e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
July 31,
2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File
Number: 0-17017
Dell Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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74-2487834
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer Identification No.)
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One Dell
Way
Round Rock, Texas 78682
(Address
of principal executive offices) (Zip Code)
1-800-289-3355
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act.
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o (Do
not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of the close of business on August 28, 2009,
1,955,623,326 shares of common stock, par value $.01 per share,
were outstanding.
PART I
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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(in millions)
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July 31,
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January 30,
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2009
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2009
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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11,699
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$
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8,352
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Short-term investments
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299
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740
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Accounts receivable, net
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5,403
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4,731
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Financing receivables, net
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2,252
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1,712
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Inventories, net
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839
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867
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Other current assets
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3,348
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3,749
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Total current assets
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23,840
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20,151
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Property, plant, and equipment, net
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2,117
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2,277
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Investments
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746
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454
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Long-term financing receivables, net
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263
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500
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Goodwill
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1,748
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1,737
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Purchased intangible assets, net
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646
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724
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Other non-current assets
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698
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657
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Total assets
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$
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30,058
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$
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26,500
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Short-term debt
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$
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49
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$
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113
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Accounts payable
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9,698
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8,309
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Accrued and other
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3,765
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3,788
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Short-term deferred enhanced services revenue
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2,775
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2,649
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Total current liabilities
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16,287
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14,859
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Long-term debt
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3,394
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1,898
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Long-term deferred enhanced services revenue
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3,051
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3,000
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Other non-current liabilities
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2,701
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2,472
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Total liabilities
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25,433
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22,229
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Commitments and contingencies (Note 8)
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Stockholders equity:
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Preferred stock and capital in excess of $.01 par value;
shares authorized: 5,000; issued and outstanding: none
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-
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-
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Common stock and capital in excess of $.01 par value;
shares authorized: 7,000; shares issued: 3,349 and 3,338,
respectively; shares outstanding: 1,955
and 1,944, respectively
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11,289
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11,189
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Treasury stock at cost: 919 shares
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(27,904
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)
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(27,904
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)
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Retained earnings
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21,439
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20,677
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Accumulated other comprehensive (loss) income
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(199
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)
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309
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Total stockholders equity
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4,625
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4,271
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Total liabilities and stockholders equity
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$
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30,058
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$
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26,500
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
1
(in millions, except per share
amounts; unaudited)
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Three Months Ended
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Six Months Ended
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July 31,
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August 1,
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July 31,
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August 1,
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2009
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2008
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2009
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2008
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Net revenue
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Products
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$
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10,623
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$
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14,147
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$
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20,855
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$
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28,103
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Services, including software related
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2,141
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2,287
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4,251
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4,408
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Total net revenue
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12,764
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16,434
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25,106
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32,511
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Cost of net revenue
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Products
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8,978
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12,161
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17,764
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24,008
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Services, including software related
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1,395
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1,446
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2,783
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2,711
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Total cost of net revenue
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10,373
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13,607
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20,547
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26,719
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Gross margin
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2,391
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2,827
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4,559
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5,792
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Operating expenses
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Selling, general, and administrative
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1,571
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1,840
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3,184
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3,752
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In-process research and development
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-
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-
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-
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2
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Research, development, and engineering
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149
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168
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290
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320
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|
|
|
|
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|
|
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Total operating expenses
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1,720
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2,008
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3,474
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4,074
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|
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|
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Operating income
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671
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819
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1,085
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1,718
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Investment and other income (expense), net
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(42
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)
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18
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(44
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)
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143
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|
|
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|
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|
|
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|
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Income before income taxes
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629
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837
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1,041
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1,861
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Income tax provision
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|
|
157
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|
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221
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|
|
|
279
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|
|
|
461
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
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$
|
472
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|
|
$
|
616
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|
$
|
762
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$
|
1,400
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|
|
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|
|
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|
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Earnings per common share:
|
|
|
|
|
|
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Basic
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$
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0.24
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|
$
|
0.31
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|
|
$
|
0.39
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Diluted
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|
$
|
0.24
|
|
|
$
|
0.31
|
|
|
$
|
0.39
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted-average shares outstanding:
|
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|
|
|
|
|
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|
|
|
|
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Basic
|
|
|
1,955
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|
|
|
1,991
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|
|
|
1,952
|
|
|
|
2,013
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|
Diluted
|
|
|
1,960
|
|
|
|
1,999
|
|
|
|
1,956
|
|
|
|
2,019
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
2
(in millions; unaudited)
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|
|
|
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Six Months Ended
|
|
|
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July 31,
|
|
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August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
762
|
|
|
$
|
1,400
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
402
|
|
|
|
379
|
|
Stock-based compensation
|
|
|
146
|
|
|
|
128
|
|
In-process research and development charges
|
|
|
-
|
|
|
|
2
|
|
Effects of exchange rate changes on monetary assets and
liabilities denominated in foreign currencies
|
|
|
26
|
|
|
|
(110
|
)
|
Deferred income taxes
|
|
|
(91
|
)
|
|
|
(19
|
)
|
Other
|
|
|
173
|
|
|
|
85
|
|
Changes in operating assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(537
|
)
|
|
|
(392
|
)
|
Financing receivables
|
|
|
(379
|
)
|
|
|
19
|
|
Inventories
|
|
|
29
|
|
|
|
77
|
|
Other assets
|
|
|
(24
|
)
|
|
|
(473
|
)
|
Accounts payable
|
|
|
1,318
|
|
|
|
(328
|
)
|
Deferred enhanced services revenue
|
|
|
40
|
|
|
|
405
|
|
Accrued and other liabilities
|
|
|
(28
|
)
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Change in cash from operating activities
|
|
|
1,837
|
|
|
|
1,251
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(776
|
)
|
|
|
(788
|
)
|
Maturities and sales
|
|
|
982
|
|
|
|
1,752
|
|
Capital expenditures
|
|
|
(179
|
)
|
|
|
(264
|
)
|
Proceeds from sale of facility and land
|
|
|
16
|
|
|
|
44
|
|
Acquisition of business, net of cash received
|
|
|
(3
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash from investing activities
|
|
|
40
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
-
|
|
|
|
(2,451
|
)
|
Issuance of common stock under employee plans
|
|
|
-
|
|
|
|
68
|
|
Issuance (payments) of commercial paper, net
|
|
|
(100
|
)
|
|
|
100
|
|
Net proceeds from debt
|
|
|
1,491
|
|
|
|
1,519
|
|
Repayments of debt
|
|
|
(12
|
)
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash from financing activities
|
|
|
1,379
|
|
|
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
91
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
3,347
|
|
|
|
859
|
|
Cash and cash equivalents at beginning of period
|
|
|
8,352
|
|
|
|
7,764
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
11,699
|
|
|
$
|
8,623
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
NOTE 1
|
BASIS OF
PRESENTATION
|
Basis of Presentation The accompanying
Condensed Consolidated Financial Statements of Dell Inc.
(Dell) should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes filed
with the U.S. Securities and Exchange Commission
(SEC) in Dells Annual Report on
Form 10-K
for the fiscal year ended January 30, 2009. The
accompanying Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). In
the opinion of management, the accompanying Condensed
Consolidated Financial Statements reflect all adjustments of a
normal recurring nature considered necessary to fairly state the
financial position of Dell and its consolidated subsidiaries at
July 31, 2009, the results of its operations for the three
and six months ended July 31, 2009, and August 1,
2008, and its cash flows for the six months ended July 31,
2009, and August 1, 2008. Dell has evaluated subsequent
events through the date this quarterly report on
Form 10-Q
was filed with the SEC on September 3, 2009.
The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in Dells Condensed
Consolidated Financial Statements and the accompanying Notes.
Actual results could differ materially from those estimates. The
results of operations and cash flows for the three and six
months ended July 31, 2009, and August 1, 2008, are
not necessarily indicative of the results to be expected for the
full year.
Recently Issued and Adopted Accounting
Pronouncements In December 2007, the
Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS)
No. 141(R), Business Combinations
(SFAS 141(R)). SFAS 141(R) requires
that the acquisition method of accounting be applied to a
broader set of business combinations and establishes principles
and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired,
liabilities assumed, any noncontrolling interest in the
acquiree, and the goodwill acquired. Dell adopted
SFAS 141(R) in the first quarter of Fiscal 2010. The
adoption of SFAS 141(R) did not have any impact on
Dells Condensed Consolidated Financial Statements.
In February 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP)
157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2),
which delayed the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
Dell adopted the provisions of
FSP 157-2
related to nonfinancial assets and liabilities effective in the
first quarter of Fiscal 2010. The adoption of the provisions of
SFAS 157 related to nonfinancial assets and nonfinancial
liabilities did not have a material impact on Dells
Condensed Consolidated Financial Statements. See Note 4 of
Notes to Condensed Consolidated Financial Statements for
additional information.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires that the
noncontrolling interest in the equity of a subsidiary be
accounted for and reported as equity, provides revised guidance
on the treatment of net income and losses attributable to the
noncontrolling interest and changes in ownership interests in a
subsidiary, and requires additional disclosures that identify
and distinguish between the interests of the controlling and
noncontrolling owners. Dell adopted SFAS 160 in the first
quarter of Fiscal 2010. The adoption of SFAS 160 did not
have any impact on Dells Condensed Consolidated Financial
Statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161), which requires
additional disclosures about the objectives of derivative
instruments and hedging activities, the method of accounting for
such instruments under SFAS 133 and its related
interpretations, and a tabular disclosure of the effects of such
instruments and related hedged items on Dells Condensed
Consolidated Financial Statements. SFAS 161 does not change
the accounting treatment for derivative instruments. Dell
adopted SFAS 161 in the first quarter of Fiscal 2010. See
Note 3 of Notes to Condensed Consolidated Financial
Statements for additional information.
4
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
In April 2009, the FASB issued
FSP 157-4
Determining Fair Value When Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
(FSP 157-4),
which provides additional guidance on measuring the fair value
of financial instruments when markets become inactive and quoted
prices may reflect distressed transactions. Dell adopted the
provisions of
FSP 157-4
in the second quarter of Fiscal 2010. The adoption of
FSP 157-4
did not have a material impact on Dells Condensed
Consolidated Financial Statements. See Note 4 of Notes to
the Condensed Consolidated Financial Statements for additional
information.
In April 2009, the FASB issued FSP
FAS No. 107-1
and APB
No. 28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP
FAS 107-1
and APB
28-1).
FSP
FAS 107-1
and APB 28-1
require additional disclosures about the fair value of financial
instruments for interim reporting periods of publicly traded
companies. Dell adopted FSP
FAS 107-1
and APB 28-1
in the second quarter of Fiscal 2010. See Note 3 of Notes
to the Condensed Consolidated Financial Statements for
additional information.
In April 2009, the FASB issued FSP
FAS No. 115-2
and
FAS No. 124-2,
Recognition and Presentation of Other-Than-Temporary
Investments (FSP
FAS 115-2
and
124-2).
FSP
FAS 115-2
and 124-2
amends the
other-than-temporary
impairment guidance for debt securities. Under FSP
FAS 115-2
and 124-2,
the pre-existing intent and ability trigger was
modified such that an
other-than-temporary
impairment is now triggered when there is intent to sell the
security, it is more likely than not that the security will be
required to be sold before recovery in value, or the security is
not expected to recover the entire amortized cost basis of the
security (credit related loss). Credit related
losses on debt securities will be considered an
other-than-temporary
impairment recognized in earnings, and any other losses due to a
decline in fair value relative to the amortized cost deemed not
to be
other-than-temporary
will be recorded in other comprehensive income. Dell adopted FSP
FAS 115-2
and 124-2 in
the second quarter of Fiscal 2010. The adoption of FSP
FAS 115-2
and 124-2
did not have a material impact on Dells Condensed
Consolidated Financial Statements. See Note 3 of Notes to
the Condensed Consolidated Financial Statements for additional
information.
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events (SFAS 165), which
provides guidance to establish general standards of accounting
for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available
to be issued. Dell adopted SFAS 165 in the second quarter
of Fiscal 2010. The adoption of SFAS 165 did not have any
impact on Dells Condensed Consolidated Financial
Statements.
Recently Issued Accounting
Pronouncements In June 2009, the FASB
issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement
No. 140 (SFAS 166). SFAS 166 amends
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, (SFAS 140), removing the
concept of a qualifying special-purpose entity, and removing the
exception from applying FASB Interpretation No. 46(R)
(revised December 2003), Consolidation of Variable Interest
Entities (FIN 46(R)), to qualifying
special-purpose entities. This statement is effective for fiscal
years beginning after November 15, 2009. Dell will adopt
this Statement for interim and annual reporting periods
beginning in the first quarter of Fiscal 2011. While management
is continuing to evaluate the impact of the adoption of
SFAS 166 on Dells Consolidated Financial Statements,
it does expect adoption to result in the consolidation of its
qualifying special purpose entities beginning in the first
quarter of Fiscal 2011. See Note 5 of Notes to the
Condensed Consolidated Financial Statements for additional
information.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R),
(SFAS 167). SFAS 167 amends
FIN 46(R), to require an enterprise to perform an analysis
to determine whether the enterprises variable interest or
interests give it a controlling financial interest in a variable
interest entity. This statement is effective for fiscal years
beginning after November 15, 2009. Dell will adopt this
Statement for interim and annual reporting periods beginning in
the first quarter of Fiscal 2011. While management is currently
evaluating the impact of the adoption of SFAS 167 on
Dells Consolidated Financial Statements, Dell expects to
consolidate the qualifying
5
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
special purpose entities beginning in the first quarter of
Fiscal 2011. See Note 5 of Notes to the Condensed
Consolidated Financial Statements for additional information.
Reclassifications To maintain
comparability among the periods presented, Dell has revised the
Fiscal 2009 presentation of the components of net revenue and
cost of net revenue presented in the Condensed Consolidated
Statements of Income in order to disclose net revenue and cost
of net revenue for services as required by the SEC
Regulation S-X
Rule 5-03
Income Statements. The revision had no impact to
total net revenue and total cost of net revenue.
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
January 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Inventories, net
|
|
|
|
|
|
|
|
|
Production materials
|
|
$
|
432
|
|
|
$
|
454
|
|
Work-in-process
|
|
|
115
|
|
|
|
150
|
|
Finished goods
|
|
|
292
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
839
|
|
|
$
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3
|
FINANCIAL
INSTRUMENTS
|
Investments
The following table summarizes, by major security type, the fair
value and amortized cost of Dells investments. All debt
security investments with remaining maturities in excess of one
year and substantially all equity and other securities are
recorded as long-term investments in the Condensed Consolidated
Statements of Financial Position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009
|
|
|
January 30, 2009
|
|
|
|
Fair
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Value
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
160
|
|
|
$
|
161
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
539
|
|
|
$
|
537
|
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
U.S. corporate
|
|
|
556
|
|
|
|
556
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
457
|
|
|
|
464
|
|
|
|
2
|
|
|
|
(9
|
)
|
International corporate
|
|
|
190
|
|
|
|
190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78
|
|
|
|
77
|
|
|
|
1
|
|
|
|
-
|
|
State and municipal governments
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
909
|
|
|
|
910
|
|
|
|
3
|
|
|
|
(4
|
)
|
|
|
1,079
|
|
|
|
1,083
|
|
|
|
6
|
|
|
|
(10
|
)
|
Equity and other securities
|
|
|
136
|
|
|
|
136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
115
|
|
|
|
115
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,045
|
|
|
$
|
1,046
|
|
|
$
|
3
|
|
|
$
|
(4
|
)
|
|
$
|
1,194
|
|
|
$
|
1,198
|
|
|
$
|
6
|
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
299
|
|
|
$
|
299
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
740
|
|
|
$
|
737
|
|
|
$
|
4
|
|
|
$
|
(1
|
)
|
Long-term
|
|
|
746
|
|
|
|
747
|
|
|
|
3
|
|
|
|
(4
|
)
|
|
|
454
|
|
|
|
461
|
|
|
|
2
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,045
|
|
|
$
|
1,046
|
|
|
$
|
3
|
|
|
$
|
(4
|
)
|
|
$
|
1,194
|
|
|
$
|
1,198
|
|
|
$
|
6
|
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
Dells investments in debt securities are classified as
available-for-sale
and equity securities held in Dells Deferred Compensation
Plan are classified as trading securities. These securities are
reported at fair value (based on quoted prices and market
observable inputs) using the specific identification method. All
other investments are initially recorded at cost and reduced for
any impairment losses. The fair value of Dells portfolio
is affected primarily by interest rate movement rather than
credit and liquidity risks. Dells exposure to asset and
mortgage backed securities was less than 1% of the value of the
portfolio at July 31, 2009. Dell attempts to mitigate these
risks by investing primarily in high credit quality securities
with AAA and AA ratings and short-term securities with an
A-1 rating,
limiting the amount that can be invested in any single issuer,
and investing primarily in shorter term investments whose market
value is less sensitive to interest rate changes. As part of its
cash and risk management process, Dell performs periodic
evaluations of the credit standing of the institutions in
accordance with its investment policy. Dells investments
in debt securities have effective maturities of less than five
years.
At July 31, 2009, and January 30, 2009, Dell did not
hold any auction rate securities. At July 31, 2009, and
January 30, 2009, the total carrying value of investments
in asset-backed and mortgage-backed debt securities was
approximately $12 million and $54 million,
respectively.
The following table summarizes Dells debt securities,
including securities classified as cash equivalents, that had
unrealized losses as of July 31, 2009, and their duration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
(Loss)
|
|
|
Value
|
|
|
(Loss)
|
|
|
Value
|
|
|
(Loss)
|
|
|
|
(in millions)
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
172
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
173
|
|
|
$
|
(1
|
)
|
U.S. corporate
|
|
|
102
|
|
|
|
-
|
|
|
|
34
|
|
|
|
(3
|
)
|
|
|
136
|
|
|
|
(3
|
)
|
International corporate
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
356
|
|
|
$
|
-
|
|
|
$
|
35
|
|
|
$
|
(4
|
)
|
|
$
|
391
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At July 31, 2009, Dell held investments in 70 debt
securities that had fair value below their carrying values for a
period of less than 12 months and 17 debt securities that
had fair value below their carrying values for a period of
12 months or more. The unrealized losses are due to
interest rate movements and are expected to be recovered over
the contractual term of the instruments.
