes corporate reconciling items of
$125 million
and
$92 million
for the three months ended
June 30, 2016
and
2015
, respectively.
|
|
|
|
|
(2)
|
Amount includes corporate reconciling items of
$175 million
and
$208 million
for the three months ended
June 30, 2016
and
2015
, respectively.
|
|
|
|
|
(3)
|
Amount includes corporate reconciling items of
$244 million
and
$182 million
for the six months ended
June 30, 2016
and
2015
, respectively.
|
|
|
|
|
(4)
|
Amount includes corporate reconciling items of
$377 million
and
$422 million
for the six months ended
June 30, 2016
and
2015
, respectively.
|
Gross Margins
Overall our gross margin percentages were
62.1%
and
59.8%
for the
three
months ended
June 30, 2016
and
2015
, respectively. During the
three
months ended
June 30, 2016
compared to
2015
, the Information Storage segment
increased
overall gross margins by
149
basis points, the Enterprise Content Division segment increased overall gross margins by
8
points, the VMware Virtual Infrastructure segment increased overall gross margins by
35
basis points and the Pivotal segment increased overall gross margin by
3
basis points. In addition, the decrease in corporate reconciling items, consisting of stock-based compensation, intangible asset amortization and the GSA settlement increased the consolidated gross margin percentage by
40
basis points. These increases were offset by the RSA Information Security segment, which decreased overall gross margins by
8
basis points.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Overall our gross margin percentages were
60.9%
and
59.7%
for the
six
months ended
June 30, 2016
and
2015
, respectively. During the
six
months ended
June 30, 2016
compared to
2015
, the Information Storage segment
increased
overall gross margins by
69
basis points, the Enterprise Content Division increased overall gross margins by
7
basis points, and the VMware Virtual Infrastructure segment increased overall gross margins by
34
basis points. In addition, the decrease in corporate reconciling items, consisting of stock-based compensation, intangible asset amortization and the GSA settlement increased the consolidated gross margin percentage by
21
basis points. These decreases were offset by the RSA Information Security segment, which
decreased
overall gross margins by
5
basis points, and the Pivotal segment, which
decreased
overall gross margins by
3
basis points.
The gross margin percentages for the Information Storage segment were
53.9%
and
51.9%
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
51.9%
and
51.3%
for the
six
months ended
June 30, 2016
and
2015
, respectively. The increase in gross margin percentage for the
three
and
six
months ended
June 30, 2016
compared to the same periods in
2015
was due to increases in both product and service margins as well as an increase in the mix of maintenance services which have higher margins than professional services.
The gross margin percentages for the Pivotal segment were
48.4%
and
40.0%
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
45.0%
and
40.1%
for the
six
months ended
June 30, 2016
and
2015
, respectively. The increase in gross margin percentage for the
three
and
six
months ended
June 30, 2016
compared to the same periods in
2015
was due to increases in both product and services margins and a shift in the mix of product revenue to products which have higher margins.
The gross margin percentages for the VMware Virtual Infrastructure segment were
86.8%
and
87.0%
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
86.7%
and
86.9%
for the
six
months ended
June 30, 2016
and
2015
, respectively. The slight decrease in gross margin percentage for the
three
and
six
months ended
June 30, 2016
compared to the same periods in
2015
was due to a higher mix of services revenues which have lower margins. These decreases were partially offset by an increase in product margins resulting from lower royalty costs.
The gross margin percentages for the RSA Information Security segment were
64.8%
and
66.6%
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
65.6%
and
66.6%
for the
six
months ended
June 30, 2016
and
2015
, respectively. Gross margins decreased for the
three
and
six
months ended
June 30, 2016
compared to the same periods in
2015
due to a decrease in product margins year over year.
The gross margin percentages for the Enterprise Content Division segment were
71.4%
and
67.8%
for the
three
months ended
June 30, 2016
and
2015
, respectively, and
69.8%
and
66.5%
for the
six
months ended
June 30, 2016
and
2015
, respectively. The increase in gross margin percentage for the
three
and
six
months ended
June 30, 2016
compared to the same periods in
2015
was primarily driven by increases in both product and services margins.
Research and Development
Research and development expenses include payroll, stock-based compensation expense and other personnel-related costs associated with product development. Also included in R&D expenses are infrastructure costs, which consist of equipment and facilities costs, and depreciation expense, intangible asset amortization and capitalized software development costs.
