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
April 30, 2010
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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-BUY-DELL
(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 þ 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 June 3, 2010,
1,958,270,699 shares of common stock, par value $.01 per
share, were outstanding.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. The words may, will,
anticipate, estimate,
expect, intend, plan,
aim and similar expressions as they relate to us or
our management are intended to identify these forward-looking
statements. All statements by us regarding our expected
financial position, revenues, cash flows and other operating
results, business strategy, legal proceedings and similar
matters are forward-looking statements. Our expectations
expressed or implied in these forward-looking statements may not
turn out to be correct. Our results could be materially
different from our expectations because of various risks,
including the risks discussed in Part I
Item 1A Risk Factors of our Annual Report
on
Form 10-K
for the fiscal year ended January 29, 2010. Any
forward-looking statement speaks only as of the date on which
such statement is made, and, except as required by law, we
undertake no obligation to update any forward-looking statement
to reflect events or circumstances, including unanticipated
events, after the date on which such statement is made.
PART I
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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DELL
INC.
(in millions)
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April 30,
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January 29,
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2010
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2010
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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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10,255
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$
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10,635
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Short-term investments
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627
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373
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Accounts receivable, net
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5,880
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5,837
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Financing receivables, net
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3,221
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2,706
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Inventories, net
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1,182
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1,051
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Other current assets
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3,619
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3,643
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Total current assets
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24,784
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24,245
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Property, plant, and equipment, net
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2,049
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2,181
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Investments
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714
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781
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Long-term financing receivables, net
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528
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332
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Goodwill
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4,181
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4,074
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Purchased intangible assets, net
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1,658
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1,694
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Other non-current assets
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327
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345
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Total assets
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$
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34,241
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$
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33,652
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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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1,079
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$
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663
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Accounts payable
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11,402
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11,373
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Accrued and other
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3,549
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3,884
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Short-term deferred services revenue
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2,950
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3,040
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Total current liabilities
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18,980
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18,960
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Long-term debt
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3,582
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3,417
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Long-term deferred services revenue
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3,194
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3,029
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Other non-current liabilities
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2,607
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2,605
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Total liabilities
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28,363
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28,011
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Commitments and contingencies (Note 12)
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Stockholders equity:
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Common stock and capital in excess of $.01 par value; shares
authorized: 7,000; shares issued: 3,361 and 3,351, respectively;
shares outstanding: 1,955 and 1,957, respectively
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11,534
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11,472
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Treasury stock at cost: 931 shares and 919 shares,
respectively
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(28,104
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)
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(27,904
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Retained earnings
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22,439
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22,110
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Accumulated other comprehensive income (loss)
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9
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(37
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)
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Total stockholders equity
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5,878
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5,641
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Total liabilities and stockholders equity
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$
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34,241
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$
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33,652
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
1
DELL
INC.
(in millions, except per share amounts; unaudited)
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Three Months Ended
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April 30,
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May 1,
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2010
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2009
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Net revenue:
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Products
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$
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12,086
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$
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10,232
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Services, including software related
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2,788
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2,110
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Total net revenue
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14,874
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12,342
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Cost of net revenue:
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Products
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10,385
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8,786
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Services, including software related
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1,973
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1,388
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Total cost of net revenue
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12,358
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10,174
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Gross margin
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2,516
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2,168
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Operating expenses:
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Selling, general, and administrative
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1,830
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1,613
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Research, development, and engineering
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167
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141
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Total operating expenses
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1,997
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1,754
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Operating income
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519
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414
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Interest and other, net
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(68
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)
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(2
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)
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Income before income taxes
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451
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412
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Income tax provision
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110
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122
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Net income
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$
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341
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$
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290
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Earnings per common share:
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Basic
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$
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0.17
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$
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0.15
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Diluted
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$
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0.17
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$
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0.15
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Weighted-average shares outstanding:
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Basic
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1,961
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1,949
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Diluted
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1,973
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1,952
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
2
DELL
INC.
(in millions; unaudited)
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Three Months Ended
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April 30,
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May 1,
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2010
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2009
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Cash flows from operating activities:
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Net income
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$
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341
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$
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290
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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247
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201
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Stock-based compensation
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76
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67
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Effects of exchange rate changes on monetary assets and
liabilities denominated in foreign currencies
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30
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-
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Deferred income taxes
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(31
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)
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(26
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)
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Provision for doubtful accounts - including financing
receivables
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122
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105
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Other
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-
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18
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Changes in assets and liabilities, net of effects from
acquisitions:
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Accounts receivable
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(119
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)
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380
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Financing receivables
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(208
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)
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(27
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Inventories
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(132
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)
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24
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Other assets
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69
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547
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Accounts payable
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22
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(483
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)
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Deferred services revenue
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72
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(25
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)
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Accrued and other liabilities
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(251
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)
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(310
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)
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Change in cash from operating activities
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238
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761
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Cash flows from investing activities:
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Investments:
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Purchases
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(350
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)
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(428
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)
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Maturities and sales
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169
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642
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Capital expenditures
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(46
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)
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(80
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)
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Acquisition of business, net of cash received
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(133
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)
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(3
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)
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Change in cash from investing activities
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(360
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)
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131
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Cash flows from financing activities:
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Repurchase of common stock
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(200
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)
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-
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Issuance of common stock under employee plans
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7
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-
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Issuance of commercial paper (maturity 90 days or less), net
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234
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-
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Proceeds from debt
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268
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497
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Repayments of debt
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(566
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)
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(12
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)
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Other
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3
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-
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Change in cash from financing activities
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(254
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)
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485
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Effect of exchange rate changes on cash and cash equivalents
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(4
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)
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(38
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)
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Change in cash and cash equivalents
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(380
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)
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1,339
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Cash and cash equivalents at beginning of period
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10,635
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8,352
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Cash and cash equivalents at end of period
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$
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10,255
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$
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9,691
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
DELL
INC.
(unaudited)
NOTE 1
BASIS OF PRESENTATION
Basis of Presentation The accompanying
Condensed Consolidated Financial Statements of Dell Inc.
individually and together with its consolidated subsidiaries,
(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 29, 2010. 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
April 30, 2010, the results of its operations for the three
months ended April 30, 2010, and May 1, 2009, and its
cash flows for the three months ended April 30, 2010, and
May 1, 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 months ended
April 30, 2010, and May 1, 2009, are not necessarily
indicative of the results to be expected for the full year.
Recently
Issued and Adopted Accounting Pronouncements
Revenue Arrangements with Multiple Deliverables
In September 2009, the Emerging Issues Task Force of
the Financial Accounting Standards Board (FASB)
reached consensus on two issues which affects the timing of
revenue recognition. The first consensus changes the level of
evidence of standalone selling price required to separate
deliverables in a multiple deliverable arrangement by allowing a
company to make its best estimate of the selling price
(ESP) of deliverables when more objective evidence
of selling price is not available and eliminates the use of the
residual method. The consensus applies to multiple deliverable
revenue arrangements that are not accounted for under other
accounting pronouncements and retains the use of vendor specific
objective evidence of selling price (VSOE) if
available and third-party evidence of selling price
(TPE), when VSOE is unavailable. The second
consensus excludes sales of tangible products that contain
essential software elements, that is, software enabled devices,
from the scope of revenue recognition requirements for software
arrangements. Dell has elected to early adopt this accounting
guidance at the beginning of the first quarter of Fiscal 2011 on
a prospective basis for applicable transactions originating or
materially modified after January 29, 2010.
Dells multiple deliverable arrangements generally include
hardware products that are sold with services such as extended
warranty services, installation, maintenance, and other services
contracts. The nature and terms of these multiple deliverable
arrangements will vary based on the customized needs of
Dells customers. Maintenance, support, and other services
are generally delivered according to the terms of the
arrangement after the initial sale of hardware or software.
Dells service contracts may include a combination of
services arrangements including deployment, asset recovery,
recycling, IT outsourcing, consulting, applications development,
applications maintenance, and business process services. These
service contracts may include provisions for cancellation,
termination, refunds, or service level adjustments. These
contract provisions would not have a significant impact on
recognized revenue as Dell generally recognizes revenue for
these contracts as the services are performed.
The adoption of the new guidance on multiple deliverable
arrangements did not change the manner in which Dell accounts
for its multiple deliverable arrangements as Dell did not use
the residual method for the majority of its offerings and its
services offerings are generally sold on a standalone basis
where evidence of selling price is available. Most of
Dells products and services qualify as separate units of
accounting. Prior to the first quarter of Fiscal 2011, Dell
allocated revenue from multiple-element arrangements to the
multiple elements based on the relative fair value of each
element, which was generally based on the relative sales price
of each element when sold separately. Because selling price is
generally available based on standalone sales, Dell has limited
application of
4
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
TPE, as determined by comparison of pricing for products and
services to the pricing of similar products and services as
offered by Dell or its competitors in standalone sales to
similarly situated customers. Thus, the adoption of this
consensus had no impact to Dells consolidated financial
statements as of and for the first quarter of Fiscal 2011, or
year ended or interim periods of Fiscal 2010.
Pursuant to the new guidance on revenue recognition for software
enabled products, certain Dell storage products are no longer
included in the scope of the software revenue recognition
guidance. Prior to the new guidance, Dell established fair value
for Post Contract Customer Support (PCS) for these
products based on VSOE and used the residual method to allocate
revenue to the delivered elements. Under the new guidance, the
revenue for what was previously deemed PCS is now considered
part of a multiple element arrangement. As such, any discount is
allocated to all elements based on the relative selling price of
both delivered and undelivered elements. The impact of applying
this consensus was not material to Dells consolidated
financial statements as of and for the first quarter of Fiscal
2011, or year ended or interim periods of Fiscal 2010.
As new products are introduced in future periods Dell may be
required to use TPE or ESP, depending on the specific facts at
the time.
Variable Interest Entities and Transfers of Financial Assets
and Extinguishments of Liabilities The
pronouncement on transfers of financial assets and
extinguishments of liabilities removes the concept of a
qualifying special-purpose entity and removes the exception from
applying variable interest entity accounting to qualifying
special-purpose entities. The pronouncement on variable interest
entities requires an entity to perform an ongoing analysis to
determine whether the entitys variable interest or
interests give it a controlling financial interest in a variable
interest entity. The pronouncements were effective for fiscal
years beginning after November 15, 2009. Dell adopted the
pronouncements at the beginning of the first quarter of Fiscal
2011. The adoption of these two pronouncements resulted in
Dells consolidation of its two qualifying special purpose
entities. See Note 5 of Notes to Condensed Consolidated
Financial Statements for additional information on the impact of
consolidation to Dells financial position, net income and
cash flows.
Reclassifications To maintain
comparability among the periods presented, Dell has revised the
presentation of certain prior period amounts reported within
cash flows from operating activities presented in the Condensed
Consolidated Statements of Cash Flows. The revision had no
impact to the total change in cash from operating activities.
NOTE 2
INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 29,
|
|
|
2010
|
|
2010
|
|
|
(in millions)
|
Inventories:
|
|
|
|
|
|
|
|
|
Production materials
|
|
$
|
631
|
|
|
$
|
487
|
|
Work-in-process
|
|
|
131
|
|
|
|
168
|
|
Finished goods
|
|
|
420
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,182
|
|
|
$
|
1,051
|
|
|
|
|
|
|
|
|
|
|
5
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 3
FAIR VALUE MEASUREMENTS
The following table presents Dells hierarchy for its
assets and liabilities measured at fair value on a recurring
basis as of April 30, 2010, and January 29, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
January 29, 2010
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
|
(in millions)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
-
|
|
|
$
|
1,260
|
|
|
$
|
-
|
|
|
$
|
1,260
|
|
|
$
|
-
|
|
|
$
|
197
|
|
|
$
|
-
|
|
|
$
|
197
|
|
U.S. government and agencies
|
|
|
-
|
|
|
|
95
|
|
|
|
-
|
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
|
-
|
|
|
|
109
|
|
|
|
-
|
|
|
|
109
|
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
|
|
66
|
|
U.S. corporate
|
|
|
-
|
|
|
|
565
|
|
|
|
30
|
|
|
|
595
|
|
|
|
-
|
|
|
|
553
|
|
|
|
30
|
|
|
|
583
|
|
International corporate
|
|
|
-
|
|
|
|
512
|
|
|
|
-
|
|
|
|
512
|
|
|
|
-
|
|
|
|
391
|
|
|
|
-
|
|
|
|
391
|
|
State & municipal bonds
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Equity and other securities
|
|
|
-
|
|
|
|
99
|
|
|
|
-
|
|
|
|
99
|
|
|
|
-
|
|
|
|
90
|
|
|
|
-
|
|
|
|
90
|
|
Retained interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151
|
|
|
|
151
|
|
Derivative instruments
|
|
|
-
|
|
|
|
167
|
|
|
|
-
|
|
|
|
167
|
|
|
|
-
|
|
|
|
96
|
|
|
|
-
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
2,808
|
|
|
$
|
30
|
|
|
$
|
2,838
|
|
|
$
|
-
|
|
|
$
|
1,395
|
|
|
$
|
181
|
|
|
$
|
1,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following section describes the valuation methodologies Dell
uses to measure financial instruments at fair value:
Cash Equivalents The majority of
Dells cash equivalents consists of commercial paper,
including corporate and asset-backed commercial paper, and U.S.
government and agencies, all with original maturities of less
than ninety days and are valued at fair value which approximates
cost. The valuation is based on models whereby all significant
inputs are observable or can be derived from or corroborated by
observable market data. Dell utilizes a pricing service to
assist in obtaining fair value pricing for the majority of this
investment portfolio. Dell conducts reviews on a quarterly basis
to verify pricing, assess liquidity, and determine if
significant inputs have changed that would impact the fair value
hierarchy disclosure.
