VMware 2009 Annual Report Download - page 57

Table of Contents
business and to expand our own administrative functions. In addition, certain employee-related costs increased as we recognized expenses
related to relocating certain positions to lower-cost locations. These cost increases were partially offset by decreased other general and
administrative costs, including legal expenses. The increase between 2008 and 2007 was primarily as a result of additional salaries and benefits
expenses resulting from the additional resources to support the growth of our business and to expand our own administrative functions.
Investment Income
Investment income was $8.2, $28.3, and $22.9 in 2009, 2008, and 2007, respectively. Investment income consists of interest earned on
cash and cash equivalent balances. Investment income decreased in 2009 compared with 2008 primarily due to a decrease in the average rate of
interest earned. The decrease in the average rate of interest earned primarily relates to a decrease in Federal Reserve rates in response to the
macroeconomic environment. Investment income increased in 2008 compared with 2007 due to higher cash and cash equivalent balances,
primarily as a result of cash provided by operating activities, as well as a full year of interest earned on proceeds we received in the middle of the
third quarter of 2007 from our IPO and the sale of shares of our Class A common stock to Intel Capital. The increase in interest income earned
on our cash and cash equivalent balances was partially offset by the negative impact of lower interest rates in 2008.
Interest Expense with EMC, Net
Interest expense with EMC, net, was $7.0 in 2009, $18.3 in 2008, and $17.8 in 2007. In 2009, 2008 and 2007, interest expense with EMC,
net, consisted primarily of $6.5, $18.6, and $26.6, respectively, of interest expense incurred on the note issued to EMC in April 2007, net of
interest income earned or incurred on intercompany balances. The decreases in interest expense in 2009 and 2008 were due to lower interest
rates on the note. For 2009, 2008 and 2007, the weighted-average rate was 1.45%, 4.14%, and 4.22%, respectively. The decrease in interest
expense in 2008 was additionally due to a repayment of $350.0 of the principal balance in August of 2007. As a result of a lower 90-day LIBOR
rate as compared with the fourth quarter of 2009, we expect our interest expense on the note payable to decrease in the first quarter of 2010. The
interest rate on the note payable resets quarterly and is determined using the 90-day LIBOR rate plus 55 basis points, two business days prior to
the first day of each fiscal quarter.
Other Income (Expense), Net
Other income (expense), net was income of $2.9 in 2009 and expense of $3.2 in 2008. In 2007, other expense, net was not material. Other
income, net increased in 2009 compared with 2008 primarily due to a gain of $5.9 from the mark-to-market of a previously held equity interest
in SpringSource to fair value in connection with the acquisition of SpringSource in the third quarter of 2009, partially offset by losses on foreign
currency transactions. Other expense, net was higher in 2008 compared with 2007 primarily due to foreign currency revaluations.
Income Tax Provision
Our effective tax rate for 2009 was 11.8% as compared with 9.1% for 2008 and 9.3% for 2007. The higher effective tax rate in 2009 was
primarily attributable to an increase in unrecognized tax positions relative to income before tax, offset by the increase in the favorable impact of
tax credits relative to income before tax. The slight decrease in the effective rate to 9.1% in 2008 from 9.3% in 2007 was mainly attributable to a
net benefit resulting from an increase in tax credits.
The 2010 tax rate is expected to be higher than the fiscal year 2009 tax rate primarily due to a forecasted shift of earnings from low-tax
non-U.S. jurisdictions to the United States and the expiration of the federal R&D credit at December 31, 2009, offset by a decrease in
unrecognized tax positions relative to income before income tax. The effective tax rate for fiscal year 2010 is based upon the income for the
year, the composition of the income in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions of
audits or other tax contingencies. Our aggregate income tax rate in foreign jurisdictions is lower than our income tax rate in the United States.
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