During the second quarter of Fiscal 2010, Dell adopted FSP
FAS 115-2
and
FAS 124-2
which amended the
other-than-temporary
impairment (OTTI) model for debt securities. The
adoption of FSP
FAS 115-2
and
FAS 124-2
did not have a material impact on the Dells Condensed
Consolidated Financial Statements. Dell reviews its investment
portfolio quarterly to determine if any investment is
other-than-temporarily
impaired. Under the new guidance, an OTTI loss is recognized in
earnings if the company has the intent to sell the debt
security, or if it is more likely than not that it will be
required to sell the debt security before recovery of its
amortized cost basis. However, if Dell does not expect to sell a
debt security, it evaluates expected cash flows to be received
and determines if a credit loss exists. In the event of a credit
loss, only the amount of impairment associated with the credit
loss is recognized currently in earnings. Amounts relating to
factors other than credit losses are recorded in other
comprehensive income. As of July 31, 2009, Dell evaluated
debt securities classified as available for sale for OTTI and
the existence of credit losses. Dell did not record any loss for
OTTI during the second quarter. As of the beginning of the
second quarter of Fiscal 2010, the amounts recorded for the
cumulative-effect adjustment, and the credit losses recognized
in the quarter, were immaterial.
7
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
The following table summarizes recognized gains and losses on
investments recorded in investment and other income (expense),
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Gains
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
12
|
|
Losses
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(3
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains (losses)
|
|
$
|
-
|
|
|
$
|
(14
|
)
|
|
$
|
1
|
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Instruments and Hedging Activities
Foreign
Currency Instruments
As part of its risk management strategy, Dell uses derivative
instruments, primarily forward contracts and purchased options,
to hedge certain foreign currency exposures. Dells
objective is to offset gains and losses resulting from these
exposures with gains and losses on the derivative contracts used
to hedge them, thereby reducing volatility of earnings and
protecting fair values of assets and liabilities. Dell applies
hedge accounting based upon the criteria established by
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, (SFAS 133),
including designation of its derivatives as fair value hedges or
cash flow hedges and assessment of hedge effectiveness. Dell
estimates the fair values of derivatives based on quoted market
prices or pricing models using current market rates and records
all derivatives in its Condensed Consolidated Statement of
Financial Position at fair value.
Cash
Flow Hedges
Dell uses a combination of forward contracts and purchased
options designated as cash flow hedges to protect against the
foreign currency exchange rate risks inherent in its forecasted
transactions denominated in currencies other than the
U.S. dollar. The risk of loss associated with purchased
options is limited to premium amounts paid for the option
contracts. The risk of loss associated with forward contracts is
equal to the exchange rate differential from the time the
contract is entered into until the time it is settled. Both of
these contracts typically expire in 12 months or less. For
derivative instruments that are designated and qualify as cash
flow hedges, Dell records the effective portion of the gain or
loss on the derivative instrument in accumulated other
comprehensive income (OCI) (loss) as a separate
component of stockholders equity and reclassifies these
amounts into earnings in the period during which the hedged
transaction is recognized in earnings. Dell reports the
effective portion of cash flow hedges in the same financial
statement line item within earnings as the changes in value of
the hedged item.
For foreign currency forward contracts and purchased options
designated as cash flow hedges, Dell assesses hedge
effectiveness both at the onset of the hedge as well as at the
end of each fiscal quarter throughout the life of the
derivative. Dell measures hedge ineffectiveness by comparing the
cumulative change in the fair value of the hedge contract with
the cumulative change in the fair value of the hedged item, both
of which are based on forward rates. Dell recognizes any
ineffective portion of the hedge, as well as amounts not
included in the assessment of effectiveness, currently in
earnings as a component of investment and other income
(expense), net. Hedge ineffectiveness for cash flow hedges was
not material for the three and six months ended July 31,
2009. During the three and six months ended July 31, 2009,
Dell did not discontinue any cash flow hedges that had a
material impact on Dells results of operations, as
substantially all forecasted foreign currency transactions were
realized in Dells actual results.
8
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
As of July 31, 2009, the total notional amount of foreign
currency option and forward contracts designated as cash flow
hedges was $6.7 billion from selling local currency.
The following tables summarize the fair value of the foreign
exchange contracts on the Condensed Consolidated Statement of
Financial Position, as well as the amount of hedge
ineffectiveness on cash flow hedges recorded in earnings for the
respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
Derivatives in
|
|
Gain (Loss) Recognized
|
|
|
Location of Gain (Loss)
|
|
Reclassified
|
|
|
Location of Gain (Loss)
|
|
Gain (Loss)
|
|
SFAS 133 Cash Flow
|
|
in Accumulated OCI, Net
|
|
|
Reclassified from
|
|
from Accumulated
|
|
|
Recognized in Income
|
|
Recognized in
|
|
Hedging
|
|
of Tax, on Derivatives
|
|
|
Accumulated OCI into
|
|
OCI into Income
|
|
|
on Derivative
|
|
Income on Derivative
|
|
Relationships
|
|
(Effective Portion)
|
|
|
Income (Effective Portion)
|
|
(Effective Portion)
|
|
|
(Ineffective Portion)
|
|
(Ineffective Portion)
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
For the Three Months Ended July 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
|
|
|
|
Total net revenue
|
|
$
|
(147
|
)
|
|
Investment and other
|
|
|
|
|
contracts
|
|
$
|
(289
|
)
|
|
Total cost of net revenue
|
|
|
(23
|
)
|
|
income (expense), net
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(289
|
)
|
|
|
|
$
|
(170
|
)
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended July 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
|
|
|
|
Total net revenue
|
|
$
|
74
|
|
|
Investment and other
|
|
|
|
|
contracts
|
|
$
|
(413
|
)
|
|
Total cost of net revenue
|
|
|
(10
|
)
|
|
income (expense), net
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(413
|
)
|
|
|
|
$
|
64
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Foreign Currency Derivative Instruments
Dell uses forward contracts to hedge monetary assets and
liabilities, primarily receivables and payables, denominated in
a foreign currency. The change in the fair value of these
instruments represents a natural hedge as their gains and losses
offset the changes in the underlying fair value of the monetary
assets and liabilities due to movements in currency exchange
rates. These contracts generally expire in three months or less.
These contracts are considered economic hedges and are not
designated as hedges under SFAS 133, and therefore, the
change in the instruments fair value is recognized
currently in earnings as a component of investment and other
income (expense), net. For the second quarter and first six
months of Fiscal 2010, losses recognized on foreign currency
forward contracts were $72 million and $26 million,
respectively. As of July 31, 2009, the total notional
amount of other foreign currency forward contracts not
designated as hedges under SFAS 133 was $971 million
from buying local currency.
Derivative
Instruments Additional Information
Cash flows from derivative instruments are presented in the same
category on the Condensed Consolidated Statements of Cash flows
as the cash flows from the intended hedged items or the economic
hedges.
While Dell has derivative contracts in more than 20 currencies,
the majority of the notional amounts are denominated in the
Euro, British Pound, Japanese Yen, Canadian Dollar, and
Australian Dollar.
Dell accounts for derivatives under FASB Interpretation
No. 39, Offsetting of Amounts Related to Certain
Contracts, which allows for net presentation of its
derivative instruments in the statement of financial position
9
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
due to right of setoff by counterparty under master netting
arrangements. As required by SFAS 161, the fair value of
the derivative instruments presented on a gross basis at
July 31, 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009
|
|
|
|
Other Current
|
|
|
Other Current
|
|
|
Total
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
|
Derivatives Designated as Hedging Instruments Under SFAS
133
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts in an asset position
|
|
$
|
38
|
|
|
$
|
78
|
|
|
$
|
116
|
|
Foreign exchange contracts in a liability position
|
|
|
(29
|
)
|
|
|
(333
|
)
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
9
|
|
|
|
(255
|
)
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not Designated as Hedging Instruments Under
SFAS 133
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts in an asset position
|
|
|
46
|
|
|
|
62
|
|
|
|
108
|
|
Foreign exchange contracts in a liability position
|
|
|
(23
|
)
|
|
|
(80
|
)
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
23
|
|
|
|
(18
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives at fair value
|
|
$
|
32
|
|
|
$
|
(273
|
)
|
|
$
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dell has reviewed the existence and nature of
credit-risk-related contingent features in derivative trading
agreements with its counterparties. Certain agreements contain
clauses whereby upon a change of control and if Dells
credit ratings were to fall below investment grade,
counterparties would have the right to terminate those
derivative contracts where Dell is in a net liability position.
As of July 31, 2009, there have been no such triggering
events.
Debt
Commercial
Paper
Dell has a $1.5 billion commercial paper program with a
supporting $1.5 billion senior unsecured revolving credit
facility that allows Dell to obtain favorable short-term
borrowing rates. The credit facility requires compliance with
conditions that must be satisfied prior to any borrowing, as
well as ongoing compliance with specified affirmative and
negative covenants, including maintenance of a minimum interest
coverage ratio. Amounts outstanding under the facility may be
accelerated for events of default, including failure to pay
principal or interest, breaches of covenants, or non-payment of
judgments or debt obligations. There were no events of default
as of July 31, 2009.
At July 31, 2009, there were no outstanding advances under
the commercial paper program and no outstanding advances under
the related revolving credit facilities. At January 30,
2009, there was $100 million outstanding under the
commercial paper program and no outstanding advances under the
related revolving credit facilities. Dell uses the proceeds of
the program for short-term liquidity needs.
10
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
Long-Term
Debt
The following table summarizes Dells long-term debt:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
January 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Notes
|
|
|
|
|
|
|
|
|
$400 million issued on June 10, 2009, at 3.375% due
June 2012 (2012 Notes) with interest payable June 15
and December 15
|
|
$
|
400
|
|
|
$
|
-
|
|
$600 million issued on April 17, 2008, at 4.70% due
April 2013 (2013 Notes) with interest payable April
15 and October 15
|
|
|
599
|
|
|
|
599
|
|
$500 million issued on April 1, 2009, at 5.625% due
April 2014 (2014 Notes) with interest payable April
15 and October 15
|
|
|
500
|
|
|
|
-
|
|
$500 million issued on April 17, 2008, at 5.65% due
April 2018 (2018 Notes) with interest payable April
15 and October 15
|
|
|
499
|
|
|
|
499
|
|
$600 million issued on June 10, 2009, at 5.875% due
June 2019 (2019 Notes) with interest payable June 15
and December 15
|
|
|
600
|
|
|
|
-
|
|
$400 million issued on April 17, 2008, at 6.50% due
April 2038 (2038 Notes) with interest payable April
15 and October 15
|
|
|
400
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
Senior Debentures
|
|
|
|
|
|
|
|
|
$300 million issued on April 1998 at 7.10% due April 2028
with interest payable April 15 and October 15 (includes the
unamortized amount related to interest rate swap terminations)
|
|
|
396
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
3,394
|
|
|
$
|
1,898
|
|
|
|
|
|
|
|
|
|
|
The 2012 Notes and the 2019 Notes were issued during the second
quarter of Fiscal 2010, and the 2014 Notes were issued during
the first quarter of Fiscal 2010, under an automatic shelf
registration statement that was filed in November 2008. The net
proceeds from these offerings, after payment of expenses, were
approximately $994 million for the 2012 Notes and the 2019
Notes and $497 million for the 2014 Notes. The estimated
fair value of the Notes was approximately $3.1 billion at
July 31, 2009, compared to a carrying value of
$3.0 billion at that date.
The principal amount of the Senior Debentures was
$300 million at July 31, 2009. The estimated fair
value of the long-term debt was approximately $302 million
at July 31, 2009, compared to a carrying value of
$396 million at that date. The carrying value includes an
unamortized amount related to the termination of interest rate
swap agreements, that were previously designated as hedges of
the debt, in the fourth quarter of Fiscal 2009.
The Indentures governing the Notes and the Senior Debentures
contain customary events of default, including failure to make
required payments, failure to comply with certain agreements or
covenants and certain events of bankruptcy and insolvency. The
Indentures also contain covenants limiting Dells ability
to create certain liens, enter into
sale-and-lease
back transactions and consolidate or merge with, or convey,
transfer or lease all or substantially all of Dells assets
to, another person.
As of July 31, 2009, there were no events of default with
respect to the Notes and the Senior Debentures.
11
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
NOTE 4
|
FAIR
VALUE MEASUREMENTS
|
Fair
Value Measurements
On February 2, 2008, Dell adopted the effective portions of
SFAS 157 for all financial assets and liabilities and
non-financial assets and liabilities accounted for at fair value
on a recurring basis. On January 31, 2009, Dell adopted
FSP 157-2
for all non-financial assets and liabilities accounted for at
fair value on a non-recurring basis. SFAS 157 defines fair
value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In determining fair
value, Dell uses various methods including market, income, and
cost approaches. Dell utilizes valuation techniques that
maximize the use of observable inputs and minimize the use of
unobservable inputs. The adoption of
FSP 157-2
did not have a material effect on the Condensed Consolidated
Financial Statements.
As a basis for categorizing these inputs, SFAS 157
establishes the following hierarchy that prioritizes the inputs
used to measure fair value from market based assumptions to
entity specific assumptions:
|
|
|
Level 1: Inputs based on quoted market prices for
identical assets or liabilities in active markets at the
measurement date.
|
|
|
Level 2: Observable inputs other than quoted prices
included in Level 1, such as quoted prices for similar
assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are
not active; or other inputs that are observable or can be
corroborated by observable market data.
|
|
|
Level 3: Inputs reflect managements best
estimate of what market participants would use in pricing the
asset or liability at the measurement date. The inputs are
unobservable in the market and significant to the
instruments valuation.
|
The following tables present the hierarchy for Dells
assets and liabilities measured at fair value on a recurring
basis as of July 31, 2009, and January 30, 2009.
Investments by major categories are disclosed in Note 3 of
Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(in millions)
|
|
|
Cash equivalents
|
|
$
|
-
|
|
|
$
|
119
|
|
|
$
|
-
|
|
|
$
|
119
|
|
Investments - available for sale securities
|
|
|
-
|
|
|
|
924
|
|
|
|
29
|
|
|
|
953
|
|
Investments - trading securities
|
|
|
-
|
|
|
|
92
|
|
|
|
-
|
|
|
|
92
|
|
Retained interest
|
|
|
-
|
|
|
|
-
|
|
|
|
119
|
|
|
|
119
|
|
Derivative instruments
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on recurring basis
|
|
$
|
-
|
|
|
$
|
1,167
|
|
|
$
|
148
|
|
|
$
|
1,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
273
|
|
|
$
|
-
|
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value on recurring basis
|
|
$
|
-
|
|
|
$
|
273
|
|
|
$
|
-
|
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(in millions)
|
|
|
Cash equivalents
|
|
$
|
-
|
|
|
$
|
56
|
|
|
$
|
-
|
|
|
$
|
56
|
|
Investments - available for sale securities
|
|
|
-
|
|
|
|
1,093
|
|
|
|
27
|
|
|
|
1,120
|
|
Investments - trading securities
|
|
|
1
|
|
|
|
73
|
|
|
|
-
|
|
|
|
74
|
|
Retained interest
|
|
|
-
|
|
|
|
-
|
|
|
|
396
|
|
|
|
396
|
|
Derivative instruments
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on recurring basis
|
|
$
|
1
|
|
|
$
|
1,849
|
|
|
$
|
423
|
|
|
$
|
2,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
131
|
|
|
$
|
-
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value on recurring basis
|
|
$
|
-
|
|
|
$
|
131
|
|
|
$
|
-
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following section describes the valuation methodologies Dell
uses to measure financial instruments at fair value:
Cash Equivalents The majority of
Dells cash equivalents, measured at fair value (fair value
approximates cost), consists of commercial paper and US
treasuries with original maturities of less than ninety days.
Dell utilizes a pricing service to assist management in
obtaining fair value pricing for the majority of the investment
portfolio.
Investments Available for Sale The
majority of Dells investment portfolio consists of various
fixed income securities such as U.S. government and
agencies, U.S. and international corporate, and state and
municipal bonds. This portfolio of investments, as of
July 31, 2009, and January 30, 2009, is valued based
on model driven valuations, whereby all significant inputs are
observable or can be derived from or corroborated by observable
market data for substantially the full term of the asset. Dell
utilizes a pricing service to assist management in obtaining
fair value pricing for the majority of the investment portfolio.
Pricing for securities is based on proprietary models, and
inputs are documented in accordance with the SFAS 157
hierarchy. Dell conducts reviews on a quarterly basis to verify
pricing, assess liquidity, and determine if significant inputs
have changed that would impact the SFAS 157 hierarchy
disclosure. The Level 3 position represents a convertible
debt security that Dell was unable to corroborate with
observable market data. The investment is valued at cost plus
accrued interest as this is managements best estimate of
fair value.
Investments Trading Securities The
majority of Dells trading portfolio consists of various
mutual funds and equity securities. The Level 1 securities
are valued using quoted prices for identical assets in active
markets. The Level 2 securities include various mutual
funds that are not exchange traded and valued at their net asset
value, which can be market corroborated.
Retained Interest in Securitized
Receivables The fair value of the retained
interest is determined using a discounted cash flow model.
Significant assumptions to the model include pool credit losses,
payment rates, and discount rates. These assumptions are
supported by both historical experience and anticipated trends
relative to the particular receivable pool. Retained interest in
securitized receivables is included in financing receivables,
current and long-term, on the Condensed Consolidated Statements
of Financial Position. See Note 5 of Notes to Condensed
Consolidated Financial Statements for additional information
about retained interest.
13
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
Derivative Instruments Dells
derivative financial instruments consist of foreign currency
forward and purchased option contracts. The portfolio is valued
using internal models based on market observable inputs,
including forward and spot prices for currencies and implied
volatilities. Credit risk is also factored into the fair value
calculation of Dells derivative instrument portfolio.
Credit risk is quantified through the use of credit default swap
spreads based on a composite of Dells counterparties,
which represents the cost of protection in the event the
counterparty or Dell were to default on the obligation.
