NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Overview and Basis of Presentation
Company and Background
VMware, Inc. (“VMware” or the “Company”) pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. Information technology (“IT”) driven innovation is disrupting markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. To take on this challenge, businesses need a flexible and secure digital foundation. VMware provides compute, cloud, mobility, networking and security infrastructure software to businesses that provides a flexible digital foundation for the applications that empower businesses to serve their customers globally.
Basis of Presentation
The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for annual financial reporting.
VMware was incorporated as a Delaware corporation in 1998, was acquired by EMC Corporation (“EMC”) in 2004 and conducted its initial public offering of VMware’s Class A common stock in August 2007. Effective September
7, 2016, Dell Technologies Inc. (“Dell”) (formerly Denali Holding Inc.) acquired EMC, including EMC’s majority control of VMware (the “Dell Acquisition”). As a result of the Dell Acquisition, EMC became a wholly-owned subsidiary of Dell and VMware became an indirectly held, majority-owned subsidiary of Dell. As of
February 2, 2018
, Dell controlled
81.9%
of VMware’s outstanding common stock and
97.6%
of the combined voting power of VMware’s outstanding common stock, including
31 million
shares of VMware’s Class A common stock and all of VMware’s Class
B common stock.
As VMware is a majority-owned and controlled subsidiary of Dell, its results of operations and financial position are consolidated with Dell’s financial statements. Transactions prior to the effective date of Dell’s Acquisition represent transactions only with EMC and its consolidated subsidiaries.
Effective January 1, 2017, VMware’s fiscal year changed from a fiscal year ending on December 31 of each calendar year to a fiscal year consisting of a 52- or 53-week period ending on the Friday nearest to January 31 of each year. The period that began on January 1, 2017 and ended on February 3, 2017 is reflected as a transition period (the “Transition Period”). VMware’s first full fiscal year 2018 under the revised fiscal calendar is a 52-week year that began on February 4, 2017 and ended on February 2, 2018. The Company has included its audited consolidated financial statements for the Transition Period in this Annual Report on Form 10-K. Prior-period financial statements have not been recast.
Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the amounts recorded for VMware’s intercompany transactions with Dell and its consolidated subsidiaries may not be considered arm’s length with an unrelated third party. Therefore, the financial statements included herein may not necessarily reflect the results of operations, financial position and cash flows had VMware engaged in such transactions with an unrelated third party during all periods presented. Accordingly, VMware’s historical financial information is not necessarily indicative of what the Company’s results of operations, financial position and cash flows will be in the future if and when VMware contracts at arm’s length with unrelated third parties for products and services the Company receives from and provides to Dell.
Principles of Consolidation
The consolidated financial statements include the accounts of VMware and subsidiaries in which VMware has a controlling financial interest. Non-controlling interests are presented as a separate component within total stockholders’ equity and represent the equity and cumulative pro-rata share of the results of operations attributable to the non-controlling interests. The portion of results of operations attributable to the non-controlling interests is eliminated in other income (expense), net on the consolidated statements of income (loss) and is not presented separately as the amount was not material for the periods presented. During 2016, VMware acquired all of the non-controlling interests previously presented as a separate component within total stockholders’ equity.
All intercompany transactions and account balances between VMware and its subsidiaries have been eliminated in consolidation. Transactions with Dell and its consolidated subsidiaries are generally settled in cash and are classified on the consolidated statements of cash flows based upon the nature of the underlying transaction.
Use of Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to, trade receivable valuation, marketing development funds and rebates, useful lives assigned to fixed assets and intangible assets, valuation of goodwill and definite-lived intangibles, income taxes, stock-based compensation and contingencies. Actual results could differ from those estimates.
Revenue Recognition
VMware derives revenue primarily from licensing software under perpetual licenses and based on consumption, related software maintenance and support, training, consulting services and hosted services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or service has been provided, the sales price is fixed or determinable and collectibility is probable.
License Revenue
VMware sells most of its license software through distributors, resellers, system vendors, systems integrators and through its direct sales force. VMware recognizes revenue from the sale of its software licenses upon shipment, provided all other revenue recognition criteria have been met. VMware also rents its software to customers using a pay-as-you-go consumption model. Revenue from this selling model is generally recognized based upon the customer’s reported usage. When software license arrangements are offered with new products that become available on a when-and-if-available basis, revenue associated with these arrangements is recognized ratably over the subscription period.
For software sold by system vendors that is bundled with their hardware, unless VMware has a separate license agreement which governs the transaction, revenue is recognized in arrears upon the receipt of royalty reports.
Services Revenue
VMware’s services revenue generally consists of software maintenance and support, training, consulting services and hosted services. Software maintenance and support offerings entitle customers to receive major and minor product upgrades on a when-and-if-available basis and technical support. Revenue from software maintenance and support offerings is generally recognized ratably over the contract period.
Professional services include design, implementation and training. Professional services are not considered essential to the functionality of VMware’s products as these services do not alter the intended product capabilities and may be performed by customers or other vendors. Revenue from professional services engagements performed for a fixed fee, for which VMware is able to make reasonably dependable estimates of progress toward completion, is recognized on a proportional performance basis assuming all other revenue recognition criteria are met. Revenue from professional services engagements invoiced on a time and materials basis is recognized as the hours are incurred.
VMware’s hosted services consist of certain software offerings sold as a service without the customer’s ability to take possession of the software over the subscription term. These arrangements are offered to VMware’s customers over a specified period of time and revenue is recognized equally in both license and services revenue ratably over the subscription term commencing upon delivery of the service. Hosted services are also provided on a consumption basis with revenue recognized commensurate with the customer’s usage of the related services.
Rebate Reserves and Marketing Development Funds
Rebates are offered to certain channel partners, which are recognized as a reduction to revenue or unearned revenue. Rebates based on actual partner sales are recognized as a reduction to revenue as the underlying revenue is recognized. Rebates earned based upon partner achievement of cumulative level of sales are recognized as a reduction of revenue proportionally for eligible sales required to achieve the target.
VMware participates in marketing development programs with certain channel partners wherein VMware reimburses its partners for certain direct costs incurred by the partners for marketing-related expenses or other services under the terms of the programs. Reimbursed costs to channel partners are recognized as a reduction of revenue based upon the maximum potential liability. The difference between the maximum potential liability recognized and the actual amount paid out has not been material to date.
Returns Reserves
With limited exceptions, VMware’s return policy does not allow product returns for a refund. VMware estimates and records reserves for product returns at the time of sale based on historical return rates. Amounts are recorded as a reduction of revenue or unearned revenue. Returns reserves were not material for all periods presented.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Multiple-Element Arrangements
VMware enters into multiple-element revenue arrangements in which a customer may purchase a combination of software, maintenance and support, training, consulting services and hosted services. For multiple-element arrangements with software elements, VMware allocates and defers revenue for the undelivered elements based on fair value using vendor-specific objective evidence (“VSOE”) and applies the residual method to allocate the remaining fee to the delivered products and services. If a product or service included in a software-related multiple-element arrangement has not been delivered, and is not considered essential to the functionality of the delivered products or services, VMware must determine the fair value of each undelivered product or service using VSOE. Absent VSOE, revenue is deferred until VSOE of fair value exists for each of the undelivered products or services, or until all elements of the arrangement have been delivered. However, if the only undelivered element without VSOE is maintenance and support, the entire arrangement fee is recognized ratably over the performance period.
VSOE of fair value for an undelivered element is generally based on historical stand-alone sales to third parties. In limited instances, for an offering that is not yet sold, VSOE is the price established by management, including contractual renewal rate, if it is probable that the price will not change when introduced to the marketplace. In determining VSOE of fair value, VMware requires that the selling prices for a product or service fall within a reasonable pricing range. VMware has established VSOE for its software maintenance and technical support services, consulting services and training.
For multiple-element arrangements that contain software and non-software elements, VMware allocates revenue to software or software-related elements as a group and any non-software elements separately based on relative selling prices using the selling price hierarchy. The relative selling price for each deliverable is determined using VSOE, if it exists, or third-party evidence (“TPE”) of selling price. TPE of selling price is based on evaluation of prices charged for competitor products or services sold to similarly situated customers. As VMware’s offerings contain significant proprietary technology and provide different features and functionality, comparable prices of similar products typically cannot be obtained and relied upon.
If neither VSOE nor TPE of selling price exists for a deliverable, VMware uses its best estimate of selling price (“BESP”) for that deliverable. The objective of BESP is to determine the price at which VMware would transact a sale if the product or service were sold on a stand-alone basis. VMware determines BESP by considering its overall pricing objectives and practices across different sales channels and geographies, market conditions, and historical sales. VMware uses BESP in the allocation of arrangement consideration for non-software elements. Once value is allocated to software or software-related elements as a group, revenue is then recognized when the relevant revenue recognition criteria are met.
A specified upgrade obligation is created in the event VMware publicly announces new specific features, functionalities or entitlements to software upgrades or license products that have not been made available. VMware generally does not have VSOE of fair value for specified upgrades or license products. Accordingly, revenue recognition is deferred for multiple-element arrangements that entitle a customer to specified upgrades or new license products until the product obligations have been fulfilled.
Unearned revenue substantially consists of customer billings and payments received in advance of revenue recognition for products and services described above.
Foreign Currency Remeasurement
The United States (“U.S.”) dollar is the functional currency of VMware’s foreign subsidiaries. VMware records net gains and losses resulting from foreign exchange transactions as a component of foreign currency exchange gains and losses in other income (expense), net on the consolidated statements of income (loss). These gains and losses are net of those recognized on foreign currency forward contracts (“forward contracts”) not designated as hedges that VMware enters into to partially mitigate its exposure to foreign currency fluctuations. A net gain of
$10 million
and a net loss of
$11 million
were recognized during the years ended
February 2, 2018
and
December 31, 2015
, respectively. Net gains and losses during the year ended December 31, 2016 and
the Transition Period
were not significant.
Cash and Cash Equivalents, Short-Term Investments, and Restricted Cash
VMware invests primarily in money market funds, highly liquid debt instruments of the U.S. government and its agencies, municipal obligations, and U.S. and foreign corporate debt securities. All highly liquid investments with maturities of 90 days or less from date of purchase are classified as cash equivalents and all highly liquid investments with maturities of greater than 90 days from date of purchase as short-term investments. Short-term investments are classified as available-for-sale securities. VMware may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions and strategic investments.
Fixed income investments are reported at market value and unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains or losses
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
are included on the consolidated statements of income (loss). Gains and losses on the sale of fixed income securities issued by the same issuer and of the same type are determined using the first-in first-out (“FIFO”) method. When a determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is realized and is included on the consolidated statements of income (loss).
Cash balances that are restricted pursuant to the terms of various agreements are classified as restricted cash and included in other current assets and other assets in the accompanying consolidated balance sheets. As of
February 2, 2018
and
February 3, 2017
, the total amount of VMware’s restricted cash was
$32 million
and
$19 million
, respectively.
As of
February 2, 2018
, VMware’s total cash, cash equivalents and short-term investments were
$11,653 million
, of which
$8,609 million
was held outside the U.S.
Allowance for Doubtful Accounts
VMware maintains an allowance for doubtful accounts for estimated losses on uncollectible accounts receivable. The allowance for doubtful accounts considers such factors as creditworthiness of VMware’s customers, historical experience, the age of the receivable, and current economic conditions. The allowance for doubtful accounts was insignificant for all periods presented.
Property and Equipment, Net
Property and equipment, net is recorded at cost. Depreciation commences upon placing the asset in service and is recognized on a straight-line basis over the estimated useful life of the assets, as follows:
|
|
|
|
Buildings
|
|
Term of underlying land lease
|
Land improvements
|
|
15 years
|
Furniture and fixtures
|
|
7 years
|
Equipment
|
|
3 to 6 years
|
Software
|
|
3 to 8 years
|
Leasehold improvements
|
|
20 years, not to exceed the shorter of the estimated useful life or remaining lease term
|
Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized on the consolidated statements of income (loss). Repair and maintenance costs that do not extend the economic life of the underlying assets are expensed as incurred.
Capitalized Software Development Costs
Costs associated with internal-use software systems, including those used to provide hosted services, during the application development stage are capitalized. Capitalization of costs begins when the preliminary project stage is completed, management has committed to funding the project, and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalization ceases at the point when the project is substantially complete and is ready for its intended purpose. The capitalized amounts are included in property and equipment, net on the consolidated balance sheets.
Development costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when technological feasibility for the product has been established and ending when the product is available for general release. During the years presented, software development costs incurred for products during the time period between reaching technological feasibility and general release were not material and accordingly were expensed as incurred.
Business Combinations
For business combinations, VMware recognizes the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in an acquiree, which are measured based on the acquisition date fair value. Goodwill is measured as the excess of consideration transferred over the net amounts of the identifiable tangible and intangible assets acquired and the liabilities assumed at the acquisition date.
VMware uses significant estimates and assumptions, including fair value estimates, to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the acquisition date. When those estimates are provisional, VMware refines them as necessary during the measurement period. The measurement period is the period after the acquisition date, not to exceed one year, in which VMware may gather and analyze the necessary information about facts and circumstances that existed as of the acquisition date to adjust the provisional amounts recognized.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Measurement period adjustments are recorded during the period in which the adjustment amount is determined. All other adjustments are recorded to the consolidated statements of income (loss).