Debt Securities The majority of
Dells debt securities 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 is valued based on model driven
valuations whereby all significant inputs, including benchmark
yields, reported trades, broker-dealer quotes, issue spreads,
benchmark securities, bids, offers and other market related data
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 this investment
portfolio. Pricing for securities is based on proprietary
models, and inputs are documented in accordance with the fair
value measurements hierarchy. Dell conducts reviews on a
quarterly basis to verify pricing, assess liquidity, and
determine if significant valuation inputs have changed that
would impact the fair value hierarchy disclosure. The
Level 3 position as of April 30, 2010, and
January 29, 2010, represents a convertible debt security
6
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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.
Equity and Other Securities The
majority of Dells investments in equity and other
securities consists of various mutual funds held in Dells
Deferred Compensation Plan. The valuation of these securities is
based on models whereby all significant inputs are observable or
can be derived from or corroborated by observable market data.
Retained Interest The fair value of
the retained interest was 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 was included in
financing receivables, short-term and long-term, on the
Condensed Consolidated Statements of Financial Position. During
the first quarter of Fiscal 2011, Dell consolidated its
previously unconsolidated special purpose entities and as a
result, the retained interest as of January 29, 2010, was
eliminated. See Note 5 of Notes to Condensed Consolidated
Financial Statements for additional information about the
consolidation of Dells previously unconsolidated special
purpose entities.
Derivative Instruments Dells
derivative financial instruments consist primarily of foreign
currency forward and purchased option contracts, and interest
rate swaps. The portfolio is valued using internal models based
on market observable inputs, including interest rate curves,
forward and spot prices for currencies, and implied
volatilities. Credit risk is factored into the fair value
calculation of Dells derivative instrument portfolio. For
interest rate derivative instruments, credit risk is determined
at the contract level with the use of credit default spreads of
either Dell, if in a net liability position or the relevant
counterparty, when in a net asset position. For foreign exchange
derivative instruments, credit risk is determined in a similar
manner, except that the credit default spread is applied based
on the net position of each counterparty with the use of the
appropriate credit default spreads.
7
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table shows a reconciliation of the beginning and
ending balances for fair value measurements using significant
unobservable inputs (Level 3) for the respective
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30, 2010
|
|
May 1, 2009
|
|
|
Retained
|
|
U.S.
|
|
|
|
Retained
|
|
U.S
|
|
|
|
|
Interest
|
|
Corporate
|
|
Total
|
|
Interest
|
|
Corporate
|
|
Total
|
|
|
(in millions)
|
Balance at beginning of period
|
|
$
|
151
|
|
|
$
|
30
|
|
|
$
|
181
|
|
|
$
|
396
|
|
|
$
|
27
|
|
|
$
|
423
|
|
Net unrealized gains (losses) included in
earnings(a)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
1
|
|
|
|
(8
|
)
|
Issuances and settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117
|
|
|
|
-
|
|
|
|
117
|
|
Transfers out of
Level 3(b)
|
|
|
(151
|
)
|
|
|
-
|
|
|
|
(151
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
-
|
|
|
$
|
30
|
|
|
$
|
30
|
|
|
$
|
504
|
|
|
$
|
28
|
|
|
$
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The unrealized gains and losses on
U.S. corporate represent accrued interest for assets that were
still held at April 30, 2010 and May 1, 2009.
|
|
|
|
(b)
|
|
Represents transfers out resulting
from the SPE consolidation. See Note 5 of Notes to
Condensed Consolidated Financial Statements for additional
information on retained interest.
|
Assets and Liabilities Measured at Fair Value on a
Nonrecurring Basis Certain assets are
measured at fair value on a nonrecurring basis and therefore are
not included in the recurring fair value table above. The assets
consist primarily of investments accounted for under the cost
method and nonfinancial assets such as goodwill and intangible
assets. Investments accounted for under the cost method included
in equity and other securities were approximately
$25 million and $22 million, on April 30, 2010,
and January 29, 2010, respectively. Goodwill and intangible
assets are measured at fair value initially and subsequently
when there is an indicator of impairment and the impairment is
recognized. No impairment charges of goodwill and intangible
assets were recorded for the three months ended April 30,
2010. See Note 9 of Notes to Condensed Consolidated
Financial Statements for additional information about goodwill
and intangible assets.
8
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 4
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
January 29, 2010
|
|
|
Fair
|
|
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Value
|
|
Cost
|
|
Gain
|
|
(Loss)
|
|
Value
|
|
Cost
|
|
Gain
|
|
(Loss)
|
|
|
(in millions)
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
108
|
|
|
$
|
108
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
65
|
|
|
$
|
65
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. corporate
|
|
|
271
|
|
|
|
270
|
|
|
|
1
|
|
|
|
-
|
|
|
|
233
|
|
|
|
232
|
|
|
|
1
|
|
|
|
-
|
|
International corporate
|
|
|
248
|
|
|
|
248
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75
|
|
|
|
75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
627
|
|
|
|
626
|
|
|
|
1
|
|
|
|
-
|
|
|
|
373
|
|
|
|
372
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
U.S. corporate
|
|
|
324
|
|
|
|
324
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
350
|
|
|
|
349
|
|
|
|
2
|
|
|
|
(1
|
)
|
International corporate
|
|
|
264
|
|
|
|
264
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
316
|
|
|
|
316
|
|
|
|
1
|
|
|
|
(1
|
)
|
State and municipal governments
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
Equity and other securities
|
|
|
124
|
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112
|
|
|
|
112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
|
714
|
|
|
|
714
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
781
|
|
|
|
780
|
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,341
|
|
|
$
|
1,340
|
|
|
$
|
3
|
|
|
$
|
(2
|
)
|
|
$
|
1,154
|
|
|
$
|
1,152
|
|
|
$
|
4
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dells investments in debt securities are classified as
available-for-sale.
Equity and other securities primarily relate to investments held
in Dells Deferred Compensation Plan, which are classified
as trading securities. Both of these classes of securities are
reported at fair value 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 movements
rather than credit and liquidity risks.
At April 30, 2010, Dell had 96 debt securities that were in
a loss position with total unrealized losses of $2 million
and a corresponding fair value of $364 million. Dell
reviews its investment portfolio quarterly to determine if any
investment is
other-than-temporarily
impaired. An
other-than-temporary
impairment (OTTI) loss is recognized in earnings if
Dell 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 still
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 in earnings. Amounts relating to factors other than
credit losses are recorded in other comprehensive income. As of
April 30, 2010, Dell evaluated debt securities classified
as
available-for-sale
for OTTI and the existence of credit losses and concluded no
such losses should be recognized for the three months ended
April 30, 2010.
9
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 and services. New
financing originations, which represent the amounts of financing
provided to customers for equipment and related software and
services through DFS, were approximately $900 million
during the three months ended both April 30, 2010, and
May 1, 2009.
Dell transfers certain customer financing receivables to special
purpose entities (SPEs). The SPEs are bankruptcy
remote legal entities with separate assets and liabilities. The
purpose of the SPEs is to facilitate the funding of customer
receivables in the capital markets. These SPEs have entered into
financing arrangements with multi-seller conduits that, in turn,
issue asset-backed debt securities in the capital markets.
Dells risk of loss related to securitized receivables is
limited to the amount of Dells right to receive
collections for assets securitized exceeding the amount required
to pay interest, principal, and other fees and expenses. Dell
provides credit enhancement to the securitization in the form of
over-collateralization. Prior to the first quarter of Fiscal
2011, the SPE that funds revolving loans was consolidated, and
the two SPEs that fund fixed-term leases and loans were not
consolidated. In accordance with the new accounting guidance on
variable interest entities (VIEs), and transfers of
financial assets and extinguishment of financial liabilities,
Dell determined that these two SPEs would be consolidated as of
the beginning of the first quarter of Fiscal 2011. The primary
factors in this determination were the obligation to absorb
losses due to the interest Dell retains in the assets
transferred to the SPEs in the form of over-collateralization,
and the power to direct activities through the servicing role
performed by Dell. Dell recorded the assets and liabilities at
their carrying amount as of the beginning of Fiscal 2011 with a
cumulative effect adjustment of $13 million to the opening
balance of retained earnings in Fiscal 2011.
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 criteria are not met and Dell is unable to
restructure the program, no further funding of receivables will
be permitted and the timing of Dells expected cash flows
from over-collateralization will be delayed. At April 30,
2010, these criteria were met.
10
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Financing
Receivables
The following table summarizes the components of Dells
financing receivables:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 29,
|
|
|
2010
|
|
2010
|
|
|
(in millions)
|
Financing receivables, net:
|
|
|
|
|
|
|
|
|
Customer receivables:
|
|
|
|
|
|
|
|
|
Revolving loans, gross
|
|
$
|
2,007
|
|
|
$
|
2,046
|
|
Fixed-term leases and loans, gross
|
|
|
1,775
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
Customer receivables, gross
|
|
|
3,782
|
|
|
|
2,870
|
|
Allowance for losses
|
|
|
(285
|
)
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
Customer receivables, net
|
|
|
3,497
|
|
|
|
2,633
|
|
Residual interest
|
|
|
252
|
|
|
|
254
|
|
Retained interest
|
|
|
-
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
3,749
|
|
|
$
|
3,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
3,221
|
|
|
$
|
2,706
|
|
Long-term
|
|
|
528
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
3,749
|
|
|
$
|
3,038
|
|
|
|
|
|
|
|
|
|
|
Managed customer receivables consist of all customer receivables
which are either owned by Dell and included in the consolidated
financial statements (including customer receivables recorded
from the consolidation of a qualified special purpose entity in
the second quarter of Fiscal 2010), or held by nonconsolidated
securitization SPEs in prior periods. In prior periods, Dell had
a retained interest in the customer receivables held in
nonconsolidated securitization SPEs. Managed customer
receivables are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 29,
|
|
|
2010
|
|
2010
|
|
|
(in millions)
|
Managed customer receivables, gross:
|
|
|
|
|
|
|
|
|
Consolidated receivables
|
|
$
|
3,782
|
|
|
$
|
2,870
|
|
Receivables in previously nonconsolidated SPEs
|
|
|
-
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
Managed customer receivables, gross
|
|
$
|
3,782
|
|
|
$
|
3,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed receivables 60 days or more delinquent
|
|
$
|
122
|
|
|
$
|
138
|
|
Included in financing receivables, net, are receivables that are
held by consolidated VIEs as shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 29,
|
|
|
2010
|
|
2010
|
|
|
(in millions)
|
Financing receivables held by consolidated VIEs, net:
|
|
|
|
|
|
|
|
|
Short-term, net
|
|
$
|
972
|
|
|
$
|
277
|
|
Long-term, net
|
|
|
197
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing receivables held by consolidated VIEs, net
|
|
$
|
1,169
|
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
11
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes the changes in the allowance for
financing receivable losses for the three months ended
April 30, 2010, and May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Allowances for losses:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
237
|
|
|
$
|
149
|
|
Incremental allowance due to VIE consolidation
|
|
|
16
|
|
|
|
-
|
|
Expense charged to income statement
|
|
|
88
|
|
|
|
41
|
|
Principal charge-offs
|
|
|
(46
|
)
|
|
|
(30
|
)
|
Interest charge-offs
|
|
|
(10
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
285
|
|
|
$
|
154
|
|
|
|
|
|
|
|
|
|
|
Customer
Receivables
The following is the description of the components of
Dells 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
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 April 30, 2010, and
January 29, 2010, receivables under these special programs
were $435 million and $442 million, respectively.
|
|
|
|
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 April 30, 2010 for Dell are as follows:
Fiscal 2011 $245 million; Fiscal
2012 $214 million; Fiscal 2013
$109 million; and Fiscal 2014 $9 million.
Fixed-term loans are offered to qualified small businesses,
large commercial accounts, governmental organizations, and
educational entities.
|
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.
Asset
Securitizations
|
|
|
|
|
The gross balance of securitized receivables reported
off-balance sheet as of January 29, 2010, was
$774 million, and the associated debt was
$624 million. As discussed above, as of the beginning of
the first quarter of Fiscal 2011, all previously nonconsolidated
qualified special purpose entities were consolidated. Upon
consolidation of these customer receivables and associated debt
at the beginning of the first quarter of
|
12
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
|
|
|
|
Fiscal 2011, Dells retained interest in securitized
receivables of $151 million at January 29, 2010, was
eliminated. A $13 million decrease to beginning retained
earnings for Fiscal 2011 was recorded as a cumulative effect
adjustment due to adoption of the new accounting guidance.
|
|
|
|
|
|
During the three months ended April 30, 2010, and
May 1, 2009, $496 million and $233 million of
customer receivables were funded via securitization through SPEs.
|
|
|
|
The structured financing debt related to the fixed-term lease
and loan, and revolving loan securitization programs was
$830 million and $788 million as of April 30,
2010, and January 29, 2010, respectively. This includes
$624 million at January 29, 2010 held by
nonconsolidated SPEs. The debt is collateralized solely by the
financing receivables in the programs. The debt has a variable
interest rate and an average duration of 12 to 36 months
based on the terms of the underlying financing receivables. The
maximum debt capacity related to the securitization programs is
$1.1 billion. See Note 6 of the Notes to the Condensed
Consolidated Financial Statements for additional information
regarding the structured financing debt.
|
|
|
|
During the first quarter of Fiscal 2011, Dell entered into
interest rate swap agreements to effectively convert a portion
of the structured financing debt from a floating rate to a fixed
rate. The interest rate swaps qualified for hedge accounting
treatment as cash flow hedges. See Note 7 of Notes to
Condensed Consolidated Financial Statements for additional
information about interest rate swaps.
|
Retained
Interest
Prior to adopting the new accounting guidance on VIEs and
transfers of financial assets and extinguishment of financial
liabilities, certain transfers of financial assets to
nonconsolidated qualified SPEs were accounted for as a sale.
