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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended:
February 3, 2006 |
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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 |
Commission file number: 0-17017
Dell Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other
jurisdiction of
incorporation or organization)
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74-2487834
(I.R.S. Employer
Identification No.)
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One Dell Way, Round Rock, Texas 78682
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code:
(512) 338-4400
Securities registered pursuant to Section 12(b) of the
Act: None
Securities Registered Pursuant to Section 12(g) of the
Act:
Common Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check One):
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Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Act). Yes o No þ
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Approximate aggregate market
value of the registrants common stock held by
non-affiliates as of July 29, 2005, based upon the closing
price reported for such date on The Nasdaq National
Market
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$107.3 billion |
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Number of shares of common stock
outstanding as of March 3, 2006
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2,306,994,456 |
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the
extent not set forth herein, is incorporated by reference from
the registrants definitive proxy statement relating to the
annual meeting of stockholders to be held in July 2006, which
definitive proxy statement will be filed with the Securities and
Exchange Commission within 120 days after the end of the
fiscal year to which this report relates.
TABLE OF CONTENTS
This report contains forward-looking statements that are
based on Dells current expectations. Actual results in
future periods may differ materially from those expressed or
implied by those forward-looking statements because of a number
of risks and uncertainties. For a discussion of risk factors
affecting Dells business and prospects, see
Item 1A Risk Factors.
All percentage amounts and ratios were calculated using
the underlying data in thousands. Unless otherwise noted, all
references to industry share and total industry growth data are
for personal computers (including desktops, notebooks and x86
servers), and are based upon information provided by IDC
Worldwide PC, Printer, and MFP Trackers, March 2006. Share data
is for the full calendar year and all Dell growth rates are on a
fiscal year-over-year basis. Unless otherwise noted, all
references to time periods refer to Dell fiscal periods.
PART I
ITEM 1 BUSINESS
General
Dell Inc., with fiscal 2006 net revenue of
$55.9 billion, is a premier provider of products and
services worldwide that enable customers to build their
information technology and Internet infrastructures. Dell offers
a broad range of product categories, including desktop computer
systems, mobility products, software and peripherals, servers
and networking products, enhanced services, and storage
products. During calendar 2005, Dell was the number one supplier
of personal computer systems worldwide as well as in the United
States. Dells global market leadership is the result of a
persistent focus on delivering the best possible customer
experience by selling products and services directly to
customers.
Dell, a Delaware corporation, was founded in 1984 by Michael
Dell on a simple concept: by selling computer systems directly
to customers, Dell could best understand their needs and
efficiently provide the most effective computing solutions to
meet those needs. Dell is based in Round Rock, Texas, and
conducts operations worldwide through its subsidiaries. Unless
otherwise specified, references to Dell include its consolidated
subsidiaries. Dell operates principally in one industry and is
managed in three geographic segments: the Americas; Europe,
Middle East and Africa (EMEA); and Asia
Pacific-Japan (APJ). See
Item 1 Business Geographic
Areas of Operations.
Business Strategy
Dells business strategy combines its direct customer model
with a highly efficient manufacturing and supply chain
management organization and an emphasis on standards-based
technologies. This strategy enables Dell to provide customers
with superior value; high-quality, relevant technology;
customized systems; superior service and support; and products
and services that are easy to buy and use. The key tenets of
Dells business strategy are:
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A direct relationship is the most efficient path to the
customer. A direct customer relationship, also referred to
as Dells direct business model, eliminates
wholesale and retail dealers that add unnecessary time and cost
or diminish Dells understanding of customer expectations.
As a result, Dell is able to offer customers superior value by
avoiding expenditures associated with the retail channel such as
higher inventory carrying costs, obsolescence associated with
technology products, and retail mark-ups. In addition, direct
customer relationships provide a constant flow of information
about customers plans and requirements and enable Dell to
continually refine its product offerings. At www.dell.com,
customers may review, configure, and price systems within
Dells entire product line; order systems online; and track
orders from manufacturing through shipping. |
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Customers can purchase custom-built products and
custom-tailored services. Dell believes the direct business
model is the most effective model for providing solutions that
address customer needs. In addition, Dells flexible,
build-to-order
manufacturing process enables Dell to turn over inventory every
five days on average, and reduce inventory levels. This allows
Dell to rapidly introduce the latest relevant technology more
quickly than companies with slow-moving, indirect distribution
channels, and to rapidly pass on component cost savings directly
to customers. |
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Dell is a low-cost leader. Dells highly efficient
supply chain management and manufacturing organization,
efficient direct business model, and concentration on
standards-based technologies allow Dell to maintain one of the
lowest cost structures among its major competitors and to pass
those savings to its customers. Dells relentless focus on
reducing its costs allows it to consistently provide customers
with superior value. |
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Dell provides a single point of accountability for its
customers. Dell recognizes that as technology needs become
more complex, it becomes more challenging for customers to
efficiently address their information technology needs. Dell
therefore strives to be the single point of accountability for
customers with complex technological challenges. Dell offers an
array of services designed to provide customers the ability to
maximize system performance, efficiency, and return on
investment. |
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Non-proprietary standards-based technologies deliver the best
value to customers. Dell believes that non-proprietary
standards-based technologies are critical to providing customers
with relevant, high-value products and services. Focusing on
standards gives customers the benefit of extensive research and
development from Dell and its entire supply chain, rather than a
single company. Unlike proprietary technologies, standards
provide customers with flexibility and choice while allowing
their purchasing decisions to be based on performance, cost, and
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Product Development
Dell is focused on developing standards-based technologies that
incorporate highly desirable features and capabilities at
competitive prices. Management believes that Dell employs a
unique and inherently better collaborative approach to product
design and development. With direct customer input, Dells
engineers work with a global network of technology companies to
architect new system designs, influence the direction of future
development, and integrate new technologies into Dells
products. This collaborative approach enables Dell to quickly
and efficiently deliver new products and services to the market.
