VMware 2012 Annual Report Download - page 57

Table of Contents
There were additional cash outflows of $133.1 , $123.8 and $86.2 in 2012 , 2011 and 2010 , respectively, to cover tax withholding
obligations in conjunction with the net share settlement upon the vesting of restricted stock units and restricted stock. Additionally, the excess
tax benefit from stock-based compensation was $138.1 , $224.5 and $223.4 in 2012 , 2011 and 2010 , respectively, and is shown as a reduction
to cash flows from operating activities and an increase to cash flows from financing activities. The year-over-year changes in the repurchase of
shares to cover tax withholding obligations and the excess tax benefit from stock-based compensation in 2012 and 2011 were primarily due to
changes in the market value of our stock and the number of awards exercised, sold or vested.
Future cash proceeds from issuances of common stock and the excess tax benefit from stock-based compensation and future cash outflows
to repurchase our shares to cover tax withholding obligations will depend upon, and could fluctuate significantly from period-to-
period based on,
the market value of our stock, the number of awards exercised, sold or vested, the tax benefit realized and the tax-affected compensation
recognized.
To date, inflation has not had a material impact on our financial results.
Note Payable to EMC
As of December 31, 2012, $450.0 remained outstanding on a note payable to EMC, with interest payable quarterly in arrears. In June 2011,
we and EMC amended and restated the note to extend the maturity date of the note to April 16, 2015 and to modify the principal amount of the
note to reflect the outstanding balance of $450.0. The interest rate continues to reset quarterly and bears an interest rate of the 90-day LIBOR
plus 55 basis points.
Non-GAAP Financial Measures
Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings,” defines and prescribes the conditions for use
of non-GAAP financial information. Our measures of core operating expenses and free cash flows each meet the definition of a non-GAAP
financial measure.
Core Operating Expenses
Management uses the non-GAAP measure of core operating expenses to understand and compare operating results across accounting
periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, to calculate bonus payments and to evaluate
our financial performance, the performance of our individual functional groups and the ability of operations to generate cash. Management
believes that by excluding certain expenses that are not reflective of our ongoing operating results, core operating expenses reflect our business
in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.
We define core operating expenses as our total operating expenses excluding the following components, which we believe are not reflective
of our ongoing operational expenses. In each case, for the reasons set forth below, management believes that excluding the component provides
useful information to investors and others in understanding and evaluating our operating results and future prospects in the same manner as
management, in comparing financial results across accounting periods and to those of peer companies and to better understand the long-term
performance of our core business.
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• Stock-based compensation. Stock-based compensation is generally fixed at the time the stock-based instrument is granted and
amortized over a period of several years. Although stock-based compensation is an important aspect of the compensation of our
employees and executives, the expense for the fair value of the stock-based instruments we utilize may bear little resemblance to the
actual value realized upon the vesting or future exercise of the related stock-based awards. Furthermore, unlike cash compensation, the
value of stock options is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our
control. Additionally, in order to establish the fair value of performance-based stock awards, which are also an element of our ongoing
stock-based compensation, we are required to apply judgment to estimate the probability of the extent to which performance objectives
will be achieved.
•
Amortization and capitalization of software development costs.
Capitalized software development costs encompass capitalization of
development costs and the subsequent amortization of the capitalized costs over the useful life of the product. Amortization and
capitalization of software development costs can vary significantly depending upon the timing of products reaching technological
feasibility and being made generally available. We did not capitalize software development costs related to product offerings during
2012. In future periods, we expect our amortization expense from previously capitalized software development costs to steadily decline
as previously capitalized software development costs become fully amortized. For additional information, see “Results of Operations -
Capitalized Software Development Costs, Net” above.
• Other expenses. Other expenses excluded are amortization of acquired intangible assets, employer payroll taxes on employee stock
transactions and other acquisition-related items. Regarding the amortization of acquired intangible