Upon the sale of the customer receivables to the SPEs, Dell
recognized a gain on the sale and retained a residual beneficial
interest in the pool of assets sold, referred to as retained
interest. The retained interest represented Dells right to
receive collections for assets securitized exceeding the amount
required to pay interest, principal, and other fees and expenses.
Retained interest was stated at the present value of the
estimated net beneficial cash flows after payment of all senior
interests. Dell valued 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 was 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 were
supported by both Dells historical experience and
anticipated trends relative to the particular receivable pool.
The key valuation assumptions for retained interest could have
been affected by many factors, including repayment terms and the
credit quality of receivables securitized.
The following table summarizes the activity in retained interest
for the three months ended May 1, 2009:
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
|
|
|
May 1, 2009
|
|
|
(in millions)
|
Retained interest:
|
|
|
|
|
Retained interest at beginning of period
|
|
$
|
396
|
|
Issuances
|
|
|
127
|
|
Distributions from conduits
|
|
|
(10
|
)
|
Net accretion
|
|
|
10
|
|
Change in fair value for the period
|
|
|
(19
|
)
|
|
|
|
|
|
Retained interest at end of the period
|
|
$
|
504
|
|
|
|
|
|
|
13
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The table below summarizes the key assumptions used to measure
the fair value of the retained interest at time of transfer
during the three months ended May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Key Assumptions
|
|
|
Monthly
|
|
|
|
|
|
|
|
|
Payment
|
|
Credit
|
|
Discount
|
|
|
|
|
Rates
|
|
Losses
|
|
Rates
|
|
Life
|
|
|
|
|
(lifetime)
|
|
(annualized)
|
|
(months)
|
Time of transfer valuation of retained interest
|
|
|
11%
|
|
|
|
6%
|
|
|
|
11%
|
|
|
|
14
|
|
Net principal charge-offs on securitized receivables were
$36 million for the three months ended May 1, 2009,
which when annualized represents 10.6% of the average
outstanding securitized financing receivable balance for the
period.
14
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 6
BORROWINGS
The following table summarizes Dells outstanding debt at:
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
January 29,
|
|
|
2010
|
|
2010
|
|
|
(in millions)
|
Long-Term Debt
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
|
|
|
|
|
|
$400 million issued on June 10, 2009, at 3.375% due
June 2012 (2012 Notes) with interest payable
June 15 and December 15
(includes hedge accounting adjustments)
|
|
$
|
401
|
|
|
$
|
401
|
|
$600 million issued on April 17, 2008, at 4.70% due
April 2013 (2013 Notes) with interest payable
April 15 and October 15
(includes hedge accounting adjustments)
|
|
|
602
|
|
|
|
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
|
|
$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
|
|
|
|
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 3, 1998 at 7.10% due
April 2028 with interest payable April 15 and
October 15 (includes the impact of interest rate swap
terminations)
|
|
|
393
|
|
|
|
394
|
|
Other
|
|
|
|
|
|
|
|
|
India term loan: entered into on October 15, 2009 at 8.9%
due October 2011 with interest payable monthly
|
|
|
24
|
|
|
|
24
|
|
Structured financing debt
|
|
|
163
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
3,582
|
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
Short-Term Debt
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
410
|
|
|
|
496
|
|
Structured financing debt
|
|
|
667
|
|
|
|
164
|
|
Other
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
1,079
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
4,661
|
|
|
$
|
4,080
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of total debt at April 30, 2010,
was approximately $4.9 billion. The fair values of the
India term loan, structured financing debt, commercial paper,
and other short-term debt approximate their carrying values. The
carrying value of the Senior Debentures includes an unamortized
amount related to the termination of interest rate swap
agreements in the fourth quarter of Fiscal 2009, which were
previously designated as hedges of the debt.
During the first quarter of Fiscal 2011 and fourth quarter of
Fiscal 2010, Dell entered into interest rate swap agreements to
effectively convert the fixed rates of the 2012 Notes and 2013
Notes to floating rates. The floating
15
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
rates are based on six-month or three-month LIBOR plus a fixed
rate. The interest rate swaps qualified for hedge accounting
treatment as fair value hedges. See Note 7 of Notes to
Condensed Consolidated Financial Statements for additional
information about interest rate swaps.
Commercial
Paper
In the first quarter of Fiscal 2011, Dell had a
$1.5 billion commercial paper program with supporting
senior unsecured revolving credit facilities. Subsequent to
April 30, 2010, Dell entered into a new agreement to expand
its commercial paper program to $2 billion. At
April 30, 2010 and January 29, 2010, there were
$410 million and $496 million, respectively,
outstanding under the commercial paper program. The
weighted-average interest rate on these outstanding short-term
borrowings remained unchanged at 0.24% when compared to the
prior quarter.
During the first quarter of Fiscal 2011, Dell expanded the
revolving credit facilities from $1.5 billion to
$2 billion. Dells $2 billion in credit
facilities consist of two agreements with $1 billion
expiring on June 1, 2011 and the remaining $1 billion
expiring on April 2, 2013. The credit facilities require
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. As of April 30, 2010,
there were no events of default and Dell was in compliance with
its minimum interest coverage ratio covenant. Amounts
outstanding under the facilities 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 outstanding advances under the
related revolving credit facilities as of April 30, 2010.
Structured
Financing Debt
As of April 30, 2010, Dell had $830 million
outstanding in structured financing related debt through the
fixed term lease and loan and revolving loan securitization
programs. See Note 5 of the Notes to Condensed Consolidated
Financial Statements for further discussion on structured
financing debt and its related interest rate swap agreements.
The indentures governing the Notes, the Senior Debentures, and
the structured financing debt 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 its assets to,
another person. As of April 30, 2010, there were no events
of default with respect to the Notes, the Senior Debentures, or
the structured financing debt.
NOTE 7
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative
Instruments
As part of its risk management strategy, Dell uses derivative
instruments, primarily forward contracts and purchased options,
to hedge certain foreign currency exposures and interest rate
swaps to manage the exposure of its debt portfolio to interest
rate risk. Dells objective is to offset gains and losses
resulting from these exposures with gains and losses on the
derivative contracts used to hedge the exposures, thereby
reducing volatility of earnings and protecting fair values of
assets and liabilities. Dell applies hedge accounting based upon
the criteria established by accounting guidance for derivative
instruments and hedging activities, including designation of its
derivatives as fair value hedges or cash flow hedges and
assessment of hedge effectiveness. Dell records all derivatives
in its Condensed Consolidated Statements 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
16
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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.
The majority of these contracts typically expire in
12 months or less.
Dell uses interest rate swaps designated as cash flow hedges to
hedge the variability in cash flows related to the interest rate
payments on structured financing debt. The interest rate swaps
economically convert the variable rate on the structured
financing debt to a fixed interest rate to match the underlying
fixed rate being received on fixed term customer leases and
loans. The duration of these contracts typically ranges from 30
to 42 months.
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 (loss) (OCI) 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 derivative instruments designated as cash flow hedges, Dell
assesses hedge effectiveness both at the onset of the hedge and
at regular intervals 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, in earnings as a
component of interest and other, net. Hedge ineffectiveness for
cash flow hedges was not material for the three months ended
April 30, 2010. During the three months ended
April 30, 2010, Dell did not discontinue any cash flow
hedges that had a material impact on Dells results of
operations. Substantially all forecasted foreign currency
transactions were realized in Dells actual results.
The aggregate unrealized net gain for interest swaps and foreign
currency exchange contracts, recorded as a component of
comprehensive income, for the three months ended April 30,
2010, was $13 million.
Fair
Value Hedges
Dell enters into interest rate swaps designated as fair value
hedges to manage the exposure of its debt portfolio to interest
rate risk. Dell issues long-term debt in U.S. dollars based on
market conditions at the time of financing. Dell uses interest
rate swaps to modify the market risk exposures in connection
with the debt to achieve primarily U.S. dollar LIBOR-based
floating interest expense. As of April 30, 2010, the
interest rate swaps hedge all interest rate exposure on the 2012
and 2013 Notes. For derivative instruments that are designated
and qualify for hedge accounting, changes in the value of the
derivative and underlying hedged item are recognized in interest
and other, net in the Condensed Consolidated Statements of
Income in the current period.
As of April 30, 2010, and January 29, 2010, the total
notional amount of the interest rate swaps was $1 billion
and $200 million, respectively. During the three months
ended April 30, 2010 the fair value change of the interest
rate contracts, and offsetting adjustment to the carrying amount
of the hedged debt resulted in a $1 million gain to
interest and other, net. During the three months ended
April 30, 2010, fair value adjustments increased the
carrying amount of the hedged fixed-rate debt outstanding by
$3 million. Dell did not have any fair value hedges during
the three months ended May 1, 2009.
17
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Effect of Derivative Instruments on the Condensed
Consolidated Statements of Financial Position and the Condensed
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
in Accumulated
|
|
Location of Gain (Loss)
|
|
Gain (Loss)
|
|
|
|
|
Derivatives in
|
|
OCI, Net
|
|
Reclassified
|
|
Reclassified
|
|
Location of Gain (Loss)
|
|
Gain (Loss)
|
Cash Flow
|
|
of Tax, on
|
|
from Accumulated
|
|
from Accumulated
|
|
Recognized in Income
|
|
Recognized in
|
Hedging
|
|
Derivatives
|
|
OCI into Income
|
|
OCI into Income
|
|
on Derivative
|
|
Income on Derivative
|
Relationships
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Ineffective Portion)
|
|
(Ineffective Portion)
|
|
|
(in millions)
|
|
|
For the three months ended April 30, 2010
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
|
|
|
|
Total net revenue
|
|
$
|
46
|
|
|
|
|
|
|
|
contracts
|
|
$
|
40
|
|
|
Total cost of net revenue
|
|
|
(18
|
)
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
-
|
|
|
Interest and other, net
|
|
|
-
|
|
|
Interest and other, net
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40
|
|
|
|
|
$
|
28
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended May 1, 2009
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
|
|
|
|
Total net revenue
|
|
$
|
221
|
|
|
|
|
|
|
|
contracts
|
|
$
|
(124
|
)
|
|
Total cost of net revenue
|
|
|
13
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
-
|
|
|
Interest and other, net
|
|
|
-
|
|
|
Interest and other, net
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(124
|
)
|
|
|
|
$
|
234
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2010, and January 29, 2010, the total
notional amount of foreign currency option and forward contracts
designated as cash flow hedges was $4.7 billion and
$4.2 billion, respectively. As of April 30, 2010, the
total notional amount of interest rate contracts designated as
cash flow hedges was $459 million. As of April 30,
2010, the total notional amount of interest rate contracts not
designated as hedges was $194 million.
Other
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 derivative instruments and hedging
activities accounting, and therefore, the change in the
instruments fair value is recognized currently in earnings
as a component of interest and other, net. Dell recognized gains
of $17 million and $46 million, with respect to its
foreign currency forward contracts, during the three months
ended April 30, 2010, and May 1, 2009, respectively.
As of April 30, 2010, and January 29, 2010, the total
notional amount of other foreign currency forward contracts not
designated as hedges was $297 million and $20 million,
respectively.
Derivative
Instruments Additional Information
Cash flows from derivative instruments are presented in the same
category in the Condensed Consolidated Statements of Cash Flows
as the cash flows from the intended hedged items or the economic
hedges.
While Dell has foreign exchange 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.
18
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Dell presents its foreign exchange derivative instruments on a
net basis in the Condensed Consolidated Statements of Financial
Position due to the right of offset by its counterparties under
master netting arrangements. The fair values of foreign exchange
and interest rate derivative instruments presented on a gross
basis for the period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
Other
|
|
Other Non-
|
|
Other
|
|
Other Non-
|
|
|
|
|
Current
|
|
Current
|
|
Current
|
|
Current
|
|
Total Fair
|
|
|
Assets
|
|
Assets
|
|
Liabilities
|
|
Liabilities
|
|
Value
|
|
|
(in millions)
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts in an asset position
|
|
$
|
295
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
301
|
|
Foreign exchange contracts in a liability position
|
|
|
(166
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(176
|
)
|
Interest rate contracts in an asset position
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
Interest rate contracts in a liability position
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
129
|
|
|
|
11
|
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts in an asset position
|
|
|
93
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
94
|
|
Foreign exchange contracts in a liability position
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(84
|
)
|
Interest rate contracts in a liability position
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
27
|
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
(2
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives at fair value
|
|
$
|
156
|
|
|
$
|
11
|
|
|
$
|
(27
|
)
|
|
$
|
(5
|
)
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 29, 2010
|
|
|
Other
|
|
Other Non-
|
|
Other
|
|
Other Non-
|
|
|
|
|
Current
|
|
Current
|
|
Current
|
|
Current
|
|
Total Fair
|
|
|
Assets
|
|
Assets
|
|
Liabilities
|
|
Liabilities
|
|
Value
|
|
|
(in millions)
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts in an asset position
|
|
$
|
181
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
186
|
|
Foreign exchange contracts in a liability position
|
|
|
(80
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(89
|
)
|
Interest rate contracts in an asset position
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
101
|
|
|
|
6
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts in an asset position
|
|
|
63
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
65
|
|
Foreign exchange contracts in a liability position
|
|
|
(74
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives at fair value
|
|
$
|
90
|
|
|
$
|
6
|
|
|
$
|
(12
|
)
|
|
$
|
-
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 if Dells credit ratings were to fall below
investment grade upon a change of control of Dell,
counterparties would have the right to terminate those
derivative contracts under which Dell is in a net liability
position. As of April 30, 2010, there have been no such
triggering events.