Dells research, development, and engineering expenses were
approximately $460 million for fiscal 2006, 2005 and 2004.
Products and Services
Dell designs, develops, manufactures, markets, sells, and
supports a wide range of products that are customized to
individual customer requirements. Dells product categories
include desktop computer systems, mobility products, software
and peripherals, servers and networking products, and storage
products. In addition, Dell offers a wide range of enhanced
services. For revenue by product and services categories, see
Revenues by Product and Services Categories in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operation
and Note 9 of Notes to Consolidated Financial Statements
included in Item 8 Financial Statements
and Supplementary Data.
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Desktop PCs. Dell offers Dell
XPStm,
OptiPlextm,
and
Dimensiontm
desktop computer systems, and Dell
Precisiontm
desktop workstations. |
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Desktop Computer Systems. Dell customers can select from
three lines of desktop computer systems. The
OptiPlextm
line is designed to help business, government, and institutional
customers manage their total cost of ownership by offering
stability, security, and managed |
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product transitions. The
Dimensiontm
line is designed for small businesses and home users requiring
the latest features for their productivity and entertainment
needs. In fiscal 2006, Dell further expanded the
XPStm
line targeted at customers who require the highest performance
gaming or entertainment experience available. Dell ranked number
one in the U.S. and worldwide in desktop shipments in calendar
2005. |
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Workstations. Dell
Precisiontm
workstations are intended for professional users who demand
exceptional performance from hardware platforms certified to run
sophisticated applications, such as three-dimensional
computer-aided design, digital content creation, geographic
information systems, computer animation, software development,
and financial analysis. In calendar 2005, Dell held the number
one position in the U.S. and worldwide for branded workstation
unit shipments. |
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Mobility. Dell offers Dell
XPStm,
Latitudetm
and
Inspirontm
notebooks, Dell
Precisiontm
mobile workstations, Dell MP3 players, and Dell
Aximtm
handhelds. |
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Notebook Computers. Dell offers three lines of notebook
computer systems. In fiscal 2006, Dell further expanded the
XPStm
line targeted at customers who require the highest performance
gaming or entertainment experience available. The
Latitudetm
line is designed to help business, government, and institutional
customers manage their total cost of ownership through managed
product lifecycles and the latest offerings in performance,
security, and communications. The
Inspirontm
line is targeted at consumers and small businesses desiring the
latest technology in a range of form factors to meet different
usage needs. Dell ranked number one in the U.S. and worldwide in
notebook computer shipments in calendar 2005. |
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Software and Peripherals. Dell offers Dell-branded
printers and displays, projectors, and a multitude of
competitively priced third-party peripheral products, a wide
range of software titles, notebook accessories, networking and
wireless products, digital cameras, power adapters, scanners,
and other products. |
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Software. Dell sells a wide range of third-party software
products, including operating systems, business and office
applications, anti-virus and related security software,
entertainment software, and products in various other categories. |
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Printers. Dell offers a wide array of Dell-branded
printers, ranging from photo, ink-jet and laser printers for
consumers to large multifunction lasers for corporate
workgroups. The Dell printer product line is focused on making
printing easier to buy, own, and use. All Dell printers feature
the Dell Ink Management
Systemtm
or Dell Toner Management
Systemtm,
which simplifies the purchasing process for supplies by
displaying ink or toner levels on the status window during every
print job and proactively prompting users to order replacement
cartridges directly from Dell. During fiscal 2006, Dell shipped
more than 6.3 million Dell-branded printers. |
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Displays. Dell offers a full line of display products
including CRT monitors, flat panel monitors, projectors, and
plasma and LCD TVs. In fiscal 2006, Dell continued its
leadership position in the flat panel monitor category with the
introductions of new 24 and
30-inch wide sizes. The
Dell projector line was expanded with the introductions of the
3400MP Ultra-Mobile Projector and the 5100MP SXGA+ resolution
projector. The Dell TV product line continued to grow in fiscal
2006 and now offers high definition or high definition ready LCD
TVs in 23, 26, 32 and
37-inch sizes and
plasma TVs in 42 and
50-inch sizes. |
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Servers & Networking. Dell provides
customers with standards-based
PowerEdgetm
line of network server hardware and
PowerConnecttm
networking solutions. |
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Servers. Dells standards-based
PowerEdgetm
line of servers is designed to provide customers affordable
performance, reliability, and scalability. Options include high
performance rack, blade, and tower servers for enterprise
customers and aggressively priced tower servers for small
organizations and networks. Dell ranks number one in the U.S.
and number two |
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worldwide in shipments of x86 servers (based on standard Intel
architecture). During calendar 2005, Dell maintained its number
two position in the category. |
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Networking Products. Dells
PowerConnecttm
switches connect computers and servers in small- to medium-sized
networks. PowerConnect products offer customers enterprise-class
features and reliability at a low cost. |
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Storage. Dell delivers a comprehensive portfolio
of storage solutions with services, including
DellIEMC and Dells
PowerVaulttm
lines of storage devices to help customers address todays
most significant challenges growth, backup and
compliance. To meet customers mission-critical
requirements, Dell offers a broad range of cost-effective tape
backup products, direct attached storage, network attached
storage, and storage area networks. Total storage revenue grew
38% during fiscal 2006 and continues to be supported by
Dells long-standing partnership with EMC Corporation. |
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Enhanced Services. By applying the direct business
model to its global services business, Dell seeks to simplify
customers computing experience by offering a full range of
flexible, tailored solutions. Dell offers a portfolio of seven
suites of services that help customers maximize
system performance, efficiency, and return on investment. |
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Assessment, Design and Implementation Services. Dell
provides a customer-focused approach to designing and
implementing non-proprietary standards-based infrastructures to
enhance performance, scalability and efficiency while helping to
minimize expenses and disruption to business operations. |
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Deployment Services. Dell deployment services can
simplify and accelerate the deployment and utilization of new
systems in customers information technology environments.