The following table summarizes our consolidated R&D expenses for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Research and development
|
$
|
821
|
|
|
$
|
782
|
|
|
$
|
39
|
|
|
5
|
%
|
|
$
|
1,635
|
|
|
$
|
1,570
|
|
|
$
|
65
|
|
|
4
|
%
|
|
Percentage of revenue
|
14
|
%
|
|
13
|
%
|
|
|
|
|
|
14
|
%
|
|
14
|
%
|
|
|
|
|
The increase in R&D expenses for the
three
months ended
June 30, 2016
when compared to the same period in
2015
was attributable to the Pivotal business, which
increased
overall R&D expenses by
$10 million
, and the VMware Virtual Infrastructure business, which
increased
overall R&D expenses by
$16 million
. In addition, corporate reconciling items
increased
consolidated R&D expenses by
$33 million
. These increases were partially offset by the EMC Information Infrastructure business, which
decreased
overall R&D expenses by
$20 million
.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
The increase in R&D expenses for the
six
months ended
June 30, 2016
when compared to the same period in
2015
was attributable to the Pivotal business, which
increased
overall R&D expenses by
$17 million
, and the VMware Virtual Infrastructure business, which
increased
overall R&D expenses by
$52 million
. In addition, corporate reconciling items
increased
consolidated R&D expenses by
$62 million
. These increases were partially offset by the EMC Information Infrastructure business, which
decreased
overall R&D expenses by
$66 million
.
The following table summarizes R&D expenses within EMC’s Information Infrastructure business for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Research and development
|
$
|
378
|
|
|
$
|
398
|
|
|
$
|
(20
|
)
|
|
(5
|
)%
|
|
$
|
756
|
|
|
$
|
822
|
|
|
$
|
(66
|
)
|
|
(8
|
)%
|
|
Percentage of revenue
|
9
|
%
|
|
9
|
%
|
|
|
|
|
|
9
|
%
|
|
10
|
%
|
|
|
|
|
R&D expenses within EMC’s Information Infrastructure business decreased for the
three
and
six
months ended
June 30, 2016
when compared to the same periods in
2015
primarily due to decreases in personnel-related costs as well as increases in capitalized software development costs due to the timing of projects reaching technological feasibility, which decreased overall R&D expenses. Personnel-related costs
decreased
by
$2 million
and
$18 million
for the
three
and
six
months ended
June 30, 2016
, respectively, primarily due to our cost reduction and business transformation program initiated in 2015.
C
apitalized software development costs increased by
$18 million
and
$47 million
for the
three
and
six
months ended
June 30, 2016
, respectively.
The following table summarizes R&D expenses within the Pivotal business for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Research and development
|
$
|
35
|
|
|
$
|
25
|
|
|
$
|
10
|
|
|
38
|
%
|
|
$
|
69
|
|
|
$
|
52
|
|
|
$
|
17
|
|
|
32
|
%
|
|
Percentage of revenue
|
36
|
%
|
|
39
|
%
|
|
|
|
|
|
38
|
%
|
|
44
|
%
|
|
|
|
|
R&D expenses within the Pivotal business
increased
for the
three
and
six
months ended
June 30, 2016
when compared to the same periods in
2015
primarily due to an increase in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions.
The following table summarizes R&D expenses within the VMware Virtual Infrastructure business for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Research and development
|
$
|
283
|
|
|
$
|
267
|
|
|
$
|
16
|
|
|
6
|
%
|
|
$
|
566
|
|
|
$
|
514
|
|
|
$
|
52
|
|
|
10
|
%
|
|
Percentage of revenue
|
17
|
%
|
|
17
|
%
|
|
|
|
|
|
17
|
%
|
|
17
|
%
|
|
|
|
|
R&D expenses within the VMware Virtual Infrastructure business increased for the
three
and
six
months ended
June 30, 2016
when compared to the same periods in
2015
primarily due to growth in personnel-related expenses of
$21 million
and
$44 million
, respectively, driven by incremental growth in headcount. Additionally, depreciation and infrastructure related R&D expenses within the VMware Virtual Infrastructure business decreased
$2 million
for the three months ended June 30, 2016 and increased
$5 million
for the
six
months ended
June 30, 2016
.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
The following table summarizes corporate reconciling items within R&D expenses for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Corporate reconciling items
|
$
|
125
|
|
|
$
|
92
|
|
|
$
|
33
|
|
|
36
|
%
|
|
$
|
244
|
|
|
$
|
182
|
|
|
$
|
62
|
|
|
34
|
%
|
Corporate reconciling items within R&D, which consist of stock-based compensation expense and intangible asset amortization,
increased
for the
three
and
six
months ended
June 30, 2016
when compared to the same periods in
2015
primarily due to stock-based compensation expense, which
increased
by
$33 million
and
$62 million
, respectively.
Selling, General and Administrative
Selling expenses include payroll, sales commissions, stock-based compensation expense and other personnel-related costs associated with the marketing and sale of product offerings. Also included in selling expenses are product launch and business development costs, including travel expenses, as well as equipment and facilities costs, including the related depreciation expense and intangible asset amortization. General and administrative expenses include payroll, stock-based compensation expense and other personnel-related costs incurred to support the overall business. These expenses include costs associated with the finance, human resources, legal and other administrative functions and initiatives.