19
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 8
ACQUISITIONS
Dell completed its acquisition of Kace Networks, Inc.
(KACE) in the first quarter of Fiscal 2011 for
approximately $123 million in cash. Dell has recorded this
acquisition using the acquisition method of accounting and
recorded the assets and liabilities of KACE at fair value at the
date of acquisition. The excess of the purchase price over the
estimated fair values was recorded as goodwill. Dell recorded
approximately $104 million in goodwill and $43 million
in intangible assets related to this acquisition. KACE is a
leading systems management appliance company with solutions
tailored to the requirements of mid-sized businesses. KACE is
being integrated primarily into Dells Small and Medium
Business and Public segments.
Dell has not presented pro forma results of operations for KACE
because this acquisition is not material to Dells
consolidated results of operations, financial position, or cash
flows.
NOTE 9
GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill allocated to Dells business segments as of
April 30, 2010, and January 29, 2010, and changes in
the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small and
|
|
|
|
|
|
|
Large
|
|
|
|
Medium
|
|
|
|
|
|
|
Enterprise
|
|
Public
|
|
Business
|
|
Consumer
|
|
Total
|
|
|
(in millions)
|
Balance at January 29, 2010
|
|
$
|
1,361
|
|
|
$
|
2,026
|
|
|
$
|
389
|
|
|
$
|
298
|
|
|
$
|
4,074
|
|
Goodwill acquired during the period
|
|
|
16
|
|
|
|
41
|
|
|
|
47
|
|
|
|
-
|
|
|
|
104
|
|
Adjustments
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2010
|
|
$
|
1,377
|
|
|
$
|
2,070
|
|
|
$
|
436
|
|
|
$
|
298
|
|
|
$
|
4,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Based on the results of its annual impairment
tests during the first half of Fiscal 2010, Dell determined that
no impairment of goodwill and indefinite-lived intangible assets
existed at July 31, 2009. Further, no triggering events
have transpired since July 31, 2009, that would indicate a
potential impairment of goodwill as of April 30, 2010. Dell
does not have any accumulated goodwill impairment charges as of
April 30, 2010.
20
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 10
WARRANTY AND DEFERRED EXTENDED WARRANTY REVENUE
Dell records liabilities for its standard limited warranties at
the time of sale for the estimated costs that may be incurred.
The liability for standard warranties is included in accrued and
other current and other non-current liabilities on Dells
Condensed Consolidated Statements of Financial Position. Revenue
from the sale of extended warranties is 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 extended warranty revenue is included in deferred
services revenue on Dells Condensed Consolidated
Statements of Financial Position. Changes in Dells
liabilities for standard limited warranties and deferred
services revenue related to extended warranties are presented in
the following tables:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Warranty liability:
|
|
|
|
|
|
|
|
|
Warranty liability at beginning of period
|
|
$
|
912
|
|
|
$
|
1,035
|
|
Costs accrued for new warranty contracts and changes in
estimates for pre-existing
warranties(a)
|
|
|
310
|
|
|
|
294
|
|
Services obligations honored
|
|
|
(295
|
)
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
Warranty liability at end of period
|
|
$
|
927
|
|
|
$
|
1,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
626
|
|
|
$
|
715
|
|
Non-current portion
|
|
|
301
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at end of period
|
|
$
|
927
|
|
|
$
|
1,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Deferred extended warranty revenue:
|
|
|
|
|
|
|
|
|
Deferred extended warranty revenue at beginning of period
|
|
$
|
5,910
|
|
|
$
|
5,587
|
|
Revenue deferred for new extended
warranties(b)
|
|
|
882
|
|
|
|
749
|
|
Revenue recognized
|
|
|
(821
|
)
|
|
|
(760
|
)
|
|
|
|
|
|
|
|
|
|
Deferred extended warranty revenue at end of period
|
|
$
|
5,971
|
|
|
$
|
5,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
2,809
|
|
|
$
|
2,635
|
|
Non-current portion
|
|
|
3,162
|
|
|
|
2,941
|
|
|
|
|
|
|
|
|
|
|
Deferred extended warranty revenue at end of period
|
|
$
|
5,971
|
|
|
$
|
5,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Changes in cost estimates related
to pre-existing warranties are aggregated with accruals for new
standard warranty contracts. Dells warranty liability
process does not differentiate between estimates made for
pre-existing warranties and new warranty obligations.
|
|
|
|
(b)
|
|
Includes the impact of foreign
currency exchange rate fluctuations.
|
21
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 11
SEVERANCE AND FACILITY ACTIONS
During Fiscal 2010 and Fiscal 2009, Dell completed a series of
individual cost reduction and facility exit activities designed
to enhance operating efficiency and to reduce costs. Dell
continued to incur costs related to these activities during the
first quarter of Fiscal 2011. As of April 30, 2010, and
January 29, 2010, the accrual related to these various cost
reductions and efficiency actions was $79 million and
$105 million, respectively, and is included in accrued and
other liabilities in the Condensed Consolidated Statements of
Financial Position.
The following table sets forth the activity related to
Dells severance and facility actions liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Facility
|
|
|
|
|
Costs
|
|
Actions
|
|
Total
|
|
|
(in millions)
|
Balance as of January 29, 2010
|
|
$
|
78
|
|
|
$
|
27
|
|
|
$
|
105
|
|
Severance and facility charges to provision
|
|
|
20
|
|
|
|
7
|
|
|
|
27
|
|
Cash paid
|
|
|
(48
|
)
|
|
|
(4
|
)
|
|
|
(52
|
)
|
Other
adjustments(a)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2010
|
|
$
|
49
|
|
|
$
|
30
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Other adjustments relate primarily
to foreign currency translation adjustments.
|
Severance and facility action charges of $57 million and
$185 million for the three months ended April 30,
2010, and May 1, 2009, respectively, are composed of the
following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Severance and facility charges to provision
|
|
$
|
27
|
|
|
$
|
175
|
|
Accelerated depreciation and other facility charges
|
|
|
30
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total severance and facility action costs
|
|
$
|
57
|
|
|
$
|
185
|
|
|
|
|
|
|
|
|
|
|
Severance and facility action charges are included in cost of
net revenue, selling, general and administrative expenses, and
research, development, and engineering in the Condensed
Consolidated Statements of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Severance and facility action costs:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
29
|
|
|
$
|
65
|
|
Selling, general, and administrative
|
|
|
25
|
|
|
|
120
|
|
Research, development, and engineering
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total severance and facility action costs
|
|
$
|
57
|
|
|
$
|
185
|
|
|
|
|
|
|
|
|
|
|
22
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 12
COMMITMENTS AND CONTINGENCIES
Restricted Cash As of April 30,
2010, and January 29, 2010, Dell had restricted cash in the
amount of $179 million and $147 million, respectively,
included in other current assets. These balances primarily
relate to an agreement between DFS and CIT Group Inc.
(CIT), which requires Dell 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.
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. 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. During the first quarter of Fiscal 2011,
Dell learned that, in connection with the SEC investigation,
several former Dell employees received Wells Notices
from the SEC staff, which indicate that the SEC staff has made a
preliminary decision to recommend that the SEC commence a civil
or administrative action against the recipients of the notices.
In connection with ongoing settlement discussions between the
company and the SEC staff, the parties have discussed a
settlement framework. This settlement would involve a civil
injunctive action against the company for alleged violations of
certain federal securities laws, including the antifraud
provisions of the federal securities laws, relating to certain
accounting and financial reporting matters. The settlement would
also include non-scienter (negligence) based fraud charges, as
well as other non-fraud based charges, relating to the
companys disclosures and alleged omissions prior to Fiscal
2008 regarding certain aspects of its commercial relationship
with Intel Corp. Dell has recorded a liability as of
April 30, 2010 for a potential settlement of
$100 million covering all of these matters. In addition,
subsequent to the close of the first quarter of Fiscal 2011, the
SEC staff and counsel for Michael Dell, Chairman and Chief
Executive Officer of Dell, commenced discussion of a settlement
framework. This settlement would include a civil action for
alleged violations of the non-scienter (negligence) based fraud
provisions of the federal securities laws, as well as other
non-fraud based provisions of the federal securities laws, with
respect to the companys disclosures and alleged omissions
prior to Fiscal 2008 regarding certain aspects of the
companys commercial relationship with Intel Corp. With
respect to Mr. Dell, the remedies under such a settlement
would include injunctive and monetary relief, but would not
include any bar against his service as an officer and director
of a public company. The independent directors of the Board of
Directors of Dell have determined that, in the context of such a
settlement, Mr. Dell will
23
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
continue to serve as Chairman and CEO of the company.
Discussions concerning the potential settlements involving the
company and Mr. Dell are ongoing. Any settlement would be
made without admitting or denying the Commissions
allegations. No assurance can be given as to when any settlement
might occur or as to the final terms and conditions of any
settlement. Any settlement recommended by the SEC staff would be
subject to approval by the Commission.
Dell and several of its current and former directors and
officers were named as parties to the following outstanding
securities lawsuit arising out of the same events and facts.
Securities Litigation 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 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 appeal was fully briefed, and oral
argument on the appeal was heard by the Fifth Circuit Court of
Appeals on September 1, 2009. On November 20, 2009,
the parties to the appeal entered into a written settlement
agreement whereby Dell would pay $40 million to the
proposed class and the plaintiff would dismiss the pending
litigation. The settlement was preliminarily approved by the
District Court on December 21, 2009. The settlement was
subject to certain conditions, including opt-outs from the
proposed class not exceeding a specified percentage and final
approval by the District Court. During the first quarter of
Fiscal 2011, the original opt-out period in the notice approved
by the Court passed and the specified percentage was not
exceeded. Accordingly, Dell accrued $40 million for this
settlement during the first quarter of Fiscal 2011. The
settlement still requires final approval by the District Court.
Other Litigation The various legal
proceedings in which Dell is involved 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.
NOTE 13
COMPREHENSIVE INCOME
The following table summarizes comprehensive income for the
three months ended April 30, 2010, and May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
341
|
|
|
$
|
290
|
|
Change related to hedging instruments, net
|
|
|
13
|
|
|
|
(358
|
)
|
Change related to marketable securities, net
|
|
|
(1
|
)
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
34
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
387
|
|
|
$
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
24
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 14
INCOME AND OTHER TAXES
Dells effective income tax rate was 24.4% for the first
quarter of Fiscal 2011, as compared to 29.6% for the same
quarter in the prior year. The decrease in Dells effective
income tax rate for the first quarter of Fiscal 2011 is
primarily due to a favorable effective settlement of a tax audit
in a foreign jurisdiction. The differences between the estimated
effective income tax rates and the U.S. federal statutory rate
of 35% principally result from Dells geographical
distribution of taxable income and differences between the book
and tax treatment of certain items. The income tax rate for
future quarters of Fiscal 2011 will be impacted by the actual
mix of jurisdictions in which income is generated.
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 2010. 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 2007 through 2009 are under
examination. The Internal Revenue Service (IRS) has
issued a Revenue Agents Report for fiscal years 2004
through 2006 proposing certain assessments primarily related to
transfer pricing matters. Dell disagrees with certain of the
proposed assessments and has contested them through the IRS
administrative procedures. The first meeting between Dell and
the IRS Appeals Division was held in March, 2010. Dell
anticipates the appeals process will involve multiple meetings
and could take an extended period of time to resolve. Dell
believes that it has provided adequate reserves related to all
matters contained in tax periods open to examination. However,
should Dell experience an unfavorable outcome in this matter, it
could have a material impact on its results of operations,
financial position, and 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 believes its
positions in these non-income tax litigation matters are
supportable, that 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. To the
extent new information is obtained and Dells views on its
positions, probable outcomes of assessments, or litigation
change, changes in estimates to Dells accrued liabilities
would be recorded in the period in which such determination is
made.
NOTE 15
EARNINGS PER 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 anti-dilutive. Accordingly,
certain stock-based incentive awards have been excluded from the
calculation of diluted earnings per share totaling
204 million shares and 247 million shares for the
first quarters of Fiscal 2011 and Fiscal 2010, respectively.
25
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table sets forth the computation of basic and
diluted earnings per share for the three months ended
April 30, 2010, and May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions, except per share)
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
341
|
|
|
$
|
290
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,961
|
|
|
|
1,949
|
|
Effect of dilutive options, restricted stock units, restricted
stock, and other
|
|
|
12
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,973
|
|
|
|
1,952
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
NOTE 16
SEGMENT INFORMATION
Dells four global business segments are Large Enterprise,
Public, Small and Medium Business (SMB), and
Consumer. Large Enterprise includes sales of IT infrastructure
and service solutions to large global and national corporate
customers. Public includes sales to educational institutions,
governments, health care organizations, and law enforcement
agencies, among others. SMB includes sales of complete IT
solutions to small and medium-sized businesses. Consumer
includes sales to individual consumers and retailers around the
world. 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 closure expenses, broad
based long-term incentives, amortization of intangibles,
acquisition-related charges, and accruals for a potential
settlement for the SEC investigation as well as a securities
litigation class action lawsuit that were accrued during the
first quarter of Fiscal 2011.