Dell offers scalable process and technology to get Dell systems
up and running quickly. |
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Asset Recovery and Recycling Services. Dell offers
logistical and disposal capabilities for a secure and
environmentally safe way to recover and dispose of owned and
leased information technology equipment. Various options,
including resale, recycling, donation, redeployment, employee
purchase, and lease return, help customers retain value while
avoiding regulatory fines and storage costs. |
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Training Services. Dell training services help develop
the skills that increase productivity with a comprehensive and
flexible suite of training services. Courses include hardware
and software training as well as PC skills and professional
development classes available through instructor-led, virtual or
self-directed online courses. The courses are designed for all
skill levels and range from personal finance to business
productivity to IT certification. |
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Enterprise Support Services. Dell can help customers
obtain maximum performance and availability from their server
and storage systems. Dell operates Enterprise Command Centers in
the United States, Ireland, China, Japan, and Malaysia to
provide rapid,
around-the-clock
support for critical enterprise systems. Dell enterprise support
services include warranty services and provide proactive
maintenance to help prevent problems as well as rapid response
and resolution of problems when they do occur. |
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Client Support Services. Dells suite of scalable
support services is designed for IT professionals and end-users
whose needs range from basic phone support to rapid response and
resolution of complex problems. Dell offers extended warranties
that help keep desktop and notebook PCs up and running so
customers remain productive. |
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Managed Lifecycle Services. Dells selective
outsourcing options for system deployment and technical support
allows customers to effectively manage costs and improve
efficiency. Dell managed deployment services provide integrated
refresh services with a single point of contact. Dell support
can ensure that end-users get the optimal level of technical
support they need. |
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Financial Services
Dell offers various financing alternatives, asset management
services, and other customer financial services for its business
and consumer customers in the U.S. through Dell Financial
Services L.P. (DFS), a joint venture between Dell
and CIT Group, Inc. (CIT). Financing through DFS is
one of many sources of funding that Dells customers may
select. For additional information about Dells financing
arrangements, see Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Off-Balance Sheet
Arrangements and Note 6 of Notes to Consolidated
Financial Statements included in Item 8
Financial Statements and Supplementary Data. Also see
Item 1A Risk Factors for
information about the risks associated with DFS.
Sales and Marketing
Dell sells its products and services directly to its customers
through dedicated sales representatives, telephone-based sales,
and online sales through www.dell.com. Dells
customers include large corporate, government, healthcare, and
education accounts, as well as
small-to-medium
businesses and individual consumers. Within each of Dells
geographic regions, Dell has divided its sales and marketing
resources among these various customer groups. No single
customer accounted for more than 10% of Dells consolidated
net revenue during any of the last three fiscal years. Dell
experiences seasonal sales trends. See
Item 1A Risk Factors for
information about the effect of seasonality on Dells
business and the risk associated with government contracts.
Dells sales and marketing efforts are organized around the
needs, trends, and characteristics of Dells customers.
Dells direct business model provides direct and continuous
feedback from its customers, thereby allowing Dell to develop
and refine its products and marketing programs for specific
customer groups. This constant flow of communication, which is
unique to the direct business model, also allows Dell to rapidly
gauge customer satisfaction and target new or existing products.
For large business and institutional customers, Dell maintains a
field sales force throughout the world. Dedicated account teams,
which include field-based system engineers and consultants, form
long-term relationships to provide our largest customers with a
single source of assistance and develop specific marketing
programs for these customers. For large, multinational
customers, Dell offers several programs designed to provide
single points of contact and accountability with global account
specialists, special global pricing, consistent service and
support programs across global regions, and access to central
purchasing facilities. Dell also maintains specific sales and
marketing programs targeted at federal, state, and local
governmental agencies as well as specific healthcare and
educational markets.
Dell markets its products and services to
small-to-medium
businesses and consumers primarily by advertising on television
and the Internet, advertising in a variety of print media, and
by mailing a broad range of direct marketing publications, such
as promotional pieces, catalogs, and customer newsletters. In
certain states and
non-U.S. locations,
Dell also operates Dell Direct Stores, which are kiosks
typically located within shopping centers that allow customers
to view Dell products in person and purchase online from Dell
with the assistance of a Dell expert.
Competition
Dell faces intense price competition when selling its products
and services. Price declines continued to hold strong in fiscal
2006, especially for lower-priced products and services. In
addition to several large branded companies, there are other
branded and generic competitors. Dell competes primarily based
on its technology, direct customer relationships, value,
performance, customer service, quality, and reliability.
Dells general practice is to aggressively pass on cost
declines to its customers in order to enhance customer value
while increasing global market share. Dell expects that the
competitive pricing environment will continue to be challenging,
and Dell expects to continue to reduce its pricing as necessary
in response to future competitive and economic conditions.
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However, Dell believes that the strength of Dells direct
business model, as well as its strong liquidity position, makes
the company better positioned than its competitors to continue
profitable growth in any business climate. See
Item 1A Risk Factors for
information about the risks associated with competition.
Manufacturing and Materials
Dell manufactures most of the products it sells and has
manufacturing locations worldwide to service its global customer
base. See Item 2 Properties for
information about Dells manufacturing locations. Dell
believes that its manufacturing processes and supply-chain
management techniques provide it a distinct competitive
advantage. Its
build-to-order
manufacturing process is designed to allow Dell to significantly
reduce cost while simultaneously providing customers the ability
to customize their product purchases. In addition, Dell
purchases some of its products from third-party original
equipment manufacturers and resells them under the Dell name.
Dells manufacturing process consists of assembly, software
installation, functional testing, and quality control. Testing
and quality control processes are also applied to components,
parts, and subassemblies obtained from third-party suppliers.
Quality control is maintained through the testing of components,
subassemblies, and systems at various stages in the
manufacturing process. Quality control also includes a burn-in
period for completed units after assembly, on-going production
reliability audits, failure tracking for early identification of
production and component problems, and information from
Dells customers obtained through services and support
programs. Dell is certified, worldwide, by the International
Standards Organization to the requirements of ISO 9001: 2000.