The following tables show a reconciliation of the beginning and
ending balances for fair value measurements using significant
unobservable inputs for the three and six months ended
July 31, 2009, and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 31, 2009
|
|
|
August 1, 2008
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
Retained
|
|
|
Available
|
|
|
|
|
|
Retained
|
|
|
Available
|
|
|
|
|
|
|
Interest
|
|
|
for Sale
|
|
|
Total
|
|
|
Interest
|
|
|
for Sale
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at beginning of the period
|
|
$
|
504
|
|
|
$
|
28
|
|
|
$
|
532
|
|
|
$
|
317
|
|
|
$
|
25
|
|
|
$
|
342
|
|
Net unrealized gains included in
earnings (a)
|
|
|
17
|
|
|
|
1
|
|
|
|
18
|
|
|
|
4
|
|
|
|
1
|
|
|
|
5
|
|
Issuances and settlements
|
|
|
100
|
|
|
|
-
|
|
|
|
100
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
Impact of special purpose entity consolidation
(b)
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
119
|
|
|
$
|
29
|
|
|
$
|
148
|
|
|
$
|
312
|
|
|
$
|
26
|
|
|
$
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
July 31, 2009
|
|
|
August 1, 2008
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
Retained
|
|
|
Available
|
|
|
|
|
|
Retained
|
|
|
Available
|
|
|
|
|
|
|
Interest
|
|
|
for Sale
|
|
|
Total
|
|
|
Interest
|
|
|
for Sale
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at beginning of period
|
|
$
|
396
|
|
|
$
|
27
|
|
|
$
|
423
|
|
|
$
|
223
|
|
|
$
|
-
|
|
|
$
|
223
|
|
Net unrealized gains (losses) included in earnings
(a)
|
|
|
8
|
|
|
|
2
|
|
|
|
10
|
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
Issuances and settlements
|
|
|
217
|
|
|
|
-
|
|
|
|
217
|
|
|
|
92
|
|
|
|
-
|
|
|
|
92
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
25
|
|
|
|
25
|
|
Impact of special purpose entity consolidation
(b)
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
119
|
|
|
$
|
29
|
|
|
$
|
148
|
|
|
$
|
312
|
|
|
$
|
26
|
|
|
$
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The unrealized gains on investments
available for sale represent accrued interest.
|
|
(b)
|
|
See Note 5 of Notes to
Condensed Consolidated Financial Statements for additional
information about the impact of the special purpose entity
consolidation.
|
Unrealized gains or (losses) on retained interest and the
convertible debt security are reported in income.
Other Financial Items Measured at Fair Value on a
Nonrecurring Basis Certain assets and
liabilities are measured at fair value on a nonrecurring basis
and therefore are not included in the above recurring fair value
table.
14
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
The balances are not material relative to Dells balance
sheet, and there were no material non-recurring adjustments to
earnings to disclose under the provisions of SFAS 157 as of
July 31, 2009, or January 30, 2009.
Nonfinancial Items Measured at Fair Value on a
Nonrecurring Basis Nonfinancial assets such
as goodwill and intangible assets are measured at fair value
when there is an indicator of impairment and recorded at fair
value only when impairment is recognized. Dell performed its
annual impairment analyses during the second quarter of Fiscal
2010. Based on the results of the impairment tests, Dell
determined that no impairment of goodwill and intangible assets
existed as of July 31, 2009.
|
|
NOTE 5
|
FINANCIAL
SERVICES
|
Dell Financial Services L.L.C.
Dell offers or arranges various financing options and services
for its business and consumer customers in the U.S. through
Dell Financial Services L.L.C. (DFS), a wholly-owned
subsidiary of Dell. DFSs key activities include the
origination, collection, and servicing of customer receivables
related to the purchase of Dell products. New financing
originations, which represent the amounts of financing provided
to customers for equipment and related software and services
through DFS, were $1.0 billion and $1.2 billion,
during the three months ended July 31, 2009, and
August 1, 2008, respectively, and $1.9 billion and
$2.3 billion for the six months ended July 31, 2009,
and August 1, 2008, respectively.
Financing
Receivables
The following table summarizes the components of Dells
financing receivables:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
January 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Financing receivables, net
|
|
|
|
|
|
|
|
|
Customer receivables
|
|
|
|
|
|
|
|
|
Revolving loans
|
|
$
|
1,034
|
|
|
$
|
963
|
|
Fixed-term leases and loans
|
|
|
715
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,749
|
|
|
|
1,686
|
|
Customer receivables previously unconsolidated
|
|
|
561
|
|
|
|
-
|
|
Allowance for losses
|
|
|
(173
|
)
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
Customer receivables, net
|
|
|
2,137
|
|
|
|
1,537
|
|
Residual interest
|
|
|
259
|
|
|
|
279
|
|
Retained interest
|
|
|
119
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
2,515
|
|
|
$
|
2,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
2,252
|
|
|
$
|
1,712
|
|
Long-term
|
|
|
263
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
2,515
|
|
|
$
|
2,212
|
|
|
|
|
|
|
|
|
|
|
15
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
Customer
Receivables
The following is the description of the components of customer
receivables:
|
|
|
|
|
Revolving loans offered under private label credit financing
programs provide qualified customers with a revolving credit
line for the purchase of products and services offered by Dell.
Revolving loans bear interest at a variable annual percentage
rate that is tied to the prime rate. Based on historical payment
patterns, revolving loan transactions are typically repaid on
average within 12 months. Revolving loans are included in
short-term financing receivables in the table above. From time
to time, account holders may have the opportunity to finance
their Dell purchases with special programs during which, if the
outstanding balance is paid in full by a specific date, no
interest is charged. These special programs generally range from
3 to 12 months. At July 31, 2009, and January 30,
2009, $331 million and $352 million, respectively,
were receivable under these special programs.
|
|
|
|
Dell enters into sales-type lease arrangements with customers
who desire lease financing. Leases with business customers have
fixed terms of two to five years. Future maturities of minimum
lease payments at July 31, 2009, for future fiscal years
are as follows: 2010 $151 million;
2011 $205 million; 2012
$118 million; 2013 $28 million; and
2014 $2 million. Fixed-term loans are offered
to qualified small businesses, large commercial accounts,
governmental organizations, and educational entities.
|
Delinquency and charge-off statistics are for customer
receivables (excluding customer receivables previously
unconsolidated).
|
|
|
|
|
As of July 31, 2009, and January 30, 2009, customer
financing receivables 60 days or more delinquent were
$54 million and $58 million, respectively. These
amounts represent 3.1% and 3.4% of the ending gross customer
financing receivables balances for the respective periods.
|
|
|
|
Net principal charge-offs for the three months ended
July 31, 2009, and August 1, 2008, were
$30 million and $20 million, respectively. These
amounts, when annualized, represent 7.2% and 5.4% of the average
gross outstanding customer financing receivable balance
(including accrued interest) for the respective three month
periods.
|
|
|
|
Net principal charge-offs for the six months ended July 31,
2009, and August 1, 2008, were $60 million and
$38 million, respectively. These amounts, when annualized,
represent 6.9% and 4.7% of the average gross outstanding
customer financing receivable balance (including accrued
interest) for the respective six month periods.
|
Customer
Receivables Previously Unconsolidated
During the second quarter, the beneficial interest in the
revolving securitization conduit owned by third parties fell
below 10%, and the previously qualifying special purpose entity
was consolidated pursuant to SFAS 140. Retained interest of
$502 million was eliminated upon consolidation, and
customer receivables previously unconsolidated were recorded at
fair value of $561 million as of July 31, 2009. The
corresponding principal balance of these receivables was
$584 million. The fair value was determined using a
discounted cash flow model, including assumptions for credit
losses and liquidations. These assumptions are supported by both
historical experience and anticipated trends relative to this
particular revolving receivable pool. Subsequent deterioration
in credit loss assumptions could result in an allowance being
recognized for these receivables. Corresponding short-term debt
of $48 million was also recorded at the time of
consolidation, and it is expected to be retired in the third
quarter of Fiscal 2010. See asset securitization section below.
16
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
Residual
Interest
Dell retains a residual interest in equipment leased under its
fixed-term
lease programs. The amount of the residual interest is
established at the inception of the lease based upon estimates
of the value of the equipment at the end of the lease term using
historical studies, industry data, and future
value-at-risk
demand valuation methods. On a quarterly basis, Dell assesses
the carrying amount of its recorded residual values for
impairment. Anticipated declines in specific future residual
values that are considered to be
other-than-temporary
are recorded currently in earnings.
Retained
Interest
Retained interest represents the residual beneficial interest
Dell retains in certain pools of securitized financing
receivables that are off-balance sheet. Retained interest is
stated at the present value of the estimated net beneficial cash
flows after payment of all senior interests. Dell values the
retained interest at the time of each receivable transfer and at
the end of each reporting period. The fair value of the retained
interest is determined using a discounted cash flow model with
various key assumptions, including payment rates, credit losses,
discount rates, and the remaining life of the receivables sold.
These assumptions are supported by both Dells historical
experience and anticipated trends relative to the particular
receivable pool. The key valuation assumptions for retained
interest can be affected by many factors, including repayment
terms and the credit quality of receivables securitized.
The following table summarizes the activity in retained interest
balances for the three and six months ended July 31, 2009,
and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Retained interest at beginning of period
|
|
$
|
504
|
|
|
$
|
317
|
|
|
$
|
396
|
|
|
$
|
223
|
|
Issuances
|
|
|
125
|
|
|
|
76
|
|
|
|
252
|
|
|
|
232
|
|
Distributions from conduits
|
|
|
(25
|
)
|
|
|
(85
|
)
|
|
|
(35
|
)
|
|
|
(140
|
)
|
Net accretion
|
|
|
14
|
|
|
|
10
|
|
|
|
24
|
|
|
|
20
|
|
Change in fair value for the period
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
(16
|
)
|
|
|
(23
|
)
|
Impact of special purpose entity consolidation
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained interest at end of period
|
|
$
|
119
|
|
|
$
|
312
|
|
|
$
|
119
|
|
|
$
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the key assumptions used to measure
the fair value of the retained interest at time of transfer
within the quarter and at the balance sheet date, July 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Key Assumptions
|
|
|
|
Monthly
|
|
|
Credit
|
|
|
Discount
|
|
|
|
|
|
|
Payment Rates
|
|
|
Losses
|
|
|
Rates
|
|
|
Life
|
|
|
|
|
|
|
(lifetime)
|
|
|
(annualized)
|
|
|
(months)
|
|
|
Time of transfer valuation of retained interest
|
|
|
5
|
%
|
|
|
1
|
%
|
|
|
12
|
%
|
|
|
19
|
|
Valuation of retained interest
|
|
|
8
|
%
|
|
|
3
|
%
|
|
|
12
|
%
|
|
|
14
|
|
17
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
The impact of adverse changes to the key valuation assumptions
to the fair value of retained interest at July 31, 2009, is
shown in the following table:
|
|
|
|
|
|
|
July 31, 2009
|
|
|
|
(in millions)
|
|
|
Adverse Change of
|
|
|
|
|
|
|
|
|
|
Expected prepayment speed: 10%
|
|
$
|
(0.1
|
)
|
Expected prepayment speed: 20%
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
Expected credit losses: 10%
|
|
$
|
(1.2
|
)
|
Expected credit losses: 20%
|
|
$
|
(2.5
|
)
|
|
|
|
|
|
Discount rate: 10%
|
|
$
|
(1.4
|
)
|
Discount rate: 20%
|
|
$
|
(2.8
|
)
|
The analyses above utilized 10% and 20% adverse variation in
assumptions to assess the sensitivities in the fair value of the
retained interest. However, these changes generally cannot be
extrapolated because the relationship between a change in one
assumption to the resulting change in fair value may not be
linear. For the above sensitivity analyses, each key assumption
was isolated and evaluated separately. Each assumption was
adjusted by 10% and 20% while holding the other key assumptions
constant. Assumptions may be interrelated, and changes to one
assumption may impact others and the resulting fair value of the
retained interest. For example, increases in market interest
rates may result in lower prepayments and increased credit
losses. The effect of multiple assumption changes were not
considered in the analyses.
Asset
Securitization
During the first six months of Fiscal 2010 and Fiscal 2009, Dell
securitized $495 million and $796 million,
respectively, of fixed-term leases and loans and revolving loans
via special purpose entities. The purpose of these special
purpose entities is to facilitate the funding of financing
receivables in the capital markets. The special purpose entities
have entered into financing arrangements with three multi-seller
conduits that, in turn, issue asset-backed debt securities in
the capital markets. Two of the three conduits fund fixed-term
leases and loans, and one conduit funded revolving loans, until
it initiated scheduled amortization and was consolidated in July
2009. Dells securitization transactions generally do not
result in servicing assets and liabilities as the contractual
fees are adequate compensation in relation to the associated
servicing cost.
Dells securitization programs contain standard structural
features related to the performance of the securitized
receivables. These structural features include defined credit
losses, delinquencies, average credit scores, and excess
collections above or below specified levels. In the event one or
more of these features are met and Dell is unable to restructure
the program, no further funding of receivables will be permitted
and the timing of expected retained interest cash flows will be
delayed, which would impact the valuation of the retained
interest.
Delinquency and charge-off statistics for securitized
fixed-term
leases and loans held by unconsolidated special purpose entities
are:
|
|
|
|
|
As of July 31, 2009, and January 30, 2009, the unpaid
principal balance of securitized receivables were
$726 million and $680 million, respectively. As of
July 31, 2009, and January 30, 2009, securitized
financing receivables 60 days or more delinquent were
$11 million and $14 million, respectively. These
amounts represent 1.5% and 2.1% of the ending securitized
financing receivables balances for the respective periods.
|
18
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
|
|
|
Net principal charge-offs for the three months ended
July 31, 2009, and August 1, 2008, were
$3 million and $6 million, respectively. These amounts
when annualized represent 1.9% and 3.1% of the average
outstanding securitized financing receivable balance for the
respective three month periods.
|
|
|
|
Net principal charge-offs for the six months ended July 31,
2009, and August 1, 2008, were $8 million and
$11 million, respectively. These amounts when annualized
represent 2.3% and 3.2% of the average outstanding securitized
financing receivable balance for the respective six month
periods.
|
|
|
NOTE 6
|
GOODWILL
AND INTANGIBLE ASSETS
|
Goodwill
Goodwill allocated to Dells business segments as of
July 31, 2009, and January 30, 2009, and changes in
the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
|
|
|
|
|
|
Small and
|
|
|
|
|
|
|
|
|
|
Enterprise
|
|
|
Public
|
|
|
Medium Business
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at January 30, 2009
|
|
$
|
677
|
|
|
$
|
411
|
|
|
$
|
354
|
|
|
$
|
295
|
|
|
$
|
1,737
|
|
Adjustments
|
|
|
6
|
|
|
|
2
|
|
|
|
-
|
|
|
|
3
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2009
|
|
$
|
683
|
|
|
$
|
413
|
|
|
$
|
354
|
|
|
$
|
298
|
|
|
$
|
1,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and indefinite lived intangibles are tested annually
during the second fiscal quarter and whenever events or
circumstances indicate impairment may have occurred. If the
carrying amount of goodwill exceeds its fair value, estimated
based on discounted cash flow analyses, an impairment charge
would be recorded. During the first half of Fiscal 2010, Dell
evaluated goodwill and indefinite lived intangibles for
potential triggering events that could indicate impairment.
Based on the results of the impairment tests, Dell determined
that no impairment of goodwill and indefinite lived intangible
assets existed at July 31, 2009. The goodwill adjustments
are primarily the result of contingent purchase price
considerations related to prior acquisitions and the effects of
foreign currency fluctuations.
19
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
NOTE 7
|
WARRANTY
LIABILITY AND RELATED DEFERRED ENHANCED SERVICES
REVENUE
|
Revenue from extended warranty and service contracts including
support agreements, for which Dell is obligated to perform, is
recorded as deferred enhanced services revenue and subsequently
recognized over the term of the contract or when the service is
completed and the costs associated with these contracts are
recognized as incurred. Deferred software related revenue is
included in accrued and other current and other non-current
liabilities on Dells Condensed Consolidated Statements of
Financial Position. Dell records warranty liabilities at the
time of sale for the estimated costs that may be incurred under
its limited warranty. Changes in Dells deferred enhanced
services revenue for extended warranties and its warranty
liability for standard warranties, which are included in accrued
and other current and other non-current liabilities on
Dells Condensed Consolidated Statements of Financial
Position, are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008 (b)
|
|
|
2009
|
|
|
2008 (b)
|
|
|
|
(in millions)
|
|
|
Deferred enhanced services revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred enhanced services revenue at beginning of period
|
|
$
|
5,637
|
|
|
$
|
5,424
|
|
|
$
|
5,649
|
|
|
$
|
5,260
|
|
Revenue deferred for new extended warranty and services
contracts sold
|
|
|
957
|
|
|
|
1,058
|
|
|
|
1,717
|
|
|
|
2,002
|
|
Revenue recognized
|
|
|
(768
|
)
|
|
|
(793
|
)
|
|
|
(1,540
|
)
|
|
|
(1,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred enhanced services revenue at end of period
|
|
$
|
5,826
|
|
|
$
|
5,689
|
|
|
$
|
5,826
|
|
|
$
|
5,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
2,775
|
|
|
$
|
2,572
|
|
|
$
|
2,775
|
|
|
$
|
2,572
|
|
Non-current portion
|
|
|
3,051
|
|
|
|
3,117
|
|
|
|
3,051
|
|
|
|
3,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred enhanced services revenue at end of period
|
|
$
|
5,826
|
|
|
$
|
5,689
|
|
|
$
|
5,826
|
|
|
$
|
5,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008(b)
|
|
|
2009
|
|
|
2008(b)
|
|
|
|
(in millions)
|
|
|
Warranty liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at beginning of period
|
|
$
|
1,032
|
|
|
$
|
1,014
|
|
|
$
|
1,035
|
|
|
$
|
929
|
|
Costs accrued for new warranty contracts and changes in
estimates for pre-existing
warranties (a)
|
|
|
193
|
|
|
|
314
|
|
|
|
487
|
|
|
|
683
|
|
Services obligations honored
|
|
|
(253
|
)
|
|
|
(250
|
)
|
|
|
(550
|
)
|
|
|
(534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at end of period
|
|
$
|
972
|
|
|
$
|
1,078
|
|
|
$
|
972
|
|
|
$
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
501
|
|
|
$
|
725
|
|
|
$
|
501
|
|
|
$
|
725
|
|
Non-current portion
|
|
|
471
|
|
|
|
353
|
|
|
|
471
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at end of period
|
|
$
|
972
|
|
|
$
|
1,078
|
|
|
$
|
972
|
|
|
$
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Changes in cost estimates related
to pre-existing warranties are aggregated with accruals for new
warranty contracts. Dells warranty liability process does
not differentiate between estimates made for pre-existing
warranties and new warranty obligations.
|
|
(b)
|
|
Fiscal 2009 amounts have been
revised to include foreign currency exchange rate fluctuations
in revenue deferred for new extended warranty and service
contracts sold and costs accrued for new warranty contracts and
changes in estimates for pre-existing warranties to conform to
the current period presentation.
|
20
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
NOTE 8
|
COMMITMENTS
AND CONTINGENCIES
|
Severance Costs and Facility Actions
In Fiscal 2008, Dell announced a comprehensive review of costs
that is currently ongoing. Since this announcement and through
the end of the second quarter of Fiscal 2010, Dell has reduced
its headcount and closed or sold certain Dell facilities.