26
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Net revenue:
|
|
|
|
|
|
|
|
|
Large Enterprise
|
|
$
|
4,246
|
|
|
$
|
3,400
|
|
Public
|
|
|
3,856
|
|
|
|
3,171
|
|
Small and Medium Business
|
|
|
3,524
|
|
|
|
2,967
|
|
Consumer
|
|
|
3,248
|
|
|
|
2,804
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
14,874
|
|
|
$
|
12,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income:
|
|
|
|
|
|
|
|
|
Large Enterprise
|
|
$
|
283
|
|
|
$
|
192
|
|
Public
|
|
|
298
|
|
|
|
293
|
|
Small and Medium Business
|
|
|
313
|
|
|
|
230
|
|
Consumer
|
|
|
17
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income
|
|
|
911
|
|
|
|
714
|
|
Severance and facility actions
|
|
|
(57
|
)
|
|
|
(185
|
)
|
Broad based long-term
incentives(a)
|
|
|
(87
|
)
|
|
|
(76
|
)
|
Amortization of intangible assets
|
|
|
(88
|
)
|
|
|
(39
|
)
|
Acquisition-related
costs(b)
|
|
|
(20
|
)
|
|
|
-
|
|
Other(c)
|
|
|
(140
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
519
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Broad based long-term incentives
include stock-based compensation and other long-term incentives
that are not allocated to Dells global segments.
|
|
|
|
(b)
|
|
Acquisition-related charges consist
primarily of retention payments, integration costs, and
consulting fees that are primarily attributable to the
acquisition of Perot Systems Corporation.
|
|
(c)
|
|
Other includes a $100 million
accrual for a potential settlement for the SEC investigation and
a $40 million securities litigation accrual.
|
27
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL NOTE: All percentage amounts and ratios
were calculated using the underlying data in thousands. Our
fiscal year is the 52 or 53 week period ending on the
Friday nearest January 31. Unless the context indicates
otherwise, references in this managements discussion and
analysis to we, us, our and
Dell mean Dell Inc. and our consolidated
subsidiaries. This managements discussion and analysis
should be read in conjunction with our Annual Report on
Form 10-K
for the fiscal year ended January 29, 2010, and the
consolidated financial statements and related notes included in
that report.
OVERVIEW
Our
Company
We are a leading integrated technology solutions provider in the
information technology (IT) industry. We built our
reputation through listening to customers and developing
solutions that meet customer needs. We are focused on providing
long-term value creation through the delivery of customized
solutions that make technology more efficient, more accessible,
and easy to use. Customer needs are increasingly being defined
by how customers use technology rather than where they use it,
which is why our businesses are globally organized. Our four
global business segments are Large Enterprise, Public, Small and
Medium Business (SMB), and Consumer. We also refer
to our Large Enterprise, Public, and SMB segments as
Commercial. Our globally organized business units
reflect the impact of globalization on our customer base.
Our enterprise solutions include servers, storage, as well as
related services, software and peripherals. Client includes
mobility, desktop products, and also related services, software
and peripherals. Our services include a broad range of
configurable IT and business services, including infrastructure
technology, consulting and applications, and business process
services.
We are focused on improving our core business, shifting our
portfolio to higher margin and recurring revenue streams over
time, and maintaining a balance of liquidity, profitability, and
growth. We consistently focus on generating strong cash flow
returns, allowing us to expand our capabilities and acquire new
ones. We seek to grow revenue over the long term while improving
operating income and cash flow growth. We have three primary
strategic initiatives:
|
|
|
|
|
Offer IT solutions to our customers that are open, capable, and
affordable to provide them with flexibility, less complexity,
and better value from their IT investments.
|
|
|
|
Optimize our supply chain to simplify our product offerings and
align our supply chain initiatives with what customers value
most.
|
|
|
|
Enhance our connections to our customers and status as a
technology
e-commerce
online leader through our online initiative.
|
We have manufacturing locations and relationships with contract
manufacturers around the world. We maintain a highly efficient
global supply chain, which allows low inventory levels and the
efficient use of and return on capital. This combined 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 and services around customers
needs in order to drive long-term sustainable growth,
profitability, and liquidity. Our business model includes
selling directly to our customers as well as through
distribution channels, such as retail, system integrators,
value-added resellers, and distributors, which allows us to
reach even more end-users around the world. We are investing
resources and are well positioned in emerging countries with an
emphasis on Brazil, Russia, India, and China (BRIC),
where, given stable economic conditions, we expect significant
growth to occur over the next several years. We are also
creating solutions to meet the preferences and requirements of
our diversified global customer base. We will focus our
investments to grow our business organically as well as
inorganically through alliances and strategic acquisitions.
By successfully executing our strategy and driving greater
efficiency and productivity in how we operate, we believe we can
help customers grow and thrive.
28
CONSOLIDATED
RESULTS OF OPERATIONS
The following table summarizes the results of our operations for
the three months ended April 30, 2010, and May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30, 2010
|
|
|
|
May 1, 2009
|
|
|
|
|
% of
|
|
%
|
|
|
|
% of
|
|
|
Dollars
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
Revenue
|
|
|
(in millions, except per share amounts and percentages)
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
12,086
|
|
|
|
81.3%
|
|
|
|
18%
|
|
|
$
|
10,232
|
|
|
|
82.9%
|
|
Services, including software related
|
|
|
2,788
|
|
|
|
18.7%
|
|
|
|
32%
|
|
|
|
2,110
|
|
|
|
17.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
14,874
|
|
|
|
100.0%
|
|
|
|
21%
|
|
|
$
|
12,342
|
|
|
|
100.0%
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,701
|
|
|
|
14.1%
|
|
|
|
18%
|
|
|
$
|
1,446
|
|
|
|
14.1%
|
|
Services, including software related
|
|
|
815
|
|
|
|
29.2%
|
|
|
|
13%
|
|
|
|
722
|
|
|
|
34.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
2,516
|
|
|
|
16.9%
|
|
|
|
16%
|
|
|
$
|
2,168
|
|
|
|
17.6%
|
|
Operating expenses
|
|
$
|
1,997
|
|
|
|
13.4%
|
|
|
|
14%
|
|
|
$
|
1,754
|
|
|
|
14.2%
|
|
Operating income
|
|
$
|
519
|
|
|
|
3.5%
|
|
|
|
25%
|
|
|
$
|
414
|
|
|
|
3.4%
|
|
Net income
|
|
$
|
341
|
|
|
|
2.3%
|
|
|
|
18%
|
|
|
$
|
290
|
|
|
|
2.3%
|
|
Earnings per share diluted
|
|
$
|
0.17
|
|
|
|
N/A
|
|
|
|
13%
|
|
|
$
|
0.15
|
|
|
|
N/A
|
|
In the first quarter of Fiscal 2011, our net revenue increased
21%
year-over-year
with increases across all our operating segments. Our Commercial
segments, which generated approximately 78% of our revenue
during the first quarter of Fiscal 2011, led the increase with
22% in revenue growth. We continue to see indications of
strengthening demand across all segments as the global economy
continues to recover.
We will continue to focus our efforts on providing IT solutions
to our customers in our solutions areas which includes servers
and networking, storage, and services. The revenue generated
from these categories, including the contributions from Perot
Systems Corporation (Perot Systems), grew a combined
38% during the first quarter of Fiscal 2011 over the same period
in the prior year. We believe these solutions are customized to
the needs of users, easy to use, and affordable. We will also
continue to improve our client business by simplifying our
product offerings, developing next generation capabilities, and
enhancing the online buying experience for our customers. Our
cost reduction activities over the past several quarters are
improving our profitability and operating leverage as revenue
growth returns. We expect that the benefits of our strategy will
carry throughout Fiscal 2011.
Our recent acquisition of Kace Networks, Inc. (KACE)
and integration of Perot Systems expands our portfolio of
enterprise solutions offerings. The comparability of our results
of operations in the first quarter of Fiscal 2011 compared with
the same period in Fiscal 2010 is impacted by these
acquisitions, primarily Perot Systems. See our Services
discussion under Revenue by Product and Services
Categories below for a comparison of Dells first
quarter Fiscal 2011 services revenue to the prior years
results of Dell services and Perot Systems.
Revenue
Product Revenue Product revenue
increased
year-over-year
by 18% for the first quarter of Fiscal 2011. Our product revenue
performance is primarily attributable to an increase in unit
shipments of 20% due to improved customer demand.
Services Revenue, including software
related Services revenue increased
year-over-year
by 32% for the first quarter of Fiscal 2011. Our services
revenue performance is attributable to a 53%
year-over-year
increase in services and an increase of 3% in software related
revenue during the first quarter of Fiscal 2011. The increase in
services revenue is primarily attributable to our integration of
Perot Systems.
29
Overall, our average selling price (total revenue per unit sold)
during the first quarter of Fiscal 2011 remained relatively flat
year-over-year.
We experienced pricing pressure on our client offerings, offset
by the addition of Perot Systems, which generates services
revenue that is not always accompanied with hardware sales. Over
time, as we continue to migrate to a higher mix of non-attached
services, average selling price will become less meaningful.
Revenue for the U.S. during the first quarter of Fiscal 2011
increased 21% over the same period last year. Revenue outside
the U.S. represented approximately 48% of net revenue for the
first quarter of Fiscal 2011, and grew 20%
year-over-year,
led by a 60% increase in BRIC revenue. Revenue from BRIC has
been increasing sequentially since the fourth quarter of Fiscal
2009 and now represents 12% of our total revenue. We are
continuing to expand into these and other emerging countries
that 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 utilize a
comprehensive hedging strategy intended to mitigate the impact
of foreign currency volatility over time. As a result of our
hedging programs, the impact of currency movements was not
material to our total revenue for the first quarter of Fiscal
2011.
Gross
Margin
The following table presents information regarding our gross
margin during the three months ended April 30, 2010, and
May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30, 2010
|
|
|
|
May 1, 2009
|
|
|
|
|
% of
|
|
%
|
|
|
|
% of
|
|
|
Dollars
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
Revenue
|
|
|
(in millions, except percentages)
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,701
|
|
|
|
14.1%
|
|
|
|
18%
|
|
|
$
|
1,446
|
|
|
|
14.1%
|
|
Services, including software related
|
|
|
815
|
|
|
|
29.2%
|
|
|
|
13%
|
|
|
|
722
|
|
|
|
34.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
2,516
|
|
|
|
16.9%
|
|
|
|
16%
|
|
|
$
|
2,168
|
|
|
|
17.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products During the first quarter of
Fiscal 2011, products gross margin increased in absolute dollars
year-over-year,
while gross margin percentage remained flat. The increase in
gross margin dollars is attributable to increased demand.
Services, including software related
During the first quarter of Fiscal 2011, our services gross
margin increased in absolute dollars compared to the prior year,
though our gross margin percentage decreased by five percentage
points to 29.2%. The decrease in gross margin percentage for
services, including software related, is primarily due to the
higher mix of stand-alone services offerings by Perot Systems.
Our services, including software related gross margin rate is
driven by our extended warranty sales, offset by lower margin
categories such as software, consulting, and managed services.
Our extended warranty services are more profitable because we
sell extended warranty offerings directly to customers instead
of selling through a distribution channel. We have a service
support structure that allows us to favorably manage our fixed
costs.
We continue to experience industry-wide global pricing
pressures, increased competition, compressed product life
cycles, and increases in the cost of raw materials and outside
manufacturing services. We expect to see upward pressure on
certain component costs for the remainder of Fiscal 2011. In
response, we will adjust our pricing strategy and continue our
shift towards a variable cost manufacturing model with the goal
of optimizing growth and profitability. Approximately 53% of our
production volume is now processed through contract
manufacturers.
Due to our continued migration towards a more variable cost
manufacturing model, we continue to incur certain severance and
facility action costs. During the first quarter of Fiscal 2011,
the cost of these actions was $57 million, of which
approximately $29 million affected gross margin.
Comparatively, for the first quarter Fiscal 2010, the cost of
these actions was $185 million, of which approximately
$65 million affected gross margin. While we believe that we
have completed a significant portion of our manufacturing
transformation, we expect to implement additional cost reduction
measures depending on a number of factors, including end-user
demand, capabilities, and our
30
continued simplification of our supply and logistics chain.
Additional cost reduction measures may include selected
headcount reductions, as well as other cost reduction programs.
See Note 11 of the Notes to Condensed Consolidated
Financial Statements included in Part I
Item 1 Financial Statements for
additional information on severance and facility action costs.
As we continue to evolve our inventory and manufacturing
business model to drive cost efficiencies, 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 structure,
which is able to respond quickly to changing market conditions
due to our customer-facing model. Such negotiations are focused
on achieving the lowest net cost of our various components,
independent of the pricing strategies used by our supplier base.
Because of the fluid nature of these ongoing negotiations, the
timing and amount of supplier discounts and rebates will vary
from time to time. We monitor our suppliers net cost,
including vendor funding programs, and work to mitigate any
disruptions or price disadvantages caused by changes in our
supplier programs, which may include adjusting our selling
prices based on varying net cost levels. In addition, we have
pursued legal action against certain vendors and are currently
involved in negotiations with other vendors regarding their
pricing practices. During the first quarter of Fiscal 2011, we
negotiated a settlement with one vendor and expect to have
additional settlements in future quarters. The settlement during
the first quarter of Fiscal 2011 had a minimal impact on our
gross margin. These discounts, rebates, and settlements are
allocated to the segments based on a variety of factors,
including strategic initiatives to drive certain programs.