This includes the design, manufacture, and service of computer
products in all Dell regions.
Dell purchases materials, supplies, and product components from
a large number of suppliers. However, in some cases, multiple
sources of supply are not available. In other cases, Dell may
establish a working relationship with a single source if it
believes it is advantageous due to performance, quality,
support, delivery, capacity, or price considerations. Dell
currently relies on Intel Corporation as a sole source supplier
of processors and Microsoft Corporation as a sole source for
various operating system and application software products.
These relationships and dependencies have not caused material
disruptions in the past, and Dell believes that any disruptions
that may occur would not disproportionately disadvantage Dell
relative to its competitors. Also see
Item 1A Risk Factors for
information about the risks associated with sole source
suppliers.
Patents, Trademarks, and Licenses
Dell holds a worldwide portfolio of 1,581 patents and had an
additional 1,416 patent applications pending as of
February 3, 2006. The inventions claimed in those patents
and patent applications cover aspects of Dells current and
possible future computer system products, manufacturing
processes, and related technologies. Dell anticipates that its
worldwide patent portfolio will be of value in negotiating
intellectual property rights with others in the industry.
Dell has obtained U.S. federal trademark registration for
its DELL word mark and its Dell logo mark. Dell owns
registrations for 56 of its other marks in the U.S. As of
February 3, 2006, Dell had pending applications for
registration of 32 other trademarks. Dell believes that
establishment of the DELL mark and logo in the U.S. is
material to Dells operations. Dell has also applied for or
obtained registration of the DELL mark and several other marks
in approximately 180 other countries.
Dell has entered into a variety of intellectual property
licensing and cross-licensing agreements. In addition, Dell has
entered into nonexclusive licensing agreements with Microsoft
Corporation for various operating system and application
software. Dell has also entered into various software licensing
agreements with other companies.
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From time to time, other companies and individuals assert
exclusive patent, copyright, trademark, or other intellectual
property rights to technologies or marks that are important to
the technology industry or Dells business. Dell evaluates
each claim relating to its products and, if appropriate, seeks a
license to use the protected technology. The licensing
agreements generally do not require the licensor to assist Dell
in duplicating its patented technology, nor do these agreements
protect Dell from trade secret, copyright, or other violations
by Dell or its suppliers in developing or selling these
products. See Item 1A Risk Factors
for information about the risks associated with intellectual
property rights.
Employees
As of February 3, 2006, Dell had approximately 65,200
regular employees and DFS had approximately 900, compared to
approximately 55,200 for Dell and 800 regular employees for DFS
as of the end of fiscal 2005. Approximately 26,200 of these
employees were located in the U.S., and approximately 39,900
were located in other countries. While Dells workforce
located both inside and outside the U.S. increased during
fiscal 2006, the proportion of Dells workforce located
outside the U.S. increased due to a number of factors,
including Dells rapid international growth. Dell has never
experienced a work stoppage due to labor difficulties, and
believes that its employee relations are good. Workforce
diversity is an essential part of Dells commitment to
quality and the future of Dell, as recognized by Dells
receipt of the Diversity Award from the International Foundation
of Gender Education in calendar year 2005, as well as
Dells recognition as one of the Top
U.S. Companies for Leaders by the Human Resource
Planning Society and Hewitt Associates in calendar year 2005 for
its exceptional efforts in attracting, developing and retaining
a diverse workforce.
Government Regulation and Environment
Dells business is subject to regulation by various federal
and state governmental agencies. Such regulation includes the
radio frequency emission regulatory activities of the
U.S. Federal Communications Commission, the anti-trust
regulatory activities of the U.S. Federal Trade Commission
and Department of Justice, the consumer protection laws of the
Federal Trade Commission, the export regulatory activities of
the U.S. Department of Commerce and the
U.S. Department of Treasury, the import regulatory
activities of U.S. Customs and Border Protection, the
product safety regulatory activities of the U.S. Consumer
Product Safety Commission, and environmental regulation by a
variety of regulatory authorities in each of the areas in which
Dell conducts business. Dell is also subject to regulation in
other countries where it conducts business. Dell did not have
any material environmental remediation or other environmental
costs during fiscal 2006. See Item 1A
Risk Factors for information about the risks associated
with government regulation.
Backlog
Dell believes that backlog is not a meaningful indicator of net
revenue that can be expected for any period. There can be no
assurance that the backlog at any point in time will translate
into net revenue in any subsequent period, as unfilled orders
can generally be canceled at any time by the customer. At the
end of fiscal 2006, 2005, and 2004, backlog was not material.
Geographic Areas of Operations
Dell conducts operations worldwide and is managed in three
geographic segments: the Americas, EMEA, and APJ. The Americas
region, which is based in Round Rock, Texas, covers the U.S.,
Canada, and Latin America. Within the Americas, Dell is further
segmented into Business and U.S. Consumer. The Americas
Business segment includes sales to corporate, government,
healthcare, and education customers, while the
U.S. Consumer segment includes sales primarily to
individual consumers. Dell is consolidating its
U.S. Consumer segment into its Americas Business segment in
the first quarter of fiscal 2007. The EMEA region, which is
based in Bracknell, England,
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encompasses Europe, the Middle East, and Africa. The APJ region
covers the Pacific Rim, including Australia and New Zealand, and
is based in Singapore. In fiscal 2006, approximately 41% of
Dells consolidated net revenue was attributable to sales
outside the U.S.
Dells new manufacturing facility in North Carolina began
production in September of fiscal 2006 and Dells second
manufacturing facility in Xiamen, China began production in
January of fiscal 2006. Dell also opened new customer-contact
centers in Oklahoma, Canada, India, Germany and El Salvador
during fiscal 2006. Dell intends to continue to expand its
global infrastructure as its international business continues to
grow. See Item 1A Risk Factors for
information about certain risks of international activities. For
financial information about the results of Dells
geographical operating segments for each of the last three
fiscal years, see Note 9 of Notes to Consolidated Financial
Statements included in Item 8 Financial
Statements and Supplementary Data.
