VMware 2013 Annual Report Download - page 71

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
these funds. However, VMware’s intent is to indefinitely reinvest its non-U.S. earnings in its foreign operations and VMware’s current plans do not
demonstrate a need to repatriate them to fund its U.S. operations. At this time, it is not practicable to estimate the amount of tax that may be payable were
VMware to repatriate these funds.
The difference between the income taxes payable or receivable that is calculated on a separate return basis and the amount actually paid to or received
from EMC pursuant to VMware’s tax sharing agreement is presented as a component of additional paid-in capital. See Note L to the consolidated financial
statements for further information.
Earnings Per Share
Basic net income per share is calculated using the weighted-average number of shares of VMware’s common stock outstanding during the period.
Diluted earnings per share are 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, Class A and Class B common stock. For purposes of calculating earnings per
share, VMware uses the two-class method. As both classes share the same rights in dividends, basic and diluted earnings 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, cash equivalents and short-term investments primarily in money market funds and fixed income securities and
limits the amount of investment 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, U.S. 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 monitors the counterparty risk for adequate diversification amongst the financial institutions holding the funds. VMware also monitors
counterparty risk to financial institutions with which VMware enters into derivatives to ensure that these financial institutions are of high credit quality.
VMware held $37 million of foreign government and agencies securities, of which $8 million was deemed sovereign debt, at December 31, 2013 . These
sovereign debt securities had an average credit rating of AAA and were predominantly from Canada.
VMware provides credit to its customers, including distributors, OEMs, resellers, and end-user customers, in the normal course of business. To reduce
credit risk, the Company performs periodic credit evaluations, which consider the customer’s prior payment history and demonstrated financial stability.
Additionally, VMware does not recognize revenues or unearned revenues to the extent a customer’s outstanding balance exceeds its credit limit.
As of December 31, 2013 , three distributors accounted for 18% , 15% and 11% of VMware’s accounts receivable balance. As of December 31, 2012 ,
three distributors accounted for 19% , 16% and 11% of VMware’s accounts receivable balance.
One distributor accounted for 15% of revenues in each of the years ended December 31, 2013 , 2012 and 2011 , respectively, and another distributor
accounted for 12% , 12% and 11% of revenues in the years ended December 31, 2013 , 2012 and 2011 , respectively. A third distributor accounted for 11%
and 10% of revenues in the years ended December 31, 2013 and 2011 , respectively.
Accounting for Stock
-Based Compensation
The Black-Scholes option-pricing model is used to determine the fair value of VMware’s stock option awards and 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. VMware restricted
stock unit awards, 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. Liability-classified awards are recorded at fair value and are included in accrued expenses and other on the consolidated balance sheets with changes
in fair value relating to the vested portion of the award recognized as stock-based compensation on the consolidated statements of income.
PSU awards will vest if certain employee-specific or VMware-designated performance targets are achieved. 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
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