We will continue to invest in initiatives that align our new and
existing products and services with customers needs,
particularly for enterprise products and solutions. As we shift
our focus more to enterprise solutions and services, we believe
the improved mix of higher margin sales will positively impact
our gross margin over time.
Operating
Expenses
Our cost reduction activities over the past several quarters are
improving operating leverage as revenue growth is returning. Our
operating expenses as a percentage of net revenue declined 80
basis points
year-over-year
during the first quarter of Fiscal 2011. The following table
summarizes our operating expenses for the three months ended
April 30, 2010, and May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30, 2010
|
|
|
|
May 1, 2009
|
|
|
|
|
% of
|
|
%
|
|
|
|
% of
|
|
|
Dollars
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
Revenue
|
|
|
(in millions, except percentages)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$
|
1,830
|
|
|
|
12.3%
|
|
|
|
13%
|
|
|
$
|
1,613
|
|
|
|
13.1%
|
|
Research, development, and engineering
|
|
|
167
|
|
|
|
1.1%
|
|
|
|
18%
|
|
|
|
141
|
|
|
|
1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
1,997
|
|
|
|
13.4%
|
|
|
|
14%
|
|
|
$
|
1,754
|
|
|
|
14.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and Administrative
During the first quarter of Fiscal 2011, selling, general and
administrative (SG&A) expenses increased
year-over-year,
while SG&A expenses as a percentage of revenue decreased.
The increase in SG&A expenses is primarily due to increases
in compensation-related expenses of approximately
$108 million due to an increase in headcount resulting from
our acquisitions. In addition, during the first quarter of
Fiscal 2011, Dell accrued $100 million for a potential
settlement of the SEC investigation and $40 million for a
securities litigation class action lawsuit that was filed
against Dell during Fiscal 2007. See Note 12 to Notes to
Condensed Consolidated Financial Statements included in
Part I Item 1 Financial
Statements for more information on legal matters. The
decrease in SG&A expenses as a percentage of revenue is
largely due to improved general spending controls resulting in
better operating leverage.
|
SG&A expenses related to headcount and infrastructure
reductions through our on-going cost optimization efforts were
$25 million for the first quarter of Fiscal 2011 compared
to $120 million for the same period in the prior year.
SG&A expenses for Fiscal 2011 also included approximately
$19 million of costs related to our acquisitions, primarily
integration costs related to Perot Systems.
31
|
|
|
Research, Development, and Engineering
During the first quarter of Fiscal 2011, research, development
and engineering (RD&E) expenses remained
approximately 1% of revenue, consistent with the prior year. We
manage our research, development, and engineering spending by
targeting those innovations and products that we believe are
most valuable to our customers and by relying upon the
capabilities of our strategic relationships. We will continue to
invest in RD&E activities to support our growth and to
provide for new, competitive products.
|
Operating
and Net Income
|
|
|
Operating Income Operating income
increased $105 million or 25% during the first quarter of
Fiscal 2011 primarily due to an increase in gross margin dollars
of 16%. A 14%
year-over-year
increase in operating expenses during the first quarter of
Fiscal 2011 negatively impacted operating income, while
operating expenses as a percentage of revenue decreased slightly
during the same period.
|
|
|
Net Income Net income increased
year-over-year
by 18% to $341 million for the first quarter of Fiscal
2011. Net income was impacted by increases in operating income
and a lower effective tax rate from 29.6% to 24.4%, and offset
by higher interest expenses. See Income and Other
Taxes and Interest and Other, net sections
below for discussions of our effective tax rates and interest
and other, net.
|
Segment
Discussion
Our four global business segments are Large Enterprise, Public,
Small and Medium Business, and Consumer.
Severance and facility action expenses, broad based long-term
incentive expenses, amortization of purchased intangible assets
costs, acquisition-related expenses, and accruals for a
potential settlement of the SEC investigation as well as a
securities litigation class action lawsuit that were accrued
during the first quarter of Fiscal 2011, are not allocated to
the reporting segments as management does not believe that these
items are reflective of the underlying operating performance of
the reporting segments. These costs totaled $392 million in
the first quarter of Fiscal 2011 and $300 million in the
first quarter of Fiscal 2010. See Note 16 of Notes to
Condensed Consolidated Financial Statements included in
Part I Item 1
Financial Statements for additional
information and reconciliation of segment revenue and operating
income to consolidated revenue and operating income.
The following table summarizes our revenue and operating income
by reportable global segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30, 2010
|
|
|
|
May 1, 2009
|
|
|
|
|
% of
|
|
%
|
|
|
|
% of
|
|
|
Dollars
|
|
Revenue(a)
|
|
Change
|
|
Dollars
|
|
Revenue(a)
|
|
|
(in millions, except percentages)
|
Large Enterprise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
4,246
|
|
|
|
28%
|
|
|
|
25%
|
|
|
$
|
3,400
|
|
|
|
27%
|
|
Operating income
|
|
|
283
|
|
|
|
7%
|
|
|
|
47%
|
|
|
|
192
|
|
|
|
6%
|
|
Public
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,856
|
|
|
|
26%
|
|
|
|
22%
|
|
|
$
|
3,171
|
|
|
|
26%
|
|
Operating income
|
|
|
298
|
|
|
|
8%
|
|
|
|
2%
|
|
|
|
293
|
|
|
|
9%
|
|
Small and Medium Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,524
|
|
|
|
24%
|
|
|
|
19%
|
|
|
$
|
2,967
|
|
|
|
24%
|
|
Operating income
|
|
|
313
|
|
|
|
9%
|
|
|
|
36%
|
|
|
|
230
|
|
|
|
8%
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,248
|
|
|
|
22%
|
|
|
|
16%
|
|
|
$
|
2,804
|
|
|
|
23%
|
|
Operating income
|
|
|
17
|
|
|
|
1%
|
|
|
|
NM
|
|
|
|
(1
|
)
|
|
|
0%
|
|
|
|
|
(a)
|
|
Operating income percentage of
revenue is stated in relation to the respective segment.
|
32
|
|
|
Large Enterprise The increase in Large
Enterprises revenue for the first quarter of Fiscal 2011
compared to the first quarter of Fiscal 2010 is mainly
attributed to improved demand. Many of our customers, who
delayed or canceled IT projects as a result of the economic
slowdown, are beginning to resume IT spending. Unit shipments
increased 28% and average selling prices decreased slightly by
3%. The decrease in average selling prices was driven by pricing
pressures in mobility and desktop products. Large Enterprise
experienced
year-over-year
increases in revenue across all product lines, except storage,
during the first quarter of Fiscal 2011. Revenue from servers
led the increase in revenue for Large Enterprise with a 61%
year-over-year
increase for the first quarter of Fiscal 2011. Services also had
a significant increase in revenue of 44%
year-over-year
largely due to the integration of Perot Systems. Demand for our
client products has increased, with desktops PCs and mobility
increasing 22% and 14% respectively. Due to improved global
economic conditions, revenue increased
year-over-year
across all regions, with the Americas and the Asia-Pacific
regions leading the increases.
|
During the first quarter of Fiscal 2011, operating income
percentage increased 100 basis points
year-over-year
to 6.7% mostly driven by tighter spending controls that resulted
in operating expenses as a percentage of revenue to decrease.
|
|
|
Public During the first quarter of
Fiscal 2011, Public experienced a
year-over-year
increase in revenue, which is primarily attributable to a
significant increase in services revenue as a result of our
integration of Perot Systems. Publics revenue increased
across all other product categories, led by services revenue,
with a 122% increase over the same period in the prior year.
Excluding the impact of Perot Systems, demand was relatively
flat, as demand from our U.S. federal government and Europe
based customers was muted.
|
For the first quarter of Fiscal 2011, operating income
percentage decreased 150 basis points from the same period last
year to 7.7%, while operating income dollars remained relatively
flat with a 2% increase. Operating income percentage was
negatively impacted by a
year-over-year
decrease in gross margin percentage as our services portfolio
mix shifted to lower margin categories. Operating expenses as a
percentage of net revenue did not change for the first quarter
Fiscal 2011 in comparison to the first quarter of Fiscal 2010.
|
|
|
Small and Medium Business During the
first quarter of Fiscal 2011, SMB experienced a
year-over-year
increase in revenue due to improved demand. SMB unit shipments
increased 29%, while average selling prices decreased 8%. SMB
experienced double digit percentage increases across all product
lines, led by 27% and 23% increases in servers and networking,
and desktop PCs, respectively. The improved demand environment
is a major contributor to the increase in revenue for SMB.
|
Operating income percentage increased 120 basis points
year-over-year
to 8.9% and operating income dollars increased 36% for the first
quarter of Fiscal 2011, largely due to tighter spending controls
that resulted in operating expenses as a percentage of revenue
to decrease.
|
|
|
Consumer The increase in
Consumers revenue growth during the first quarter of
Fiscal 2011 is largely due to improved demand. We expanded our
global retail presence over the prior year and now reach
approximately 60,000 retail locations worldwide, compared to
30,000 at the end of the first quarter of Fiscal 2010. Our
global retail expansion has expanded our customer base. During
the first quarter of 2011, units sold increased 20%, while
average selling prices decreased 4%. The decline in average
selling prices is mainly due to growth in retail as well as a
shift in mix to lower priced products. Mobility had the most
significant increase in revenue with a 26% increase over the
first quarter of Fiscal 2010. 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 from higher to lower priced
notebooks. At a country level, our targeted BRIC revenue grew
95%
year-over-year
for the first quarter of Fiscal 2011.
|
Consumers operating income percentage increased
approximately 50 basis points
year-over-year
to 0.5%. Operating expenses as a percentage of revenue decreased
during the first quarter of Fiscal 2011 as compared to the first
quarter of Fiscal 2010, even though operating expenses remained
flat
year-over-year.
During the first quarter of Fiscal 2011, we combined Consumer
and SMB under a single leadership team to reduce overall costs,
though we are continuing to manage and report the two segments
separately. As we work to improve
33
profitability, we continue to monetize aspects of the consumer
business model with arrangements with vendors and suppliers,
such as revenue sharing arrangements, which we believe will
continue to contribute to and improve Consumers operating
income over time. We expect the operating income percentage for
Consumer to be in the 1% - 2% range, as we balance
profitability with growth.
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 products and services are
organized between enterprise solutions and client categories.
Enterprise solutions include servers, storage, and related
services, software and peripherals. Client includes mobility,
desktop products, and also related services, software and
peripherals.
The following table summarizes our net revenue by product and
service categories for the three months ended April 30,
2010, and May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30, 2010
|
|
|
|
May 1, 2009
|
|
|
|
|
% of
|
|
%
|
|
|
|
% of
|
|
|
Dollars
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
Revenue
|
|
|
(in millions, except percentages)
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servers and networking
|
|
$
|
1,785
|
|
|
|
12%
|
|
|
|
39%
|
|
|
$
|
1,286
|
|
|
|
10%
|
|
Storage
|
|
|
554
|
|
|
|
4%
|
|
|
|
4%
|
|
|
|
534
|
|
|
|
4%
|
|
Services
|
|
|
1,891
|
|
|
|
13%
|
|
|
|
53%
|
|
|
|
1,238
|
|
|
|
10%
|
|
Software and peripherals
|
|
|
2,496
|
|
|
|
17%
|
|
|
|
11%
|
|
|
|
2,246
|
|
|
|
18%
|
|
Client:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility
|
|
|
4,563
|
|
|
|
30%
|
|
|
|
18%
|
|
|
|
3,875
|
|
|
|
32%
|
|
Desktop PCs
|
|
|
3,585
|
|
|
|
24%
|
|
|
|
13%
|
|
|
|
3,163
|
|
|
|
26%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
14,874
|
|
|
|
100%
|
|
|
|
21%
|
|
|
$
|
12,342
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
Solutions
Servers and Networking The increase in our
server and networking revenue during the first quarter of Fiscal
2011 as compared to the first quarter of Fiscal 2010 was due to
demand improvements across all Commercial segments and regions.
Unit shipments increased 30%
year-over-year,
and average selling prices increased 7%
year-over-year,
driven by improved product mix toward our new product lines. Our
cloud computing servers contributed approximately 30% of the
year-over-year
dollar increase in server revenue. We are continuing to
introduce new products such as our cloud optimized PowerEdge-C
servers, and we were the first to market with Nehalem EX servers
to help our customers realize better overall system performance
and improve energy efficiency.
Storage During the first quarter of Fiscal
2011, Public and SMB both had
year-over-year
increases in storage revenue, while Large Enterprise experienced
a slight decrease. Dell
EqualLogictm
continues to perform strongly, with
year-over-year
revenue growth of 78%. We are shifting towards more Dell-branded
and co-branded storage offerings, which generally can be sold
with service solutions and provide increased margin opportunity.
During the first quarter of Fiscal 2011, we introduced new open
and
easy-to-manage
storage products such as the Dell DX Object Storage Solution
designed for enterprise content management and data archiving,
the Dell | EMC NS Series addressing the unified
storage market, and the Dell | EMC DD Series
(Data Domain)
backup-to-disk
de-duplication solution.
Services Services offerings include
infrastructure technology, consulting and applications, and
business process services. Services revenue increased by
$653 million
year-over-year
during the first quarter of Fiscal 2011, with revenue from Perot
Systems contributing a large proportion of the increase. Perot
Systems reported revenue for the
34
three months ended March 31, 2009, was $621 million.
Combining the results of Perot Systems revenue for the three
months ended March 31, 2009, with Dell Services revenue for
the three months ended May 1, 2009, does not take into
consideration intercompany charges nor anticipated synergies or
other effects of the integration of Perot Systems. Perot
Systems March 31, 2009, results are presented for
informational purposes only and are not indicative of the
results that actually would have occurred if the acquisition was
completed at the beginning of Fiscal 2010, nor are they
indicative of future results.