Results of operations for the second quarter and first six
months of Fiscal 2010 include net pre-tax charges of
$87 million and $272 million, respectively, for these
actions, which is comprised of $62 million and
$237 million, respectively, related to headcount reduction
and a net $25 million and $35 million, respectively,
related to facility actions, including accelerated depreciation.
In the second quarter and first half of Fiscal 2009, costs
related to severance and facility action expenses were
$25 million and $131 million, respectively. As of
July 31, 2009, and January 30, 2009, the accrual
related to these cost reductions and efficiency actions was
$188 million and $98 million, respectively, which is
included in accrued and other liabilities in the Condensed
Consolidated Statements of Financial Position.
Restricted Cash Pursuant to an
agreement between Dell and CIT, Dell is required to maintain
escrow cash accounts that are held as recourse reserves for
credit losses, performance fee deposits related to Dells
private label credit card, and deferred servicing revenue.
Restricted cash in the amount of $168 million and
$213 million is included in other current assets at
July 31, 2009, and January 30, 2009, respectively.
Legal Matters Dell is involved in
various claims, suits, assessments, investigations, and legal
proceedings that arise from
time-to-time
in the ordinary course of its business, including matters
involving consumer, antitrust, tax, intellectual property, and
other issues on a global basis. While Dell does not expect that
the ultimate outcomes in these proceedings, individually or
collectively, will have a material adverse effect on its
business, financial position, results of operations, or cash
flows, the results and timing of the ultimate resolutions of
these various proceedings are inherently unpredictable. Whether
the outcome of any claim, suit, assessment, investigation, or
legal proceeding, individually or collectively, could have a
material effect on Dells business, financial condition,
results of operations, or cash flows will depend on a number of
variables, including the nature, timing, and amount of any
associated expenses, amounts paid in settlement, damages or
other remedies or consequences. As required by
SFAS No. 5, Accounting for Contingencies, Dell
accrues a liability when it believes that it is both probable
that a liability has been incurred and that it can reasonably
estimate the amount of the loss. Dell reviews these accruals at
least quarterly and adjusts them to reflect ongoing
negotiations, settlements, rulings, advice of legal counsel, and
other relevant information. To the extent new information is
obtained and Dells views on the probable outcomes of
claims, suits, assessments, investigations, or legal proceedings
change, changes in Dells accrued liabilities would be
recorded in the period in which such determination is made.
The following is a discussion of Dells significant
on-going legal matters and other proceedings.
Investigations and Related Litigation In
August 2005, the SEC initiated an inquiry into certain of
Dells accounting and financial reporting matters and
requested that Dell provide certain documents. The SEC expanded
that inquiry in June 2006 and entered a formal order of
investigation in October 2006. In August 2006, because of
potential issues identified in the course of responding to the
SECs requests for information, Dells Audit
Committee, on the recommendation of management and in
consultation with PricewaterhouseCoopers LLP, Dells
independent registered public accounting firm, initiated an
independent investigation, which was completed in the third
quarter of Fiscal 2008. Although the Audit Committee
investigation has been completed, the SEC investigation is
ongoing. Dell continues to cooperate with the SEC.
Dell and several of its current and former directors and
officers were named as parties to the following outstanding
securities and shareholder derivative lawsuits all arising out
of the same events and facts.
|
|
|
|
|
Four putative securities class actions filed between
September 13, 2006, and January 31, 2007, in the
Western District of Texas, Austin Division, against Dell and
certain of its current and former officers were consolidated as
In re Dell Securities Litigation, and a lead plaintiff
was appointed by the court. The lead plaintiff asserted claims
under sections 10(b), 20(a), and 20A of the Securities
Exchange Act of 1934 based on alleged false and
|
21
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
|
|
|
misleading disclosures or omissions regarding Dells
financial statements, governmental investigations, internal
controls, known battery problems and business model, and based
on insiders sales of Dell securities. This action also
included Dells independent registered public accounting
firm, PricewaterhouseCoopers LLP, as a defendant. On
October 6, 2008, the court dismissed all of the
plaintiffs claims with prejudice and without leave to
amend. On November 3, 2008, the plaintiff appealed the
dismissal of Dell and the officer defendants to the Fifth
Circuit Court of Appeals. The hearing is scheduled for September
2009.
|
|
|
|
|
|
In addition, seven shareholder derivative lawsuits filed between
September 29, 2006, and January 22, 2007, in three
separate jurisdictions were consolidated as In re Dell
Derivative Litigation into three actions. One of those
consolidated actions was pending in the Western District of
Texas, Austin Division, but was dismissed without prejudice by
an order filed October 9, 2007. The second consolidated
shareholder derivative action was pending in Delaware Chancery
Court. On October 16, 2008, the Delaware court granted the
parties stipulation to dismiss all of the plaintiffs
claims in the Delaware lawsuit without prejudice. The third
consolidated shareholder derivative action is pending in state
district court in Williamson County, Texas. These shareholder
derivative lawsuits named various current and former officers
and directors as defendants and Dell as a nominal defendant, and
asserted various claims derivatively on behalf of Dell under
state law, including breaches of fiduciary duties.
|
|
|
|
The Board of Directors received a shareholder demand letter,
dated November 12, 2008, asserting allegations similar to
those made in the securities and shareholder derivative lawsuits
against various current and former officers and directors and
PricewaterhouseCoopers LLP, and requesting that the Board of
Directors investigate and assert claims relating to those
allegations on behalf of Dell. The Board of Directors is
considering and will address the demand.
|
Dell continues to defend these securities and shareholder
derivative lawsuits, and does not expect the outcomes to have a
material adverse effect on its financial position, results of
operations, or cash flows.
Copyright Levies Rights holder associations
in Europe seek to impose levies on information technology
equipment such as personal computers and multifunction devices
that facilitate making private copies of copyrighted materials.
The total levies due, if imposed, would be based on the number
of products sold and the per-product amounts of the levies,
which vary, by product and country. Dell, along with other
companies and various industry associations, are opposing
unreasonable levies and instead are advocating compensation to
rights holders through digital rights management systems.
On December 29, 2005, Zentralstelle Für private
Überspielungrechte (ZPÜ), a joint
association of various German collection societies, instituted
arbitration proceedings against Dells German subsidiary
before the Arbitration Body in Munich. ZPÜ claims a levy of
18.4 per PC that Dell sold in Germany from January 1,
2002, through December 31, 2005. On July 31, 2007, the
Arbitration Body recommended a levy of 15 on each PC sold
during that period for audio and visual copying capabilities.
Dell and ZPÜ rejected the recommendation, and on
February 21, 2008, ZPÜ filed a lawsuit in the German
Regional Court in Munich. Dell plans to continue to defend this
claim and does not expect the outcome to have a material adverse
effect on its financial position, results of operations or cash
flows.
Tax Matters Dell is currently under income
tax audits in various jurisdictions, including the United
States. The tax periods open to examination by the major taxing
jurisdictions to which Dell is subject include fiscal years 1997
through 2009. As a result of these audits, Dell maintains
ongoing discussions and negotiations relating to tax matters
with the taxing authorities in these various jurisdictions.
Dells U.S. Federal income tax returns for fiscal
years 2004 through 2006 are under examination, and the Internal
Revenue Service (IRS) has issued a Revenue
Agents Report proposing certain assessments primarily
related to transfer pricing matters, which Dell has protested in
accordance with IRS administrative procedures. Dell anticipates
this audit will take several years to resolve and believes that
it has provided adequate reserves related to the matters under
audit. However, an
22
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
unfavorable outcome in this matter could have a material impact
on Dells results of operations, financial position, or
cash flows. Although the timing of income tax audit resolutions
and negotiations with taxing authorities are highly uncertain,
Dell does not anticipate a significant change to the total
amount of unrecognized income tax benefits within the next
12 months.
Dell takes certain non-income tax positions in the jurisdictions
in which it operates and has received certain non-income tax
assessments from various jurisdictions. Dell is also involved in
related non-income tax litigation matters in various
jurisdictions. Dell believes its positions are supportable, a
liability is not probable, and that it will ultimately prevail.
In the normal course of business, Dells positions and
conclusions related to its non-income taxes could be challenged
and assessments may be made.
Other Litigation The various legal
proceedings Dell is involved in include commercial litigation
and a variety of patent suits. In some of these cases Dell is
the sole defendant but more often Dell is one of a number of
defendants in the electronics and technology industries. The
following are potentially significant suits pending against Dell
at this time:
|
|
|
|
|
Abstrax, Inc. v. Dell On June 1,
2007, Abstrax, Inc. filed a lawsuit against Dell and Gateway,
Inc. in the Eastern District of Texas, Marshall Division,
alleging that Dell infringed claims under its U.S. Patent
No. 6,240,328 entitled Manufacturing Method for
Assembling Products by Generating and Scheduling Dynamically
Assembly Instructions. Abstrax seeks monetary damages and
injunctive relief. On July 2, 2007, Dell filed its defense
and counterclaim, asserting non-infringement, invalidity,
laches, intervening rights, inequitable conduct and patent
expiration. Dell subsequently filed an amended answer and
counterclaims on April 4, 2008. A jury trial is scheduled
for October, 2009 in Marshall, Texas.
|
|
|
|
Active Solutions, L.L.C. and Southern Electronics Supply,
Inc. v. Dell Inc. et. al. On April 20,
2007, plaintiffs Active Solutions, L.L.C. and Southern
Electronics Supply, Inc. filed a lawsuit in Orleans Parish, New
Orleans, Louisiana. The defendants are Dell Inc., the City of
New Orleans, certain representatives of and former
subcontractors for the City of New Orleans, and the
subcontractors principals. The plaintiffs seek monetary
damages for promissory estoppel, breach of a Dell nondisclosure
agreement, breach of the Louisiana Unfair Trade Practices Act,
conspiracy to violate the Uniform Trade Secrets Act, and unjust
enrichment. A jury trial is scheduled for September 14,
2009, in New Orleans.
|
|
|
|
Dell believes that it has meritorious defenses with respect to
the claims made in the Abstrax and Active Solutions
lawsuits. However, the outcome of litigation is inherently
unpredictable, and an unfavorable outcome in either matter could
have a material adverse effect on Dells financial
position, results of operations or cash flows for the periods in
which the effects become reasonably estimable.
|
Additional information on Dells commitments and
contingencies can be found in Dells Annual Report on
Form 10-K
for the fiscal year ended January 30, 2009, and in
Dells Quarterly Report on
Form 10-Q
for the fiscal quarter ended May 1, 2009.
23
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
NOTE 9
|
COMPREHENSIVE
INCOME
|
The following table summarizes comprehensive income for the
three and six months ended July 31, 2009, and
August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
472
|
|
|
$
|
616
|
|
|
$
|
762
|
|
|
$
|
1,400
|
|
Change related to foreign currency hedging
instruments, net
|
|
|
(119
|
)
|
|
|
14
|
|
|
|
(477
|
)
|
|
|
(17
|
)
|
Change related to marketable securities, net
|
|
|
3
|
|
|
|
2
|
|
|
|
3
|
|
|
|
(23
|
)
|
Foreign currency translation adjustments
|
|
|
(26
|
)
|
|
|
28
|
|
|
|
(34
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
330
|
|
|
$
|
660
|
|
|
$
|
254
|
|
|
$
|
1,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10
|
EARNINGS
PER COMMON SHARE
|
Basic earnings per share is based on the weighted-average effect
of all common shares issued and outstanding and is calculated by
dividing net income by the weighted-average shares outstanding
during the period. Diluted earnings per share is calculated by
dividing net income by the weighted-average number of common
shares used in the basic earnings per share calculation plus the
number of common shares that would be issued assuming exercise
or conversion of all potentially dilutive common shares
outstanding. Dell excludes equity instruments from the
calculation of diluted earnings per share if the effect of
including such instruments is antidilutive. Accordingly, certain
stock-based incentive awards have been excluded from the
calculation of diluted earnings per share totaling
232 million shares and 237 million shares for the
second quarter of Fiscal 2010 and Fiscal 2009, respectively; and
239 million and 256 million shares during the six
months ended July 31, 2009 and August 1, 2008,
respectively.
The following table sets forth the computation of basic and
diluted earnings per share for the three and six months ended
July 31, 2009, and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share amounts)
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
472
|
|
|
$
|
616
|
|
|
$
|
762
|
|
|
$
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,955
|
|
|
|
1,991
|
|
|
|
1,952
|
|
|
|
2,013
|
|
Effect of dilutive options, restricted stock units, restricted
stock, and other
|
|
|
5
|
|
|
|
8
|
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,960
|
|
|
|
1,999
|
|
|
|
1,956
|
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.31
|
|
|
$
|
0.39
|
|
|
$
|
0.70
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
0.31
|
|
|
$
|
0.39
|
|
|
$
|
0.69
|
|
24
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
NOTE 11
|
SEGMENT
INFORMATION
|
During the first quarter of Fiscal 2010, Dell completed its
reorganization from geographic commercial segments (Americas
Commercial; Europe, Middle East, and Africa Commercial; and Asia
Pacific-Japan Commercial) to global business units (Large
Enterprise, Public, and Small and Medium Business), reflecting
the impact of globalization on Dells customer base.
Dells four global business segments are Large Enterprise,
Public, Small and Medium Business, and Consumer.
The business segments disclosed in the accompanying Condensed
Consolidated Financial Statements are based on this
organizational structure and information reviewed by Dells
management to evaluate the business segment results. Dells
measure of segment operating income for management reporting
purposes excludes severance and facility action expenses, broad
based long-term incentives, acquisition-related charges such as
in-process research and development, and amortization of
intangibles.
The following table presents net revenue by Dells
reportable global segments as well as a reconciliation of
consolidated segment operating income to Dells
consolidated operating income for the three and six months ended
July 31, 2009, and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large Enterprise
|
|
$
|
3,285
|
|
|
$
|
4,806
|
|
|
$
|
6,685
|
|
|
$
|
9,727
|
|
Public
|
|
|
3,798
|
|
|
|
4,510
|
|
|
|
6,969
|
|
|
|
8,091
|
|
Small and Medium Business
|
|
|
2,820
|
|
|
|
3,958
|
|
|
|
5,787
|
|
|
|
8,202
|
|
Consumer
|
|
|
2,861
|
|
|
|
3,160
|
|
|
|
5,665
|
|
|
|
6,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
12,764
|
|
|
$
|
16,434
|
|
|
$
|
25,106
|
|
|
$
|
32,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large Enterprise
|
|
$
|
172
|
|
|
$
|
259
|
|
|
$
|
364
|
|
|
$
|
645
|
|
Public
|
|
|
383
|
|
|
|
331
|
|
|
|
676
|
|
|
|
608
|
|
Small and Medium Business
|
|
|
246
|
|
|
|
330
|
|
|
|
476
|
|
|
|
660
|
|
Consumer
|
|
|
89
|
|
|
|
29
|
|
|
|
88
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income
|
|
|
890
|
|
|
|
949
|
|
|
|
1,604
|
|
|
|
2,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and facility action expenses
|
|
|
(87
|
)
|
|
|
(25
|
)
|
|
|
(272
|
)
|
|
|
(131
|
)
|
Broad based long-term
incentives (a)
|
|
|
(92
|
)
|
|
|
(78
|
)
|
|
|
(168
|
)
|
|
|
(128
|
)
|
In-process research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Amortization of intangible assets
|
|
|
(40
|
)
|
|
|
(27
|
)
|
|
|
(79
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
671
|
|
|
$
|
819
|
|
|
$
|
1,085
|
|
|
$
|
1,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Broad based long-term incentives
includes stock based compensation of $79 million and
$78 million for the three months ended July 31, 2009,
and August 1, 2008, respectively; and $146 million and
$128 million for the six months ended July 31, 2009,
and August 1, 2008, respectively.
|
25
|
|
ITEM 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
SPECIAL NOTE: This section, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements based on
our current expectations. Actual results in future periods may
differ materially from those expressed or implied by those
forward-looking statements because of a number of risks and
uncertainties. For a discussion of risk factors affecting our
business and prospects, see Part I
Item 1A Risk Factors in our Annual Report
on
Form 10-K
for the fiscal year ended January 30, 2009.
All percentage amounts and ratios were calculated using
the underlying data in thousands. Unless otherwise noted, all
references to industry share and total industry growth data are
for personal computers (including desktops, notebooks, and x86
servers), and are based on preliminary information provided by
IDC Worldwide Quarterly PC Tracker, August 17, 2009. Share
data is for the calendar quarter and all our growth rates are on
a fiscal
year-over-year
basis. Unless otherwise noted, all references to time periods
refer to our fiscal periods.