Costs to effect an acquisition are recorded in general and administrative expenses on the consolidated statements of income (loss) as the expenses are incurred. Gains recognized for the remeasurement of ownership interest to fair value upon completion of a step acquisition are recorded in other income (expense), net on the consolidated statements of income (loss).
Purchased Intangible Assets and Goodwill
Goodwill is evaluated for impairment during the third quarter of each year or more frequently if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. VMware elected to perform a quantitative assessment of goodwill with respect to its
one
reporting unit. In doing so, VMware compared the enterprise fair value to the carrying amount of the reporting unit, including goodwill. VMware concluded that, to date, there have been
no
impairments of goodwill.
Purchased intangible assets with finite lives are generally amortized over their estimated useful lives using the straight-line method. VMware reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.
VMware previously evaluated goodwill for impairment during the fourth quarter of each year. Effective January 1, 2017, the Company changed its fiscal year end from December 31 of each calendar year to a 52- or 53-week period ending on the Friday nearest to January 31 of each year. During the third quarter of fiscal 2018, VMware changed the date of its annual goodwill impairment test from the fourth quarter to the third quarter. Management believes this voluntary change is preferable as the timing of its annual goodwill impairment test during the third quarter aligns with Dell’s. The goodwill impairment test date change was applied prospectively for the fiscal year beginning February 3, 2017 and had no effect on the Company’s consolidated financial statements as of
February 2, 2018
and
February 3, 2017
.
Derivative Instruments and Hedging Activities
Derivative instruments are measured at fair value and reported as current assets and current liabilities on the consolidated balance sheets, as applicable.
To manage VMware’s exposure to foreign currency fluctuations, VMware enters into forward contracts to hedge a portion of VMware’s net outstanding monetary asset or liability positions. These forward contracts are generally entered into on a monthly basis, with a typical contractual term of
one
month. These forward contracts are not designated as hedging instruments under applicable accounting guidance and therefore are adjusted to fair value through other income (expense), net on the consolidated statements of income (loss).
Additionally, VMware enters into forward contracts which it designates as cash flow hedges to manage the volatility of cash flows that relate to operating expenses denominated in certain foreign currencies. These forward contracts are entered into annually, have maturities of
twelve
months or less, and are adjusted to fair value through accumulated other comprehensive income (loss), net of tax, on the consolidated balance sheets. When the underlying expense transaction occurs, the gains or losses on the forward contract are subsequently reclassified from accumulated other comprehensive loss to the related operating expense line item on the consolidated statements of income (loss).
The Company does not, and does not intend to, use derivative financial instruments for trading or speculative purposes.
Employee Benefit Plans
The Company has a defined contribution program for U.S. employees that complies with Section 401(k) of the Internal Revenue Code. In addition, the Company offers defined contribution plans to employees in certain countries outside the U.S. During the years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
and
the Transition Period
, the Company contributed
$98 million
,
$86 million
,
$78 million
and
$12 million
, respectively, to its defined contribution plans.
Advertising
Advertising costs are expensed as incurred. Advertising expense was
$36 million
,
$21 million
and
$22 million
during the years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
, respectively. Advertising expense during
the Transition Period
was not significant.
Income Taxes
Income taxes as presented herein are calculated on a separate tax return basis, although VMware is included in the consolidated tax return of Dell. However, under certain circumstances, transactions between VMware and Dell are assessed using consolidated tax return rules. Deferred tax assets and liabilities are recognized for the expected future tax consequences of
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax credits are generally recognized as reductions of income tax provisions in the year in which the credits arise. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Tax Cuts and Jobs Act enacted on December 22, 2017 (the “2017 Tax Act”) introduces significant changes to U.S. income tax law including a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries and a reduction of the U.S. statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. During December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows recognition of provisional tax amounts during a measurement period not to extend beyond one year of the enactment date. Due to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, the Company has made reasonable estimates for these effects and recorded provisional amounts on its consolidated financial statements for fiscal 2018. The Company has not yet finalized its calculation of the total foreign earnings and profits for its respective foreign subsidiaries. In addition, the Company does not have sufficient information available, prepared or analyzed to develop a reasonable estimate of the deferred tax liability related to remaining outside basis differences, withholding taxes, certain state taxes, and other items; as such, the Company has not estimated these impacts as permitted by SAB 118.
Provisional taxes relating to the effect of the tax law changes, including the estimated transition tax and the remeasurement of U.S. deferred tax assets and liabilities, among others, were recognized during fiscal 2018. As the Company completes its analysis of the 2017 Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies and relevant authorities, it may make adjustments to provisional amounts that it has recorded that may materially impact its provision for income taxes in the period in which the adjustments are made. The Company expects to complete its analysis within the measurement period permitted under SAB 118.
The Global Intangible Low-Taxed Income (“GILTI”) provisions of the 2017 Tax Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. GAAP allows the Company to choose between an accounting policy which treats the U.S. tax under GILTI provisions as either a current expense, as incurred, or as a component of the Company’s measurement of deferred taxes. Due to the timing of the enactment and the complexity involved in applying the GILTI provisions, the Company does not have sufficient information available, prepared or analyzed to develop a reasonable estimate or establish an accounting policy for GILTI; therefore, it has not recorded any tax impacts associated with GILTI on its consolidated financial statements for fiscal 2018.
VMware is subject to tax in the U.S. and in multiple foreign tax jurisdictions. VMware’s U.S. liquidity needs are currently satisfied using cash flows generated from the Company’s U.S. operations, borrowings, or both. The Company also utilizes a variety of tax planning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. Prior to the year ended February 2, 2018, the Company did not recognize a deferred tax liability related to undistributed foreign earnings of its subsidiaries because such earnings were considered to be indefinitely reinvested in its foreign operations, or were remitted substantially free of U.S. tax. Under the 2017 Tax Act, all foreign earnings are subject to U.S. taxation. As a result, the Company now expects to repatriate a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings. The Company has recorded a provisional estimate for the transition tax on these earnings.
The difference between the income taxes payable or receivable that is calculated on a separate return basis and the amount paid to or received from Dell pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital, generally in the period in which the consolidated return is filed. Refer to Note N for further information.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated using the weighted-average number of shares of VMware’s common stock outstanding during the period. Diluted net income (loss) per share is calculated using the weighted-average number of common shares, including the dilutive effect of equity awards as determined under the treasury stock method. VMware has two classes of common stock, Classes A and B. For purposes of calculating net income (loss) per share, VMware uses the two-class method. As both classes share the same rights in dividends, basic and diluted net income (loss) per share are the same for both classes.
Concentrations of Risks
Financial instruments, which potentially subject VMware to concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash on deposit with banks may exceed the amount of insurance provided on such deposits. These deposits may be redeemed upon demand. VMware places cash and cash equivalents and short-term investments primarily in money market funds and fixed income securities and limits the amount of investment
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
with any single issuer and any single financial institution. VMware holds a diversified portfolio of money market funds and fixed income securities, which primarily consist of various highly liquid debt instruments of the U.S. government and its agencies, municipal obligations, and U.S. and foreign corporate debt securities. VMware’s fixed income investment portfolio is denominated in U.S. dollars and consists of securities with various maturities.
VMware manages counterparty risk through necessary diversification of the investment portfolio among various financial institutions and by entering into derivative contracts with financial institutions that are of high credit quality.
VMware provides credit to its customers, including distributors, original equipment manufacturers (“OEMs”), resellers, and end-user customers, in the normal course of business. To reduce credit risk, VMware performs periodic credit evaluations, which consider the customer’s payment history and financial stability.
As of
February 2, 2018
and
February 3, 2017
, one distributor accounted for
18%
and
20%
, respectively, of VMware’s accounts receivable balance, and another distributor accounted for
17%
and
13%
, respectively, of VMware’s accounts receivable balance. A third distributor accounted for
11%
of VMware’s accounts receivable balance as of
February 2, 2018
and
February 3, 2017
.
One
distributor accounted for
15%
of revenue in each of the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
, respectively, and
16%
of revenue during
the Transition Period
. Another distributor accounted for
11%
of revenue during the year ended
February 2, 2018
and
12%
of revenue in each of the
years ended
December 31, 2016
and
December 31, 2015
and
the Transition Period
, respectively. A third distributor accounted for
10%
of revenue in each of the
years ended
February 2, 2018
and
December 31, 2016
and
the Transition Period
, respectively, and
11%
of revenue during the year ended
December 31, 2015
.
Accounting for Stock-Based Compensation
VMware restricted stock, including performance stock unit (“PSU”) awards, are valued based on the Company’s stock price on the date of grant. For those awards expected to vest which only contain a service vesting feature, compensation cost is recognized on a straight-line basis over the awards’ requisite service periods.
PSU awards will vest if certain VMware-designated performance targets, including in certain cases a time-based or market-based vesting component, are achieved. All PSU awards also include a time-based vesting component. If minimum performance thresholds are achieved, each PSU award will convert into VMware’s Class A common stock at a defined ratio depending on the degree of achievement of the performance target designated by each individual award. If minimum performance thresholds are not achieved, then no shares will be issued. Based upon the expected levels of achievement, stock-based compensation is recognized on a straight-line basis over the PSUs’ requisite service periods. The expected levels of achievement are reassessed over the requisite service periods and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted and recorded on the consolidated statements of income (loss) and the remaining unrecognized stock-based compensation is recognized over the remaining requisite service period.
The Black-Scholes option-pricing model is used to determine the fair value of VMware’s stock option awards and Employee Stock Purchase Plan (the “ESPP”) shares. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected term and risk-free interest rates. These assumptions reflect the Company’s best estimates, but these items involve uncertainties based on market and other conditions outside of the Company’s control.
New Accounting Pronouncements
Topic 606, Revenue from Contracts with Customers
During May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). In 2016, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12, which provide interpretive clarifications on the guidance in Topic 606 (collectively, “Topic 606”). The updated revenue standard replaces all existing revenue recognition guidance under GAAP and establishes common principles for recognizing revenue for all industries. It also provides guidance on the accounting for costs to fulfill or obtain a customer contract. The core principle underlying the updated standard is the recognition of revenue based on consideration expected to be entitled from the transfer of goods or services to a customer. The updated standard is effective for interim and annual periods beginning after December 15, 2017 and permits the use of either the full retrospective or cumulative effect transition method.
VMware plans to adopt Topic 606 using the full retrospective transition method when it becomes effective for the Company in the first quarter of fiscal 2019. Currently, VMware defers license revenue related to the sale of perpetual licenses in the event certain revenue recognition criteria are not met. This would include transactions that offer undelivered future products including emerging products that are offered as part of product promotions, where VSOE of fair value has not been established.
However, under Topic 606, VMware would generally expect that substantially all license revenue related to the sale of perpetual licenses
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
will be recognized upon delivery. In addition, under Topic 606, revenue from on-premise license sales to OEMs or rental of on-premise licenses to the Company’s VMware Cloud Provider Program (“VCPP”) partners will be recognized when the sale or usage occurs. As a result, for periods where reporting of sales or consumption by OEMs or VCPP partners, respectively, are not available, revenue will be recognized based on estimated sales or usage.
The net impact of adopting Topic 606 to license and total revenue is not expected to be material for the year ended February 2, 2018. Deferred license revenue as of February 2, 2018 is expected to decrease by approximately
$350 million
, primarily due to the acceleration of revenue recognition for on-premise license sales that were deferred under previous accounting guidance, and due to prepayments on contracts with various cancellation rights. In limited situations, VMware’s contracts include termination clauses allowing customers to terminate without penalty. Under Topic 606, prepayments received from customers for contracts, or a portion of a contract, subject to termination without penalty will be recorded as a customer deposit in accrued expenses and other on the consolidated balance sheets. Under previous guidance, prepayments received from customers were recorded in unearned revenue on the consolidated balance sheets.
Topic 606 is also expected to impact the timing and recognition of costs to obtain contracts with customers, such as commissions. Incremental costs to obtain contracts with customers are deferred and recognized over the expected period of benefit. As a result, additional commission costs will be deferred and amortized over a longer duration. Other assets are expected to increase by approximately
$600 million
as of February 2, 2018 due to the treatment of commission costs under Topic 606. In addition, sales and marketing expense under Topic 606 is expected to decrease by approximately
$90 million
for the year ended February 2, 2018, primarily due to the treatment of commission costs.
VMware is continuing to evaluate the effect that Topic 606 will have on its consolidated financial statements, including the impact on income tax expense and related balance sheet accounts. In preparation for the adoption of the updated standard, VMware has implemented a new revenue recognition software to enable the Company to perform the accounting assessment related to the standard and is in the process of implementing internal controls. The preliminary adjustments under Topic 606 may differ from the final adjusted consolidated financial statements for fiscal 2018.
ASU No. 2016-02, Leases
During February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The updated standard also requires additional disclosure regarding leasing arrangements. It is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption, with early adoption permitted. VMware is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures, and expects that most of its lease commitments will be subject to the updated standard and recognized as lease liabilities and right-of-use assets upon adoption.