Dells corporate headquarters are located in Round Rock,
Texas. Its manufacturing facilities are located in Austin,
Texas; Winston-Salem, North Carolina; Lebanon, Tennessee;
Eldorado do Sul, Brazil; Limerick, Ireland; Penang, Malaysia;
and Xiamen, China. See Item 2
Properties.
Trademarks and Service Marks
Unless otherwise noted, trademarks appearing in this report are
trademarks of Dell. Dell disclaims proprietary interest in the
marks and names of others. EMC is a registered trademark of EMC
Corporation.
Available Information
Dell maintains an Internet website at www.dell.com. Dells
reports filed with the Securities and Exchange Commission
(SEC) (including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, any
amendments to these reports, and Section 16 filings) are
accessible through Dells Investor Relations website at
www.dell.com/investor, free of charge, as soon as reasonably
practicable after electronic filing. The public may read and
copy any materials filed by Dell with the SEC at the SECs
Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC at www.sec.gov.
8
Executive Officers of Dell
The following table sets forth the name, age, and position of
each of the persons who were serving as executive officers of
Dell as of March 15, 2006:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Title |
|
|
| |
|
|
Michael S. Dell
|
|
|
41 |
|
|
Chairman of the Board
|
Kevin B. Rollins
|
|
|
53 |
|
|
President and Chief Executive
Officer
|
Bradley R. Anderson
|
|
|
46 |
|
|
Senior Vice President, Product Group
|
Paul D. Bell
|
|
|
45 |
|
|
Senior Vice President, Europe,
Middle East and Africa
|
Jeffrey W. Clarke
|
|
|
43 |
|
|
Senior Vice President, Product Group
|
Stephen J. Felice
|
|
|
48 |
|
|
Vice President, Asia Pacific-Japan
|
Martin J. Garvin
|
|
|
53 |
|
|
Senior Vice President, Worldwide
Procurement
|
Alexander Gruzen
|
|
|
43 |
|
|
Senior Vice President, Product Group
|
John S. Hamlin
|
|
|
40 |
|
|
Senior Vice President, Global
eBusiness Group, Global Brand Marketing, and Dell International
Services
|
Joseph A. Marengi
|
|
|
52 |
|
|
Senior Vice President, Americas
|
Paul D. McKinnon
|
|
|
55 |
|
|
Senior Vice President, Human
Resources
|
John K. Medica
|
|
|
47 |
|
|
Senior Vice President, Product Group
|
Glenn E. Neland
|
|
|
57 |
|
|
Senior Vice President, Worldwide
Procurement and Global Customer Experience
|
Rosendo G. Parra
|
|
|
46 |
|
|
Senior Vice President, Americas
|
James M. Schneider
|
|
|
53 |
|
|
Senior Vice President and Chief
Financial Officer
|
Susan E. Sheskey
|
|
|
57 |
|
|
Vice President and Chief
Information Officer
|
Lawrence P. Tu
|
|
|
51 |
|
|
Senior Vice President, General
Counsel and Secretary
|
Michael S. Dell Mr. Dell currently
serves as Chairman of the Board of Directors of Dell. He has
held this role since he founded the company in 1984.
Mr. Dell also served as Chief Executive Officer of Dell
from 1984 until July 2004. He serves on the Foundation Board of
the World Economic Forum, serves on the executive committee of
the International Business Council, and is a member of the
U.S. Business Council. He also serves on the
U.S. Presidents Council of Advisors on Science and
Technology and sits on the governing board of the Indian School
of Business in Hyderabad, India.
Kevin B. Rollins Mr. Rollins currently
serves as a director and President and Chief Executive Officer
of Dell. In this role, he is responsible for Dells
day-to-day global
operations and establishes Dells strategic direction.
Mr. Rollins joined Dell in April 1996 as Senior Vice
President, Corporate Strategy, was named Senior Vice President,
General Manager Americas in May 1996, and was named
Vice Chairman in 1997. In 2001, Mr. Rollins title was
changed from Vice Chairman to President and Chief Operating
Officer. He was named Chief Executive Officer of Dell in July
2004. For 12 years prior to joining Dell, Mr. Rollins
was employed by Bain & Company, an international
strategy consulting firm, most recently serving as a director
and partner. Mr. Rollins received a Master of Business
Administration degree and a Bachelor of Arts degree from Brigham
Young University. Mr. Rollins is a member of the
universitys Presidents Leadership Council and the
Marriott School National Advisory Council at Brigham Young
University, where he founded and continues to sponsor the
Rollins Center for
E-Commerce. In April
2003, Mr. Rollins was appointed by President George W. Bush
to serve on the Advisory Committee for Trade Policy and
Negotiation, offering counsel to the U.S. Trade
Representative on matters of policy affecting national
interests. Mr. Rollins is also a member of the Technology
CEO Council, Executive Committee and the U.S. Business
Council. Mr. Rollins is also active in the American
Enterprise Institute and the Juvenile
9
Diabetes Research Foundation. Mr. Rollins serves as a
director on the board of Catalyst, a leading non-profit
organization dedicated to the advancement of women in the
workplace.
Bradley R. Anderson Mr. Anderson joined
Dell in July 2005 and serves as Senior Vice President, Product
Group. In this role, he is responsible along with
Mr. Clarke for worldwide development, marketing, quality,
and delivery into manufacturing of all Dell workstations,
servers, networking, and storage systems, as well as the
strategic technology direction for these businesses. Prior to
joining Dell, Mr. Anderson was Senior Vice President and
General Manager of the Industry Standard Servers business at
Hewlett-Packard Company (HP) where he was
responsible for HPs server solutions. Previously, he was
Vice President of Server, Storage and Infrastructure for HP,
where he led the team responsible for server storage, peripheral
and infrastructure products. Before joining HP in 1996,
Mr. Anderson held top management positions at Cray Research
in executive staff, field marketing, sales, finance and
corporate marketing. Mr. Anderson earned a bachelor of
science in Petroleum Engineering from Texas A&M University
and a Master of Business Administration from Harvard University.