The following table summarizes our consolidated selling, general and administrative (“SG&A”) expenses for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Selling, general and administrative
|
$
|
2,034
|
|
|
$
|
2,102
|
|
|
$
|
(68
|
)
|
|
(3
|
)%
|
|
$
|
4,021
|
|
|
$
|
4,139
|
|
|
$
|
(118
|
)
|
|
(3
|
)%
|
|
Percentage of revenue
|
34
|
%
|
|
35
|
%
|
|
|
|
|
|
35
|
%
|
|
36
|
%
|
|
|
|
|
The decrease in SG&A expenses for the
three
months ended
June 30, 2016
when compared to the same period in
2015
was attributable to the EMC Information Infrastructure business, which
decreased
overall SG&A expenses by
$69 million
and corporate reconciling items which decreased consolidated SG&A expenses by
$33 million
. Partially offsetting the decreases were increases in the VMware Virtual Infrastructure business, which
increased
overall SG&A expenses by
$30 million
and the Pivotal business, which
increased
overall SG&A expenses by
$4 million
.
The decrease in SG&A expenses for the
six
months ended
June 30, 2016
when compared to the same period in
2015
was attributable to the EMC Information Infrastructure business, which
decreased
overall SG&A expenses by
$155 million
and corporate reconciling items which decreased consolidated SG&A expenses by
$45 million
. Partially offsetting the decreases were increases in the VMware Virtual Infrastructure business, which
increased
overall SG&A expenses by
$68 million
and the Pivotal business, which
increased
overall SG&A expenses by
$14 million
.
The following table summarizes SG&A expenses within EMC’s Information Infrastructure business for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Selling, general and administrative
|
$
|
1,132
|
|
|
$
|
1,201
|
|
|
$
|
(69
|
)
|
|
(6
|
)%
|
|
$
|
2,216
|
|
|
$
|
2,371
|
|
|
$
|
(155
|
)
|
|
(7
|
)%
|
|
Percentage of revenue
|
27
|
%
|
|
27
|
%
|
|
|
|
|
|
28
|
%
|
|
28
|
%
|
|
|
|
|
SG&A expenses within EMC’s Information Infrastructure business
decreased
for the
three
and
six
months ended
June 30, 2016
when compared to the same periods in
2015
primarily due to personnel-related costs which
decreased
by
$67 million
and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
$135 million
, respectively, and business development costs which
decreased
by
$5 million
and
$16 million
, respectively. These decreases were primarily due to our cost reduction and business transformation program which was initiated in 2015.
The following table summarizes SG&A expenses within the Pivotal business for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Selling, general and administrative
|
$
|
57
|
|
|
$
|
53
|
|
|
$
|
4
|
|
|
9
|
%
|
|
$
|
115
|
|
|
$
|
101
|
|
|
$
|
14
|
|
|
13
|
%
|
|
Percentage of revenue
|
60
|
%
|
|
82
|
%
|
|
|
|
|
|
64
|
%
|
|
86
|
%
|
|
|
|
|
SG&A expenses within the Pivotal business increased for the
three
and
six
months ended
June 30, 2016
when compared to the same periods in
2015
primarily due to an increase of
$6 million
and
$15 million
, respectively, in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions. Pivotal continues to build out its go-to-market capabilities as it grows its business.
The following table summarizes SG&A expenses within the VMware Virtual Infrastructure business for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Selling, general and administrative
|
$
|
670
|
|
|
$
|
640
|
|
|
$
|
30
|
|
|
5
|
%
|
|
$
|
1,313
|
|
|
$
|
1,245
|
|
|
$
|
68
|
|
|
6
|
%
|
|
Percentage of revenue
|
40
|
%
|
|
40
|
%
|
|
|
|
|
|
40
|
%
|
|
40
|
%
|
|
|
|
|
SG&A expenses within the VMware Virtual Infrastructure business increased for the
three
and
six
months ended
June 30, 2016
when compared to the same periods in
2015
primarily due to growth in personnel-related costs of
$27 million
and
$53 million
, respectively, due to incremental growth in headcount.
Additionally, charitable donations increased by $9 million and $14 million for the
three
and
six
months ended
June 30, 2016
, respectively.
The following table summarizes corporate reconciling items within SG&A expenses for the
three
and
six
months ended
June 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 2015
|
|
$ Change
|
|
% Change
|
|
Corporate reconciling items
|
$
|
175
|
|
|
$
|
208
|
|
|
$
|
(33
|
)
|
|
(15
|
)%
|
|
$
|
377
|
|
|
$
|
422
|
|
|
$
|
(45
|
)
|
|
(11
|
)%
|
Corporate reconciling items within SG&A, which consist of stock-based compensation, intangible asset amortization, acquisition and other related charges and merger-related costs,
decreased
for the
three
and
six
months ended
June 30, 2016
when compared to the same periods in
2015
primarily due to a decrease in acquisition and other related charges of
$42 million
and
$71 million
, respectively, due to the decreases in installment payments to certain key employees of AirWatch. Partially offsetting these decreases was an increase in stock-based compensation of
$3 million
and
$28 million
for the
three
and
six
months ended
June 30, 2016
, respectively.
