VMware 2014 Annual Report Download - page 75

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
VMware does not provide for a U.S. income tax liability on undistributed earnings of VMware’s non-U.S. subsidiaries. The earnings of non-
U.S. subsidiaries, which reflect full provision for non-U.S. income taxes, are currently indefinitely reinvested in foreign operations or will be
remitted substantially free of additional tax. If these overseas funds are needed for its operations in the U.S., VMware would be required to
accrue and pay U.S. taxes on related undistributed earnings to repatriate 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 if VMware were 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. Refer to Note K to
the consolidated financial statements for further information.
Net Income 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 net income 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, Class A and Class B common stock. For
purposes of calculating net income per share, VMware uses the two-class method. As both classes share the same rights in dividends, basic and
diluted net income 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, 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 adequate 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, 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 payment history and 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, 2014 , two distributors accounted for 19% and 13% of VMware’s accounts receivable balance. As of December 31,
2013 , three distributors accounted for 18% , 15% and 11% of VMware’s accounts receivable balance.
One distributor accounted for 15% of revenues in each of the years ended December 31, 2014 , 2013 and 2012 , and another distributor
accounted for 13% , 12% and 12% of revenues in the years ended December 31, 2014 , 2013 and 2012 , respectively. A third distributor
accounted for 11% of revenues in each of the years ended December 31, 2014 and 2013 , 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 2007 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. 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 at each reporting period and are included in accrued expenses and other on the consolidated balance sheets.
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
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