OVERVIEW
Our
Company
We are a leading technology solutions provider in the IT
industry. We are the number one supplier of computer systems in
the United States, and the number two supplier worldwide. We
offer a broad range of products, including mobility products,
desktop PCs, software and peripherals, servers and networking,
and storage products. Our enhanced services offerings include
infrastructure consulting, deployment of enterprise products and
computer systems in customers environments, asset recovery
and recycling, computer-related training, IT support, client and
enterprise support, and managed service solutions. We also offer
various financing alternatives, asset management services, and
other customer financial services for business and consumer
customers.
We were founded on the core principle of a direct customer
business model, which creates direct relationships with our
customers. These relationships allow us to be on the forefront
of changing user requirements and needs while competing as one
of the industry leaders in selling the most relevant technology,
at the best value, to our customers. We continue to simplify
technology and enhance product design and features to meet our
customers needs and preferences.
Our direct customer business model includes a highly efficient
global supply chain, which allows low inventory levels and the
efficient use of and return on capital. We have manufacturing
locations around the world and relationships with third-party
contract manufacturers. This structure allows us to optimize our
global supply chain to best serve our global customer base. To
maintain our competitiveness, we continuously strive to improve
our products, services, technology, manufacturing, and logistics.
We are continuing to invest in initiatives that will align our
new and existing products around customers needs in order
to drive long-term sustainable growth, profitability, and
operating cash flow. We have expanded our business model to
include new distribution partners, such as retail, system
integrators, value-added resellers, and distributors, which
allow us to reach even more end-users around the world. We are
investing resources in emerging countries with an emphasis on
Brazil, Russia, India, and China (BRIC), where we
expect significant growth to occur over the next several years.
We are also creating customized products and services to meet
the preferences and requirements of our diversified global
customer base.
As part of our overall growth strategy, we have completed
strategic acquisitions to augment select areas of our business
with more products, services, and technology. We expect to
continue to grow our business organically, and inorganically
through alliances and through strategic acquisitions.
During the first quarter of Fiscal 2010, we completed our
reorganization from our geographic commercial segments [Americas
Commercial; Europe, Middle East, and Africa (EMEA)
Commercial; and Asia Pacific-Japan (APJ)
Commercial], to global business units [Large Enterprise, Public,
and Small and Medium Business (SMB)], reflecting the
impact of globalization on our customer base. To simplify
reporting, we aligned certain countries that represent a small
percentage of our total revenue with a single global segment,
based mainly on the countries
26
customer base. This realignment creates a clear customer focus,
which allows us to serve customers with faster innovation and
greater responsiveness, thus allowing us to capitalize on
competitive advantages, while strengthening execution and
synergies. We began managing and reporting in our new business
segment structure in the first quarter of Fiscal 2010. Our four
global business segments are:
|
|
|
Large Enterprise Our customers include
large global and national corporate businesses. We believe that
a single large-enterprise unit will give us an even greater
knowledge of our customers and thus further our advantage in
delivering globally consistent and cost-effective solutions and
services to the worlds largest IT users. We intend to
improve our global leadership and relationships with these
customers. Our execution in this space will be increasingly
focused on data center solutions, disruptive innovation,
customer segment specialization, and the value chain of design
to value, price to value, market to value, and sell to value.
|
|
|
Public Our customers, which include
educational institutions, government, health care, and law
enforcement agencies, operate in communities and their missions
are aligned with their constituents needs. We intend to
further our understanding of our Public customers goals
and missions and extend our leadership in answering their urgent
IT challenges. To better meet our customers goals, we are
focusing on simplifying IT, providing faster deployment of IT
applications, expanding our enterprise and services offerings,
helping customers understand economic stimulus packages through
our Economic Stimulus Learning Center, and strengthening our
partner relations to build best of breed integrated solutions.
|
|
|
Small and Medium Business Our
customers include those in the small and medium business sector.
We are focused on providing small and medium businesses with the
simplest and most complete standards-based IT solutions and
services, customized for their needs. Our SMB organization will
accelerate the creation and delivery of specific solutions and
technology to small and medium-sized businesses worldwide in an
effort to help our customers improve and grow their businesses.
We are doing this through solutions such as our
ProManage-Managed Services and through extending our channel
program (PartnerDirect) to provide additional certification
paths and purchase options to our customers.
|
|
|
Consumer Our customers include
individual consumers who buy through our on-line store at
www.dell.com, over the phone, and through retail channels. The
globalization of our business has improved our global sales
execution and coverage through better customer alignment,
targeted sales force investments in rapidly growing countries,
and improved marketing tools. We are designing new, innovative
products with faster development cycles and competitive
features. In order to reach more consumers, we will continue to
expand and transform both our direct and retail business.
|
References to Commercial business refers to Large Enterprise,
Public, and Small and Medium Business (Commercial).
27
CONSOLIDATED
RESULTS OF OPERATIONS
The following table summarizes the results of our operations for
the three and six months ended July 31, 2009, and
August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 31, 2009
|
|
|
|
|
August 1, 2008
|
|
July 31, 2009
|
|
|
|
|
August 1, 2008
|
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
|
Dollars
|
|
|
Revenue
|
|
|
(in millions, except per share amounts and percentages)
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
10,623
|
|
|
|
83.2%
|
|
|
(25)%
|
|
|
$
|
14,147
|
|
|
|
86.1%
|
|
$
|
20,855
|
|
|
|
83.1%
|
|
|
(26)%
|
|
|
$
|
28,103
|
|
|
|
86.4%
|
Services, including software related
|
|
|
2,141
|
|
|
|
16.8%
|
|
|
(6)%
|
|
|
|
2,287
|
|
|
|
13.9%
|
|
|
4,251
|
|
|
|
16.9%
|
|
|
(4)%
|
|
|
|
4,408
|
|
|
|
13.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
12,764
|
|
|
|
100.0%
|
|
|
(22)%
|
|
|
$
|
16,434
|
|
|
|
100.0%
|
|
$
|
25,106
|
|
|
|
100.0%
|
|
|
(23)%
|
|
|
$
|
32,511
|
|
|
|
100.0%
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,645
|
|
|
|
15.5%
|
|
|
(17)%
|
|
|
$
|
1,986
|
|
|
|
14.0%
|
|
$
|
3,091
|
|
|
|
14.8%
|
|
|
(25)%
|
|
|
$
|
4,095
|
|
|
|
14.6%
|
Services, including software related
|
|
|
746
|
|
|
|
34.8%
|
|
|
(11)%
|
|
|
|
841
|
|
|
|
36.8%
|
|
|
1,468
|
|
|
|
34.5%
|
|
|
(13)%
|
|
|
|
1,697
|
|
|
|
38.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross margin
|
|
$
|
2,391
|
|
|
|
18.7%
|
|
|
(15)%
|
|
|
$
|
2,827
|
|
|
|
17.2%
|
|
$
|
4,559
|
|
|
|
18.2%
|
|
|
(21)%
|
|
|
$
|
5,792
|
|
|
|
17.8%
|
Operating expenses
|
|
$
|
1,720
|
|
|
|
13.5%
|
|
|
(14)%
|
|
|
$
|
2,008
|
|
|
|
12.2%
|
|
$
|
3,474
|
|
|
|
13.8%
|
|
|
(15)%
|
|
|
$
|
4,074
|
|
|
|
12.5%
|
Operating income
|
|
$
|
671
|
|
|
|
5.2%
|
|
|
(18)%
|
|
|
$
|
819
|
|
|
|
5.0%
|
|
$
|
1,085
|
|
|
|
4.3%
|
|
|
(37)%
|
|
|
$
|
1,718
|
|
|
|
5.3%
|
Net income
|
|
$
|
472
|
|
|
|
3.7%
|
|
|
(23)%
|
|
|
$
|
616
|
|
|
|
3.7%
|
|
$
|
762
|
|
|
|
3.0%
|
|
|
(46)%
|
|
|
$
|
1,400
|
|
|
|
4.3%
|
Earnings per share diluted
|
|
$
|
0.24
|
|
|
|
N/A
|
|
|
(23)%
|
|
|
$
|
0.31
|
|
|
|
N/A
|
|
$
|
0.39
|
|
|
|
N/A
|
|
|
(43)%
|
|
|
$
|
0.69
|
|
|
|
N/A
|
The challenging economic conditions that began in the second
half of Fiscal 2009 continued to be prevalent in the second
quarter and first half of Fiscal 2010. As a result, we
experienced a decline in global IT end-user demand on a
year-over-year
basis. Consistent with the second half of Fiscal 2009, we
focused on balancing liquidity, profitability, and growth by
selecting areas that provided profitable growth opportunities.
We also took actions in a challenging component cost environment
to maximize gross margins by optimizing product pricing and
product costs, reducing operating expenses, and improving our
working capital management. We will continue these actions
throughout Fiscal 2010. For the third quarter of Fiscal 2010, we
expect to see seasonal demand improvements in our
U.S. Federal government and Consumer businesses; however,
we anticipate slower demand with our large commercial customers
due to seasonality. Overall, we expect demand to be stronger in
the second half of Fiscal 2010 than in the first half of Fiscal
2010.
Revenue
Product Revenue Product revenue and
unit shipments decreased
year-over-year
by 25% and 14%, respectively, for the second quarter of Fiscal
2010. For the first half of Fiscal 2010, product revenue
decreased
year-over-year
by 26% on unit shipment decline of 15%. Our product revenue
performance is primarily attributed to a decrease in customer
demand as a result of the challenging economic environment and a
reduction in average selling price.
Services Revenue, including software
related Services revenue decreased
year-over-year
by 6% and 4% for the second quarter and first half of Fiscal
2010, respectively. Our services revenue performance is
primarily attributed to an 11% and 10%
year-over-year
decrease in enhanced services revenue for the second quarter and
first half of Fiscal 2010, respectively, partially offset by a
1% and 6% increase in software related revenue for the second
quarter and first half of Fiscal 2010, respectively. Enhanced
services revenue has decreased as a result of unit shipment
declines as enhanced services demand is generally correlated
with hardware unit sales.
Overall, our average selling price (total revenue per unit sold)
during the second quarter and first half of Fiscal 2010
decreased 10% and 9%
year-over-year,
respectively, due to a shift in revenue mix between the
Commercial and Consumer businesses. During the second quarter
and first half of Fiscal 2010, Commercial accounted for
28
approximately 78% of total revenue as compared to 81% and 80%
for the same periods of Fiscal 2009. During the second quarter
and first half of Fiscal 2010, Consumer accounted for
approximately 22% of total revenue as compared to 19% and 20%
for the respective periods of Fiscal 2009. Selling prices in
Commercial are typically higher than Consumers selling
prices; and furthermore, average selling prices in Consumer
declined 22% and 24%
year-over-year
for the second quarter and first half of Fiscal 2010,
respectively. Comparatively, average selling prices for
Commercial declined 2%
year-over-year
for the second quarter of Fiscal 2010 and remained relatively
flat
year-over-year
for the first half of Fiscal 2010.
In general, our market strategy in the Commercial business is to
concentrate on solution sales with a focus on enterprise
products and services. In the Consumer business, our market
strategy is to expand our product offerings and customer
coverage, focusing on optimized products and services. We also
price our products to remain competitive in the marketplace.
During the second quarter of Fiscal 2010, we continued to see
competitive pressure, particularly for lower priced desktops and
notebooks. We expect this competitive pricing environment will
continue for the foreseeable future.
Revenue outside the U.S. represented approximately 45% and
46% of net revenue for the second quarter and first half of
Fiscal 2010, respectively. Outside the U.S., we experienced a
27%
year-over-year
revenue decline for the second quarter and first half of Fiscal
2010, respectively, as compared to an approximate decline of 18%
in revenue for the U.S. during the same time periods. At a
consolidated level, BRIC revenue declined 17% and 19% during the
second quarter and first half of Fiscal 2010, respectively, as
compared to the same periods in the prior year. We are
continuing to expand into these and other emerging countries
which represent the vast majority of the worlds
population, tailor solutions to meet specific regional needs,
and enhance relationships to provide customer choice and
flexibility.
We manage our business on a U.S. Dollar basis, and as a
result of our comprehensive hedging program, foreign currency
fluctuations did not have a significant impact on our
consolidated results of operations.
Share
Position
We shipped 10.0 million units in the second quarter of
Fiscal 2010. According to IDC, for the second quarter of
calendar year 2009, we maintained our second place position in
the worldwide computer systems market with a share position of
14.0%, which is slightly better than our share position of 13.9%
for the first quarter of calendar year 2009. However, we lost
2.4 percentage points of share since the second quarter of
calendar year 2008 due to our Commercial businesss slower
unit growth as we pursued profitable growth opportunities in a
slow global IT demand environment.
Gross
Margin
Products During the second quarter of
Fiscal 2010, products gross margin decreased in absolute dollars
by $341 million, compared to same period in the prior year;
however, products gross margin percentage improved to 15.5% from
14.0% as costs declined 26%. For the first half of Fiscal 2010,
our products gross margin decreased in absolute dollars by
$1.0 billion while gross margin percentage increased
slightly to 14.8% from 14.6%. The decline in gross margin
dollars is attributable to soft demand and lower average selling
prices. Average selling prices were impacted by our further
expansion into retail through an increased number of worldwide
retail locations, a shift in product revenue mix from our
Commercial segments to our Consumer segment, and competitive
pricing pressures. In spite of component cost pressures, gross
margin percentage improved for the second quarter and first half
of Fiscal 2010 as we continue to realize the benefits of our
cost improvement initiatives, which resulted in the launching of
a number of new cost optimized products. We will continue these
cost optimization efforts throughout Fiscal 2010. We continue to
make progress against our other ongoing cost improvement
initiatives, and approximately 40% of our production volume is
now going through contract manufacturers. Also, disciplined
pricing across our commercial segments contributed to the gross
margin increase in the second quarter of Fiscal 2010.
Services, including software related
Our services (including software related) gross margin rate is
driven by our extended warranty sales, partially offset by lower
margin categories such as software, consulting, and managed
services. Our extended warranty services are more profitable
because we sell extended warranty
29
offerings directly to customers instead of selling through a
distribution channel. We also have a service support structure
that allows us to favorably manage our fixed costs.
During the second quarter of Fiscal 2010, our services gross
margin decreased in absolute dollars by $95 million
compared to the same period in the prior year with a
corresponding decrease in gross margin percentage to 34.8% from
36.8%. For the first half of Fiscal 2010, our services gross
margin decreased in absolute dollars by $229 million
compared to same period in the prior year with a corresponding
decrease in gross margin percentage to 34.5% from 38.5%. Our
solution services offerings face competitive margin pressures in
the current economic environment. A mix shift toward lower
margin software products further reduced our overall services
gross margin rate.
We continue to actively review all aspects of our facilities,
logistics, supply chain, and manufacturing footprints. This
review is focused on identifying efficiencies and cost reduction
opportunities while maintaining a strong customer experience.
The cost of these actions, including severance related expenses,
was $87 million and $272 million during the second
quarter and first half of Fiscal 2010, respectively, of which
approximately $14 million and $79 million,
respectively, affected gross margin. Comparatively, for the
second quarter and first half of Fiscal 2009, the cost of these
actions was $25 million and $131 million,
respectively, of which approximately $11 million and
$35 million, respectively, affected gross margin. We expect
to take additional facility actions depending on a number of
factors, including end-user demand, capabilities, and our
migration to a more variable cost manufacturing model.
We continue to evaluate and optimize our global manufacturing
and distribution network, including our relationships with
contract manufacturers, to better meet customer needs and reduce
product cycle times. Our goal is to introduce the latest
relevant technology and to deliver the best value to our
customers worldwide. As we continue to evolve our inventory and
manufacturing business model to capitalize on component cost
declines, we continuously negotiate with our suppliers in a
variety of areas including availability of supply, quality, and
cost. These real-time continuous supplier negotiations support
our business model, which is able to respond quickly to changing
market conditions due to our direct customer model and real-time
manufacturing. Because of the fluid nature of these ongoing
negotiations, the timing and amount of supplier discounts and
rebates vary from time to time. These discounts and rebates are
allocated to the segments based on a variety of factors
including strategic initiatives to drive certain programs.
In general, gross margin and margins on individual products and
services will remain under downward pressure due to a variety of
factors, including continued industry-wide global pricing
pressures, increased competition, compressed product life
cycles, potential increases in the cost and availability of raw
materials, and outside manufacturing services. For the remainder
of the fiscal year, we expect to continue to see pressure on
certain component costs, and we will continue to adjust our
pricing strategy with the goals of being in a competitive price
position.
Operating
Expenses
The following table summarizes our operating expenses for the
three and six months ended July 31, 2009, and
August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 31, 2009
|
|
|
|
August 1, 2008
|
|
July 31, 2009
|
|
|
|
August 1, 2008
|
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
|
(in millions, except percentages)
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$
|
1,571
|
|
|
|
12.3%
|
|
|
|
(15)%
|
|
|
$
|
1,840
|
|
|
|
11.2%
|
|
|
$
|
3,184
|
|
|
|
12.7%
|
|
|
|
(15)%
|
|
|
$
|
3,752
|
|
|
|
11.5%
|
|
In-process research and development
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
N/A
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
(100)%
|
|
|
|
2
|
|
|
|
0.0%
|
|
Research, development, and engineering
|
|
|
149
|
|
|
|
1.2%
|
|
|
|
(12)%
|
|
|
|
168
|
|
|
|
1.0%
|
|
|
|
290
|
|
|
|
1.1%
|
|
|
|
(9)%
|
|
|
|
320
|
|
|
|
1.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
1,720
|
|
|
|
13.5%
|
|
|
|
(14)%
|
|
|
$
|
2,008
|
|
|
|
12.2%
|
|
|
$
|
3,474
|
|
|
|
13.8%
|
|
|
|
(15)%
|
|
|
$
|
4,074
|
|
|
|
12.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Selling, general, and administrative
During the second quarter of Fiscal 2010, selling, general and
administrative (SG&A) decreased 15% to
$1.6 billion compared to $1.8 billion in the same
period of Fiscal 2009, and SG&A expenses were 12.3% of
revenue as compared to 11.2% a year ago. The decrease in
SG&A expenses is primarily due to a reduction in
compensation-related expenses of approximately
$180 million, largely driven by a decrease in headcount.