Restructuring and Acquisition-Related Charges
For the
three
months ended
June 30, 2016
, we recorded a restructuring and acquisition-related credit of
$1 million
and for the
six
months ended
June 30, 2016
, we incurred restructuring and acquisition-related charges of
$48 million
. For the
three
and
six
months ended
June 30, 2015
, we incurred restructuring and acquisition-related charges of
$23 million
and
$158 million
, respectively.
For the
three
and
six
months ended
June 30, 2016
, EMC recorded a
$1 million
credit and a
$6 million
credit, respectively, related to our prior restructuring programs. For the
three
months ended
June 30, 2016
, VMware incurred a
$1 million
credit related
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
to its restructuring programs. For the
six
months ended
June 30, 2016
, VMware incurred
$52 million
of restructuring charges, primarily related to its current year restructuring program. Additionally, for the
three
and
six
months ended
June 30, 2016
, VMware incurred
$1 million
and
$2 million
, respectively, of charges in connection with acquisitions for financial, advisory, legal and accounting services.
For the
three
and
six
months ended
June 30, 2015
, EMC incurred
$23 million
and
$133 million
, respectively, of restructuring charges, primarily related to our
2015
restructuring programs, and
$2 million
and
$3 million
, respectively, of charges in connection with acquisitions for financial, advisory, legal and accounting services. For the
three
months ended
June 30, 2015
, VMware recognized a credit of
$2 million
related to its restructuring program and for the
six
months ended
June 30, 2015
, VMware incurred
$21 million
of restructuring charges, primarily related to its 2015 program. For the
six
months ended
June 30, 2015
, VMware incurred
$1 million
of charges in connection with acquisitions for financial, advisory, legal and accounting services.
In the first quarter of 2016, VMware approved a plan to streamline its operations, with plans to reinvest the associated savings in field, technical and support resources associated with growth products. As a result, approximately
800
positions at VMware were eliminated during the
six
months ended
June 30, 2016
. Actions relating to VMware’s plan were substantially completed by June 30, 2016.
In the first and second quarters of
2015
, EMC implemented restructuring programs to create further operational efficiencies which resulted in a workforce reduction of approximately
1,320
and
160
positions, respectively. The actions impacted positions around the globe covering our Information Storage, RSA Information Security, Enterprise Content Division and Pivotal segments. All of these actions were completed within a year of the start of the program. In the first quarter of
2015
, VMware eliminated approximately
350
positions across all major functional groups and geographies to streamline its operations. All of these actions were completed within a year of the start of the program.
For the
three
and
six
months ended
June 30, 2016
, we recognized
$5 million
and
$10 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. For the
three
and
six
months ended
June 30, 2015
, we recognized
$10 million
and
$16 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 accruals are expected to be utilized by the end of 2022.
Investment Income
Investment income was
$26 million
and
$39 million
for the
three
and
six
months ended
June 30, 2016
, respectively. Investment income was
$26 million
and
$51 million
for the
three
and
six
months ended
June 30, 2015
, respectively. Investment income remained flat for the
three
months ended
June 30, 2016
. Investment income
decreased
for the
six
months ended
June 30, 2016
when compared to the same period in
2015
primarily due to an increase in net realized losses.
For the
three
and
six
months ended
June 30, 2016
, interest income was
$28 million
and
$56 million
, respectively, and net realized losses were
$4 million
and
$20 million
, respectively. For the
three
and
six
months ended
June 30, 2015
, interest income was
$26 million
and
$51 million
, respectively, and net realized losses had an immaterial impact to overall investment income in both the
three
and
six
month periods.
Interest Expense
Interest expense was
$42 million
and
$84 million
for the
three
and
six
months ended
June 30, 2016
, respectively. Interest expense was
$41 million
and
$81 million
for the
three
and
six
months ended
June 30, 2015
, respectively. Interest expense during the
three
and
six
months ended
June 30, 2016
and
2015
consists primarily of interest on the
$5.5 billion
aggregate principal amount of senior notes (collectively, the “Notes”), which we issued in June 2013.
Other Income (Expense), Net
Other expense was
$14 million
and
$9 million
for the
three
and
six
months ended
June 30, 2016
, respectively. Other income was
$24 million
and
$34 million
for the
three
and
six
months ended
June 30, 2015
, respectively. Other income (expense), net primarily consists of net gains and losses on strategic investments, impairment of joint venture and foreign exchange gains and losses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
During the
three
months ended
June 30, 2016
, we recognized net gains from strategic investments of
$15 million
and foreign currency exchange gains of
$12 million
. Offsetting these gains was a $39 million impairment loss related to the LenovoEMC joint venture. During the
six
months ended
June 30, 2016
, we recognized net gains from strategic investments of
$20 million
and foreign currency exchange gains of
$23 million
. Offsetting these gains was a $39 million impairment loss related to the LenovoEMC joint venture and an
$18 million
foreign currency exchange loss related to the re-measurement of assets and liabilities of our Venezuela subsidiary in connection with the Venezuela currency devaluation during the
six
months ended
June 30, 2016
.