He serves on the Texas A&M Look College of Engineering
Advisory Council.
Paul D. Bell Mr. Bell joined Dell in
1996 and has served as Senior Vice President, Europe, Middle
East and Africa since February 2000. In this role, Mr. Bell
is responsible for Dells operations in all markets in the
Europe, Middle East and Africa region, including Dells
manufacturing and customer-contact centers in that region. Prior
to this, Mr. Bell served as Senior Vice President, Home and
Small Business. Prior to joining Dell in July 1996,
Mr. Bell was a management consultant with Bain &
Company for six years, including two years as a consultant for
Dell. Mr. Bell received bachelors degrees in Fine
Arts and Business Administration from Pennsylvania State
University and a Master of Business Administration degree from
the Yale School of Organization and Management.
Jeffrey W. Clarke Mr. Clarke has served
as Senior Vice President, Product Group since January 2003. In
this role, he is responsible, along with Mr. Anderson, for
worldwide development, marketing, quality, and delivery into
manufacturing of all Dell workstations, servers, networking, and
storage systems, as well as the strategic technology direction
for these businesses. In addition, Mr. Clarke has similar
responsibilities for the OptiPlexTM and DimensionTM desktop
businesses. Mr. Clarke joined Dell in 1987 as a quality
engineer and has served in a variety of engineering and
management roles. In 1995 Mr. Clarke became the director of
desktop development, and from November 2001 to January 2003 he
served as Vice President and General Manager, Relationship
Product Group. Mr. Clarke received a bachelors degree
in Electrical Engineering from the University of Texas at
San Antonio.
Stephen J. Felice Mr. Felice was named
Vice President, Asia Pacific-Japan in August 2005.
Mr. Felice leads Dells operations throughout that
region, including manufacturing and customer service centers in
Penang, Malaysia, and Xiamen, China. Mr. Felice joined Dell
in February 1999 and held various executive roles in Dells
sales and consulting services organizations. From February 2002
until July 2005, Mr. Felice was Vice President, Corporate
Business Group, Dell Americas. Prior to joining Dell,
Mr. Felice served as Chief Executive Officer and President
of DecisionOne Corp. Under Mr. Felices guidance, that
company became the largest independent provider of multivendor
computer maintenance and technology support services in North
America. Mr. Felice also served as Vice President, Planning
and Development, with Bell Atlantic Customer Services. He spent
five years with Shell Oil in Houston. Mr. Felice holds a
bachelors degree in business administration from the
University of Iowa and a Master of Business Administration
degree from the University of Houston.
Martin J. Garvin Mr. Garvin is Senior
Vice President, Worldwide Procurement. In this role he shares
responsibility with Mr. Neland for procurement and supply
chain activities. Mr. Garvin joined Dell in August 1997,
and until March 2003 served as Vice President, Worldwide
Procurement where he and Mr. Neland shared responsibility
for global supply chain optimization, including responsibility
for cost, quality, availability, technology, and service for all
computer system commodities and sub-systems. Prior to joining
Dell, Mr. Garvin held a variety of executive level
positions at Hewlett-
10
Packard Company, Sun Microsystems Inc., and NetEdge Systems,
Inc. Mr. Garvin holds a Master in Business Administration
and a Bachelor in Biological Sciences from California State
University at San Jose.
Alexander Gruzen Mr. Gruzen joined Dell
as Senior Vice President, Product Group in August 2004. In this
role, he is responsible for worldwide development, marketing,
quality, and delivery into manufacturing of Dell notebooks,
imaging and the strategic technology direction for these product
lines. Prior to joining Dell, Mr. Gruzen was employed by
Hewlett-Packard Company, last serving as Senior Vice President
and General Manager of the Mobile Computing Global Business
Unit. Prior to the merger of HP and Compaq Computer Corporation
in 2002, Mr. Gruzen was employed by Compaq where he served
as Vice President and General Manager, Mobile Division, Access
Business Group after holding the position of Vice President,
Asia Consumer Group. Mr. Gruzen joined Compaq in 1999.
Mr. Gruzen holds Bachelor of Science and Master of Science
degrees in Aeronautical and Astronautical Engineering from the
Massachusetts Institute of Technology, and a Master of Business
Administration degree from Harvard University.
John S. Hamlin Mr. Hamlin was named
Senior Vice President, Global eBusiness Group, Global Brand
Marketing and Dell International Services in November 2005. In
this role Mr. Hamlin is responsible for Dells
worldwide eBusiness, including online sales, service technology
and content development; Dells worldwide brand and
advertising strategy; and Dell International Services, which is
Dells global network of customer care centers. In February
2004, Mr. Hamlin was assigned management responsibility for
Dells international customer care centers. From January
2003 until November 2003, Mr. Hamlin served as Senior Vice
President, U.S. Consumer Business. From May 2000 until
January 2003, he was Vice President, U.S. Consumer
Business. Prior to May 2000, Mr. Hamlin served as Vice
President, Home and Small Business in Japan, and managed
Dells preferred accounts segment in Japan. Mr. Hamlin
joined Dell in March 1996, and held a variety of positions
within Dell prior to moving to Japan. Prior to joining Dell,
Mr. Hamlin was in venture capital for three years and was a
management consultant for Bain & Company for six years.
Mr. Hamlin is a graduate of Dartmouth College and holds a
Master in Business Administration degree from Harvard Business
School.