With the increase in retail volumes, advertising expenses
decreased approximately $65 million in the second quarter
of Fiscal 2010 compared to the same period in Fiscal 2009. In
line with the spending control measures undertaken companywide,
there were decreases in most other categories of expenses,
including telecom, maintenance, and travel. Partially offsetting
these declines were a $59 million increase in severance and
facility actions cost in the second quarter of Fiscal 2010
compared to the second quarter of Fiscal 2009.
For the first half of Fiscal 2010, SG&A expenses decreased
15% to $3.2 billion compared to $3.8 billion for the
same period in Fiscal 2009. The decrease in SG&A expenses
is primarily due to a reduction in compensation related expenses
of approximately $360 million, driven by a reduction in
headcount. With the increase in retail volumes, advertising
expenses decreased approximately $125 million in the first
half of Fiscal 2010, compared to the same period in Fiscal 2009.
Due to spending control measures undertaken companywide, there
were decreases in most other categories of expenses, including
telecom, maintenance, and travel. Partially offsetting these
declines were a $97 million increase in severance and
facility actions cost in the first half of Fiscal 2010 compared
to the first half of Fiscal 2009.
Research, Development, and Engineering
During the second quarter and first half of Fiscal 2010,
research, development and engineering (RD&E)
expenses remained approximately 1% of revenue. During the second
quarter of Fiscal 2010, RD&E expenses decreased
approximately $19 million
year-over-year,
and during the first half of Fiscal 2010, RD&E expenses
decreased approximately $30 million
year-over-year.
The decrease was primarily driven by a slight decrease in
headcount coupled with tighter general spending controls.
Operating
Income
During the second quarter of Fiscal 2010, operating income
decreased 18%
year-over-year
to $671 million from $819 million in the second
quarter of Fiscal 2009. Operating income decreased 37%
year-over-year
to $1.1 billion in the first half of Fiscal 2010 from
$1.7 billion in the first half of Fiscal 2009. The decrease
in operating income is primarily attributable to a
year-over-year
revenue decline of 22% and 23% and a decline in gross margin
dollars of 15% and 21% during the second quarter and first half
of Fiscal 2010, respectively. A 14% and 15%
year-over-year
reduction in operating expenses for the second quarter and first
half of Fiscal 2010, respectively, favorably impacted operating
income while operating expenses as a percentage of revenue
increased during the same time periods. Also favorably impacting
operating income was the recognition of $69 million of
revenue in the second quarter of Fiscal 2010 related to a
vendors purchase of our contractual right to share in
future revenues from product renewals sold by the vendor.
Approximately $53 million of the $69 million
transaction impacted the Consumer segments operating
income. See Consumer segment below for further discussion of
this transaction.
Net
Income
For the second quarter and first half of Fiscal 2010, net income
decreased
year-over-year
by 23% and 46% to $472 million and $762 million,
respectively. Net income was impacted by significant declines in
operating income and investment and other income (expense), net.
During the second quarter, a decrease in our effective tax rate
to 25.0% from 26.4% positively impacted net income, but for the
first half of Fiscal 2010 as compared to Fiscal 2009, net income
was negatively impacted by an increase in our effective tax rate
to 26.8% from 24.8%.
SEGMENT
DISCUSSION
During the first quarter of Fiscal 2010, we completed the
reorganization from our geographic commercial segments (Americas
Commercial, EMEA Commercial, and APJ Commercial), to global
business units (Large Enterprise, Public, and Small and Medium
Business), reflecting the impact of globalization on our
customer base. Our four global business segments are Large
Enterprise, Public, Small and Medium Business, and Consumer.
31
During the reorganization to global business units, we
identified revenue activities that were managed and reported
within our Commercial business, but which had characteristics
more consistent with our Consumer business. As a result, these
activities were realigned into our Consumer segment during the
first quarter of Fiscal 2010.
The following table summarizes our revenue and operating income
by reportable global segments for the three and six months ended
July 31, 2009, and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 31, 2009
|
|
|
|
August 1, 2008
|
|
July 31, 2009
|
|
|
|
August 1, 2008
|
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
|
(in millions, except percentages)
|
|
Large Enterprise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,285
|
|
|
|
26%
|
|
|
|
(32)%
|
|
|
$
|
4,806
|
|
|
|
29%
|
|
|
$
|
6,685
|
|
|
|
27%
|
|
|
|
(31)%
|
|
|
$
|
9,727
|
|
|
|
30%
|
|
Operating income
|
|
|
172
|
|
|
|
5%
|
|
|
|
(34)%
|
|
|
|
259
|
|
|
|
5%
|
|
|
|
364
|
|
|
|
5%
|
|
|
|
(44)%
|
|
|
|
645
|
|
|
|
7%
|
|
Public
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
3,798
|
|
|
|
30%
|
|
|
|
(16)%
|
|
|
|
4,510
|
|
|
|
28%
|
|
|
|
6,969
|
|
|
|
28%
|
|
|
|
(14)%
|
|
|
|
8,091
|
|
|
|
25%
|
|
Operating income
|
|
|
383
|
|
|
|
10%
|
|
|
|
16%
|
|
|
|
331
|
|
|
|
7%
|
|
|
|
676
|
|
|
|
10%
|
|
|
|
11%
|
|
|
|
608
|
|
|
|
8%
|
|
Small and Medium Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
2,820
|
|
|
|
22%
|
|
|
|
(29)%
|
|
|
|
3,958
|
|
|
|
24%
|
|
|
|
5,787
|
|
|
|
23%
|
|
|
|
(29)%
|
|
|
|
8,202
|
|
|
|
25%
|
|
Operating income
|
|
|
246
|
|
|
|
9%
|
|
|
|
(26)%
|
|
|
|
330
|
|
|
|
8%
|
|
|
|
476
|
|
|
|
8%
|
|
|
|
(28)%
|
|
|
|
660
|
|
|
|
8%
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
2,861
|
|
|
|
22%
|
|
|
|
(9)%
|
|
|
|
3,160
|
|
|
|
19%
|
|
|
|
5,665
|
|
|
|
22%
|
|
|
|
(13)%
|
|
|
|
6,491
|
|
|
|
20%
|
|
Operating income
|
|
|
89
|
|
|
|
3%
|
|
|
|
207%
|
|
|
|
29
|
|
|
|
1%
|
|
|
|
88
|
|
|
|
2%
|
|
|
|
(25)%
|
|
|
|
117
|
|
|
|
2%
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
12,764
|
|
|
|
100%
|
|
|
|
(22)%
|
|
|
$
|
16,434
|
|
|
|
100%
|
|
|
$
|
25,106
|
|
|
|
100%
|
|
|
|
(23)%
|
|
|
$
|
32,511
|
|
|
|
100%
|
|
Segment operating income
|
|
$
|
890
|
|
|
|
7%
|
|
|
|
(6)%
|
|
|
$
|
949
|
|
|
|
6%
|
|
|
$
|
1,604
|
|
|
|
6%
|
|
|
|
(21)%
|
|
|
$
|
2,030
|
|
|
|
6%
|
|
Severance and facility action expenses, broad based long-term
incentive expenses, in-process research and development, and
amortization of purchased intangible assets costs are not
allocated to the reporting segments. These costs totaled
$219 million in the second quarter of Fiscal 2010 and
$130 million in the second quarter of Fiscal 2009, and
these costs totaled $519 million and $312 million for
the first half of Fiscal 2010 and Fiscal 2009, respectively.
|
|
|
Large Enterprise During the second
quarter of Fiscal 2010, Large Enterprises revenue
decreased 32%
year-over-year
mainly due to a unit shipment decline of 32% as prices remained
relatively stable
year-over-year.
During the first half of Fiscal 2010, Large Enterprises
revenue decreased 31%
year-over-year
due to a unit shipment decline of 34%, partially offset by a 4%
increase in average selling prices. Large Enterprises weak
performance can generally be attributed to the current global
economy coupled with our focus on balancing growth and
profitability. As a result of the current economic slowdown,
many of our customers have either delayed or canceled IT
projects. The increase in average selling prices for the first
half of Fiscal 2010 was driven by higher mix of services and
software related revenues, which improved overall product mix.
Large Enterprise experienced significant
year-over-year
declines in revenue across all product lines during the second
quarter and first half of Fiscal 2010. For the second quarter of
Fiscal 2010, revenue from desktop PCs and mobility products
declined
year-over-year
40% and 43%, respectively, servers and networking, storage, and
software and peripherals revenue decreased
year-over-year
23%, 30%, and 25%, respectively; and enhanced services revenue
declined 13%. For the first half of Fiscal 2010, revenue
declines across all product lines were consistent with the
declines for the second quarter. Revenue decreased significantly
year-over-year
across all countries due to current global economic conditions
and competitive pressures.
|
For the second quarter of Fiscal 2010, operating income
percentage decreased 20 basis points
year-over-year
to 5.2% from 5.4%. For the first half of Fiscal 2010, operating
income percentage decreased 120 basis points
year-over-year
to 5.4% from 6.6%. Operating income deteriorated as revenue and
costs of revenue both decreased
year-over-year
32% during the second quarter of Fiscal 2010 and decreased 31%
for the first half of Fiscal 2010
32
due to lower demand, which was driven by current market
conditions. Additionally, operating expenses as a percentage of
revenue increased 100 basis points and 120 basis
points
year-over-year
for the second quarter and first half of Fiscal 2010,
respectively, even though operating expense dollars decreased
26% and 25% during the same time periods, driven by our cost
reduction initiatives.
|
|
|
Public During the second quarter and
first half of Fiscal 2010, Public experienced a 16% and 14%
year-over-year
decline, respectively, in revenue primarily due to a unit
shipment decline of 15% for both time periods. The decline in
unit shipments can be attributed to continued soft demand in the
current global economy. Additionally, during the second quarter,
Publics selling prices began to decline due to aggressive
pricing competition in certain areas and as a result of seasonal
growth in education sector sales, which typically have lower
selling prices than other areas of Publics business.
Publics revenue declined across all product categories for
the second quarter and first half of Fiscal 2010; however,
services and software related revenue improved
year-over-year.
Product revenue decline was led by desktop PCs, which decreased
year-over-year
27% and 26% for the second quarter and first half of Fiscal
2010, respectively. From a country perspective, revenue declined
across most countries during the second quarter and first half
of Fiscal 2010. For the third quarter of Fiscal 2010, we
anticipate seasonally strong demand from the U.S. Federal
government due to its fiscal year end.
|
For the second quarter of Fiscal 2010, operating income
percentage increased approximately 280 basis points from
the same period last year, and operating income dollars
increased 16%. For the first half of Fiscal 2010, operating
income percentage increased approximately 220 basis points
year-over-year,
and operating income dollars increased 11%. Operating income
dollars and percentage were positively impacted by a
year-over-year
improvement in gross margin percentage for the second quarter
and first half of Fiscal 2010 as we continued to optimize our
pricing and cost structure. Also, favorably impacting operating
income was a 14%
year-over-year
decrease in operating expenses for both the second quarter and
first half of Fiscal 2010, driven by our spending control
initiatives that began in Fiscal 2009.
|
|
|
Small and Medium Business During the
second quarter of Fiscal 2010, SMB experienced a 29% and 25%
year-over-year
decline in revenue and unit shipments, respectively. During the
first half of Fiscal 2010, SMB experienced a 29% and 27%
year-over-year
decline in revenue and unit shipments, respectively. Average
selling prices declined 5% and 3% for the second quarter and
first half of Fiscal 2010, respectively. SMB experienced a
double digit revenue decline across all product lines, led by a
38% and 31% decline in desktop PC and mobility revenue,
respectively, for both the second quarter and first half of
Fiscal 2010. Consistent with our other segments
performance, the contraction of the global economy in the first
half of Fiscal 2010 and competitive pressures are significant
contributors to SMBs
year-over-year
revenue, unit shipment, and average selling price declines.
Additionally, we limited our participation in certain lower
priced-but higher demand bands in an effort to protect
profitability. From a country perspective, revenue declined
across most countries for the second quarter and first half of
Fiscal 2010.
|
Operating income percentage increased 40 basis points and
20 basis points
year-over-year
for the second quarter and first half of Fiscal 2010,
respectively. However, operating income dollars decreased 26%
and 28%
year-over-year
for the second quarter and first half of Fiscal 2010,
respectively, as revenue and unit shipments decreased
significantly for both time periods mainly due to the
challenging end-user demand environment. We were also able to
reduce operating expenses by 23% and 24% during the second
quarter and first half of Fiscal 2010, respectively, as compared
to the same time periods in the prior year, mainly due to
tighter spending controls around SG&A expenses.
|
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|
Consumer During the second quarter and
first half of Fiscal 2010, Consumers revenue declined 9%
and 13%
year-over-year,
respectively, on unit growth of 17% and 14%, respectively. Even
though unit shipments grew, our Consumer revenue decreased
mainly due to our growth in retail, which tends to have lower
average selling prices, combined with a shift in product mix and
competitive pricing pressures. As a result, our average selling
prices declined 22% and 24%
year-over-year
in the second quarter and first half of Fiscal 2010,
respectively. In addition, Consumers desktop PC revenue
declined 27% for the second quarter of Fiscal 2010 as compared
to the second quarter of Fiscal 2009 on a unit shipment decline
of 11%, and desktop PC revenue declined 31% for the first half
of Fiscal 2010 as compared to the first half of Fiscal 2009 on a
unit shipment decline of 16%. Mobility shipments increased
year-over-year
by 30% and 31% for the second quarter and first half of Fiscal
2010, respectively, while
|
33
|
|
|
average selling prices for mobility products declined 24% and
26% during the same time periods. The continued shift in
consumer preference from desktops to notebooks has contributed
to our mobility unit growth. The reduction in mobility average
selling prices is mainly attributable to our expansion into
retail coupled with a demand shift to lower priced notebooks
from higher priced notebooks. Software and peripheral revenue
also declined 6% and 14%
year-over-year
during the second quarter and first half of Fiscal 2010,
respectively. At a country level, our targeted BRIC revenue grew
17%
year-over-year
for both the second quarter and first half of Fiscal 2010.
|
For the second quarter of Fiscal 2010, Consumers operating
income grew 207% or $60 million over the prior year, and
for the first half of Fiscal 2010, Consumers operating
income declined 25%
year-over-year.
Consumers revenue and operating income was favorably
impacted by a $53 million transaction, in which a vendor
purchased our contractual right to share in future revenues from
product renewals sold by the vendor. We have no continuing
obligations or performance requirements in connection with this
transaction, and amounts are non-refundable. Excluding this
transaction, Consumers operating income percentage would
have been 1.3% instead of 3.1% for the second quarter and 0.6%
instead of 1.6% for the first half of Fiscal 2010. While we do
not expect this transaction to be recurring, we may from time to
time enter into similar agreements.
Other factors impacting Consumers operating performance
include a
year-over-year
improvement in gross margin for the second quarter of Fiscal
2010. Operating expenses decreased 10%
year-over-year,
which partially contributed to our operating income percentage
increasing to 3.1% for the second quarter of Fiscal 2010 from
0.9% in the second quarter of Fiscal 2009. For the first half of
Fiscal 2010, gross margin percentage remained relatively flat
year-over-year
while operating expenses decreased 11%. However, the cost
improvements did not offset the 13%
year-over-year
decline in revenue, and as a result, operating income declined
25%
year-over-year
for the first half of Fiscal 2010.
We sell desktop and notebook computers, printers, ink, and toner
through retail channels. Our goal is to have strategic
relationships with a number of major retailers in our larger
geographic regions. During the first half of Fiscal 2010, we
continued to expand our global retail presence, and we now reach
over 40,000 retail locations worldwide.
REVENUE
BY PRODUCT AND SERVICES CATEGORIES
We design, develop, manufacture, market, sell, and support a
wide range of products that in many cases are customized to
individual customer requirements. Our product categories include
mobility products, desktop PCs, software and peripherals,
servers and networking products, and storage products. In
addition, we offer a range of services.
In the first quarter of Fiscal 2010, we performed an analysis of
our enhanced services revenue and determined that certain items
previously classified as enhanced services revenue were more
appropriately categorized within product revenue. Also, certain
items previously categorized as mobility, desktop PC, and
servers and networking revenue were more appropriately
reclassified to storage revenue. Fiscal 2009 balances reflect
the revised revenue classifications.
34
The following table summarizes our net revenue by product and
service categories for the three and six months ended
July 31, 2009, and August 1, 2008:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
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Six Months Ended
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July 31, 2009
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August 1, 2008
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July 31, 2009
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|
|
August 1, 2008
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|
|
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% of
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%
|
|
|
|
|
% of
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|
|
|
% of
|
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%
|
|
|
|
|
% of
|
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|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Mobility
|
|
$
|
3,891
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|
|
|
30%
|
|
|
|
(21)%
|
|
|
$
|
4,895
|
|
|
|
30%
|
|
|
$
|
7,766
|
|
|
|
31%
|
|
|
|
(20)%
|
|
|
$
|
9,744
|
|
|
|
30%
|
|
Desktop PCs
|
|
|
3,319
|
|
|
|
26%
|
|
|
|
(33)%
|
|
|
|
4,954
|
|
|
|
30%
|
|
|
|
6,482
|
|
|
|
26%
|
|
|
|
(33)%
|
|
|
|
9,735
|
|
|
|
30%
|
|
Software and peripherals
|
|
|
2,382
|
|
|
|
19%
|
|
|
|
(15)%
|
|
|
|
2,790
|
|
|
|
17%
|
|
|
|
4,628
|
|
|
|
18%
|
|
|
|
(16)%
|
|
|
|
5,531
|
|
|
|
17%
|
|
Servers and networking
|
|
|
1,403
|
|
|
|
11%
|
|
|
|
(19)%
|
|
|
|
1,733
|
|
|
|
11%
|
|
|
|
2,689
|
|
|
|
11%
|
|
|
|
(22)%
|
|
|
|
3,451
|
|
|
|
11%
|
|
Enhanced services
|
|
|
1,218
|
|
|
|
10%
|
|
|
|
(11)%
|
|
|
|
1,372
|
|
|
|
8%
|
|
|
|
2,456
|
|
|
|
10%
|
|
|
|
(10)%
|
|
|
|
2,716
|
|
|
|
8%
|
|
Storage
|
|
|
551
|
|
|
|
4%
|
|
|
|
(20)%
|
|
|
|
690
|
|
|
|
4%
|
|
|
|
1,085
|
|
|
|
4%
|
|
|
|
(19)%
|
|
|
|
1,334
|
|
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
12,764
|
|
|
|
100%
|
|
|
|
(22)%
|
|
|
$
|
16,434
|
|
|
|
100%
|
|
|
$
|
25,106
|
|
|
|
100%
|
|
|
|
(23)%
|
|
|
$
|
32,511
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Mobility During the second quarter and
first half of Fiscal 2010, revenue from mobility products (which
includes notebook computers and mobile workstations) declined
21% and 20%, respectively, on a unit decline of 1% and 3%,
respectively, compared to the second quarter and first half of
Fiscal 2009.