During the
three
months ended
June 30, 2015
, we recognized net gains from strategic investments of
$25 million
and foreign currency exchange gains of
$16 million
. During the
six
months ended
June 30, 2015
, we recognized net gains from strategic investments of
$45 million
and foreign currency exchange gains of
$6 million
. These gains were partially offset by a fair value adjustment on an asset held for sale of
$20 million
for the
three
and
six
months ended
June 30, 2015
.
Provision for Income Taxes
Our effective income tax rates were
26.1%
and
25.1%
for the
three
and
six
months ended
June 30, 2016
, respectively. Our effective income tax rates were
24.6%
and
23.7%
for the
three
and
six
months ended
June 30, 2015
, 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 six months ended June 30, 2016, 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 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 provision for income taxes from foreign operations has been earned by our Irish subsidiaries. For the three and six months ended June 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. 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. On December 18, 2015, the Consolidated Appropriations Act, 2016 was signed into law. Some of the provisions were retroactive to January 1, 2015 including a permanent extension of the U.S. federal tax credit for increasing research activities. Our effective income tax rates for the three and six months ended June 30, 2015 do not reflect any federal tax credit for increasing research activities.
Our effective income tax rate increased in the three and six months ended June 30, 2016 from the three and six months ended June 30, 2015 due primarily to a lower tax rate differential for international jurisdictions. There were also differences in 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. In the third quarter of 2012, the IRS commenced a federal income tax audit for the tax years 2009 and 2010. The IRS completed their field audit for the tax years 2009 and 2010 and issued Revenue Agent Reports (“RARs”) in the first quarter of 2016. We disagree with certain proposed adjustments and have filed a formal protest to the IRS Appeals Division. In the first quarter of 2015, the IRS commenced a federal income tax audit for the tax year 2011, which is still ongoing. 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 2004. 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 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.
Our effective income tax rate for the remainder of 2016 may be affected by such factors as changes in tax laws, regulations or income tax rates, changing interpretation of existing laws or regulations, the impact of accounting for stock-based compensation, the impact of accounting for business combinations, changes in our international organization, and changes in overall levels of income before provision for income taxes. Our effective income tax rate may also be adversely affected by earnings being lower than anticipated in countries where we have lower statutory income tax rates and higher than anticipated in countries where we have higher statutory income tax rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Non-controlling Interests
The net income attributable to the non-controlling interests was
$49 million
and
$32 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and was
$78 million
and
$72 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. The net income attributable to the non-controlling interest in VMware was
$51 million
and
$32 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and was
$82 million
and
$72 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
The increase in the
three
and
six
months ended
June 30, 2016
compared to the same periods in
2015
was due to increases in VMware’s reported net income, partially offset by net losses attributable to the non-controlling interests in Pivotal. VMware’s reported net income was
$265 million
and
$172 million
for the
three
months ended
June 30, 2016
and
2015
, respectively, and was
$426 million
and
$368 million
for the
six
months ended
June 30, 2016
and
2015
, respectively. The weighted average non-controlling interest in VMware was approximately
19%
for both the
three
and
six
months ended
June 30, 2016
and
2015
. EMC did not purchase any shares of VMware common stock during the
three
and
six
months ended
June 30, 2016
.
Financial Condition
Proposed Transaction with Dell
On October 12, 2015, EMC and Denali signed a definitive Merger Agreement. 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 Denali, we 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. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements for the next twelve months.
The Merger Agreement contains specified termination rights for each of Denali 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 Denali a termination fee of
$2.5 billion
.
Cash, Cash Equivalents and Investments
At
June 30, 2016
, our total cash, cash equivalents, and short-term and long-term investments were
$16.1 billion
. This balance includes approximately
$8.7 billion
held by VMware, of which
$6.6 billion
is held outside the U.S. and
$2.1 billion
is held in the U.S., and
$7.4 billion
held by EMC, of which
$6.1 billion
is held outside the U.S. and
$1.3 billion
is held in the U.S. If the funds that are held outside the U.S. are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
Under the terms of the Merger Agreement, EMC is required to provide Denali with access to EMC’s cash to help fund the Merger consideration. If there is a need to transfer cash to the U.S. in order to meet the requirements of the Merger, EMC does not expect that taxes and other costs incurred would be material.