ASU No. 2016-16, Income Taxes
During October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires entities to recognize at the transaction date the income tax consequences of intra-entity asset transfers. Previous guidance required the tax effects from intra-entity asset transfers to be deferred until that asset is sold to a third party or recovered through use. The updated standard is effective for annual and interim periods beginning after December 15, 2017 and requires a modified retrospective transition method. Historically, VMware transferred intellectual property between its legal entities. While VMware is continuing to assess the potential effects, transfers of intellectual property between its legal entities occurring after the adoption of the updated standard could have a material impact on the Company’s consolidated statements of income (loss) in the period that the transfer occurs.
ASU No. 2016-09, Compensation
VMware adopted ASU No. 2016-09, Compensation–Stock Compensation (Topic 718), on a prospective basis, effective February 4, 2017. Prior periods have not been reclassified to conform to the fiscal 2018 presentation. Net excess tax benefits recognized in connection with stock-based awards are included in the income tax provision on the consolidated statements of income (loss). Net excess tax benefits recognized during the
year ended
February 2, 2018
were
$106 million
. Prior to adopting the updated standard, such amounts were recognized in additional paid-in capital on the Company’s consolidated balance sheets.
Additionally, all tax-related cash flows resulting from stock-based awards are reported as operating activities in the statements of cash flows. Prior to adopting the updated standard, excess tax benefits were reported as a cash inflow from financing activities in the statements of cash flows.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
B. Related Parties
The information provided below includes a summary of the transactions entered into with Dell and Dell’s consolidated subsidiaries, including EMC (collectively, “Dell”) from the effective date of the Dell Acquisition through
February 2, 2018
. Transactions prior to the effective date of the Dell Acquisition reflect transactions only with EMC and its consolidated subsidiaries.
Transactions with Dell
VMware and Dell engaged in the following ongoing intercompany transactions, which resulted in revenue and receipts and unearned revenue for VMware:
|
|
•
|
Pursuant to OEM and reseller arrangements, Dell integrates or bundles VMware’s products and services with Dell’s products and sells them to end users. Dell also acts as a distributor, purchasing VMware’s standalone products and services for resale to end-user customers through VMware-authorized resellers. Revenue under these arrangements is presented net of related marketing development funds and rebates paid to Dell.
|
|
|
•
|
Dell purchases products and services from VMware for its internal use.
|
|
|
•
|
VMware provides professional services to end users based upon contractual agreements with Dell.
|
|
|
•
|
Pursuant to an ongoing distribution agreement, VMware acts as the selling agent for certain products and services of Pivotal Software, Inc. (“Pivotal”), a subsidiary of Dell, in exchange for an agency fee. Under this agreement, cash is collected from the end user by VMware and remitted to Pivotal, net of the contractual agency fee.
|
|
|
•
|
VMware provides various services to Pivotal. Support costs incurred by VMware are reimbursed to VMware and are recorded as a reduction to the costs incurred by VMware.
|
Dell purchases VMware products and services directly from VMware, as well as through VMware’s channel partners. Information about VMware’s revenue and receipts, and unearned revenue from such arrangements, for the periods presented consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue and Receipts
|
|
Unearned Revenue
|
|
|
|
Transition Period
|
|
|
|
For the Year Ended
|
|
January 1 to
|
|
As of
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
February 2,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
|
2018
|
|
2017
|
Reseller revenue
|
$
|
1,220
|
|
|
$
|
508
|
|
|
$
|
301
|
|
|
$
|
44
|
|
|
$
|
1,248
|
|
|
$
|
616
|
|
Internal-use revenue
|
40
|
|
|
35
|
|
|
17
|
|
|
7
|
|
|
10
|
|
|
18
|
|
Professional services revenue
|
105
|
|
|
115
|
|
|
100
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Agency fee revenue
|
2
|
|
|
4
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reimbursement for services to Pivotal
|
—
|
|
|
1
|
|
|
4
|
|
|
—
|
|
|
n/a
|
|
|
n/a
|
|
VMware and Dell engaged in the following ongoing intercompany transactions, which resulted in costs to VMware:
|
|
•
|
VMware purchases and leases products and purchases services from Dell.
|
|
|
•
|
From time to time, VMware and Dell enter into agreements to collaborate on technology projects, and VMware pays Dell for services provided to VMware by Dell related to such projects.
|
|
|
•
|
In certain geographic regions where VMware does not have an established legal entity, VMware contracts with Dell subsidiaries for support services and support from Dell personnel who are managed by VMware. The costs incurred by Dell on VMware’s behalf related to these employees are charged to VMware with a mark-up intended to approximate costs that would have been incurred had VMware contracted for such services with an unrelated third party. These costs are included as expenses on VMware’s consolidated statements of income (loss) and primarily include salaries, benefits, travel and occupancy expenses. Dell also incurs certain administrative costs on VMware’s behalf in the U.S. that are recorded as expenses on VMware’s consolidated statements of income (loss).
|
|
|
•
|
From time to time, VMware invoices end users on behalf of Dell for certain services rendered by Dell. Cash related to these services is collected from the end user by VMware and remitted to Dell.
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Information about VMware’s costs from such arrangements
during the periods presented
consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Purchases and leases of products and purchases of services
|
$
|
142
|
|
|
$
|
97
|
|
|
$
|
63
|
|
|
$
|
14
|
|
Collaborative technology project costs
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Dell subsidiary support and administrative costs
|
123
|
|
|
105
|
|
|
100
|
|
|
13
|
|
VMware also purchases Dell products through Dell’s channel partners. Purchases of Dell products through Dell’s channel partners were not significant during the periods presented.
From time to time, VMware and Dell also enter into joint marketing and development arrangements, for which both parties may incur costs.
During the second quarter of fiscal 2018, VMware acquired Wavefront, Inc. (“Wavefront”). Upon closing of the acquisition, Dell was paid
$20 million
in cash for its non-controlling ownership interest in Wavefront.
Dell Financial Services (“DFS”)
DFS provided financing to certain of VMware’s end customers based on the customer’s discretion. Upon acceptance of the financing arrangement by both VMware’s end customer and DFS, amounts classified as trade accounts receivable are reclassified to due from related parties, net on the consolidated balance sheets. Revenue recognized on transactions financed through DFS was recorded net of financing fees, which were
$25 million
during the
year ended
February 2, 2018
and were not significant during the
year ended
December 31, 2016
and
the Transition Period
.
EMC Equity Awards Held by VMware Employees
In connection with the Dell Acquisition, vesting was accelerated for all outstanding EMC stock options and restricted stock units and stock options were automatically exercised on the last trading day prior to the effective date of the merger. VMware’s portion of the expense associated with accelerated EMC equity awards held by VMware employees was
$7 million
and was included within stock-based compensation expense on the consolidated statements of income (loss) during the year ended
December 31, 2016
.
Due To/From Related Parties, Net
Amounts due to and from related parties, net
as of the periods presented
consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
February 3,
|
|
2018
|
|
2017
|
Due (to) related parties
|
$
|
(106
|
)
|
|
$
|
(85
|
)
|
Due from related parties
|
638
|
|
|
178
|
|
Due from related parties, net
|
$
|
532
|
|
|
$
|
93
|
|
Amounts included in due from related parties, net, excluding DFS and tax obligations, are generally settled in cash within
60 days
of each quarter-end.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Purchase Arrangements with Dell
From time to time, VMware enters into stock purchase arrangements with Dell. The following table summarizes purchases of VMware Class A common stock from Dell, pursuant to stock purchase agreements entered into on December 15, 2016 and March 29, 2017 (aggregate purchase price in millions, shares in thousands):
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
February 2,
|
|
December 31,
|
|
2018
|
|
2016
|
Aggregate purchase price
|
$
|
725
|
|
|
$
|
375
|
|
Class A common shares repurchased
(1)
|
7,572
|
|
|
4,775
|
|
Weighted-average price per share
|
$
|
95.75
|
|
|
$
|
78.53
|
|
(1)
The aggregate number of shares purchased was determined based upon a volume-weighted average price during a defined period, less an agreed upon discount.
VMware did
not
repurchase any shares of its Class A common stock from Dell during
the Transition Period
.
Notes Payable to Dell
On January 21, 2014, VMware entered into a note exchange agreement with Dell providing for the issuance of
three
promissory notes in the aggregate principal amount of
$1,500 million
, which consisted of outstanding principal due on the following dates:
$680 million
due
May 1, 2018
,
$550 million
due
May 1, 2020
and
$270 million
due
December 1, 2022
.
On August 21, 2017, VMware repaid two of the notes payable to Dell in the aggregate principal amount of
$1,230 million
, representing repayment of the note due
May 1, 2018
at par value and repayment of the note due
May 1, 2020
at a discount. During the
year ended
February 2, 2018
, VMware recognized a gain on extinguishment of debt of
$6 million
, which was recorded in other income (expense), net on the consolidated statements of income (loss). The remaining note payable of
$270 million
due
December 1, 2022
may be prepaid without penalty or premium.
Interest is payable quarterly in arrears, at the annual rate of
1.75%
. During the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
, interest expense of
$16 million
,
$26 million
and
$26 million
, respectively, was recognized. Interest expense during
the Transition Period
was not significant.
Pivotal
In April 2016, VMware contributed
$20 million
in cash to Pivotal in exchange for additional preferred equity interests in Pivotal. VMware’s ownership interest in Pivotal was
20%
and
21%
as of
February 2, 2018
and
February 3, 2017
, respectively. This strategic investment is accounted for using the cost method.
C. Business Combinations, Definite-Lived Intangible Assets, Net and Goodwill
Business Combinations
Fiscal 2018
Acquisition of Velocloud Networks, Inc.
During the fourth quarter of fiscal 2018, VMware completed the acquisition of Velocloud Networks, Inc. (“Velocloud”), a provider of cloud-delivered software-defined wide-area network (SD-WAN) technology for enterprises and service providers. VMware acquired Velocloud to build on its network virtualization platform, VMware NSX, and to expand its networking portfolio. The total purchase price was
$449 million
, net of cash acquired of
$24 million
. The purchase price primarily included
$142 million
of identifiable intangible assets and
$326 million
of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets primarily include completed technology of
$87 million
and customer contracts of
$44 million
, with estimated useful lives of
six
to
seven
years.
The fair value of assumed unvested equity awards attributed to post-combination services was
$30 million
and will be expensed over the remaining requisite service periods on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.
The initial allocation of the purchase price was based on a preliminary valuation and assumptions and is subject to change within the measurement period. VMware expects to finalize the allocation of the purchase price as soon as practicable and no later than one year from the acquisition date.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Prior to the closing of the acquisition, VMware held an ownership interest in Velocloud. Upon completion of the step acquisition, VMware recognized a gain of
$8 million
in other income (expense), net for the remeasurement of its previously held ownership interest to fair value, which was
$12 million
.
The pro forma financial information assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.
Other 2018 Business Combinations
During the second quarter of fiscal 2018, VMware completed the acquisitions of Wavefront and Apteligent, Inc., which were not material to the consolidated financial statements. The aggregate purchase price for the two acquisitions was
$238 million
, net of cash acquired of
$35 million
. The aggregate purchase price included
$36 million
of identifiable intangible assets and
$238 million
of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets primarily relate to purchased technology, with estimated useful lives of
five years
. The fair value of assumed unvested equity awards attributed to post-combination services was
$37 million
and will be expensed over the remaining requisite service periods on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.
Prior to the closing of the acquisition, VMware held an ownership interest in Wavefront. Upon completion of the step acquisition, VMware recognized a gain of
$34 million
in other income (expense), net for the remeasurement of its previously held ownership interest to fair value, which was
$49 million
. Upon closing of the acquisition, Dell was paid
$20 million
in cash for its non-controlling ownership interest in Wavefront.
The initial allocation of the purchase price was based on a preliminary valuation and assumptions and is subject to change within the measurement period. VMware expects to finalize the allocation of the purchase price as soon as practicable and no later than one year from the acquisition date.
The pro forma financial information assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.
Fiscal 2016
Acquisition of Arkin Net, Inc.
On June 21, 2016, VMware acquired all of the outstanding shares of Arkin Net, Inc. (“Arkin”) for approximately
$67 million
of cash, net of liabilities assumed. VMware acquired 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. The aggregate purchase price included
$39 million
of goodwill and
$25 million
of identifiable intangible assets. The identifiable intangible assets acquired were primarily related to purchased technology with estimated useful lives of
four to five years
. Goodwill was
not
deductible for U.S. income tax purposes.
The pro forma 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 revenue and earnings generated during the current year, were not material for disclosure purposes.
Prior to the closing of the acquisition on June 21, 2016, Dell owned approximately
16%
of the outstanding shares of Arkin. As a result of the acquisition, cash paid to Dell was approximately
$13 million
.