Year-over-year,
Commercial revenue and units declined 31% and 22%, respectively,
for the second quarter of Fiscal 2010 while revenue and units
decreased 30% and 25%, respectively, for first half of Fiscal
2010. The declines are generally driven by the softer demand
environment. Additionally, we generally were selective in
participating in lower price bands. Average selling prices in
Commercial declined 12% and 7% for the second quarter and first
half of Fiscal 2010, respectively, due to an overall industry
decline in mobility selling prices.
|
Consumers mobility revenue declined 1%
year-over-year
on unit growth of 30% for the second quarter of Fiscal 2010, and
for the first half of Fiscal 2010, Consumers mobility
revenue decreased 3% on unit growth of 31%. During the second
quarter and first half of Fiscal 2010, Consumers average
selling price for mobility products decreased 24% and 26%
year-over-year,
respectively. Consumers revenue, unit, and average selling
price performance is attributable to Consumers continued
expansion into retail coupled with an industry mix shift to
lower priced mobility product offerings.
Our products range from the lightest ultra-portable in our
history to the most powerful mobile workstation. We believe the
on-going trend to mobility products will continue, and we are
therefore focused on expanding our product platforms to cover
broader price bands and functionalities. During the second
quarter of Fiscal 2010, we launched mobility products such as
the Latitude 2100, whose optional touch-screen is the first for
education netbooks; the Dell Studio 14z, which is a powerful
mobile entertainment system; the Alienware M17x, a powerful
gaming laptop; the ultraportable
Vostrotm
1220 business laptop; and the Inspiron Mini 10v netbook.
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Desktop PCs During both the second
quarter and first half of Fiscal 2010, revenue from desktop PCs
(which includes desktop computer systems and workstations)
decreased 33%
year-over-year
on a unit decline of 23% and 24%, respectively. In the
marketplace, we are continuing to see rising end-user demand for
mobility products, which contributes to further slowing demand
for desktop PCs as mobility growth is expected to continue to
outpace desktop growth. The decline in desktop PC revenue was
also due to the on-going competitive pricing pressure for lower
priced desktops and a softening in global IT end-user demand.
Consequently, our average selling price for desktops decreased
13% and 12%
year-over-year
during the second quarter and first half of Fiscal 2010 as we
continued to align our prices and product offerings with the
marketplace. For the second quarter and first half of Fiscal
2010, desktop revenue decreased across all segments. During the
second quarter of Fiscal 2010, we introduced our
Vostrotm
All In One desktop, which is designed to save desk space for our
business customers.
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Software and Peripherals Revenue from
sales of software and peripherals (S&P)
consists of Dell-branded printers, monitors (not sold with
systems), projectors, and a multitude of competitively priced
third-party peripherals including plasma and LCD televisions,
standalone software sales and related support services, and
other products. S&P revenue declined 15% and 16%
year-over-year
for the second quarter and first six months of Fiscal 2010,
respectively. S&Ps revenue decline was driven by
overall customer unit shipment declines and
|
35
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demand softness in displays, imaging products, and electronics,
which experienced year-over-year revenue decreases of 34%, 19%,
and 11%, respectively, during the second quarter and
year-over-year revenue declines of 35%, 25%, and 19%,
respectively, for the first half of Fiscal 2010. We continued to
see growth in software licensing with 1% and 6% revenue
improvement for the second quarter and first half of Fiscal
2010, respectively. Contributing to this growth was our
acquisition of ASAP Software (ASAP) in the fourth
quarter of Fiscal 2008. With ASAP, we now offer products from
over 2,400 software publishers. We continue to believe that
software licensing is a revenue growth opportunity as customers
continue to seek out consolidated software sources. All segments
experienced
year-over-year
revenue declines for the second quarter and first half of Fiscal
2010.
|
Software revenue from our S&P line of business, which
includes software license fees and related post contract
customer support (PCS), is included in services
revenue on the Condensed Consolidated Statements of Income.
Software and related support services revenue represents 43% and
40% of services revenue for the second quarters of Fiscal 2010
and Fiscal 2009, respectively, and 42% and 38% of services
revenue for the first half of Fiscal 2010 and Fiscal 2009,
respectively.
|
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|
Servers and Networking During the
second quarter and first half of Fiscal 2010, revenue from sales
of servers and networking products (which includes rack, blade,
and tower servers) decreased 19% and 22%
year-over-year,
respectively, on a unit shipment decrease of 23% and 25%,
respectively. The decline in our server and networking revenue
is due to demand challenges across all Commercial segments and
regions. Our average selling price for servers and networking
products increased 5% and 4%
year-over-year
during the second quarter and first half of Fiscal 2010,
respectively. During the second quarter, we continued the
rollout of our new 11th generation PowerEdge servers as a
part of our mission to help companies of all sizes simplify
their IT environments. These servers provide optimal
virtualization, system management, and usability.
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Enhanced Services Enhanced services
offerings include infrastructure consulting, deployment of
enterprise products and computer systems in customers
environments, asset recovery and recycling, computer-related
training, IT support, client and enterprise support, and managed
service solutions. Enhanced services revenue decreased 11% and
10%
year-over-year
for the second quarter and first half of Fiscal 2010 to
$1.2 billion and $2.5 billion, respectively. Although
we continue to move towards more standalone services, a
significant portion of our portfolio is made up of support
services, which tend to correlate with hardware unit growth, and
thus causing the
year-over-year
decline. For the second quarter and first half of Fiscal 2010,
enhanced services revenue declined for each of our segments as
compared to the same time periods in Fiscal 2009 with Large
Enterprise experiencing the largest reduction from an absolute
dollar perspective. Our deferred enhanced service revenue
balance increased 2%
year-over-year
to $5.8 billion at July 31, 2009, primarily due to an
increase in up-sell service offerings. We continue to view
enhanced services as a strategic growth opportunity and will
continue to invest in our offerings and resources focused on
increasing our solution sales.
|
|
|
Storage Revenue from sales of storage
products decreased 20% and 19%
year-over-year
for the second quarter and first half of Fiscal 2010,
respectively. All Commercial segments contributed to the
year-over-year
decrease in storage revenue for the second quarter and first
half of Fiscal 2010. EqualLogic performed strongly with
year-over-year
revenue growth of 42% and 52% for the second quarter and first
half of Fiscal 2010, respectively. During the second quarter of
Fiscal 2010, we introduced the EqualLogic PS4000 storage array
and the PowerVault NX3000 network attached storage device to
help small businesses and remote office customers meet their
growing storage needs.
|
36
Investment
and Other Income (Expense), net
The table below provides a detailed presentation of investment
and other income (expense), net for the three and six months
ended July 31, 2009, and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Investment and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, primarily interest
|
|
$
|
15
|
|
|
$
|
49
|
|
|
$
|
36
|
|
|
$
|
104
|
|
Gains (losses) on investments, net
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
1
|
|
|
|
(11
|
)
|
Interest expense
|
|
|
(39
|
)
|
|
|
(26
|
)
|
|
|
(68
|
)
|
|
|
(38
|
)
|
Foreign exchange
|
|
|
(26
|
)
|
|
|
20
|
|
|
|
(26
|
)
|
|
|
110
|
|
Other
|
|
|
8
|
|
|
|
(11
|
)
|
|
|
13
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income (expense), net
|
|
$
|
(42
|
)
|
|
$
|
18
|
|
|
$
|
(44
|
)
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
year-over-year
decrease in investment income for the second quarter and first
half of Fiscal 2010 is primarily due to decreased yields on a
higher short-term investment mix. The change in gains (losses)
on investments, net for the second quarter and first six months
of Fiscal 2010 is mainly due to a $10 million impairment
charge related to our asset backed securities in the second
quarter of Fiscal 2009. Interest expense increased
year-over-year
for the second quarter and first half of Fiscal 2010 due to the
issuance of $1 billion of debt in the second quarter of
Fiscal 2010, $500 million of debt in the first quarter
Fiscal 2010, and $1.5 billion of debt in the first quarter
of Fiscal 2009. During the second quarter and first half of
Fiscal 2010, we recognized a $9 million and
$18 million increase, respectively, in the fair market
value of our investments related to our deferred compensation
plan compared to a $2 million and $10 million decrease
during second quarter and first six months of Fiscal 2009,
respectively. Fair market value adjustments related to the
deferred compensation plan are included in Other in the table
above.
The
year-over-year
decrease in foreign exchange for the second quarter of Fiscal
2010, as compared to the same period in the prior year, is
primarily due to fair value losses on undesignated foreign
currency derivatives as most major foreign currencies
strengthened relative to the U.S. dollar during the first
half of Fiscal 2010. The first half of Fiscal 2009 includes a
$42 million gain related to the correction of errors in the
remeasurement of certain local currency balances to the
functional currency related to prior periods as disclosed in
previous Securities and Exchange Commission (SEC)
filings.
Income
Taxes
For the first half of Fiscal 2010 and Fiscal 2009, our effective
income tax rate was 26.8% and 24.8%, respectively. The increase
in our effective income tax rate for the first half of Fiscal
2010 as compared to the same period in the prior year is
primarily due to an increase in the accrual of interest and
penalties related to uncertain tax positions and a decreased
benefit resulting from the favorable effective settlement of
examinations in foreign jurisdictions. Our effective income tax
rate was 25.0% and 26.4% for the second quarter of Fiscal 2010
and Fiscal 2009, respectively. The decrease in our effective
income tax rate for the second quarter of Fiscal 2010 as
compared to the second quarter of Fiscal 2009 is primarily due
to improved profitability mix, partially offset by a decreased
benefit resulting from favorable effective settlements of
examinations in foreign jurisdictions. The differences between
the estimated effective income tax rate and the
U.S. federal statutory rate of 35% principally result from
our geographical distribution of taxable income and differences
between the book and tax treatment of certain items. The income
tax rate for Fiscal 2010 will be impacted by the actual mix of
jurisdictions in which income is generated. See Note 8 of Notes
to the Condensed Consolidated Financial Statements included in
Part I Item I Financial
Statements for additional information.
ACCOUNTS
RECEIVABLE
We sell products and services directly to customers and through
a variety of sales channels, including retail distribution. At
July 31, 2009, our gross accounts receivable balance was
$5.5 billion, a 14% increase from our
37
balance at January 30, 2009. The growth in accounts
receivable was mainly due to increased sales to Consumer retail
customers who typically have longer credit terms, seasonality
factors in our Public business, and foreign currency impacts in
our EMEA and APJ regions. We maintain an allowance for doubtful
accounts to cover receivables that may be deemed uncollectible.
The allowance for losses is based on specific identifiable
customer accounts that are deemed at risk and general historical
bad debt experience. As of July 31, 2009, and
January 30, 2009, the allowance for doubtful accounts was
$130 million and $112 million, respectively. In
general, we have seen an increase in the allowance caused by the
global economic conditions, particularly in a number of emerging
economies and regions. Based on our assessment, we believe that
we are adequately reserved for expected credit losses. We
monitor the aging of our accounts receivable and continue to
take actions in Fiscal 2010 to reduce our exposure to credit
losses.
FINANCING
RECEIVABLES
At July 31, 2009, and January 30, 2009, our net
financing receivables balance was $2.5 billion and
$2.2 billion, respectively. The increase is primarily the
result of funding more customer receivables on balance sheet. We
expect growth in financing receivables to continue throughout
Fiscal 2010 as we reduce our off-balance sheet securitizations
and decrease our fundings with CIT Group Inc. (CIT).
To manage growth in financing receivables, we will continue to
balance the use of our own working capital and other sources of
liquidity. See Note 5 of Notes to the Condensed
Consolidated Financial Statements included in Part I
Item 1 Financial
Statements for additional information about our financing
receivables.
We maintain an allowance to cover financing receivable credit
losses. The allowance for losses is determined based on various
factors, including historical and anticipated experience, past
due receivables, receivable type, and customer risk profile. As
of July 31, 2009, and January 30, 2009, the allowance
for financing receivable losses was $173 million and
$149 million, respectively. The increase in the allowance
is primarily due to an increase in customer receivables. Based
on our assessment of the customer financing receivables and the
associated risks, we believe that we are adequately reserved.
The Credit Card Accountability, Responsibility, and Disclosure
Act of 2009 was signed into U.S. law on May 22, 2009,
and will impose new restrictions on credit card companies in the
areas of marketing, servicing, and pricing of consumer credit
accounts. Some provisions of the law are now in effect, with the
most substantive provisions effective in February 2010. We are
compliant with the recent legislation in effect, and are
evaluating future changes in regulations. We do not expect that
the changes will substantially alter how consumer credit is
offered to our customers or how their accounts will be serviced.
Commercial credit is unaffected by the change in law.
CIT, formerly a joint venture partner of DFS, has a limited role
in the financing activities of DFS. For the three and six months
ended July 31, 2009, CIT funded approximately 17% and 24%,
respectively, of DFS financing receivables. CITs funding
percentage is expected to further decline below the maximum
contractual funding percentage of 25% over the remainder of
Fiscal 2010, as agreed to by Dell and CIT. Currently, revolving
loans are offered by DFS under private label credit financing
programs underwritten by CIT Bank. We expect to secure a new
banking relationship in Fiscal 2010 to replace the existing CIT
Bank arrangement without adversely affecting our ability to
offer or arrange financing for our customers. Additionally, of
the total customer receivables balance at July 31, 2009,
and January 30, 2009, $46 million and
$45 million, respectively, represent balances which are due
from CIT in connection with specified promotional programs.
OFF-BALANCE
SHEET ARRANGEMENTS
Asset
Securitization
During the second quarter of Fiscal 2010, we continued to
transfer certain customer financing receivables to
unconsolidated qualifying special purpose entities. The
qualifying special purpose entities are bankruptcy remote legal
entities with assets and liabilities separate from ours. The
purpose of the qualifying special purpose entities is to
facilitate the funding of customer receivables in the capital
markets. Our qualifying special purpose entities have entered
into financing arrangements with three multi-seller conduits
that, in turn, issue asset-backed debt securities in the capital
markets. Two of the three conduits fund fixed-term leases and
loans, and one conduit funded revolving loans until it initiated
scheduled amortization and was consolidated in July 2009. See
Note 5 of Notes to the
38
Condensed Consolidated Financial Statements included in
Part I Item 1
Financial Statements for additional
information. During the first six months of Fiscal 2010 and
Fiscal 2009, $495 million and $796 million,
respectively, of customer receivables were funded via
securitization through special purpose entities.
Certain transfers are accounted for as a sale in accordance with
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities, (SFAS 140). Upon the sale of
the customer receivables to qualifying special purpose entities,
we recognize a gain on the sale and retain an interest in the
assets sold. We provide credit enhancement to the securitization
in the form of over-collateralization. Receivables transferred
to the qualified special purpose entities exceed the level of
debt issued. We retain the right to receive collections for
assets securitized exceeding the amount required to pay
interest, principal, and other fees and expenses (referred to as
retained interest). Retained interest is included in Financing
Receivables on the balance sheet. At July 31, 2009, and
January 30, 2009, our retained interest in securitized
receivables was $119 million and $396 million,
respectively. Our risk of loss related to securitized
receivables is limited to the amount of our retained interest.
We service securitized receivables and earn a servicing fee. Our
securitization transactions generally do not result in servicing
assets and liabilities as the contractual fees are adequate
compensation in relation to the associated servicing cost. The
principal balance of securitized receivables reported
off-balance sheet as of July 31, 2009, and January 30,
2009, were $726 million and $1.4 billion, respectively.
As discussed in Note 5 of Notes to the Condensed
Consolidated Financial Statements included in Part I
Item 1 Financial
Statements, during the three months ended July 31,
2009, the beneficial interest in the revolving securitization
conduit owned by third parties fell below 10%, and the
previously qualified special purpose entity was consolidated
pursuant to SFAS 140.
We expect to renew one of our fixed-term securitization
facilities in Fiscal 2010, and may enter into new securitization
arrangements.
LIQUIDITY
AND CAPITAL COMMITMENTS
Current
Market Conditions
Recently, we have seen improved stability in the financial and
capital markets; however, volatility remains high relative to
historical levels. During the second quarter of Fiscal 2010, we
continued to monitor the financial health of our supplier base,
carefully managed customer credit, continued diversifying our
financial institution exposure, and monitored the risk
concentration of our cash and cash equivalents balance. We
maintained a conservative investment portfolio with shorter
duration and high quality assets and monitored the effectiveness
of our foreign currency hedging program. We remain focused on
maintaining spending controls across the company. We will
monitor and manage these activities depending on current and
expected market developments.
We monitor credit risk associated with our financial
counterparties using various market credit risk indicators such
as reviews and actions taken by rating agencies and changes in
credit default swap levels. We perform periodic evaluations of
our positions with these counterparties and may limit the
agreements or contracts entered into with any one counterparty
in accordance with our policies. See Part I
Item 1A
Risk Factors in our Annual
Report on
Form 10-K
for the fiscal year ended January 30, 2009, for further
discussion of risks associated with our use of counterparties.
We believe that no significant concentration of credit risk
exists for our investments. The impact on our Condensed
Consolidated Financial Statements of any credit adjustments
related to these counterparties has been immaterial.