We expect that existing U.S. cash and cash equivalents, together with any cash generated from operations, will be sufficient to meet normal operating requirements for the next twelve months. We expect to continue to generate positive cash flows from operations and to use cash generated by operations as a primary source of liquidity. Should we require more capital than is generated by our operations to fund discretionary activities, such as business acquisitions, we have the ability to raise capital through the issuance of commercial paper or by drawing on our credit facility at reasonable interest rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Cash Flow
The following table summarizes our cash flow activity for the six months ended
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
$ Change
|
|
Cash provided by operating activities
|
$
|
2,540
|
|
|
$
|
2,113
|
|
|
$
|
427
|
|
|
Cash provided by (used in) investing activities
|
797
|
|
|
(1,455
|
)
|
|
2,252
|
|
|
Cash used in financing activities
|
(518
|
)
|
|
(1,124
|
)
|
|
606
|
|
|
Effect of exchange rates on cash and cash equivalents
|
(14
|
)
|
|
(74
|
)
|
|
60
|
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
2,805
|
|
|
$
|
(540
|
)
|
|
$
|
3,345
|
|
Cash provided by operating activities consists primarily of cash collections from our customers somewhat offset by cash used for employee related expenditures, cash paid to suppliers for material and manufacturing costs and income tax payments.
The following table summarizes the primary drivers of the decrease in cash provided by operating activities for the
six
months ended
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
$ Change
|
|
Cash received from customers
|
$
|
12,953
|
|
|
$
|
13,137
|
|
|
$
|
(184
|
)
|
|
Cash paid to suppliers and employees
|
(9,749
|
)
|
|
(10,076
|
)
|
|
327
|
|
|
Income taxes paid
|
(649
|
)
|
|
(949
|
)
|
|
300
|
|
Net cash provided by operating activities increased by
$427 million
to
$2,540 million
for the
six
months ended
June 30, 2016
compared to the same period in
2015
primarily due to a decrease in cash paid to suppliers and employees resulting from our cost reduction and business transformation program which was initiated in 2015. This was partially offset by a decrease in cash received from customers, attributable to lower sales volume. Additionally, income tax payments, which are comprised of estimated taxes for the current year, extension payments for the prior year and refunds or payments associated with income tax filings and tax audits, decreased primarily due to lower pre-tax income in 2015 compared to 2014.
Cash used in investing activities consists primarily of the timing of purchases, sales and maturities of our investments in available-for-sale securities, business acquisitions and the purchase of capital and other assets.
The following table summarizes the primary drivers of the increase in cash used in investing activities for the
six
months ended
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
$ Change
|
|
Net sales (purchases) of available-for-sale securities
|
$
|
1,453
|
|
|
$
|
(632
|
)
|
|
$
|
2,085
|
|
|
Net sales (purchases) of strategic and other related investments
|
16
|
|
|
(51
|
)
|
|
67
|
|
Net cash provided by investing activities increased by
$2,252 million
to
$797 million
for the
six
months ended
June 30, 2016
compared to the same period in
2015
primarily due to a increase in cash provided by/(used in) the net sales, maturities and purchases of available-for-sale securities and strategic and other related investments. The net sales, maturities and purchases of available-for-sale securities and strategic and other related investments varies from period to period based upon our cash collections, cash requirements and maturity dates of our investments as well as cash available after the issuance and payment of debt.
Cash used in financing activities consists primarily of net proceeds or payments from the issuance or repayment of short-term and long-term debt as well as proceeds from the issuance of common stock, stock repurchases and dividend payments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
The following table summarizes the primary drivers of the decrease in cash used in financing activities for the
six
months ended
June 30, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
$ Change
|
|
Net proceeds from Pivotal equity instruments
|
$
|
233
|
|
|
$
|
—
|
|
|
$
|
233
|
|
|
Repurchase of EMC and VMware common stock
|
—
|
|
|
(2,913
|
)
|
|
2,913
|
|
|
Net proceeds (payments) of short-term obligations
|
(503
|
)
|
|
1,948
|
|
|
(2,451
|
)
|
Net cash used in financing activities decreased by
$606 million
to
$518 million
for the
six
months ended
June 30, 2016
compared to the same period in
2015
primarily due to a decrease in cash spent on EMC and VMware stock repurchases as well as an increase in cash from Pivotal’s issuance of preferred equity instruments in May 2016, partially offset by the cash outflows related to the repayment of short-term obligations in 2016.
Share Repurchase
During April 2016, VMware’s Board of Directors authorized the repurchase of up to an aggregate of
$1.2 billion
of VMware’s common stock through the end of 2016. For the
six
months ended
June 30, 2016
, VMware did not repurchase any shares as it was subject to a number of legal and regulatory constraints resulting from the Merger Agreement, which impacted the timing and ability to execute repurchases of VMware’s shares. VMware expects to repurchase the authorized
$1.2 billion
of its Class A common stock during the remainder of 2016, following the EMC shareholder vote on the proposed merger of EMC and Dell which occurred on July 19, 2016.
During the
six
months ended
June 30, 2015
, we spent
$2,063 million
to repurchase
76 million
shares of our common stock, and VMware spent
$850 million
to repurchase
10 million
shares of their common stock.