Definite-Lived Intangible Assets, Net
The following table summarizes the changes in the carrying amount of definite-lived intangible assets
during the periods presented
(table in millions):
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
February 3,
|
|
2018
|
|
2017
|
Balance, beginning of the year
|
$
|
507
|
|
|
$
|
517
|
|
Additions to intangible assets related to business combinations
|
178
|
|
|
—
|
|
Amortization expense
|
(137
|
)
|
|
(10
|
)
|
Balance, end of the year
|
$
|
548
|
|
|
$
|
507
|
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of the periods presented
, definite-lived intangible assets consisted of the following (amounts in tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2018
|
|
Weighted-Average Useful Lives
(in years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
Purchased technology
|
6.4
|
|
$
|
750
|
|
|
$
|
(466
|
)
|
|
$
|
284
|
|
Leasehold interest
|
34.9
|
|
149
|
|
|
(29
|
)
|
|
120
|
|
Customer relationships and customer lists
|
7.8
|
|
177
|
|
|
(74
|
)
|
|
103
|
|
Trademarks and tradenames
|
8.4
|
|
70
|
|
|
(31
|
)
|
|
39
|
|
Other
|
5.7
|
|
5
|
|
|
(3
|
)
|
|
2
|
|
Total definite-lived intangible assets
|
|
|
$
|
1,151
|
|
|
$
|
(603
|
)
|
|
$
|
548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2017
|
|
Weighted-Average Useful Lives
(in years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
Purchased technology
|
6.5
|
|
$
|
641
|
|
|
$
|
(366
|
)
|
|
$
|
275
|
|
Leasehold interest
|
34.9
|
|
149
|
|
|
(24
|
)
|
|
125
|
|
Customer relationships and customer lists
|
8.3
|
|
132
|
|
|
(64
|
)
|
|
68
|
|
Trademarks and tradenames
|
8.7
|
|
61
|
|
|
(23
|
)
|
|
38
|
|
Other
|
5.7
|
|
4
|
|
|
(3
|
)
|
|
1
|
|
Total definite-lived intangible assets
|
|
|
$
|
987
|
|
|
$
|
(480
|
)
|
|
$
|
507
|
|
Amortization expense on definite-lived intangible assets was
$137 million
,
$129 million
,
$145 million
and
$10 million
during the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
and
the Transition Period
, respectively.
Based on intangible assets recorded as of
February 2, 2018
and assuming no subsequent additions, dispositions or impairment of underlying assets, the remaining estimated annual amortization expense over the next five fiscal years and thereafter is expected to be as follows (table in millions):
|
|
|
|
|
2019
|
148
|
|
2020
|
123
|
|
2021
|
69
|
|
2022
|
53
|
|
2023
|
30
|
|
Thereafter
|
125
|
|
Total
|
$
|
548
|
|
Goodwill
The following table summarizes the changes in the carrying amount of goodwill during the
during the periods presented
(table in millions):
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
February 3,
|
|
2018
|
|
2017
|
Balance, beginning of the year
|
$
|
4,032
|
|
|
$
|
4,032
|
|
Increase in goodwill related to business combinations
|
565
|
|
|
—
|
|
Balance, end of the year
|
$
|
4,597
|
|
|
$
|
4,032
|
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
D. Realignment and Loss on Disposition
Disposition of VMware vCloud Air Business
During the second quarter of fiscal 2018, VMware completed the sale of its VMware vCloud Air business (“vCloud Air”) to OVH US LLC (“OVH”). Losses recognized in connection with this transaction were
$90 million
during the
year ended February 2, 2018
and were recorded in realignment and loss on disposition on the consolidated statements of income (loss). Losses recognized on the disposition of vCloud Air include the impairment of fixed assets identified as part of the sale, as well as the costs associated with certain transition services, which primarily include employee-related expenses and costs associated with data-center colocation services. Transition services are to be provided over a period of
18 months
, starting from the date of the sale.
In connection with the disposition of vCloud Air,
$35 million
of total unearned revenue, which included
$18 million
of unearned license revenue, was transferred to OVH during the second quarter of fiscal 2018.
Realignment
On January 22, 2016, VMware approved a plan to streamline its operations, with plans to reinvest the associated savings in field, technical and support resources related to growth products. As a result of these actions, approximately
800
positions were eliminated during the
year ended December 31, 2016
. VMware recognized
$50 million
of severance-related realignment expenses during the
year ended December 31, 2016
on the consolidated statements of income (loss). Additionally, VMware consolidated certain facilities as part of this plan, which resulted in the recognition of
$2 million
of related expenses during the
year ended December 31, 2016
on the consolidated statements of income (loss). Actions associated with this plan were substantially completed by December 31, 2016.
During the
year ended
December 31, 2015
, VMware eliminated approximately
380
positions across all major functional groups and geographies to streamline its operations. As a result of these actions,
$23 million
of realignment expenses were recognized during the year ended December 31, 2015 on the consolidated statements of income (loss).
The following table summarizes the activity for the accrued realignment expenses for the period presented (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
|
Balance as of
January 1, 2016
|
|
Realignment
|
|
Utilization
|
|
Balance as of
December 31, 2016
|
Severance-related costs
|
$
|
3
|
|
|
$
|
50
|
|
|
$
|
(52
|
)
|
|
$
|
1
|
|
Costs to exit facilities
|
—
|
|
|
2
|
|
|
(1
|
)
|
|
1
|
|
Total
|
$
|
3
|
|
|
$
|
52
|
|
|
$
|
(53
|
)
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2015
|
|
Balance as of
January 1, 2015
|
|
Realignment
|
|
Utilization
|
|
Balance as of
December 31, 2015
|
Severance-related costs
|
$
|
8
|
|
|
$
|
23
|
|
|
$
|
(28
|
)
|
|
$
|
3
|
|
E. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding and potentially dilutive securities outstanding during the period, as calculated using the treasury stock method. Potentially dilutive securities primarily include unvested restricted stock units, including performance stock units, and stock options, including purchase options under VMware’s employee stock purchase plan. Securities are excluded from the computation of diluted net income (loss) per share if their effect would be anti-dilutive. VMware uses the two-class method to calculate net income (loss) per share as both classes share the same rights in dividends, therefore basic and diluted earnings per share are the same for both classes.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the computations of basic and diluted net income (loss) per share
during the periods presented
(table in millions, except per share amounts and shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Net income (loss)
|
$
|
570
|
|
|
$
|
1,186
|
|
|
$
|
997
|
|
|
$
|
(8
|
)
|
Gain on stock purchase with Dell, net of tax
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
Net income (loss), as adjusted
|
$
|
570
|
|
|
$
|
1,178
|
|
|
$
|
997
|
|
|
$
|
(8
|
)
|
Weighted-average shares, basic for Classes A and B
|
406,738
|
|
|
420,520
|
|
|
424,003
|
|
|
408,625
|
|
Effect of stock purchase with Dell
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
Effect of other dilutive securities
|
6,630
|
|
|
3,467
|
|
|
2,544
|
|
|
—
|
|
Weighted-average shares, diluted for Classes A and B
|
413,368
|
|
|
423,994
|
|
|
426,547
|
|
|
408,625
|
|
Net income (loss) per weighted-average share, basic for Classes A and B
|
$
|
1.40
|
|
|
$
|
2.82
|
|
|
$
|
2.35
|
|
|
$
|
(0.02
|
)
|
Net income (loss) per weighted-average share, diluted for Classes A and B
(1)
|
$
|
1.38
|
|
|
$
|
2.78
|
|
|
$
|
2.34
|
|
|
$
|
(0.02
|
)
|
(1)
During the Transition Period, VMware incurred a net loss. As a result, all potentially dilutive securities were anti-dilutive and excluded from the computation of diluted net loss per share.
The following table sets forth the weighted-average common share equivalents of Class A common stock that were excluded from the diluted net income (loss) per share calculations
during the periods presented
, because their effect would have been anti-dilutive (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Anti-dilutive securities:
|
|
|
|
|
|
|
|
Employee stock options
|
51
|
|
|
1,817
|
|
|
2,219
|
|
|
2,353
|
|
Restricted stock units
|
140
|
|
|
652
|
|
|
249
|
|
|
3,259
|
|
Total
|
191
|
|
|
2,469
|
|
|
2,468
|
|
|
5,612
|
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F. Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments
as of the periods presented
consisted of the following (tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2018
|
|
Cost or Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Aggregate Fair Value
|
Cash
|
$
|
423
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
423
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money-market funds
|
$
|
5,460
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,460
|
|
U.S. and foreign corporate debt securities
|
88
|
|
|
—
|
|
|
—
|
|
|
88
|
|
Total cash equivalents
|
$
|
5,548
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,548
|
|
Short-term investments:
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
$
|
965
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
957
|
|
U.S. and foreign corporate debt securities
|
4,503
|
|
|
1
|
|
|
(31
|
)
|
|
4,473
|
|
Foreign governments and multi-national agency obligations
|
99
|
|
|
—
|
|
|
(1
|
)
|
|
98
|
|
Mortgage-backed securities
|
123
|
|
|
—
|
|
|
(2
|
)
|
|
121
|
|
Marketable available-for-sale equity securities
|
15
|
|
|
18
|
|
|
—
|
|
|
33
|
|
Total short-term investments
|
$
|
5,705
|
|
|
$
|
19
|
|
|
$
|
(42
|
)
|
|
$
|
5,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2017
|
|
Cost or Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Aggregate Fair Value
|
Cash
|
$
|
720
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
720
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money-market funds
|
$
|
2,471
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,471
|
|
Time deposits
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Municipal obligations
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total cash equivalents
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,500
|
|
Short-term investments:
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
$
|
733
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
730
|
|
U.S. and foreign corporate debt securities
|
3,884
|
|
|
3
|
|
|
(16
|
)
|
|
3,871
|
|
Foreign governments and multi-national agency obligations
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Municipal obligations
|
350
|
|
|
—
|
|
|
—
|
|
|
350
|
|
Asset-backed securities
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Mortgage-backed securities
|
188
|
|
|
—
|
|
|
(2
|
)
|
|
186
|
|
Total short-term investments
|
$
|
5,191
|
|
|
$
|
3
|
|
|
$
|
(21
|
)
|
|
$
|
5,173
|
|
Other assets:
|
|
|
|
|
|
|
|
Marketable available-for-sale equity securities
|
$
|
15
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
22
|
|
During the first quarter of fiscal 2018, marketable available-for-sale equity securities were reclassified to short-term investments on the consolidated balance sheets, as restrictions on the Company’s ability to sell the common stock lapsed
within twelve months
of the balance sheet date. As of
February 3, 2017
, these securities were classified as other assets on the consolidated balance sheets.
VMware evaluated its available-for-sale investments as of
February 2, 2018
and
February 3, 2017
for other-than-temporary declines in fair value and did not consider any to be other-than-temporarily impaired. The realized gains and losses on
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
investments during the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
and
the Transition Period
were not significant.
Unrealized losses on cash equivalents and available-for-sale investments, which have been in a net loss position for less than twelve months as of the periods presented, were classified by sector as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2018
|
|
February 3, 2017
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
U.S. and foreign corporate debt securities
|
$
|
3,100
|
|
|
$
|
(22
|
)
|
|
$
|
2,287
|
|
|
$
|
(16
|
)
|
As of the periods presented, unrealized losses on cash equivalents and available-for-sale investments in the other investment categories, which have been in a net loss position for less than twelve months, were not significant. Unrealized losses on cash equivalents and available-for-sale investments, which have been in a net loss position for twelve months or greater, were not significant as of
February 2, 2018
and
February 3, 2017
.
Contractual Maturities
The contractual maturities of fixed income securities included in short-term investments on the consolidated balance sheets and held as of
February 2, 2018
, consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
Amortized
Cost Basis
|
|
Aggregate
Fair Value
|
Due within one year
|
$
|
2,164
|
|
|
$
|
2,160
|
|
Due after 1 year through 5 years
|
3,351
|
|
|
3,318
|
|
Due after 5 years through 10 years
|
95
|
|
|
93
|
|
Due after 10 years
|
80
|
|
|
78
|
|
Total fixed income securities
|
$
|
5,690
|
|
|
$
|
5,649
|
|
G. Debt
Long-term Debt
On August 21, 2017, VMware issued
three
series of unsecured senior notes (“Senior Notes”) pursuant to a public debt offering. The proceeds from the issuance were
$3,961 million
, net of debt discount of
$9 million
and debt issuance costs of
$30 million
.
The carrying value of the Senior Notes as of
February 2, 2018
was as follows (amounts in millions):
|
|
|
|
|
|
|
|
February 2,
|
|
Effective Interest Rate
|
|
2018
|
|
Long-term debt:
|
|
|
|
2.30% Senior Note Due August 21, 2020
|
$
|
1,250
|
|
|
2.56%
|
2.95% Senior Note Due August 21, 2022
|
1,500
|
|
|
3.17%
|
3.90% Senior Note Due August 21, 2027
|
1,250
|
|
|
4.05%
|
Total principal amount
|
4,000
|
|
|
|
Less: unamortized discount
|
(8
|
)
|
|
|
Less: unamortized debt issuance costs
|
(28
|
)
|
|
|
Net carrying amount
|
$
|
3,964
|
|
|
|
Interest is payable semiannually in arrears, on
February 21
and
August 21
of each year. During the
year ended
February 2, 2018
,
$58 million
of interest expense, which included amortization of discount and issuance costs, was recognized on the consolidated statements of income (loss). The discount and issuance costs are amortized over the term of the Senior Notes on a straight-line basis, which approximates the effective interest method.
The Senior Notes are redeemable in whole at any time or in part from time to time at VMware’s option, subject to a make-whole premium. In addition, upon the occurrence of certain change-of-control triggering events and certain downgrades of the
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ratings on the Senior Notes, VMware may be required to repurchase the notes at a repurchase price equal to
101%
of the aggregate principal plus any accrued and unpaid interest on the date of purchase. The Senior Notes rank equally in right of payment with VMware’s other unsecured and unsubordinated indebtedness. The Senior Notes also include restrictive covenants that, in certain circumstances, limit VMware’s ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate, merge, sell or otherwise dispose of all or substantially all of VMware’s assets.