Joseph A. Marengi Mr. Marengi joined
Dell in 1997 and serves as Senior Vice President, Americas. In
this position, Mr. Marengi shares responsibility with
Mr. Parra for Dells Americas Business units, serving
corporate, government, education, healthcare, consumer, and
small and medium business customers in the United States,
Canada, and Latin America. He is also responsible for
Dells services business, for Dells manufacturing
operations in Austin, Nashville, Winston-Salem, and Eldorado do
Sul, Brazil. Prior to joining Dell, Mr. Marengi worked at
Novell, Inc., most recently serving as its President and Chief
Operating Officer. Prior to joining Novell in 1989,
Mr. Marengi served as Vice President of Channel Sales for
Excelan, Inc. and in various other executive, sales, and
information management positions. From 1978 through 1981,
Mr. Marengi served in the U.S. Coast Guard and Coast
Guard Reserve, reaching the rank of Lieutenant Commander.
Mr. Marengi earned a bachelors degree in Public
Administration from the University of Massachusetts and a Master
in Management degree from the University of Southern California.
Mr. Marengi is a member of the board of directors of
Hovnanian Enterprises, Inc. serves on the Corporate Advisory
Board of the USC Marshall School of Business.
Paul D. McKinnon Mr. McKinnon joined
Dell in November 1997 as Vice President, Human Resources. He was
named Senior Vice President, Human Resources in May 2000 and
continues to serve in that role. He is responsible for all human
resources functions and activities as well as security, global
diversity, and corporate communications. From July 1994 to
November 1997, Mr. McKinnon was a principle of McKinnon
Consulting. Prior to July 1994, Mr. McKinnon was partner of
Novations Group and Harbridge House Inc., and from 1982 to 1986
was an Assistant Professor at the University of Virginia. He
holds a bachelors degree in History and a Master in
Organizational Behavior from Brigham Young University, and a
doctorate in Organizational Studies from Massachusetts Institute
of Technology.
11
John K. Medica In January, 2006
Mr. Medica was named Senior Vice President, Product Group
responsible for all aspects of the customer experience including
product definition, design, development and customer support
across client, enterprise and peripheral product portfolios.
Prior to this role, he managed worldwide development, marketing,
quality, services, and delivery into manufacturing of all Dell
desktops, imaging and printing products, displays and other
peripherals for Dell. Mr. Medica joined Dell in 1993 as
Vice President, Portable Systems. In 1996, Mr. Medica was
named President and Chief Operating Officer of Dells Japan
division. Mr. Medica returned to the U.S. as Vice
President, Procurement in August 1997 and later served as Vice
President, Web Products Group and Vice President and General
Manager, Transactional Product Group. Prior to joining Dell,
Mr. Medica held a variety of development and operations
positions over a ten-year period at Apple Computer, Inc.
Mr. Medica graduated from Wake Forest University with a
Master in Business Administration and holds a Bachelor in
Electrical Engineering from Manhattan College.
Glenn E. Neland Mr. Neland is Senior
Vice President, Worldwide Procurement and Global Customer
Experience. In this role he shares responsibility with
Mr. Garvin for procurement and supply chain activities. He
also manages Dells customer experience initiatives on a
worldwide basis. He joined Dell in September 1997, and until
March 2003 served as Vice President, Worldwide Procurement,
Commodities, where he and Mr. Garvin shared responsibility
for global supply chain optimization, including responsibility
for cost, quality, availability, technology, and service for all
computer system commodities and sub-systems. Mr. Neland was
also responsible for notebook operations and portables
procurement. Before joining Dell, Mr. Neland held various
positions at Texas Instruments Incorporated, including General
Manager for notebooks, Vice President and General Manager of
Printing Systems, as well as other operations and engineering
positions. He holds a bachelors degree in electrical
engineering from the University of Illinois. Mr. Neland
serves on the Board of Directors of International Displayworks,
Inc.
Rosendo G. Parra Mr. Parra joined Dell
in 1993 and was named Senior Vice President, Americas in May
2001. In this position, he shares responsibility with
Mr. Marengi for Dells Americas Business units,
serving corporate, government, education, healthcare, consumer,
and small and medium business customers in the United States,
Canada, and Latin America. He is also responsible for
Dells services business for Dells manufacturing
operations in Austin, Nashville, Winston-Salem, and Eldorado do
Sul, Brazil. Prior to his current position, Mr. Parra held
various executive level positions including Senior Vice
President, Worldwide Home and Small Business Group; Senior Vice
President, Public Sector; Senior Vice President, Americas Public
and International Group. Prior to joining Dell, Mr. Parra
spent four years in various sales and general management
positions at GRiD Systems Corporation. Before joining GRiD,
Mr. Parra spent eleven years in various sales and
management positions for RadioShack Corporation. Mr. Parra
earned a bachelors degree in Marketing from the University
of Maryland. Mr. Parra serves on the Board of Directors of
Brinker International, Inc.
James M. Schneider Mr. Schneider serves
as Senior Vice President and Chief Financial Officer. In this
role, he is responsible for Dells finance function for all
business units worldwide, including the controller function,
corporate planning, tax, treasury, investor relations, corporate
development, real estate, risk management, and internal audit.
Mr. Schneider joined Dell in 1996 as Vice President of
Finance and Chief Accounting Officer, was named Senior Vice
President in 1998, and Chief Financial Officer in 2000. For
three years prior to joining Dell, Mr. Schneider was
employed by MCI Communications Corporation, last serving as
Senior Vice President of Corporate Finance. For 19 years
prior to joining MCI, Mr. Schneider was associated with
Price Waterhouse LLP, serving as a partner for 10 years.
Mr. Schneider holds a bachelors degree in Accounting
from Carroll College in Waukesha, Wisconsin, and is a Certified
Public Accountant. He is a member of the board of directors of
General Communications, Inc., Gap, Inc., and Lockheed Martin
Corporation. Mr. Schneider is also a member of the
Financial Executives Institute.