Liquidity
Our cash balances are held in numerous locations throughout the
world, including substantial amounts held outside of the
U.S. The majority of our cash and investments that are
located outside of the U.S. are denominated in the
U.S. dollar. Most of the amounts held outside of the
U.S. could be repatriated to the U.S., but under current
law, would be subject to U.S. federal income taxes, less
applicable foreign tax credits. In some countries, repatriation
of certain foreign balances is restricted by local laws. We have
provided for the U.S. federal tax liability on these
amounts for financial statement purposes, except for foreign
earnings that are considered permanently reinvested
39
outside of the U.S. Repatriation could result in additional
U.S. federal income tax expense. We utilize a variety of
tax planning and financing strategies with the objective of
having our worldwide cash available in the locations in which it
is needed.
We have an active working capital management team that monitors
the efficiency of our balance sheet by evaluating liquidity
under various macroeconomic and competitive scenarios. These
scenarios quantify risks to the financial statements and provide
a basis for actions necessary to ensure adequate liquidity.
During the second quarter of Fiscal 2010, we continued to
monitor and prioritize capital expenditures and other
discretionary spending. The shift to third party manufacturers
and the associated closure or sale of several of our
manufacturing and other facilities has reduced the amount of
capital required for our business, and we have not repurchased
our shares since the third quarter of Fiscal 2009. We have a
$1.5 billion commercial paper program with a supporting
$1.5 billion senior unsecured revolving credit facility
that allows us to obtain favorable short-term borrowing rates.
No amounts were outstanding under any of these facilities at
July 31, 2009, and these facilities remain available to
augment our liquidity, if needed.
In the first half of Fiscal 2010, we issued $1.5 billion of
notes, maturing in 2012, 2014, and 2019, under a shelf
registration statement filed with the SEC in November 2008. Due
to the overall strength of our financial position, we do not
believe that the current credit conditions in the capital
markets will impede our ability to access the capital markets in
the future, should we choose to do so.
We ended the second quarter of Fiscal 2010 with
$12.7 billion in cash, cash equivalents, and investments,
compared to $9.5 billion at the end of the second quarter
of Fiscal 2009. Since August 2, 2008, we have generated
$2.5 billion in cash flow from operations and
$1.5 billion from debt issuance. We use cash generated by
operations as our primary source of liquidity and believe that
internally generated cash flows are sufficient to support
business operations. Over the past year, we have issued term
debt to supplement our domestic liquidity, provide for financial
flexibility, and fund any strategic initiatives.
The following table summarizes the results of our Condensed
Consolidated Statements of Cash Flows for the six months ended
July 31, 2009, and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net change in cash from:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,837
|
|
|
$
|
1,251
|
|
Investing activities
|
|
|
40
|
|
|
|
579
|
|
Financing activities
|
|
|
1,379
|
|
|
|
(987
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
91
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
3,347
|
|
|
$
|
859
|
|
|
|
|
|
|
|
|
|
|
During the first half of Fiscal 2010, we were able to improve
our cash generation from operating activities as a result of net
income improvement combined with the efficient management of our
working capital. For further discussion of the results of our
cash conversion cycle, see Key Performance
Metrics below.
Operating Activities Cash from
operating activities was $1.8 billion during the first half
of Fiscal 2010, compared to $1.3 billion during the first
half of Fiscal 2009. During the first half of Fiscal 2010,
operating cash flows resulted primarily from net income and
favorable changes in our cash conversion cycle. Comparatively,
cash from operations during the first half of Fiscal 2009 was
primarily from net income offset by a deterioration in our days
in accounts payable as a result of a shift away from suppliers
with extended payment terms and the timing of purchases from and
payments to suppliers during the first half of Fiscal 2009.
Key Performance Metrics Our direct
business model allows us to maintain an efficient cash
conversion cycle, which compares favorably with that of others
in our industry.
40
The following table presents the components of our cash
conversion cycle at July 31, 2009, and August 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
Days of sales outstanding
(a)
|
|
|
42
|
|
|
|
38
|
|
Days of supply in inventory
(b)
|
|
|
7
|
|
|
|
7
|
|
Days in accounts payable
(c)
|
|
|
84
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(35
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Days of sales outstanding
(DSO) calculates the average collection period of
our accounts receivable. DSO is based on the ending net trade
receivables and the most recent quarterly total net revenue for
each period. DSO also includes the effect of product costs
related to customer shipments not yet recognized as revenue that
are classified in other current assets. DSO is calculated by
adding accounts receivable, net of allowance for doubtful
accounts, and customer shipments in transit and dividing that
sum by average net revenue per day for the current quarter
(90 days). At July 31, 2009, and August 1, 2008,
DSO and days of customer shipments not yet recognized were 38
and 4 days and 35 and 3 days, respectively.
|
|
(b)
|
|
Days of supply in inventory
(DSI) measures the average number of days from
procurement to sale of our product. DSI is based on ending
inventory and most recent quarterly total cost of sales for each
period. DSI is calculated by dividing inventory by average cost
of goods sold per day for the current quarter (90 days).
|
|
(c)
|
|
Days in accounts payable
(DPO) calculates the average number of days our
payables remain outstanding before payment. DPO is based on
ending accounts payable and most recent quarterly total cost of
sales for each period. DPO is calculated by dividing accounts
payable by average cost of goods sold per day for the current
quarter (90 days).
|
Our cash conversion cycle improved six days at July 31,
2009, from August 1, 2008, driven by a ten day improvement
in DPO offset by a four day increase in DSO. The improvement in
DPO from August 1, 2008, is primarily attributable to our
ongoing transition to contract manufacturing, further
standardization of vendor agreements, and timing of supplier
purchases and payments during the second quarter of Fiscal 2010
as compared to second quarter of Fiscal 2009. The increase in
DSO from August 1, 2008, is primarily attributable to our
growth in consumer retail whose customers typically have longer
payment terms, slightly offset by a reduction in past-due
receivables. We believe that we can generate cash flow from
operations in excess of net income over the long-term and can
operate our cash conversion at negative 30 days or better.
We defer the cost of revenue associated with customer shipments
not yet recognized as revenue until they are delivered. These
deferred costs are included in our reported DSO because we
believe it presents a more accurate presentation of our DSO and
cash conversion cycle. These deferred costs are recorded in
other current assets in our Condensed Consolidated Statements of
Financial Position and totaled $537 million and
$521 million at July 31, 2009, and August 1,
2008, respectively.
Investing Activities Cash provided by
investing activities for the first half of Fiscal 2010, was
$40 million, compared to $579 million of cash provided
by investing activities during the same period last year. Cash
generated or used in investing activities principally consists
of the net of sales and maturities and purchases of investments;
net capital expenditures for property, plant, and equipment; and
cash used to fund strategic acquisitions, which was
approximately $3 million during the first half of Fiscal
2010 compared to $165 million during the first half of
Fiscal 2009. In light of continued capital market conditions, we
maintained the overall interest rate profile of the investment
portfolio to shorter duration securities.
Financing Activities Cash provided by
financing activities during the first half of Fiscal 2010, was
$1.4 billion as compared to $987 million used during
the same period last year. Financing activities typically
consist of debt issuance proceeds, the issuance of common stock
under employee stock plans, offset with the repurchase of our
common stock. The
year-over-year
increase in cash provided by financing activities is due
primarily to the reduction of our share repurchase program and
proceeds from the issuance of long-term debt offset by our
repayment of long-term debt. During the first half of Fiscal
2010, we did not repurchase any shares compared to approximately
112 million shares repurchased at an aggregate cost of
$2.5 billion in the first half of Fiscal 2009. We issued
and sold long-term notes of $1.5 billion during the first
half of Fiscal 2010 and $1.5 billion during the first half
of Fiscal 2009. During the first half of Fiscal 2009, we also
repaid the $200 million principal amount of notes that
matured in April 2008.
41
We also have a $1.5 billion commercial paper program with a
supporting $1.5 billion senior unsecured revolving credit
facility that allows us to obtain favorable short-term borrowing
rates. We use the proceeds for general corporate purposes. At
July 31, 2009, there was no outstanding balance under the
commercial paper program and no advances under the supporting
credit facility. See Note 3 of Notes to Condensed
Consolidated Financial Statements included in
Part I Item 1 Financial
Statements for further discussion on our debt and
commercial paper program.
Capital
Commitments
Share Repurchase Program We have a
share repurchase program that authorizes us to purchase shares
of common stock in order to increase shareholder value and
manage dilution resulting from shares issued under our equity
compensation plans. However, we do not currently have a policy
that requires the repurchase of common stock to offset
share-based compensation arrangements.
We typically repurchase shares of common stock through a
systematic program of open market purchases. We did not
repurchase any shares during the second quarter of Fiscal 2010
compared to the repurchase of approximately 60 million
shares at an aggregate cost of $1.4 billion during the
second quarter of Fiscal 2009.
Capital Expenditures During the second
quarter and first half of Fiscal 2010, we spent approximately
$99 million and $179 million, respectively, on
property, plant, and equipment primarily on our global expansion
efforts and infrastructure investments in order to support
future growth. Product demand, product mix, and the increased
use of contract manufacturers, as well as ongoing investments in
operating and information technology infrastructure, influence
the level and prioritization of our capital expenditures.
Capital expenditures for Fiscal 2010, related to our continued
expansion worldwide, are currently expected to reach
approximately $400 million. These expenditures are expected
to be funded from our cash flows from operating activities.
Restricted Cash Pursuant to an
agreement between Dell and CIT, we are required to maintain
escrow cash accounts that are held as recourse reserves for
credit losses, performance fee deposits related to our private
label credit card, and deferred servicing revenue. Restricted
cash in the amount of $168 million and $213 million is
included in other current assets at July 31, 2009, and
January 30, 2009, respectively.
RECENTLY
ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Condensed Consolidated Financial
Statements included in
Part I Item 1
Financial Statements for a description of recently
issued and adopted accounting pronouncements, including the
expected dates of adoption and estimated effects on our results
of operations, financial position, and cash flows.
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
For a description of our market risks, see
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Market Risk in our
Annual Report on
Form 10-K
for the fiscal year ended January 30, 2009. Our exposure to
market risks has not changed materially from the description in
the Annual Report on
Form 10-K.
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
This Report includes the certifications of our Chief Executive
Officer and Chief Financial Officer required by
Rule 13a-14
of the Securities Exchange Act of 1934 (the Exchange
Act). See Exhibits 31.1 and 31.2. This Item 4
includes information concerning the controls and control
evaluations referred to in those certifications.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) are designed to ensure that information
required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in SEC rules and forms and
that such information is accumulated and communicated to
management, including the chief executive officer and the chief
financial officer, to allow timely decisions regarding required
disclosures.
42
In connection with the preparation of this Report, our
management, under the supervision and with the participation of
the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of
July 31, 2009. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were effective as of
July 31, 2009.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial
reporting during the second quarter of Fiscal 2010 that
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
43
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
The information required by this item is set forth under
Note 8 of Notes to Condensed Consolidated Financial
Statements included in Part I
Item 1 Financial Statements, and is
incorporated herein by reference.
For a description of the risk factors affecting our business and
results of operations, see Part I
Item 1A
Risk Factors in our Annual
Report on
Form 10-K
for the fiscal year ended January 30, 2009.
44
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
The annual meeting of Dells stockholders was held on
July 17, 2009. At that meeting, the following four
proposals were submitted to a vote of Dells stockholders:
|
|
(1)
|
Proposal 1 (Election of Directors) A proposal
for the election of the persons who will serve as Dells
directors until next years annual meeting.
|
|
(2)
|
Proposal 2 (Ratification of Independent
Auditor) A proposal for the ratification of the
Audit Committees selection of PricewaterhouseCoopers LLP
as Dells independent auditor for Fiscal 2010.
|
|
(3)
|
Stockholder Proposal 1 (Reimbursement of Proxy
Expenses) A proposal to amend our Bylaws to provide
for the reimbursement of certain proxy expenses incurred in
connection with a stockholder proposed director nomination.
|
|
(4)
|
Stockholder Proposal 2 (Adopt Simple Majority
Vote) A proposal to amend our Certificate of
Incorporation and Bylaws to provide for a simple majority vote
requirement for matters brought before stockholders.
|
Proposal 1, Proposal 2 and Stockholder Proposal 2
were approved, and Stockholder Proposal 1 was not approved.
The following table sets forth the results of the voting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Votes
|
|
|
|
|
|
Proposal 1:
|
|
For
|
|
|
Withheld
|
|
|
|
|
|
|
|
|
Election of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James W. Breyer
|
|
|
1,636,653,739
|
|
|
|
32,156,742
|
|
|
|
|
|
|
|
|
|
Donald J. Carty
|
|
|
1,631,633,628
|
|
|
|
37,176,854
|
|
|
|
|
|
|
|
|
|
Michael S. Dell
|
|
|
1,627,397,709
|
|
|
|
41,412,773
|
|
|
|
|
|
|
|
|
|
William H. Gray, III
|
|
|
1,396,321,550
|
|
|
|
272,488,932
|
|
|
|
|
|
|
|
|
|
Sallie L. Krawcheck
|
|
|
1,643,632,411
|
|
|
|
25,178,040
|
|
|
|
|
|
|
|
|
|
Judy C. Lewent
|
|
|
1,646,325,730
|
|
|
|
22,484,752
|
|
|
|
|
|
|
|
|
|
Thomas W. Luce, III
|
|
|
1,482,484,852
|
|
|
|
186,325,630
|
|
|
|
|
|
|
|
|
|
Klaus S. Luft
|
|
|
1,599,449,293
|
|
|
|
69,361,188
|
|
|
|
|
|
|
|
|
|
Alex J. Mandl
|
|
|
1,627,064,605
|
|
|
|
41,745,877
|
|
|
|
|
|
|
|
|
|
Samuel A. Nunn, Jr.
|
|
|
1,399,029,662
|
|
|
|
269,780,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal 2:
|
|
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Votes
|
|
Ratification of Independent Auditor
|
|
|
1,643,819,083
|
|
|
|
21,507,204
|
|
|
|
3,484,193
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Stockholder Proposal 1:
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Reimbursement of Proxy Expenses
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490,597,816
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901,757,293
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19,857,894
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256,597,477
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Stockholder Proposal 2:
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Adopt Simple Majority Vote
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973,083,305
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437,260,886
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1,863,616
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256,602,673
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Exhibits See Index to Exhibits below.
45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DELL INC.
Thomas W. Sweet
Vice President, Corporate Finance and
Chief Accounting Officer
(On behalf of the registrant and as
principal accounting officer)
Date: September 3, 2009
46
INDEX TO
EXHIBITS
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Exhibit
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No.
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Description of Exhibit
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3.1
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Restated Certificate of Incorporation, filed February 1,
2006 (incorporated by reference to Exhibit 3.3 of
Dells Current Report on
Form 8-K
filed on February 2, 2006, Commission File
No. 0-17017)
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3.2
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Restated Bylaws, as amended and effective March 8, 2007
(incorporated by reference to Exhibit 3.1 of Dells
Current Report on
Form 8-K
filed on March 13, 2007, Commission File
No. 0-17017)
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4.1
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Indenture, dated as of April 27, 1998, between Dell
Computer Corporation and Chase Bank of Texas, National
Association (incorporated by reference to Exhibit 99.2 of
Dells Current Report on
Form 8-K
filed April 28, 1998, Commission File
No. 0-17017)
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4.2
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Officers Certificate pursuant to Section 301 of the
Indenture establishing the terms of Dells
7.10% Senior Debentures Due 2028 (incorporated by reference
to Exhibit 99.4 of Dells Current Report on
Form 8-K
filed April 28, 1998, Commission File
No. 0-17017)
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4.3
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Form of Dells 7.10% Senior Debentures Due 2028
(incorporated by reference to Exhibit 99.6 of Dells
Current Report on
Form 8-K
filed April 28, 1998, Commission File
No. 0-17017)
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4.4
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Indenture, dated as of April 17, 2008, between Dell Inc.
and The Bank of New York Trust Company, N.A., as trustee
(including the form of notes) (incorporated by reference to
Exhibit 4.1 of Dells Current Report on
Form 8-K
filed April 17, 2008, Commission file
No. 0-17017)
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4.5
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Indenture, dated April 6, 2009, between Dell Inc. and The
Bank of New York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.1 of Dells
Current Report on
Form 8-K
filed April 6, 2009, Commission file
No. 0-17017)
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4.6
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First Supplemental Indenture, dated April 6, 2009, between
Dell Inc. and The Bank of New York Mellon Trust Company,
N.A., as trustee (incorporated by reference to Exhibit 4.2
of Dells Current Report on
Form 8-K
filed April 6, 2009, Commission file
No. 0-17017)
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4.7
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Form of 5.625% Notes due 2014 (incorporated by reference to
Exhibit 4.3 of Dells Current Report on
Form 8-K
filed April 6, 2009, Commission file
No. 0-17017)
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4.8
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Second Supplemental Indenture, dated as of June 15, 2009,
between Dell Inc. and The Bank of New York Mellon
Trust Company, N.A., as trustee (incorporated by reference
to Exhibit 4.1 of Dells Current Report on
Form 8-K
filed June 15, 2009, Commission file
No. 0-17017)
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4.9
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Form of 3.375% Notes due 2012 (incorporated by reference to
Exhibit 4.2 of Dells Current Report on
Form 8-K
filed June 15, 2009, Commission file
No. 0-17017)
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4.10
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Form of 5.875% Notes due 2019 (incorporated by reference to
Exhibit 4.3 of Dells Current Report on
Form 8-K
filed June 15, 2009, Commission file
No. 0-17017)
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10.1
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*
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Form of Indemnification Agreement between Dell and each Director
and Officer of Dell
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10.2
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*
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Form of Senior Executive Officer New Hire Stock Unit Agreement
under the Amended and Restated 2002 Long-Term Incentive Plan
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31.1
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Certification of Michael S. Dell, Chairman and Chief Executive
Officer, pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
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47
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31.2
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Certification of Brian T. Gladden, Senior Vice President and
Chief Financial Officer, pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certifications of Michael S. Dell, Chairman and Chief Executive
Officer, and Brian T. Gladden, Senior Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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* |
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Identifies Exhibit that consists of or includes a management
contract or compensatory plan or arrangement. |
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Filed herewith. |
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Furnished herewith. |
48