Refer to Note B for information regarding the notes payable to Dell.
Revolving Credit Facility
On September 12, 2017, VMware entered into an unsecured credit agreement establishing a revolving credit facility (“Credit Facility”) with a syndicate of lenders that provides the Company with a borrowing capacity of up to
$1,000 million
, which may be used for general corporate purposes. Commitments under the Credit Facility are available for a period of
five
years, which may be extended, subject to the satisfaction of certain conditions, by up to
two
one
-year periods.
A
s of
February 2, 2018
, there were
no
outstanding borrowings under the Credit Facility. The credit agreement contains certain representations, warranties and covenants.
Commitment fees, interest rates and other terms of borrowing under the Credit Facility may vary based on VMware’s external
credit ratings. The amount paid in connection with the ongoing commitment fee, which is payable quarterly in arrears, was not significant duri
ng the
year ended
February 2, 2018
.
H. Fair Value Measurements
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Certain financial assets and liabilities are measured at fair value on a recurring basis. VMware determines 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 noted as being 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; and
|
|
|
•
|
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.
|
VMware’s fixed income securities were primarily classified as Level 2, with the exception of some of the U.S. Government and agency obligations that were classified as Level 1. Additionally, VMware’s Level 2 classification included forward contracts, notes payable to Dell and the Senior Notes.
As of
February 2, 2018
and
February 3, 2017
, VMware’s Level 2 investment securities were generally priced using non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques.
VMware did not have any significant assets or liabilities that were classified as Level 3 of the fair value hierarchy for the periods presented, and there have been no transfers between fair value measurement levels
during the periods presented
.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables set forth the fair value hierarchy of VMware’s cash equivalents, short-term investments and derivatives that were required to be measured at fair value
as of the periods presented
(tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2018
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
|
Money-market funds
|
$
|
5,460
|
|
|
$
|
—
|
|
|
$
|
5,460
|
|
U.S. and foreign corporate debt securities
|
—
|
|
|
88
|
|
|
88
|
|
Total cash equivalents
|
$
|
5,460
|
|
|
$
|
88
|
|
|
$
|
5,548
|
|
Short-term investments:
|
|
|
|
|
|
U.S. Government and agency obligations
|
$
|
684
|
|
|
$
|
273
|
|
|
$
|
957
|
|
U.S. and foreign corporate debt securities
|
—
|
|
|
4,473
|
|
|
4,473
|
|
Foreign governments and multi-national agency obligations
|
—
|
|
|
98
|
|
|
98
|
|
Mortgage-backed securities
|
—
|
|
|
121
|
|
|
121
|
|
Marketable available-for-sale equity securities
|
33
|
|
|
—
|
|
|
33
|
|
Total short-term investments
|
$
|
717
|
|
|
$
|
4,965
|
|
|
$
|
5,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2017
|
|
Level 1
|
|
Level 2
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
Money-market funds
|
$
|
2,471
|
|
|
$
|
—
|
|
|
$
|
2,471
|
|
Time deposits
|
—
|
|
|
26
|
|
|
26
|
|
Municipal obligations
|
—
|
|
|
3
|
|
|
3
|
|
Total cash equivalents
|
$
|
2,471
|
|
|
$
|
29
|
|
|
$
|
2,500
|
|
Short-term investments:
|
|
|
|
|
|
U.S. Government and agency obligations
|
$
|
445
|
|
|
$
|
285
|
|
|
$
|
730
|
|
U.S. and foreign corporate debt securities
|
—
|
|
|
3,871
|
|
|
3,871
|
|
Foreign governments and multi-national agency obligations
|
—
|
|
|
32
|
|
|
32
|
|
Municipal obligations
|
—
|
|
|
350
|
|
|
350
|
|
Asset-backed securities
|
—
|
|
|
4
|
|
|
4
|
|
Mortgage-backed securities
|
—
|
|
|
186
|
|
|
186
|
|
Total short-term investments
|
$
|
445
|
|
|
$
|
4,728
|
|
|
$
|
5,173
|
|
Other current assets:
|
|
|
|
|
|
Derivative due to stock purchase with Dell
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
9
|
|
Other assets:
|
|
|
|
|
|
Marketable available-for-sale equity securities
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
The notes payable to Dell and the Senior Notes were not adjusted to fair value. The fair value of the notes payable to Dell was approximately
$246 million
and
$1,492 million
as of
February 2, 2018
and
February 3, 2017
, respectively. The fair value of the Senior Notes was approximately
$3,863 million
as of
February 2, 2018
. Fair value for both the notes payable to Dell and the Senior Notes was estimated primarily based on observable market interest rates (Level 2 inputs).
VMware offers a deferred compensation plan for eligible employees, which allows participants to defer payment for part or all of their compensation. The net impact to the consolidated statements of income (loss) is not significant since changes in the fair value of the assets substantially offset changes in the fair value of the liabilities. As such, assets and liabilities associated with this plan have not been included in the above tables. Assets associated with this plan were the same as the liabilities at approximately
$60 million
and
$36 million
as of
February 2, 2018
and
February 3, 2017
, respectively, and are included in other assets and other liabilities on the consolidated balance sheets.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
VMware holds strategic investments in its portfolio accounted for using the cost method. These strategic investments are periodically assessed for other-than-temporary impairment. VMware uses Level 3 inputs as part of its impairment analysis, including pre- and post-money valuations of recent financing events, the impact of financing events on its ownership percentages, and other available information relevant to the issuer’s historical and forecasted performance. The estimated fair value of these investments is considered in VMware’s impairment review if any events or changes in circumstances occur that might have a significant adverse effect on their value. If VMware determines that an other-than-temporary impairment has occurred, VMware writes down the investment to its fair value.
During the
years ended
February 2, 2018
and
December 31, 2015
and
the Transition Period
, VMware determined that certain strategic investments were considered to be other-than-temporarily impaired and the impairment charges were not significant. During the
year ended
December 31, 2016
, VMware recognized approximately
$14 million
as an impairment charge for certain strategic investments that were considered to be other-than-temporarily impaired. Strategic investments are included in other assets on the consolidated balance sheets. The carrying value of VMware’s strategic investments was
$146 million
and
$139 million
as of
February 2, 2018
and
February 3, 2017
, respectively.
I. Derivatives and Hedging Activities
VMware conducts business on a global basis in multiple foreign currencies, subjecting the Company to foreign currency risk. To mitigate a portion of this risk, VMware utilizes hedging contracts as described below, which potentially expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreements. VMware manages counterparty risk by seeking counterparties of high credit quality, by monitoring credit ratings and credit spreads of, and other relevant public information about its counterparties. VMware does not, and does not intend to, use derivative instruments for trading or speculative purposes.
Cash Flow Hedges
To mitigate its exposure to foreign currency fluctuations resulting from certain operating expenses denominated in certain foreign currencies, VMware enters into forward contracts that are designated as cash flow hedging instruments as the accounting criteria for such designation are met. Therefore, the effective portion of gains or losses resulting from changes in the fair value of these instruments is initially reported in accumulated other comprehensive loss on the consolidated balance sheets and is subsequently reclassified to the related operating expense line item on the consolidated statements of income (loss) in the same period that the underlying expenses are incurred. During the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
and
the Transition Period
, the effective portion of gains or losses reclassified to the consolidated statements of income (loss) was not significant. Interest charges or “forward points” on VMware’s forward contracts are excluded from the assessment of hedge effectiveness and are recorded in other income (expense), net on the consolidated statements of income (loss) as incurred.
These forward contracts have contractual maturities of
twelve
months or less, and as of
February 2, 2018
and
February 3, 2017
, outstanding forward contracts had a total notional value of
$318 million
and
$250 million
, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract.
During the years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
and
the Transition Period
, all cash flow hedges were considered effective.
Forward Contracts Not Designated as Hedges
VMware has established a program that utilizes forward contracts to offset the foreign currency risk associated with net outstanding monetary asset and liability positions. These forward contracts are not designated as hedging instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are reported in other income (expense), net on the consolidated statements of income (loss).
These forward contracts have a contractual maturity of
one
month, and as of
February 2, 2018
and
February 3, 2017
, outstanding forward contracts had a total notional value of
$1,020 million
and
$834 million
, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract.
During the year ended
February 2, 2018
and
the Transition Period
, VMware recognized losses of
$97 million
and
$18 million
, respectively, and gains of
$23 million
and
$36 million
during the
years ended
December 31, 2016
and
December 31, 2015
, respectively, related to the settlement of forward contracts. Gains and losses are recorded in other income (expense), net on the consolidated statements of income (loss).
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The combined gains and losses related to the settlement of forward contracts and the underlying foreign currency denominated assets and liabilities were not significant during the years ended
February 2, 2018
and
December 31, 2016
and
the Transition Period
. During the
year ended
December 31, 2015
, combined gains and losses related to forward contracts and the underlying foreign currency denominated assets and liabilities resulted in a net loss of
$14 million
. Net gains and losses are recorded in other income (expense), net on the consolidated statements of income (loss).
J. Property and Equipment, Net
Property and equipment, net,
as of the periods presented
consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
February 3,
|
|
2018
|
|
2017
|
Equipment and software
|
$
|
1,262
|
|
|
$
|
1,273
|
|
Buildings and improvements
|
824
|
|
|
814
|
|
Furniture and fixtures
|
101
|
|
|
101
|
|
Construction in progress
|
129
|
|
|
38
|
|
Total property and equipment
|
2,316
|
|
|
2,226
|
|
Accumulated depreciation
|
(1,242
|
)
|
|
(1,184
|
)
|
Total property and equipment, net
|
$
|
1,074
|
|
|
$
|
1,042
|
|
As of
February 2, 2018
, construction in progress primarily represented buildings and site improvements related to VMware’s Palo Alto campus expansion that had not yet been placed into service.
Depreciation expense was
$195 million
,
$215 million
,
$190 million
and
$18 million
during the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
and
the Transition Period
, respectively.
K. Commitments and Contingencies
Litigation
On August 10, 2015, the Company received a subpoena from the California Attorney General’s office (“California AG”), following the Company’s settlement with the Department of Justice and the General Services Administration during June 2015. In this matter, the California AG is investigating the accuracy of the Company’s sales practices with departments and agencies within the State of California. The Company held an initial meeting with the California AG’s representatives on November 5, 2015, and thereafter provided certain requested documents to the California AG. The Company did not receive any further communications from the California AG until the fall of 2017. Since then, the California AG and the Company have exchanged communications regarding the allegations at issue in the investigation and the Company has provided additional information requested by the California AG. In January 2018, the California AG advised the Company that it was ready to further discuss the matter. The Company is unable at this time to reasonably assess whether or to what extent it may be found liable and believes a loss is not considered probable and is not estimable.
On March 27, 2015, Phoenix Technologies (“Phoenix”) filed a complaint against VMware in the U.S. District Court for the Northern District of California asserting claims for breach of contract and copyright infringement relating to a version of Phoenix’s BIOS software that the Company licensed from Phoenix. The jury trial ran from May 30, 2017, through June 12, 2017, ending with a jury verdict on June 12, 2017, finding that VMware did not infringe on any of the four bases asserted by Phoenix. The Court subsequently entered judgment in VMware’s favor, following which the parties filed various post-trial motions. On February 12, 2018, the Court denied Phoenix’s post-trial motion seeking a judgment as a matter of law and a new trial, as well as the Company’s motion for attorneys’ fees pursuant to the federal copyright statute. Neither party filed a notice of appeal. As a result, the only remaining open issue is the Company’s Bill of Costs, which has been fully briefed by the parties and awaits a ruling from the Court.
On March 4, 2015, Christoph Hellwig, a software developer who alleged that software code he wrote is used in a component of the Company’s vSphere product, filed a lawsuit against VMware in the Hamburg Regional Court in Germany alleging copyright infringement for failing to comply with the terms of the open source General Public License v.2 (“GPL v.2”). On July 8, 2016, the German court issued a written decision dismissing Mr. Hellwig’s lawsuit. Mr. Hellwig has appealed this decision and both parties have filed their initial opening appellate briefs. No hearing schedule has yet been set by the appellate court. The Company intends to continue vigorously defending itself against this lawsuit.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
While VMware believes that it has valid defenses against each of the above legal matters, given the unpredictable nature of legal proceedings, an unfavorable resolution of one or more legal proceedings, claims, or investigations could have a material adverse effect on VMware’s consolidated financial statements.
VMware accrues for a liability when a determination has been made that a loss is both probable and the amount of the loss can be reasonably estimated. If only a range can be estimated and no amount within the range is a better estimate than any other amount, an accrual is recorded for the minimum amount in the range. Significant judgment is required in both the determination that the occurrence of a loss is probable and is reasonably estimable. In making such judgments, VMware considers the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs are generally recognized as expense when incurred.
VMware is also subject to other legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business or in connection with business mergers and acquisitions, including claims with respect to commercial, contracting and sales practices, product liability, intellectual property, employment, corporate and securities law, class action, whistleblower and other matters. From time to time, VMware also receives inquiries from and has discussions with government entities and stockholders on various matters. As of
February 2, 2018
, amounts accrued relating to these other matters arising as part of the ordinary course of business were considered not material. VMware does not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on its consolidated financial statements.