Dividends
Our Board of Directors declared the following dividends during
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend Per Share
|
|
Record Date
|
|
Total Amount (in millions)
|
|
Payment Date
|
|
2016:
|
|
February 11, 2016
|
|
$
|
0.115
|
|
|
April 1, 2016
|
|
$
|
229
|
|
|
April 22, 2016
|
|
May 12, 2016
|
|
$
|
0.115
|
|
|
July 1, 2016
|
|
$
|
231
|
|
|
July 22, 2016
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
December 17, 2015
|
|
$
|
0.115
|
|
|
January 4, 2016
|
|
$
|
230
|
|
|
January 22, 2016
|
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 “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,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
for additional one-year periods. As of
June 30, 2016
, we were in compliance with customary required covenants and had no funds borrowed under the credit facility. At December 31, 2015, we had
$600 million
outstanding under the credit facility. At August 8, 2016, we had
$900 million
outstanding 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
June 30, 2016
, we were in compliance with customary required covenants. At
June 30, 2016
, we had $
800 million
of Commercial Paper outstanding. At December 31, 2015, we had $
699 million
of Commercial Paper outstanding. At August 8, 2016, we had
no
Commercial Paper outstanding.
Long-Term Debt
During 2013, we issued
$5.5 billion
of Notes which pay a fixed rate of interest semi-annually in arrears. The proceeds from the Notes were used to repay the
$1.725 billion
1.75%
convertible senior notes due 2013 as well as for general corporate purposes including stock repurchases, dividend payments, business acquisitions, 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
June 30, 2016
, we were in compliance with all debt covenants, which are customary in nature.
Use of Non-GAAP Financial Measures and Reconciliations to GAAP Results
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). EMC uses certain non-GAAP financial measures, which exclude stock-based compensation, intangible asset amortization, restructuring charges, acquisition and other related charges, infrequently occurring gains, losses, benefits and charges, and special tax items to measure its revenues, gross margin, operating margin, net income and diluted earnings per share for purposes of managing our business. EMC also assesses its financial performance by measuring its free cash flow which is also a non-GAAP financial measure. Free cash flow is defined as net cash provided by operating activities, less additions to property, plant and equipment and capitalized software development costs. These non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of EMC’s financial performance or liquidity prepared in accordance with GAAP. EMC’s non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how EMC defines its non-GAAP financial measures.
EMC’s management uses the non-GAAP financial measures to gain an understanding of EMC’s comparative operating performance (when comparing such results with previous periods or forecasts) and future prospects and excludes these items from its internal financial statements for purposes of its internal budgets and each reporting segment’s financial goals. These non-GAAP financial measures are used by EMC’s management in their financial and operating decision-making because management believes they reflect EMC’s ongoing business in a manner that allows meaningful period-to-period comparisons. EMC’s management believes that these non-GAAP financial measures provide useful information to investors and others (a) in understanding and evaluating EMC’s current operating performance and future prospects in the same manner as management does, if they so choose, and (b) in comparing in a consistent manner EMC’s current financial results with EMC’s past financial results.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Our non-GAAP operating results for the
three
months ended
June 30, 2016
and
2015
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
Revenue
|
$
|
6,017
|
|
|
$
|
6,073
|
|
|
Gross margin
|
3,842
|
|
|
3,762
|
|
|
Gross margin percentage
|
63.8
|
%
|
|
61.9
|
%
|
|
Operating income
|
1,287
|
|
|
1,178
|
|
|
Operating margin percentage
|
21.4
|
%
|
|
19.4
|
%
|
|
Income tax provision
|
330
|
|
|
290
|
|
|
Net income attributable to EMC
|
888
|
|
|
845
|
|
|
Diluted earnings per share attributable to EMC
|
$
|
0.45
|
|
|
$
|
0.43
|
|
The increase in non-GAAP gross margin for the period was attributable to lower costs of revenue in Information Storage, and higher sales volume in VMware Virtual Infrastructure. Non-GAAP gross margin percentage increased for the
three
months ended
June 30, 2016
due to an increase in Information Storage margins and an increase in the mix of VMware revenue which has higher overall margins.
The increase in the non-GAAP operating income for the
three
months ended
June 30, 2016
was attributable to the overall increase in gross margin as well as lower operating expenses resulting from our cost reduction program. Non-GAAP operating margin percentage increased for the
three
months ended
June 30, 2016
primarily due to the increase in gross margin percentage.