The integration of Perot Systems primarily impacts our Public
and Large Enterprise segments. We continue to view services as a
strategic growth opportunity and will continue to invest in our
offerings and resources focused on increasing our solutions
sales. The dynamics of our services business will continue to
change as we integrate Perot Systems. With Perot Systems, we
have extended our services business further into infrastructure
business process outsourcing, consulting, and application
development as well as our overall customer base. We also
anticipate expanding our existing managed and modular services
businesses.
Our deferred service revenue balance increased 8%
year-over-year
to $6.1 billion at April 30, 2010, primarily due to an
increase in up-sell service offerings.
Software and Peripherals Revenue from
sales of software and peripherals (S&P) is
derived from sales of Dell-branded printers, monitors (not sold
with systems), projectors, keyboards, mice, docking stations,
and a multitude of third-party peripherals including LCD
televisions, cameras, stand-alone software sales and related
support services, and other products. The increase in S&P
revenue was driven by overall customer unit shipment increases
due to improvements in demand in displays, imaging products, and
electronics, which experienced a combined
year-over-year
revenue increase of 15% for the first quarter of Fiscal 2011.
All segments experienced
year-over-year
revenue increases during the first quarter of Fiscal 2011.
Software revenue from our S&P line of business, which
includes software license fees and related post-contract
customer support, is included in services revenue, including
software related on the Condensed Consolidated Statements of
Income. Software and related support services revenue represents
32% and 41% of services revenue, including software related
during the first quarter of Fiscal 2011, and Fiscal 2010,
respectively.
Client
Mobility Revenue from mobility products
(which include notebook computers, mobile workstations, and
smartphones) increased during the first quarter of Fiscal 2011
due to demand improvements, offset in part by an industry mix
shift to lower priced mobility product offerings. Mobility units
increased 27%
year-over-year.
Overall, Consumer mobility revenue increased 26%
year-over-year
and Commercial increased 12%. We believe the on-going demand
trend towards mobility products will continue, and we plan to
address this demand by expanding our product platforms to cover
broader feature sets and price bands, like our new Vostro 3000
series laptop computers, the Dell Precision M4500 mobile
workstations, and our new additions to our Dell Latitude
E-family of
laptops.
Desktop PCs During the first quarter of
Fiscal 2011, revenue from desktop PCs (which include desktop
computer systems and workstations) increased as unit demand for
desktop PCs increased by 12%. The average selling price for our
desktop computers has remained relatively flat
year-over-year.
The increase in demand was driven by our Large Enterprise and
SMB customers, with 27% and 20% increases
year-over-year,
respectively. In the consumer marketplace, we are continuing to
see rising end-user demand for mobility products, which
moderates the demand for desktop PCs. The unit demand for
desktop PCs declined 2% while mobility units increased 29%
year-over-year
for our Consumer customers. During the first quarter of Fiscal
2011, we introduced new desktop computers with AMD Vision
technology, as well as our new Dell OptiPlex 980 commercial
desktop.
35
Interest
and Other, Net
The following table provides a detailed presentation of interest
and other, net for the three months ended April 30, 2010,
and May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Interest and other, net:
|
|
|
|
|
|
|
|
|
Investment income, primarily interest
|
|
$
|
8
|
|
|
$
|
21
|
|
Gains on investments, net
|
|
|
-
|
|
|
|
1
|
|
Interest expense
|
|
|
(47
|
)
|
|
|
(29
|
)
|
Foreign exchange
|
|
|
(30
|
)
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Interest and other, net
|
|
$
|
(68
|
)
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
We continued to maintain a portfolio of instruments with shorter
maturities, which typically carry lower market yields. Market
yields on short-term instruments declined
year-over-year
resulting in lower investment income. Increased debt levels to
$4.7 billion as of April 30, 2010, compared to
$2.5 billion as of May 1, 2009, resulted in increased
interest expense. The
year-over-year
increase in foreign exchange for the first quarter of Fiscal
2011, as compared to the same period in the prior year, is
primarily due to revaluation of certain unhedged foreign
currency balances resulting from recent currency volatility,
particularly the Euro, as it weakened relative to the U.S.
dollar.
Income
and Other Taxes
Our effective income tax rate was 24.4% and 29.6% for the first
quarter of Fiscal 2011 and Fiscal 2010, respectively. The
decrease in our effective income tax rate for the first quarter
of Fiscal 2011 is primarily due to the favorable effective
settlement of a tax audit in a foreign jurisdiction. For the
Fiscal 2011 year, we estimate our effective annual tax
rate, including the effect of this favorable settlement to be
approximately 27%. The difference between the estimated
effective income tax rate and the U.S. federal statutory rate of
35% principally results from our geographical distribution of
taxable income and differences between the book and tax
treatment of certain items. The income tax rate for future
quarters of Fiscal 2011 will be impacted by the actual mix of
jurisdictions in which income is generated.
We take certain non-income tax positions in the jurisdictions in
which we operate and have received certain non-income tax
assessments from some of these jurisdictions. We are also
involved in related non-income tax litigation matters in various
jurisdictions. These jurisdictions include Brazil, where we are
in litigation with the government over the proper application of
transactional taxes to warranties and software related to the
sale of computers, as well as over the appropriate use of state
statutory incentives to reduce the transactional taxes. Tax
litigation in Brazil has historically taken multiple years to
resolve. While we believe we will ultimately prevail in the
Brazilian courts, we have also negotiated certain tax incentives
with the state that can be used to offset potential tax
liabilities should the courts rule against us. The incentives
are based upon maintaining a certain number of jobs within the
state. In the first quarter of Fiscal 2011, pursuant to
Brazilian law, we pledged our manufacturing facility in
Hortolandia, Brazil to the government. The pledge was made as
security for payment of an assessment for an adverse preliminary
ruling on one of three cases pending with the government of
Brazil. This pledge allows us to defend against the assessment
and continue business with the Brazilian government while the
appeal is pending. The manufacturing facility has an appraised
value of approximately $60 million.
We continue to believe our positions are supportable, a
liability is not probable, that we will ultimately prevail, and
that a risk of disruption to our Brazilian manufacturing
operations is remote. In the normal course of business, our
positions and conclusions related to our non-income taxes could
be challenged and assessments may be made. To the extent new
information is obtained and our views on our positions, probable
outcomes of assessments, or litigation change, changes in
estimates to our accrued liabilities would be recorded in the
period in which the determination is made.
36
CONTINGENCIES
Our future operating results may be adversely affected by the
terms and effects of unfavorable resolutions of various pending
claims, suits, legal proceedings and investigations described in
Note 12 of Notes to Condensed Consolidated Financial
Statements, including the previously reported SEC investigation
into certain financial reporting and disclosure matters. Dell
continues to cooperate with the SEC investigation and to engage
in discussions with the SEC staff regarding a potential
settlement of the matter which would include the imposition of
monetary penalties and other relief within the SECs
authority. These discussions have progressed and, as a result,
Dell recorded a liability for potential settlement of
$100 million as of April 30, 2010. While we have
determined that a liability should be recorded, our discussions
with the SEC staff are ongoing, and no assurance can be given as
to the ultimate outcome of this matter, including when any
settlement might occur, or the terms or conditions of any
settlement, or the potential impact of any resolution of this
matter on our business.
ACCOUNTS
RECEIVABLE
We sell products and services directly to customers and through
a variety of sales channels, including a retail distribution
network. At April 30, 2010, our gross accounts receivable
balance was $6.0 billion, a slight increase of 0.5% from
our balance at January 29, 2010. 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 April 30,
2010, and January 29, 2010, the allowance for doubtful
accounts was $103 million and $115 million,
respectively. 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 to
reduce our exposure to credit losses.
FINANCING
RECEIVABLES
At April 30, 2010, and January 29, 2010, our net
financing receivables balances were $3.7 billion and
$3.0 billion, respectively. The increase was primarily the
result of the consolidation of two previously nonconsolidated
SPEs as discussed below. We expect some growth in financing
receivables to continue throughout Fiscal 2011. To manage the
growth in financing receivables, we will continue to balance the
use of our own working capital and other sources of liquidity,
including securitization programs. Starting in the first quarter
of Fiscal 2011, CIT, formerly a joint venture partner of DFS, is
no longer funding DFS financing receivables.
During the first quarter of Fiscal 2011, we continued to
transfer certain customer financing receivables to SPEs in
securitization transactions. The purpose of the SPEs is to
facilitate the funding of customer receivables through financing
arrangements with multi-seller conduits that issue asset-backed
debt securities in the capital markets. During the three months
ended April 30, 2010, and May 1, 2009, we transferred
$496 million and $233 million, respectively, to these
SPEs. Our risk of loss related to these securitized receivables
is limited to the amount of our over-collateralization in the
transferred pool of receivables. We have a securitization
program to fund revolving loans through a consolidated SPE,
which we account for as a secured borrowing. Additionally, as of
January 29, 2010, the two SPEs that funded fixed-term
leases and loans were not consolidated. As of the beginning of
the first quarter of Fiscal 2011, we adopted the new accounting
guidance that requires us to apply variable interest entity
accounting to these special purpose entities and therefore,
consolidated the two remaining nonconsolidated SPEs. The impact
of the adoption resulted in a decrease to beginning retained
earnings for Fiscal 2011 of $13 million. There was no
impact to our results of operations or our cash flows upon
adoption of the new accounting guidance. Starting in the first
quarter of Fiscal 2011, we account for these fixed-term
securitization programs as secured borrowings. At April 30,
2010 and January 29, 2010, the structured financing debt
related to all of our secured borrowing securitization programs
was $830 million and $164 million, respectively, and
the carrying amount of the corresponding financing receivables
was $1.2 billion and $0.3 billion, respectively.
We maintain an allowance to cover expected financing receivable
credit losses and we evaluate credit loss expectations based on
our total managed portfolio. For the periods ended
April 30, 2010, and January 29, 2010, the annualized
principal charge-off rate for our managed portfolio was 7.6% and
8.2%, respectively. The allowance for losses is determined based
on various factors, including historical and anticipated
experience, past due receivables, receivable type, and customer
risk profile. At April 30, 2010, and January 29, 2010,
the allowance for financing
37
receivable losses was $285 million and $237 million,
respectively. In general, we are seeing improving loss rates
associated with our financing receivables as the economy
strengthens. The increase in the allowance is primarily due to
the incremental allowance from the consolidation of variable
interest entities and an additional allowance related to assets
that were included in a qualified special purpose entity and
consolidated during the second quarter of Fiscal 2010, which
have liquidated slower than what was originally anticipated.
Based on our assessment of the customer financing receivables,
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 affect the consumer financing provided by DFS. This Act
will impose new restrictions on credit card companies in the
areas of marketing, servicing, and pricing of consumer credit
accounts. We do not expect 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. A majority of the provisions of the law are
now in effect, with additional provisions becoming effective in
August 2010. We expect to be compliant with future
regulations by the established deadlines. Some of the future
regulations, including changes to rules relating to late fees,
are subject to additional clarification. We do not expect the
impact of these pending changes to be material to our financial
results in future periods.
See Note 5 of Notes to Condensed Consolidated Financial
Statements included in Part I
Item 1 Financial Statements for
additional information about our financing receivables.
OFF-BALANCE
SHEET ARRANGEMENTS
With the consolidation of our previously nonconsolidated special
purpose entities, we no longer have off-balance sheet financing
arrangements.
LIQUIDITY
AND CAPITAL COMMITMENTS
Current
Market Conditions
We regularly monitor economic conditions and associated impacts
on the financial markets and our business. Though there were
signs of improvement in the global economic environment during
the first quarter of Fiscal 2011, we continue to be cautious
given the volatility associated with international sovereign
economies. We continue to evaluate the financial health of our
supplier base, carefully manage customer credit, diversify
counterparty risk, and monitor the concentration risk of our
cash and cash equivalents balances globally. Additionally, we
maintain a conservative investment portfolio with shorter
duration and high quality assets.
We monitor credit risk associated with our financial
counterparties using various market credit risk indicators such
as credit ratings issued by nationally recognized rating
agencies and changes in market credit default swap levels. We
perform periodic evaluations of our positions with these
counterparties and may limit exposure to any one counterparty in
accordance with our policies. We monitor and manage these
activities depending on current and expected market developments.
See Part I Item 1A
Risk Factors in our Annual Report on
Form 10-K
for the fiscal year ended January 29, 2010, for further
discussion of risks associated with instability in the financial
markets as well as 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
We ended the first quarter of Fiscal 2011 with
$11.6 billion in cash, cash equivalents, and investments
compared to $10.7 billion at the end of the first quarter
of Fiscal 2010. Our cash balances are held in numerous locations
throughout the world, including substantial amounts held outside
of the U.S. Amounts held outside of the U.S. could be
repatriated to the U.S., unless limited by local regulations.
Where local regulations limit an efficient intercompany transfer
of funds, we will continue to utilize these amounts for local
liquidity needs. Under current law, balances available to be
repatriated would be subject to U. S. federal income taxes, less
applicable foreign tax credits. We have provided for the U.S.
federal tax liability on these amounts for financial statement
38
purposes, except for foreign earnings that are considered
permanently reinvested outside of the U.S. We utilize a variety
of tax planning and financing strategies with the objective of
having our worldwide cash available in the locations where it is
needed. Our
non-U.S.
domiciled cash and investments are generally denominated in the
U.S. dollar.