Operating Leases and Other Contractual Commitments
VMware leases office facilities and equipment under various operating arrangements. Rent expense for the years ended
February 2, 2018
,
December 31, 2016
, and
December 31, 2015
was
$116 million
,
$112 million
and
$105 million
, respectively. Rent expense for
the Transition Period
was
$9 million
. VMware’s minimum future lease commitments and other contractual commitments at
February 2, 2018
were as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Lease Commitments
(1)
|
|
Purchase Obligations
|
|
Other Contractual Commitments
(2)
|
|
Total
|
2019
|
$
|
87
|
|
|
$
|
45
|
|
|
$
|
4
|
|
|
$
|
136
|
|
2020
|
82
|
|
|
16
|
|
|
5
|
|
|
103
|
|
2021
|
59
|
|
|
10
|
|
|
3
|
|
|
72
|
|
2022
|
47
|
|
|
1
|
|
|
2
|
|
|
50
|
|
2023
|
40
|
|
|
1
|
|
|
3
|
|
|
44
|
|
Thereafter
|
545
|
|
|
—
|
|
|
7
|
|
|
552
|
|
Total
|
$
|
860
|
|
|
$
|
73
|
|
|
$
|
24
|
|
|
$
|
957
|
|
|
|
(1)
|
Amounts in the table above exclude expected sublease income.
|
|
|
(2)
|
Consisting of various contractual agreements, which include commitments on the lease for VMware’s Washington data center facility and asset retirement obligations.
|
The amount of the future lease commitments after fiscal
2023
is primarily for the ground leases on VMware’s Palo Alto, California headquarter facilities, which expire in fiscal
2047
. As several of VMware’s operating leases are payable in foreign currencies, the operating lease payments may fluctuate in response to changes in the exchange rate between the U.S. dollar and the foreign currencies in which the commitments are payable.
Guarantees and Indemnification Obligations
VMware enters into agreements in the ordinary course of business with, among others, customers, distributors, resellers, system vendors and systems integrators. Most of these agreements require VMware to indemnify the other party against third-party claims alleging that a VMware product infringes or misappropriates a patent, copyright, trademark, trade secret, and/or other intellectual property right. Certain of these agreements require VMware to indemnify the other party against certain claims relating to property damage, personal injury, or the acts or omissions of VMware, its employees, agents, or representatives.
VMware has agreements with certain vendors, financial institutions, lessors and service providers pursuant to which VMware has agreed to indemnify the other party for specified matters, such as acts and omissions of VMware, its employees, agents, or representatives.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware has procurement or license agreements with respect to technology that it has obtained the right to use in VMware’s products and agreements. Under some of these agreements, VMware has agreed to indemnify the supplier for certain claims that may be brought against such party with respect to VMware’s acts or omissions relating to the supplied products or technologies.
VMware has agreed to indemnify the directors and executive officers of VMware, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. VMware’s by-laws and charter also provide for indemnification of directors and officers of VMware and VMware subsidiaries to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. VMware also indemnifies certain employees who provide service with respect to employee benefits plans, including the members of the Administrative Committee of the VMware 401(k) Plan, and employees who serve as directors or officers of VMware’s subsidiaries.
In connection with certain acquisitions, VMware has agreed to indemnify the former directors and officers of the acquired company in accordance with the acquired company’s by-laws and charter in effect immediately prior to the acquisition or in accordance with indemnification or similar agreements entered into by the acquired company and such persons. VMware typically purchases a “tail” directors and officers insurance policy, which should enable VMware to recover a portion of any future indemnification obligations related to the former officers and directors of an acquired company.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with prior indemnification claims and the unique facts and circumstances involved in each particular situation. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s consolidated results of operations, financial position, or cash flows.
L. Accrued Expenses and Other
Accrued expenses and other
as of the periods presented
consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
February 3,
|
|
2018
|
|
2017
|
Accrued employee related expenses
|
$
|
634
|
|
|
$
|
443
|
|
Accrued partner liabilities
|
251
|
|
|
249
|
|
Other
|
356
|
|
|
195
|
|
Total
|
$
|
1,241
|
|
|
$
|
887
|
|
Accrued partner liabilities primarily relate to rebates and marketing development fund accruals for channel partners, system vendors and systems integrators. Accrued partner liabilities also include accruals for professional service arrangements for which VMware intends to leverage channel partners to directly fulfill the obligation to its customers.
M. Unearned Revenue
Unearned revenue
as of the periods presented
consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
February 3,
|
|
2018
|
|
2017
|
Unearned license revenue
|
$
|
523
|
|
|
$
|
484
|
|
Unearned software maintenance revenue
|
5,141
|
|
|
4,405
|
|
Unearned professional services revenue
|
586
|
|
|
451
|
|
Total unearned revenue
|
$
|
6,250
|
|
|
$
|
5,340
|
|
Unearned license revenue is generally recognized upon delivery of existing or future products or services, or is otherwise recognized ratably over the term of the arrangement. Future products include, in some cases, emerging products that are offered as part of product promotions where the purchaser of an existing product is entitled to receive the future product at no additional charge. To the extent the future product has not been delivered and VSOE of fair value cannot be established, revenue for the entire order is deferred until all product delivery obligations have been fulfilled. In the event the arrangement does not include professional services and if the customer is granted the right to receive unspecified future products or VSOE of fair value on the software maintenance element of the arrangement does not exist, then unearned license revenue may also be
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
recognized ratably. Unearned license revenue derived from commitments to future products that have not been delivered represents a significant portion of total unearned license revenue as of
February 2, 2018
and
February 3, 2017
. Upon adoption of Topic 606, unearned license revenue is expected to substantially decline primarily due to the acceleration of revenue recognition for on-premise license sales that were deferred under current accounting guidance and due to customer prepayments on contracts with various cancellation rights.
Unearned software maintenance revenue is attributable to VMware’s maintenance contracts and is generally recognized ratably over the contract period. The weighted-average remaining term as of
February 2, 2018
was approximately
two years
. Unearned professional services revenue results primarily from prepaid professional services, including training, and is generally recognized as the services are delivered. The amount of unearned revenue derived from transactions denominated in a foreign currency is affected by fluctuations in the foreign currencies in which VMware invoices.
In connection with the disposition of vCloud Air,
$35 million
of total unearned revenue, which included
$18 million
of unearned license revenue, was transferred to OVH during the second quarter of fiscal 2018. Refer to Note D for further information.
N. Income Taxes
The domestic and foreign components of income (loss) before provisions (benefits) for income taxes were as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Domestic
|
$
|
676
|
|
|
$
|
478
|
|
|
$
|
257
|
|
|
$
|
(51
|
)
|
Foreign
|
1,125
|
|
|
995
|
|
|
956
|
|
|
17
|
|
Total income (loss) before income tax
|
$
|
1,801
|
|
|
$
|
1,473
|
|
|
$
|
1,213
|
|
|
$
|
(34
|
)
|
VMware’s provision (benefit) for income taxes consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Federal:
|
|
|
|
|
|
|
|
Current
|
$
|
690
|
|
|
$
|
153
|
|
|
$
|
142
|
|
|
$
|
207
|
|
Deferred
|
373
|
|
|
5
|
|
|
(33
|
)
|
|
(234
|
)
|
|
1,063
|
|
|
158
|
|
|
109
|
|
|
(27
|
)
|
State:
|
|
|
|
|
|
|
|
Current
|
6
|
|
|
14
|
|
|
9
|
|
|
16
|
|
Deferred
|
12
|
|
|
(5
|
)
|
|
(1
|
)
|
|
(21
|
)
|
|
18
|
|
|
9
|
|
|
8
|
|
|
(5
|
)
|
Foreign:
|
|
|
|
|
|
|
|
Current
|
151
|
|
|
128
|
|
|
96
|
|
|
6
|
|
Deferred
|
(1
|
)
|
|
(8
|
)
|
|
3
|
|
|
—
|
|
|
150
|
|
|
120
|
|
|
99
|
|
|
6
|
|
Total provision (benefit) for income taxes
|
$
|
1,231
|
|
|
$
|
287
|
|
|
$
|
216
|
|
|
$
|
(26
|
)
|
The 2017 Tax Act introduces significant changes to U.S. income tax law including a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries and a reduction of the U.S. statutory corporate income tax rate from 35% to 21%, effective January 1, 2018, which resulted in a blended rate of
34%
during the year ended February 2, 2018. During December 2017, the SEC staff issued SAB 118, which allows recognition of provisional tax amounts during a measurement period not to extend beyond one year of the enactment date. Due to the timing of the enactment and the complexity involved in
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
applying the provisions of the 2017 Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its consolidated financial statements for the
year ended
February 2, 2018
.
Federal income tax increased during the year ended February 2, 2018, primarily due to the 2017 Tax Act. As a result of the transition tax, VMware recorded a provisional estimate for income tax expense of approximately
$800 million
that was calculated on a separate tax return basis. In addition, the Company recorded a provisional estimate for tax expense of approximately
$170 million
related to the remeasurement of its deferred tax assets and liabilities, which resulted from the reduction of the U.S. statutory corporate income tax rate.
Provisional taxes relating to the effect of the tax law changes, including the estimated transition tax and the remeasurement of U.S. deferred tax assets and liabilities, among others, were recognized during the year ended February 2, 2018. As VMware completes its analysis of the 2017 Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies and relevant authorities, the Company may make adjustments to provisional amounts that it has recorded that may materially impact its provision for income taxes in the period in which the adjustments are made. VMware expects to complete its analysis within the measurement period permitted under SAB 118.
A reconciliation of VMware’s income tax rate to the statutory federal tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Statutory federal tax rate
(1)
|
34
|
%
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
State taxes, net of federal benefit
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
13
|
%
|
Tax rate differential for non-U.S. jurisdictions
|
(13
|
)%
|
|
(16
|
)%
|
|
(20
|
)%
|
|
(1
|
)%
|
U.S. tax credits
|
(4
|
)%
|
|
(3
|
)%
|
|
(2
|
)%
|
|
—
|
%
|
Excess tax benefits from stock-based compensation
(2)
|
(6
|
)%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Transition Tax due to 2017 Tax Act
(3)
|
44
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Rate Change due to 2017 Tax Act
(3)
|
10
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Permanent items
|
2
|
%
|
|
4
|
%
|
|
3
|
%
|
|
27
|
%
|
Other
|
—
|
%
|
|
(2
|
)%
|
|
1
|
%
|
|
2
|
%
|
Effective tax rate
|
68
|
%
|
|
19
|
%
|
|
18
|
%
|
|
76
|
%
|
(1)
The 2017 Tax Act reduced the U.S. statutory corporate income tax rate from 35% to 21%, effective January 1, 2018, which resulted in a blended U.S. statutory corporate tax rate of
34%
during the
year ended
February 2, 2018
.
|
|
(2)
|
VMware adopted ASU No. 2016-09 during the first quarter of fiscal 2018. As a result, net excess tax benefits recognized in connection with stock-based awards are included in the income tax provision on the consolidated statements of income (loss). Prior to adopting the updated standard, such amounts were recognized in additional paid-in capital on the Company’s consolidated balance sheets.
|
(3)
The effective tax rate was impacted by key components of the 2017 Tax Act, including the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries, and the remeasurement of VMware’s deferred tax assets and liabilities due to the reduction in the U.S. statutory corporate tax rate.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred tax assets and liabilities are recognized for future tax consequences resulting from differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
February 3,
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Unearned revenue
|
$
|
223
|
|
|
$
|
566
|
|
Accruals and other
|
48
|
|
|
63
|
|
Stock-based compensation
|
52
|
|
|
85
|
|
Tax credit and net operating loss carryforwards
|
254
|
|
|
169
|
|
Other assets, net
|
27
|
|
|
34
|
|
Intangible and other non-current assets
|
—
|
|
|
58
|
|
Basis difference on investment in business
|
13
|
|
|
20
|
|
Gross deferred tax assets
|
617
|
|
|
995
|
|
Valuation allowance
|
(200
|
)
|
|
(161
|
)
|
Total deferred tax assets
|
417
|
|
|
834
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment, net
|
(67
|
)
|
|
(118
|
)
|
Intangibles and other assets, net
|
(4
|
)
|
|
—
|
|
Total deferred tax liabilities
|
(71
|
)
|
|
(118
|
)
|
Net deferred tax assets
|
$
|
346
|
|
|
$
|
716
|
|
The decrease in net deferred tax assets from
February 3, 2017
to
February 2, 2018
was driven in part by the remeasurement of the deferred tax balances resulting from the reduction in the U.S. statutory corporate income tax rate under the 2017 Tax Act. In addition, deferred tax assets related to unearned revenue were higher as of
February 3, 2017
, primarily due to the Dell Acquisition and VMware’s change in fiscal year.
VMware has U.S. federal net operating loss carryforwards of
$195 million
and
$90 million
as of
February 2, 2018
and
February 3, 2017
, respectively, from acquisitions made since
2007
. These operating loss carryforwards expire at different periods through
2037
. Portions of these carryforwards are subject to annual limitations. VMware expects to be able to fully utilize these net operating losses against future income. VMware also has state net operating loss carryforwards of
$187 million
and
$116 million
as of
February 2, 2018
and
February 3, 2017
, respectively, resulting from acquisitions since
2007
, expiring at different periods through
2037
.