The reconciliation of the above financial measures from GAAP to non-GAAP is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2016
|
|
|
Revenue
|
|
Gross margin
|
|
Operating income
|
|
Income tax provision (benefit)
|
|
Net income attributable to EMC
|
|
Diluted Earnings per share attributable to EMC
|
|
GAAP
|
$
|
6,017
|
|
|
$
|
3,736
|
|
|
$
|
882
|
|
|
$
|
222
|
|
|
$
|
581
|
|
|
$
|
0.29
|
|
|
Stock-based compensation expense
|
—
|
|
|
46
|
|
|
302
|
|
|
68
|
|
|
211
|
|
|
0.11
|
|
|
Intangible asset amortization
|
—
|
|
|
60
|
|
|
89
|
|
|
25
|
|
|
59
|
|
|
0.03
|
|
|
Restructuring charges
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
Acquisition and other related charges
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
Merger-related costs
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
9
|
|
|
0.01
|
|
|
Joint venture impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
24
|
|
|
0.01
|
|
|
Non-GAAP
|
$
|
6,017
|
|
|
$
|
3,842
|
|
|
$
|
1,287
|
|
|
$
|
330
|
|
|
$
|
888
|
|
|
$
|
0.45
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2015
|
|
|
Revenue
|
|
Gross margin
|
|
Operating income
|
|
Income tax provision (benefit)
|
|
Net income attributable to EMC
|
|
Diluted Earnings per share attributable to EMC
|
|
GAAP
|
$
|
5,997
|
|
|
$
|
3,587
|
|
|
$
|
680
|
|
|
$
|
170
|
|
|
$
|
487
|
|
|
$
|
0.25
|
|
|
Stock-based compensation expense
|
—
|
|
|
37
|
|
|
258
|
|
|
58
|
|
|
181
|
|
|
0.09
|
|
|
Intangible asset amortization
|
—
|
|
|
62
|
|
|
100
|
|
|
29
|
|
|
66
|
|
|
0.03
|
|
|
Restructuring charges
|
—
|
|
|
—
|
|
|
21
|
|
|
5
|
|
|
16
|
|
|
0.01
|
|
|
Acquisition and other related charges
|
—
|
|
|
—
|
|
|
49
|
|
|
15
|
|
|
29
|
|
|
0.01
|
|
|
R&D tax credit
|
—
|
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
12
|
|
|
0.01
|
|
|
Fair value adjustment on assets held for sale
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
12
|
|
|
0.01
|
|
|
VMware GSA settlement
|
76
|
|
|
76
|
|
|
70
|
|
|
18
|
|
|
42
|
|
|
0.02
|
|
|
Non-GAAP
|
$
|
6,073
|
|
|
$
|
3,762
|
|
|
$
|
1,178
|
|
|
$
|
290
|
|
|
$
|
845
|
|
|
$
|
0.43
|
|
We also monitor our ability to generate free cash flow. For the
three
months ended
June 30, 2016
, our free cash flow was
$1,344 million
, an increase of
108%
compared to the free cash flow generated for the
three
months ended
June 30, 2015
. For the
six
months ended
June 30, 2016
, our free cash flow was
$1,931 million
, an increase of
38%
compared to the free cash flow generated for the
six
months ended
June 30, 2015
. EMC uses free cash flow, among other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalized software development costs. Management believes that information regarding free cash flow provides investors with an important perspective on the cash available to make strategic acquisitions and investments, repurchase shares, service and issue debt, pay dividends and fund ongoing operations. As free cash flow is not a measure of liquidity calculated in accordance with GAAP, free cash flow should be considered in addition to, but not as a substitute for, the analysis provided in the statements of cash flows.
The reconciliation of the above free cash flow from GAAP to non-GAAP is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
2016
|
|
June 30,
2015
|
|
June 30,
2016
|
|
June 30,
2015
|
|
Cash Flow from Operations
|
$
|
1,608
|
|
|
$
|
1,033
|
|
|
$
|
2,540
|
|
|
$
|
2,113
|
|
|
Capital expenditures
|
(111
|
)
|
|
(252
|
)
|
|
(299
|
)
|
|
(449
|
)
|
|
Capitalized software development costs
|
(153
|
)
|
|
(134
|
)
|
|
(310
|
)
|
|
(262
|
)
|
|
Free Cash Flow
|
$
|
1,344
|
|
|
$
|
647
|
|
|
$
|
1,931
|
|
|
$
|
1,402
|
|
Free cash flow represents a non-GAAP measure related to operating cash flows. In contrast, our GAAP measure of cash flow consists of three components. These are cash flows provided by operating activities of
$2,540 million
and
$2,113 million
for the
six
months ended
June 30, 2016
and
2015
, respectively, cash provided by investing activities of
$797 million
and used in investing activities of
$1,455 million
for the
six
months ended
June 30, 2016
and
2015
, respectively, and net cash used in financing activities of
$518 million
and
$1,124 million
for the
six
months ended
June 30, 2016
and
2015
, respectively.
All of the foregoing non-GAAP financial measures have limitations. Specifically, the non-GAAP financial measures that exclude the items noted above do not include all items of income and expense that affect EMC’s operations or cash flows. Further, these non-GAAP financial measures are not prepared in accordance with GAAP, may not be comparable to non-GAAP financial measures used by other companies and do not reflect any benefit that such items may confer on EMC. Management compensates for these limitations by also considering EMC’s financial results as determined in accordance with GAAP.