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 first quarter of Fiscal 2011, we repurchased
$200 million of our shares and continued to monitor and
prioritize capital expenditures and other discretionary spending.
Cash generated from operations is our primary source of
operating liquidity and we believe that internally generated
cash flows are sufficient to support business operations. We
expect to continue to grow our business through strategic
acquisitions, which will impact our future cash requirements and
liquidity. We utilize external capital sources, such as notes
and other term debt, commercial paper, or structured financing
arrangements, to supplement our internally generated sources of
liquidity as necessary. Outstanding as of April 30, 2010,
was $3.3 billion in principal on long-term notes,
$410 million in commercial paper, and $830 million in
structured financing debt. In November 2008, we filed a
shelf registration statement with the SEC for debt securities.
The amount of debt securities issued under this registration
statement at any point in time will be established by our Board
of Directors.
The following table contains a summary of our Condensed
Consolidated Statements of Cash Flows for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
|
|
(in millions)
|
Net change in cash from:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
238
|
|
|
$
|
761
|
|
Investing activities
|
|
|
(360
|
)
|
|
|
131
|
|
Financing activities
|
|
|
(254
|
)
|
|
|
485
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(4
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
(380
|
)
|
|
$
|
1,339
|
|
|
|
|
|
|
|
|
|
|
Operating Activities Cash flows from
operating activities were $238 million during the first
quarter of Fiscal 2011 compared to $761 million during the
first quarter of Fiscal 2010. The decrease in operating cash
flows was primarily led by unfavorable changes in working
capital, and the timing of settlement of favorable foreign
exchange contracts during the first quarter of Fiscal 2010, the
effects of which were partially offset by the increase in net
income. See Key Performance Metrics below for
additional discussion of our cash conversion cycle.
Investing Activities Cash used in
investing activities during the first quarter of Fiscal 2011 was
$360 million as compared to cash provided of
$131 million during the first quarter of Fiscal 2010.
Investing activities consist of the net of maturities and sales
and purchases of investments; net capital expenditures for
property, plant, and equipment; and net cash used to fund
strategic acquisitions. During the first quarter of Fiscal 2011,
net cash used for investment activities was $181 million,
as compared to a net cash sourced of $214 million during
the first quarter of Fiscal 2010 due to a shift from cash
equivalents to short-term investments. Cash used to fund
strategic acquisitions, net of cash acquired, was approximately
$133 million during the first quarter of Fiscal 2011,
primarily related to the acquisition of KACE, compared to
$3 million during the first quarter of Fiscal 2010.
Financing Activities Cash used in
financing activities during the three months ended
April 30, 2010, was $254 million as compared to cash
provided of $485 million during the three months ended
May 1, 2009. Financing activities primarily consist of
proceeds and repayments from borrowings and the repurchase of
our common stock. The
year-over-year
decrease in cash provided by financing activities was mainly due
to net proceeds from issuance of long-term debt of
$497 million during the first quarter of Fiscal 2010 and a
share repurchase of 12 million shares for $200 million
during the first quarter of Fiscal 2011. The amount of shares
repurchased during the first quarter of
39
Fiscal 2010 was immaterial to financing activities. We expect to
repurchase an additional amount of shares throughout Fiscal 2011.
Due to the overall strength of our financial position, we
believe that we will have adequate access to capital markets. We
intend to maintain the appropriate debt levels based upon cash
flow expectations, the overall cost of capital, cash
requirements for operations, and discretionary spending,
including for acquisitions and share repurchases.
As of April 30, 2010, we had a $1.5 billion commercial
paper program enabling us to obtain attractive short-term
borrowings. Subsequent to April 30, 2010, Dell entered into
a new agreement to expand Dells commercial paper program
to $2 billion. Dell has $2 billion of senior unsecured
revolving credit facilities supporting the commercial paper
program. Our $2 billion of credit facilities consist of two
agreements with $1 billion expiring on June 1, 2011,
and the remaining $1 billion expiring on April 2, 2013.
During the first quarter of Fiscal 2011, we issued commercial
paper with original maturities of less than 90 days and we
continue to be active in the commercial paper market by issuing
short-term borrowings to augment our liquidity as needed. As of
April 30, 2010, and May 1, 2009, we had
$410 million and $100 million, respectively, in
outstanding commercial paper.
We issued structured financing-related debt to fund our
financing receivables as previously discussed in the
Financing Receivables section above. The total debt
capacity of our securitization programs is $1.1 billion,
which we expect to be adequate to fund expected securitization
activities during Fiscal 2011. As of April 30, 2010, we had
$830 million in outstanding structured financing-related
debt.
Standard and Poors Rating Services, Moodys Investors
Service, and Fitch Ratings currently rate our senior unsecured
long-term debt A-, A2, and A, respectively, and our short-term
debt A-1,
P-1, and F1,
respectively. These rating agencies use proprietary and
independent methods of evaluating our credit risk. Factors used
in determining our rating include, but are not limited to,
publically available information, industry trends and ongoing
discussions between the company and the agencies. We are not
aware of any planned changes to our corporate credit ratings by
the rating agencies. However, any credit rating downgrade will
increase our borrowing costs and may limit our ability to issue
commercial paper or additional term debt.
See the debt section in Note 6 of the Notes to Condensed
Consolidated Financial Statements under
Part I Item 1 Financial
Statements for further discussion of our debt.
40
Key Performance Metrics Our cash
conversion cycle for the fiscal quarter ended April 30,
2010, improved from the fiscal quarter ended May 1, 2009.
Our business model allows us to maintain an efficient cash
conversion cycle, which compares favorably with that of others
in our industry.
The following table presents the components of our cash
conversion cycle for the three months ended April 30, 2010,
and May 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
May 1,
|
|
|
2010
|
|
2009
|
Days of sales
outstanding(a)
|
|
|
38
|
|
|
|
34
|
|
Days of supply in
inventory(b)
|
|
|
9
|
|
|
|
7
|
|
Days in accounts
payable(c)
|
|
|
(83
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(36
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Days of sales outstanding
(DSO) calculates the average collection period of
our receivables. DSO is based on the ending net trade
receivables and the most recent quarterly 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
April 30, 2010, and May 1, 2009, DSO and days of
customer shipments not yet recognized were 35 and 3 days,
and 31 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 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 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 eight days at April 30,
2010, from May 1, 2009, driven by a 14 day improvement
in DPO, which was partially offset by a four day increase in DSO
and a two day increase in DSI. The improvement in DPO from
May 1, 2009, was attributable to our ongoing transition to
contract manufacturing, further standardization of vendor
agreements, and timing of supplier purchases and payments during
the first quarter of Fiscal 2011 as compared to same period of
Fiscal 2010. The increase in DSO from May 1, 2009, was
primarily attributable to growth in customer receivables with
longer payment terms. The increase in DSI from May 1, 2009,
was primarily attributable to an increase in strategic materials
purchases and finished goods inventory.
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 this reporting results in 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 $465 million
and $409 million, at April 30, 2010, and May 1,
2009, respectively.
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 cycle at negative mid-thirty days or better.
Capital
Commitments
Share Repurchase Program We have a
share repurchase program that authorizes us to purchase shares
of common stock through a systematic program of open market
purchases 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. For more information
regarding share repurchases, see Part II
Item 2 Unregistered Sales of Equity Securities
and Use of Proceeds.
Capital Expenditures During the three
months ended April 30, 2010, and May 1, 2009, we spent
$46 million and $80 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
41
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 2011, related to infrastructure
refreshment and strategic initiatives, are currently expected to
reach approximately $500 million. These expenditures are
expected to be funded from our cash flows from operating
activities.
Restricted Cash As of April 30,
2010, and January 29, 2010, we have restricted cash in the
amount of $179 million and $147 million, respectively,
included in other current assets. These balances primarily
relate to an agreement between DFS and CIT, which requires us 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.
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 29, 2010. 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
under 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.
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
April 30, 2010. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were effective as of
April 30, 2010.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial
reporting during the first quarter of Fiscal 2011 that
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
42
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
The information required by this item is set forth under the
caption Legal Matters in Note 12 of Notes to
Condensed Consolidated Financial Statements included in
Part I Item 1 Financial
Statements, and is incorporated by reference into this
Item 1 of Part II of this report.
Additional information on Dells commitments and
contingencies can be found in Dells Annual Report on
Form 10-K
for the fiscal year ended January 29, 2010.
ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this report,
the factors discussed in Part I
Item 1A Risk Factors in our Annual Report
on
Form 10-K
for the fiscal year ended January 29, 2010, could
materially affect our business, financial condition or operating
results. The risks described in our Annual Report on
Form 10-K
are not the only risks facing us. There are additional risks and
uncertainties not currently known to us or that we currently
deem to be immaterial, that may also materially adversely affect
our business, financial condition, or operating results.
|
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
PURCHASES
OF COMMON STOCK
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 in
conjunction with share-based payment arrangements. The following
table sets forth information regarding our repurchases or
acquisitions of common stock during the first quarter of Fiscal
2011 and the remaining authorized amount for future purchases
under our share repurchase program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Approximate
|
|
|
|
|
|
|
Number of
|
|
Dollar Value
|
|
|
|
|
|
|
Shares
|
|
of Shares That
|
|
|
|
|
|
|
Purchased
|
|
May Yet Be
|
|
|
Total
|
|
|
|
as Part of
|
|
Purchased
|
|
|
Number
|
|
Weighted
|
|
Publicly
|
|
Under the
|
|
|
of
|
|
Average
|
|
Announced
|
|
Announced
|
|
|
Shares
|
|
Price Paid
|
|
Plans or
|
|
Plans or
|
Period
|
|
Purchased(a)
|
|
per Share
|
|
Programs(b)
|
|
Programs(b)
|
|
|
(in millions, except average price paid per share)
|
January 30, 2010 through February 26, 2010
|
|
|
-
|
|
|
|
N/A
|
|
|
|
-
|
|
|
$
|
4,543
|
|
February 27, 2010 through March 26, 2010
|
|
|
2
|
|
|
$
|
14.51
|
|
|
|
2
|
|
|
$
|
4,509
|
|
March 27, 2010 through April 30, 2010
|
|
|
10
|
|
|
$
|
16.49
|
|
|
|
10
|
|
|
$
|
4,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12
|
|
|
$
|
16.12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes 683 shares withheld
to cover employee tax obligations for restricted stock awards
vested during quarter ended April 30, 2010 at an average
price of $13.68 per share.
|
|
|
|
(b)
|
|
On December 4, 2007, we
publicly announced that our Board of Directors had authorized a
share repurchase program for up to $10 billion of our
common stock over an unspecified amount of time.
|
Exhibits See Index to Exhibits below.
43
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.
|
|
|
|
Date: June 10, 2010
|
|
/s/ THOMAS W. SWEET
|
|
|
|
|
|
Thomas W. Sweet
|
|
|
Vice President, Corporate Finance and
|
|
|
Chief Accounting Officer
|
|
|
(On behalf of the registrant and as
|
|
|
principal accounting officer)
|
44
INDEX TO
EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
|
|
Description of Exhibit
|
|
3
|
.1
|
|
|
|
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)
|
|
3
|
.2
|
|
|
|
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)
|
|
4
|
.1
|
|
|
|
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)
|
|
4
|
.2
|
|
|
|
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)
|
|
4
|
.3
|
|
|
|
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)
|
|
4
|
.4
|
|
|
|
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)
|
|
4
|
.5
|
|
|
|
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)
|
|
4
|
.6
|
|
|
|
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)
|
|
4
|
.7
|
|
|
|
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)
|
|
4
|
.8
|
|
|
|
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)
|
|
4
|
.9
|
|
|
|
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)
|
|
4
|
.10
|
|
|
|
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)
|
|
10
|
.1
|
|
|
|
Form of Performance Based Stock Unit Agreement for Key Vice
Presidents under the Amended and Restated 2002 Long-Term
Incentive Plan
|
|
10
|
.2
|
|
|
|
Form of Performance Based Stock Unit Agreement for
Communications Solutions Executive Officers under the Amended
and Restated 2002 Long-Term Incentive Plan
|
|
10
|
.3
|
|
|
|
Form of Nonstatutory Stock Option Agreement for Executive
Officers under the Amended and Restated 2002 Long-Term Incentive
Plan
|
|
10
|
.4
|
|
|
|
Form of Restricted Stock Unit Agreement for Executive Officers
under the Amended and Restated 2002 Long-Term Incentive Plan
|
|
10
|
.5
|
|
|
|
Form of Restricted Stock Unit Agreement for New Hire Senior
Executive Officers under the Amended and Restated 2002 Long-Term
Incentive Plan
|
|
12
|
.1
|
|
|
|
Computation of Ratio of Earnings to Fixed Charges
|
|
31
|
.1
|
|
|
|
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
|
|
31
|
.2
|
|
|
|
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
|
45
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
|
|
Description of Exhibit
|
|
32
|
.1
|
|
|
|
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
|
|
101
|
.INS§
|
|
|
|
XBRL Instance Document
|
|
101
|
.SCH§
|
|
|
|
XBRL Taxonomy Extension Schema Document
|
|
101
|
.CAL§
|
|
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101
|
.LAB§
|
|
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101
|
.PRE§
|
|
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
|
|
Filed with this report.
|
|
|
|
Furnished with this report.
|
|
§
|
|
Furnished with this report. In
accordance with Rule 406T of
Regulation S-T,
the information in these exhibits shall not be deemed to be
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise
subject to liability under that section, and shall not be
incorporated by reference into any registration statement or
other document filed under the Securities Act of 1933, as
amended, except as expressly set forth by specific reference in
such filing.
|
46