VMware has California research and development (“R&D”) credit carryforwards for income tax purposes of
$168 million
and
$110 million
as of
February 2, 2018
and
February 3, 2017
, respectively, that can be carried over indefinitely. VMware also has R&D credit carryforwards for Massachusetts and Georgia which were not material as of
February 2, 2018
and
February 3, 2017
and expire at different periods through
2032
. In addition, VMware has foreign tax credit carryforwards of
$10 million
as of
February 2, 2018
which expire in
2029
. There were
no
foreign tax credit carryforwards as of
February 3, 2017
. VMware has non-U.S. net operating losses of
$16 million
as of
February 3, 2017
resulting from certain foreign operations and non-U.S. acquisitions in
2014
. The non-U.S. net operating losses as of
February 2, 2018
were not material. These net operating losses have various carryforward periods, including certain portions that can be carried over indefinitely.
VMware determined that the realization of deferred tax assets relating to portions of the state net operating loss carryforwards, state R&D tax credits and capital losses did not meet the more-likely-than-not threshold. Accordingly, a valuation allowance of
$183 million
and
$134 million
was recorded as of
February 2, 2018
and
February 3, 2017
, respectively. If, in the future, new evidence supports the realization of the deferred tax assets related to these items, the valuation allowance will be reversed and a tax benefit will be recorded accordingly.
VMware believes it is more-likely-than-not that the net deferred tax assets as of
February 2, 2018
and
February 3, 2017
, will be realized in the foreseeable future as VMware believes that it will generate sufficient taxable income in future years. VMware's ability to generate sufficient taxable income in future years in appropriate tax jurisdictions will determine the amount
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of net deferred tax asset balances to be realized in future periods. During the year ended
February 2, 2018
, the total change in the valuation allowance was
$39 million
, which was primarily due to California R&D credits generated during the year ended February 2, 2018.
For the periods presented, VMware’s rate of taxation in non-U.S. jurisdictions was lower than the U.S. tax rate. VMware’s non-U.S. earnings are primarily earned by its subsidiaries organized in Ireland, where the statutory rate is
12.5%
. Prior to the year ended February 2, 2018, the Company did not recognize a deferred tax liability related to undistributed foreign earnings of its subsidiaries because such earnings were considered to be indefinitely reinvested in its foreign operations, or were remitted substantially free of U.S. tax. Under the 2017 Tax Act, all foreign earnings are subject to U.S. taxation. As a result, the Company expects to repatriate a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings. The Company has recorded a provisional estimate for the transition tax on these earnings. Further developments in non-U.S. tax jurisdictions and unfavorable changes in non-U.S. tax laws and regulations, such as foreign tax laws enacted in response to the 2017 Tax Act, could result in adverse changes to global taxation and materially affect VMware’s financial position, results of operations, or annual effective tax rate.
Tax Sharing Agreement with Dell
On September 6, 2016, VMware entered into an amended tax sharing agreement with Dell, in connection with, and effective as of, the Dell Acquisition.
Although VMware’s results are included in the Dell consolidated return for U.S. federal income tax purposes, VMware’s income tax provision is calculated primarily as though VMware were a separate taxpayer. However, under certain circumstances, transactions between VMware and Dell are assessed using consolidated tax return rules.
VMware has made payments to Dell pursuant to the tax sharing agreement. The following table summarizes the payments made
during the periods presented
(table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Payments from VMware to Dell, net
|
$
|
54
|
|
|
$
|
373
|
|
|
$
|
144
|
|
|
$
|
—
|
|
Payments from VMware to Dell under the tax sharing agreement relate to VMware’s portion of federal income taxes on Dell’s consolidated tax return as well as state tax payments for combined states. The timing of the tax payments due to and from related parties is governed by the tax sharing agreement. The amounts that VMware pays to Dell for its portion of federal income taxes on Dell’s consolidated tax return differ from the amounts VMware would owe on a separate tax return basis and the difference is recognized as a component of additional paid-in capital, generally in the period in which the consolidated return is filed. The difference between the amount of tax calculated on a separate return basis and the amount of tax calculated pursuant to the tax sharing agreement was not significant during the year ended
February 2, 2018
and during
the Transition Period
. During the years ended
December 31, 2016
and
December 31, 2015
, the difference between the amount of tax calculated on a separate return basis and the amount of tax calculated pursuant to the tax sharing agreement was recorded in additional paid-in capital as an increase of
$15 million
and
$13 million
, respectively.
As a result of the activity under the tax sharing agreement with Dell, amounts due to and from Dell, net
as of the periods presented
consisted of the following (table in millions):
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
February 3,
|
|
2018
|
|
2017
|
Income tax due to Dell
|
$
|
781
|
|
|
$
|
21
|
|
Income tax due to Dell as of February 2, 2018, primarily related to VMware’s estimated tax obligation resulting from the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries under the 2017 Tax Act. The 2017 Tax Act includes a deferral election for an eight-year installment payment method on transition tax obligations. The Company currently expects to pay its transition tax obligation over a period of eight years.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties associated with unrecognized tax benefits, is as follows (table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Balance, beginning of the year/period
|
$
|
263
|
|
|
$
|
245
|
|
|
$
|
190
|
|
|
$
|
260
|
|
Tax positions related to current year/period:
|
|
|
|
|
|
|
|
Additions
|
63
|
|
|
45
|
|
|
41
|
|
|
3
|
|
Tax positions related to prior years/period:
|
|
|
|
|
|
|
|
Additions
|
1
|
|
|
9
|
|
|
54
|
|
|
—
|
|
Reductions
|
(2
|
)
|
|
(8
|
)
|
|
(14
|
)
|
|
(1
|
)
|
Settlements
|
(9
|
)
|
|
(16
|
)
|
|
(12
|
)
|
|
—
|
|
Reductions resulting from a lapse of the statute of limitations
|
(24
|
)
|
|
(14
|
)
|
|
(11
|
)
|
|
—
|
|
Foreign currency effects
|
10
|
|
|
(1
|
)
|
|
(3
|
)
|
|
1
|
|
Balance, end of the year/period
|
$
|
302
|
|
|
$
|
260
|
|
|
$
|
245
|
|
|
$
|
263
|
|
Of the net unrecognized tax benefits, including interest and penalties, of
$208 million
and
$281 million
as of
February 2, 2018
and
February 3, 2017
, respectively, approximately
$185 million
and
$263 million
, respectively, would, if recognized, benefit VMware's annual effective income tax rate. The
$208 million
and
$281 million
of net unrecognized tax benefits are included in income tax payable on the consolidated balance sheets as of
February 2, 2018
and
February 3, 2017
, respectively. VMware includes interest expense and penalties related to income tax matters in the income tax provision. VMware had accrued
$41 million
and
$45 million
of interest and penalties associated with unrecognized tax benefits as of
February 2, 2018
and of
February 3, 2017
, respectively. Income tax expense included interest and penalties associated with uncertain tax positions, which were not significant during the year ended
February 2, 2018
and
the Transition Period
, and were
$10 million
and
$13 million
during the years ended
December 31, 2016
and
December 31, 2015
, respectively.
The Dell-owned EMC consolidated group is routinely under audit by the Internal Revenue Service (“IRS”). All U.S. federal income tax matters have been concluded for years through
2011
, except for any matters under appeal. In addition, VMware is under corporate income tax audits in various states and non-U.S. jurisdictions. Consistent with the Company’s historical practices under the tax sharing agreement with EMC, when VMware becomes subject to federal tax audits as a member of Dell’s consolidated group, the tax sharing agreement provides that Dell has authority to control the audit and represent Dell’s and VMware’s interests to the IRS.
Open tax years subject to examinations for larger non-U.S. jurisdictions vary beginning in
2008
. Open tax years for Ireland, the largest non-U.S. jurisdiction, begin in
2010
. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. When considering the outcomes and the timing of tax examinations, 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 total net unrecognized tax benefits could be potentially reduced by approximately
$23 million
within the next 12 months.
O. Stockholders’ Equity
VMware Class B Common Stock Conversion Rights
Each share of Class B common stock is convertible into one share of Class A common stock. If VMware’s Class B common stock is distributed to security holders of Dell in a qualified distribution, the Class B shares will no longer be convertible into shares of Class A common stock unless a stockholder vote is obtained after certain conditions are satisfied. Prior to any such distribution, all Class B shares automatically convert into shares of Class A common stock if Dell transfers such shares to a third party that is not a successor or a Dell subsidiary or at such time as the number of shares of common stock owned by Dell or its successor falls below
20%
of the outstanding shares of VMware’s common stock. As of
February 2, 2018
,
300.0 million
shares of Class A common stock were reserved for conversion.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware Equity Plan
In June 2007, VMware adopted its 2007 Equity and Incentive Plan (the “2007 Plan”). As of
February 2, 2018
, the number of authorized shares under the 2007 Plan was
126.1 million
. The number of shares underlying outstanding equity awards that VMware assumes in the course of business acquisitions are also added to the 2007 Plan reserve on an as-converted basis. VMware has assumed
5.6 million
shares, which accordingly have been added to authorized shares under the 2007 Plan reserve.
Awards under the 2007 Plan may be in the form of stock-based awards, such as restricted stock units, or stock options. VMware’s Compensation and Corporate Governance Committee determines the vesting schedule for all equity awards. Generally, restricted stock grants made under the 2007 Plan have a
three
-year to
four
-year period over which they vest and vest
25%
the first year and semi-annually thereafter. The per share exercise price for a stock option awarded under the 2007 Plan shall not be less than
100%
of the per share fair market value of VMware Class A common stock on the date of grant. Most options granted under the 2007 Plan vest
25%
after the first year and monthly thereafter over the following
three
years and expire between
six
and
seven
years from the date of grant. VMware utilizes both authorized and unissued shares to satisfy all shares issued under the 2007 Plan. As of
February 2, 2018
, there were an aggregate of
15.8 million
shares of common stock available for issuance pursuant to future grants under the 2007 Plan.
VMware Stock Repurchases
VMware purchases stock from time to time in open market transactions, subject to market conditions. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including VMware’s stock price, cash requirements for operations and business combinations, corporate, legal and regulatory requirements and other market and economic conditions. VMware is not obligated to purchase any shares under its stock repurchase programs. Purchases can be discontinued at any time VMware believes additional purchases are not warranted. From time to time, VMware also purchases stock in private transactions, such as those with Dell. All shares repurchased under VMware’s stock repurchase programs are retired.
During January 2017, VMware’s board of directors authorized the repurchase of up to
$1,200 million
of VMware’s Class A common stock through the end of fiscal 2018. During August 2017, VMware’s board of directors authorized the repurchase of up to an additional
$1,000 million
of Class A common stock through August 31, 2018. As of
February 2, 2018
, the cumulative authorized amount remaining for stock repurchases was
$876 million
.
The following table summarizes stock repurchase authorizations approved by VMware’s board of directors, which were open or completed during the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
(amounts in table in millions):
|
|
|
|
|
|
|
|
Authorization Date
|
|
Amount Authorized
|
|
Expiration Date
|
|
Status
|
August 14, 2017
|
|
$1,000
|
|
August 31, 2018
|
|
Open
|
January 26, 2017
|
|
1,200
|
|
February 2, 2018
|
|
Completed in fiscal 2018
|
April 18, 2016
|
|
1,200
|
|
December 31, 2016
|
|
Completed in fiscal 2016
|
January 27, 2015
|
|
1,000
|
|
December 31, 2017
|
|
Completed in fiscal 2016
|
August 6, 2014
|
|
1,000
|
|
December 31, 2016
|
|
Completed in fiscal 2015
|
The following table summarizes stock repurchase activity, including shares purchased from Dell,
during the periods presented
(aggregate purchase price in millions, shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
2018
|
|
2016
|
|
2015
|
Aggregate purchase price
(1)
|
$
|
1,449
|
|
|
$
|
1,575
|
|
|
$
|
1,125
|
|
Class A common shares repurchased
|
13,977
|
|
|
21,281
|
|
|
13,495
|
|
Weighted-average price per share
|
$
|
103.66
|
|
|
$
|
73.99
|
|
|
$
|
83.36
|
|
(1)
The aggregate purchase price of repurchased shares is classified as a reduction to additional paid-in capital.
VMware did
not
repurchase any shares of its Class A common stock during
the Transition Period
.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware Restricted Stock
VMware’s restricted stock primarily consists of restricted stock unit (“RSU”) awards, which have been granted to employees. The value of an RSU grant is based on VMware’s stock price on the date of grant. The shares underlying the RSU awards are not issued until the RSUs vest. Upon vesting, each RSU converts into one share of VMware Class A common stock.
VMware’s restricted stock also includes performance stock unit (“PSU”) awards, which have been granted to certain VMware executives and employees. The PSU awards include performance conditions and, in certain cases, a time-based or market-based vesting component. Upon vesting, PSU awards convert into VMware’s Class A common stock at various ratios ranging from
0.5
to
2.0
shares per PSU, depending upon the degree of achievement of the performance or market-based target designated by each award. If minimum performance thresholds are not achieved, then no shares are issued.
