Intangibles and Goodwill
Intangible Assets
Intangible assets, excluding goodwill, as of December 31, 2013 and 2012 consist of (tables in millions):
|
| | | | | | | | | | | |
| December 31, 2013 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Purchased technology | $ | 2,356 |
| | $ | (1,429 | ) | | $ | 927 |
|
Patents | 225 |
| | (102 | ) | | 123 |
|
Software licenses | 101 |
| | (90 | ) | | 11 |
|
Trademarks and tradenames | 171 |
| | (118 | ) | | 53 |
|
Customer relationships and customer lists | 1,386 |
| | (855 | ) | | 531 |
|
Leasehold interest | 145 |
| | (11 | ) | | 134 |
|
Other | 28 |
| | (27 | ) | | 1 |
|
Total intangible assets, excluding goodwill | $ | 4,412 |
| | $ | (2,632 | ) | | $ | 1,780 |
|
|
| | | | | | | | | | | |
| December 31, 2012 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Purchased technology | $ | 2,233 |
| | $ | (1,207 | ) | | $ | 1,026 |
|
Patents | 225 |
| | (87 | ) | | 138 |
|
Software licenses | 96 |
| | (88 | ) | | 8 |
|
Trademarks and tradenames | 173 |
| | (102 | ) | | 71 |
|
Customer relationships and customer lists | 1,378 |
| | (724 | ) | | 654 |
|
Leasehold interest | 145 |
| | (7 | ) | | 138 |
|
Other | 26 |
| | (26 | ) | | — |
|
Total intangible assets, excluding goodwill | $ | 4,276 |
| | $ | (2,241 | ) | | $ | 2,035 |
|
In the year ended December 31, 2011, we, along with three other technology companies, acquired specific patents from Novell, Inc. for $450 million, of which we paid $113 million. We assigned our portion of the patent portfolio an average life of 10 years, based on the average contractual term remaining on the patents we acquired. The cash outflow was included in purchases of strategic and other related investments in the investing activities section of the consolidated statements of cash flows.
In the year ended December 31, 2011, VMware purchased all of the right, title and interest in a ground lease covering the property and improvements located adjacent to VMware’s Palo Alto, California campus for $225 million. The gross amount classified to property, plant and equipment, net was $74 million. The remaining $151 million of the $225 million purchase price was for the fair value of the ground lease and the right to develop additional square footage on the parcel. The long-term portion of $147 million was recorded to intangible assets, net with the remainder recorded to other current assets on the consolidated balance sheet. Concurrent with the closing of the transaction, VMware entered into an amended and restated ground lease for the related property. The buildings and site improvements will be depreciated from the date they are placed into service through the term of the amended and restated ground lease, and intangible assets will be amortized through 2046.
Amortization expense on intangibles was $389 million, $365 million and $342 million in 2013, 2012 and 2011, respectively. As of December 31, 2013, amortization expense on intangible assets for the next five years is expected to be as follows (table in millions):
|
| | | |
2014 | $ | 360 |
|
2015 | 316 |
|
2016 | 260 |
|
2017 | 210 |
|
2018 | 179 |
|
Total | $ | 1,325 |
|
Goodwill
Changes in the carrying amount of goodwill, net, on a consolidated basis and by segment, for the years ended December 31, 2013 and 2012 consist of the following (tables in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2013 |
| Information Storage | | Information Intelligence Group | | RSA Information Security | | Pivotal | | VMware Virtual Infrastructure | | Total |
Balance, beginning of the year | $ | 7,442 |
| | $ | 1,484 |
| | $ | 2,022 |
| | $ | — |
| | $ | 2,892 |
| | $ | 13,840 |
|
Goodwill resulting from acquisitions | 145 |
| | 1 |
| | 181 |
| | 37 |
| | 233 |
| | 597 |
|
Finalization of purchase price allocations and other, net | 11 |
| | 2 |
| | — |
| | — |
| | (26 | ) | | (13 | ) |
Goodwill transferred in formation of Pivotal | (112 | ) | | — |
| | — |
| | 140 |
| | (28 | ) | | — |
|
Balance, end of the year | $ | 7,486 |
| | $ | 1,487 |
| | $ | 2,203 |
| | $ | 177 |
| | $ | 3,071 |
| | $ | 14,424 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2012 |
| Information Storage | | Information Intelligence Group | | RSA Information Security | | Pivotal | | VMware Virtual Infrastructure | | Total |
Balance, beginning of the year | $ | 7,034 |
| | $ | 1,469 |
| | $ | 1,849 |
| | $ | — |
| | $ | 1,803 |
| | $ | 12,155 |
|
Goodwill resulting from acquisitions | 438 |
| | 15 |
| | 179 |
| | — |
| | 1,092 |
| | 1,724 |
|
Finalization of purchase price allocations and other, net | (1 | ) | | — |
| | (6 | ) | | — |
| | (3 | ) | | (10 | ) |
Goodwill de-recognized in divestiture of business | (29 | ) | | — |
| | — |
| | — |
| | — |
| | (29 | ) |
Balance, end of the year | $ | 7,442 |
| | $ | 1,484 |
| | $ | 2,022 |
| | $ | — |
| | $ | 2,892 |
| | $ | 13,840 |
|
During the second quarter of 2013, EMC and VMware formed Pivotal, with an investment from GE. As Pivotal is considered a separate reportable segment, the transfer of goodwill from the Information Storage and VMware Virtual Infrastructure segments to the newly formed Pivotal segment is shown above for 2013. The amount of transferred goodwill was determined using the relative fair value method. See Note S for further discussion of the segment disclosures.
Valuation of Goodwill and Intangibles
We perform an assessment of the recoverability of goodwill, at least annually, in the fourth quarter of each year. Our assessment is performed at the reporting unit level which, for certain of our operating segments, is one step below our reporting segment level. We employ both qualitative and quantitative tests of our goodwill. For some of our reporting units, we performed a qualitative assessment on goodwill to determine whether a quantitative assessment was necessary and determined there were no indicators of potential impairment. For other reporting units we evaluated goodwill using a quantitative model. For all of our goodwill assessments we determined that there was sufficient market value above the carrying value of those reporting units so that we would not expect any near term changes in the operating results that would trigger an impairment.
The determination of relevant comparable industry companies impacts our assessment of fair value. Should the operating performance of our reporting units change in comparison to these companies or should the valuation of these companies change, this could impact our assessment of the fair value of the reporting units. Our discounted cash flow analyses factor in assumptions on revenue and expense growth rates. These estimates are based upon our historical experience and projections of future activity, factoring in customer demand, changes in technology and a cost structure necessary to achieve the related revenues. Additionally, these discounted cash flow analyses factor in expected amounts of working capital and weighted average cost of capital. Changes in judgments on any of these factors could materially impact the value of the reporting unit. There was no impairment in 2013, 2012 or 2011.
Other intangible assets are evaluated based upon the expected period the asset will be utilized, forecasted cash flows, changes in technology and customer demand. Changes in judgments on any of these factors could materially impact the value of the assets.