The following table summarizes restricted stock activity since January 1, 2015 (units in thousands):
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted-Average Grant Date Fair Value
(per unit)
|
Outstanding, January 1, 2015
|
12,585
|
|
|
$
|
88.88
|
|
Granted
|
12,787
|
|
|
72.42
|
|
Vested
|
(4,855
|
)
|
|
90.72
|
|
Forfeited
|
(1,824
|
)
|
|
87.39
|
|
Outstanding, December 31, 2015
|
18,693
|
|
|
77.29
|
|
Granted
|
12,742
|
|
|
60.90
|
|
Vested
|
(7,188
|
)
|
|
77.18
|
|
Forfeited
|
(3,381
|
)
|
|
75.93
|
|
Outstanding, December 31, 2016
|
20,866
|
|
|
67.54
|
|
Vested
|
(256
|
)
|
|
77.07
|
|
Forfeited
|
(159
|
)
|
|
68.11
|
|
Outstanding, February 3, 2017
|
20,451
|
|
|
67.41
|
|
Granted
|
7,838
|
|
|
93.84
|
|
Vested
|
(9,070
|
)
|
|
67.89
|
|
Forfeited
|
(1,859
|
)
|
|
72.68
|
|
Outstanding, February 2, 2018
|
17,360
|
|
|
78.62
|
|
As of
February 2, 2018
, the
17.4 million
units outstanding included
16.7 million
of RSUs and
0.7 million
of PSUs. The above table includes RSUs issued for outstanding unvested RSUs in connection with business combinations.
Restricted stock that is expected to vest as of
February 2, 2018
was as follows (units in thousands, aggregate intrinsic value in millions):
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Remaining Term
(in years)
|
|
Aggregate Intrinsic Value
(1)
|
Expected to vest
|
15,115
|
|
|
2.51
|
|
$
|
1,855
|
|
|
|
(1)
|
The aggregate intrinsic value represents the total pre-tax intrinsic values based on VMware's closing stock price of
$122.72
as of
February 2, 2018
, which would have been received by the RSU holders had the RSUs been issued as of
February 2, 2018
.
|
The aggregate vesting date fair value of VMware restricted stock that vested during the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
and
the Transition Period
was
$946 million
,
$468 million
,
$379 million
and
$21 million
, respectively. As of
February 2, 2018
, restricted stock representing
17.4 million
shares of VMware’s Class A common stock were outstanding, with an aggregate intrinsic value of
$2,130 million
based on VMware’s closing stock price as of
February 2, 2018
.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware Employee Stock Purchase Plan
In June 2007, VMware adopted its 2007 Employee Stock Purchase Plan (the “ESPP”), which is intended to be qualified under Section 423 of the Internal Revenue Code. As of
February 2, 2018
, the number of authorized shares under the ESPP was a total of
23.3 million
shares. Under the ESPP, eligible VMware employees are granted options to purchase shares at the lower of
85%
of the fair market value of the stock at the time of grant or
85%
of the fair market value at the time of exercise. The option period is generally twelve months and includes two embedded six-month option periods. Options are exercised at the end of each embedded option period. If the fair market value of the stock is lower on the first day of the second embedded option period than it was at the time of grant, then the twelve-month option period expires and each enrolled participant is granted a new twelve-month option. As of
February 2, 2018
,
8.7 million
shares of VMware Class A common stock were available for issuance under the ESPP.
The following table summarizes ESPP activity
during the periods presented
(cash proceeds in millions, shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Cash proceeds
|
$
|
65
|
|
|
$
|
103
|
|
|
$
|
98
|
|
|
$
|
60
|
|
Class A common shares purchased
|
903
|
|
|
2,657
|
|
|
1,495
|
|
|
1,468
|
|
Weighted-average price per share
|
$
|
72.40
|
|
|
$
|
38.78
|
|
|
$
|
65.54
|
|
|
$
|
40.65
|
|
As of
February 2, 2018
,
$80 million
of ESPP withholdings were recorded as a liability in accrued expenses and other on the consolidated balance sheets for the purchase that occurred on February 28, 2018.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware Stock Options
The following table summarizes stock option activity since January 1, 2015 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware Stock Options
|
|
EMC Stock Options
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
(per share)
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
(per share)
|
Outstanding, January 1, 2015
|
5,869
|
|
|
$
|
50.54
|
|
|
1,271
|
|
|
$
|
16.08
|
|
Options relating to employees transferred (to) from EMC
|
—
|
|
|
—
|
|
|
8
|
|
|
20.23
|
|
Granted
|
21
|
|
|
54.23
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(322
|
)
|
|
70.42
|
|
|
(1
|
)
|
|
19.37
|
|
Expired
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
14.21
|
|
Exercised
|
(2,404
|
)
|
|
29.44
|
|
|
(201
|
)
|
|
13.96
|
|
Outstanding, December 31, 2015
|
3,164
|
|
|
64.56
|
|
|
1,063
|
|
|
16.54
|
|
Options relating to employees transferred (to) from EMC
|
—
|
|
|
—
|
|
|
19
|
|
|
15.90
|
|
Granted
|
66
|
|
|
6.53
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(259
|
)
|
|
77.42
|
|
|
—
|
|
|
—
|
|
Expired
|
(476
|
)
|
|
80.52
|
|
|
(17
|
)
|
|
14.44
|
|
Exercised
|
(418
|
)
|
|
13.41
|
|
|
(1,065
|
)
|
|
16.56
|
|
Outstanding, December 31, 2016
|
2,077
|
|
|
67.75
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(9
|
)
|
|
79.45
|
|
|
—
|
|
|
—
|
|
Exercised
|
(77
|
)
|
|
23.72
|
|
|
—
|
|
|
—
|
|
Outstanding, February 3, 2017
|
1,991
|
|
|
69.38
|
|
|
—
|
|
|
—
|
|
Granted
|
745
|
|
|
13.79
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(36
|
)
|
|
55.44
|
|
|
—
|
|
|
—
|
|
Expired
|
(3
|
)
|
|
93.87
|
|
|
—
|
|
|
—
|
|
Exercised
|
(1,050
|
)
|
|
53.50
|
|
|
—
|
|
|
—
|
|
Outstanding, February 2, 2018
|
1,647
|
|
|
54.63
|
|
|
—
|
|
|
—
|
|
The above table includes stock options granted in conjunction with unvested stock options assumed in business combinations. As a result, the weighted-average exercise price per share may vary from the VMware stock price at time of grant.
The stock options outstanding as of
February 2, 2018
had an aggregate intrinsic value of
$112 million
based on VMware’s closing stock price as of
February 2, 2018
.
Options outstanding that are exercisable and that have vested and are expected to vest as of
February 2, 2018
were as follows (outstanding options in thousands, aggregate intrinsic value in in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware Stock Options
|
|
Outstanding Options
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Term
(in years)
|
|
Aggregate Intrinsic Value
(1)
|
Exercisable
|
1,020
|
|
|
$
|
73.60
|
|
|
3.34
|
|
$
|
50
|
|
Vested and expected to vest
|
1,644
|
|
|
54.56
|
|
|
5.11
|
|
112
|
|
|
|
(1)
|
The aggregate intrinsic values represent the total pre-tax intrinsic values based on VMware's closing stock price of
$122.72
as of
February 2, 2018
, which would have been received by the option holders had all in-the-money options been exercised as of that date.
|
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total fair value of VMware stock options that vested during the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
was
$32 million
,
$29 million
and
$60 million
, respectively, and was not material during
the Transition Period
.
The options exercised during the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
had a pre-tax intrinsic value of
$62 million
,
$22 million
and
$136 million
, respectively, and was not material during
the Transition Period
.
The pre-tax intrinsic value of EMC stock options held by VMware employees that were exercised during the
years ended
December 31, 2016
and
December 31, 2015
was
$13 million
and
$3 million
, respectively.
VMware Shares Repurchased for Tax Withholdings
During the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
and
the Transition Period
, VMware repurchased and retired or withheld
3.3 million
,
2.6 million
,
2.6 million
and
0.1 million
shares, respectively, of Class A common stock, for
$348 million
,
$167 million
,
$173 million
and
$7 million
, respectively, to cover tax withholding obligations in connection with such equity awards. These amounts may differ from the amounts of cash remitted for tax withholding obligations on the consolidated statements of cash flows due to the timing of payments. Pursuant to the respective award agreements, these shares were withheld in conjunction with the net share settlement upon the vesting of restricted stock and restricted stock units (including PSUs) during the period. The value of the withheld shares, including restricted stock units, was classified as a reduction to additional paid-in capital.
Stock-Based Compensation
The following table summarizes the components of total stock-based compensation included in VMware’s consolidated statements of income (loss)
during the periods presented
(table in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Cost of license revenue
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Cost of services revenue
|
50
|
|
|
52
|
|
|
44
|
|
|
5
|
|
Research and development
|
355
|
|
|
305
|
|
|
226
|
|
|
31
|
|
Sales and marketing
|
197
|
|
|
195
|
|
|
168
|
|
|
19
|
|
General and administrative
|
79
|
|
|
82
|
|
|
64
|
|
|
7
|
|
Stock-based compensation
|
683
|
|
|
636
|
|
|
504
|
|
|
62
|
|
Income tax benefit
|
(232
|
)
|
|
(183
|
)
|
|
(144
|
)
|
|
(19
|
)
|
Total stock-based compensation, net of tax
|
$
|
451
|
|
|
$
|
453
|
|
|
$
|
360
|
|
|
$
|
43
|
|
As of
February 2, 2018
, the total unrecognized compensation cost for stock options and restricted stock was
$1,052 million
and will be recognized through fiscal
2022
with a weighted-average remaining period of
1.5 years
. Stock-based compensation related to VMware equity awards held by VMware employees is recognized on VMware’s consolidated statements of income (loss) over the awards’ requisite service periods.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value of VMware Options
The fair value of each option to acquire VMware Class A common stock granted
during the periods presented
was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
VMware Stock Options
|
2018
|
|
2016
|
|
2015
|
Dividend yield
|
None
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
29.1
|
%
|
|
31.9
|
%
|
|
32.0
|
%
|
Risk-free interest rate
|
1.7
|
%
|
|
0.9
|
%
|
|
1.1
|
%
|
Expected term (in years)
|
3.3
|
|
|
3.1
|
|
|
3.3
|
|
Weighted-average fair value at grant date
|
$
|
83.62
|
|
|
$
|
49.64
|
|
|
$
|
27.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
For the Year Ended
|
|
January 1 to
|
|
February 2,
|
|
December 31,
|
|
December 31,
|
|
February 3,
|
VMware Employee Stock Purchase Plan
|
2018
|
|
2016
|
|
2015
|
|
2017
|
Dividend yield
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
Expected volatility
|
22.6
|
%
|
|
38.3
|
%
|
|
30.1
|
%
|
|
25.0
|
%
|
Risk-free interest rate
|
1.2
|
%
|
|
0.5
|
%
|
|
0.1
|
%
|
|
0.8
|
%
|
Expected term (in years)
|
0.9
|
|
|
0.7
|
|
|
0.5
|
|
|
0.8
|
|
Weighted-average fair value at grant date
|
$
|
21.93
|
|
|
$
|
13.57
|
|
|
$
|
20.59
|
|
|
$
|
21.18
|
|
There were no options to acquire VMware Class A common stock granted during
the Transition Period
.
The weighted-average grant date fair value of VMware stock options can fluctuate from period to period primarily due to higher valued options assumed through business combinations with exercise prices lower than the fair market value of VMware’s stock on the date of grant.
For equity awards granted during the
years ended
February 2, 2018
,
December 31, 2016
and
December 31, 2015
, volatility was based on an analysis of historical stock prices and implied volatilities of VMware’s Class A common stock. The expected term is based on historical exercise patterns and post-vesting termination behavior, the term of the option period for grants made under the ESPP, or the weighted-average remaining term for options assumed in acquisitions. VMware’s expected dividend yield input was
zero
as it has not historically paid, nor expects in the future to pay, cash dividends on its common stock. The risk-free interest rate was based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock options.
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accumulated Other Comprehensive Loss
The changes in components of accumulated other comprehensive loss
during the periods presented
were as follows (tables in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on
Available-for-Sale Securities
|
|
Unrealized Gain (Loss) on
Forward Contracts
|
|
Total
|
Balance, January 1, 2016
|
$
|
(7
|
)
|
|
$
|
(1
|
)
|
|
$
|
(8
|
)
|
Unrealized gains (losses), net of tax (benefit) of ($4), $—, and ($3)
|
(6
|
)
|
|
1
|
|
|
(5
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income (loss), net of tax benefit of $3, $—, and $3
|
5
|
|
|
(1
|
)
|
|
4
|
|
Other comprehensive loss, net
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Balance, December 31, 2016
|
(8
|
)
|
|
(1
|
)
|
|
(9
|
)
|
Unrealized gains, net of tax provision of $1, $— and $1
|
2
|
|
|
3
|
|
|
5
|
|
Balance, February 3, 2017
|
(6
|
)
|
|
2
|
|
|
(4
|
)
|
Unrealized gains (losses), net of tax (benefit) of ($5), $—, and ($5)
|
(12
|
)
|
|
1
|
|
|
(11
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income (loss), net of tax benefit of $2, $— and $2
|
3
|
|
|
(3
|
)
|
|
—
|
|
Other comprehensive loss, net
|
(9
|
)
|
|
(2
|
)
|
|
(11
|
)
|
Balance, February 2, 2018
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
(15
|
)
|