Susan E. Sheskey Ms. Sheskey was named
Vice President and Chief Information Officer in August 2005. Her
responsibilities span Dells global information systems and
technology infrastruc-
12
ture. Before becoming Chief Information Officer,
Ms. Sheskey was Dells Vice President of information
technology for the Americas Region. In this role, she had
responsibility for the development, deployment, and support of
Dell Global Sales, Services, Manufacturing and Fulfillment
Systems. Ms. Sheskey joined Dell in 1993 and has held
various executive positions in the information technology
organization where she has provided leadership vision and
delivered strategic IT solutions to the areas of sales,
manufacturing, fulfillment, services, procurement, data
warehouse, finance, and human resources. Prior to joining Dell,
Ms. Sheskey compiled key planning, development and
operational experience during 20 years with
Ameritechs corporate and services functions and at Ohio
Bell. Ms. Sheskey graduated from Miami University in
Oxford, Ohio with a bachelors degree in Zoology and
Geography.
Lawrence P. Tu Mr. Tu joined Dell as
Senior Vice President, General Counsel and Secretary in July
2004, and is responsible for overseeing Dells global legal
department and governmental affairs. Before joining Dell,
Mr. Tu served as Executive Vice President and General
Counsel at NBC Universal for three years. Prior to his position
at NBC, he was a partner with the law firm of
OMelveny & Myers LLP, where he focused on high
technology, Internet and media related transactions, and where
he served five years as managing partner of the firms Hong
Kong office. Mr. Tus prior experience also includes
serving as General Counsel Asia-Pacific for Goldman Sachs,
attorney for the U.S. State Department and law clerk for
U.S. Supreme Court Justice Thurgood Marshall. Mr. Tu
holds Juris Doctor and Bachelor of Arts degrees from Harvard
University, as well as a Masters degree from Oxford University,
where he was a Rhodes Scholar.
ITEM 1A RISK FACTORS
There are many risk factors that affect Dells business and
the results of its operations, some of which are beyond
Dells control. The following is a description of some of
the important risk factors that may cause the actual results of
Dells operations in future periods to differ substantially
from those currently expected or desired.
|
|
|
Declining general economic, business, or industry conditions
may cause reduced net revenue. Dell is a global company with
customers in virtually every business and industry. If the
economic climate in the U.S. or abroad deteriorates,
customers or potential customers could reduce or delay their
technology investments. Reduced or delayed technology
investments could decrease Dells net revenue and
profitability. |
|
|
Dells failure to maintain a cost advantage may result
in reduced market share, revenue, and profitability.
Dells success is partly based on its ability to profitably
offer its products at a lower price than its competitors.
However, many companies compete with Dell globally in all
aspects of its business. Dell cannot guarantee that it will
maintain its cost advantage if its competitors improve their
cost structure or business model, or take other actions that
affect Dells current competitive advantage. Dell may lose
market share, revenue, and profitability if it does not maintain
its cost advantage. |
|
|
Dells ability to generate substantial
non-U.S. net
revenue faces many additional risks and uncertainties. Sales
outside the U.S. accounted for approximately 41% of
Dells consolidated net revenue in fiscal 2006. Dells
future growth rates and success are dependent on continued
growth in international markets. Dells international
operations face many risks and uncertainties, including varied
local economic and labor conditions, political instability, and
unexpected changes in the regulatory environment, trade
protection measures, tax laws (including U.S. taxes on
foreign operations), and foreign currency exchange rates. Any of
these factors could adversely affect Dells operations. |
|
|
Dells overall profitability may not meet expectations
if its product, customer, and geographic mix is substantially
different than anticipated. Dells profit margins vary
among its products, customers, and geographies. If Dells
mix of any of these is substantially different from what it
anticipates in any particular period, Dells profitability
could be less than expected. |
13
|
|
|
Infrastructure failures could harm Dells business.
Dell depends on its information technology and manufacturing
infrastructure to achieve its business objectives. If a problem,
such as a computer virus, intentional disruption by a
third-party, natural disaster, manufacturing failure, or
telephone system failure impairs Dells infrastructure,
Dell may be unable to book or process orders, manufacture, and
ship in a timely manner or otherwise carry on its business. An
infrastructure disruption could cause Dell to lose customers and
revenue, and could require Dell to incur significant expense to
eliminate these problems and address related security concerns.
The harm to Dells business could be even greater if it
occurs during a period of disproportionately heavy demand. |
|
|
Dells failure to effectively manage a product
transition could reduce the demand for Dells products and
the profitability of Dells operations. Continuing
improvements in technology mean frequent new product
introductions, short product life cycles, and improvement in
product performance characteristics. Product transitions present
execution challenges and risks for Dell. If Dell is unable to
effectively manage a product transition, its business and
results of operations could be unfavorably affected. |
|
|
Disruptions in component availability could unfavorably
affect Dells performance. Dells direct business
model gives it the ability to operate with reduced levels of
component and finished goods inventories. Dells financial
success is partly due to its supply chain management practices,
including its ability to achieve rapid inventory turns. Because
Dell maintains minimal levels of component inventory, a
disruption in component availability could harm Dells
financial performance and its ability to satisfy customer needs. |
|
|
Dells reliance on suppliers creates risks and
uncertainties. Dells manufacturing process requires a
high volume of quality components from third-party suppliers.
Defective parts received from these suppliers could reduce
product reliability and harm the reputation of Dells
products. Reliance on suppliers subjects Dell to possible
industry shortages of components and reduced control over
delivery schedules (which can harm Dells manufacturing
efficiencies), and increases in component costs (which can harm
Dells profitability). |
|
|
Dell could experience manufacturing interruptions, delays, or
inefficiencies if it is unable to timely and reliably procure
components from single-sourced suppliers. Dell maintains
several single-source supplier relationships, either because
alternative sources are not available or the relationship is
advantageous due to performance, quality, support, delivery,
capacity, or price considerations. If the supply of a critical
single-source material or component is delayed or curtailed,
Dell may not be able to ship the related product in desired
quantities and in a timely manner. Even where alternative
sources of supply are available, qualification of the
alternative suppliers and establishment of reliable supplies
could result in delays and a possible loss of sales, which could
harm operating results. |
|
|
Dells failure to effectively hedge its exposure to
fluctuations in foreign currency exchange rates and interest
rates could unfavorably affect its performance. Dell
utilizes derivative instruments to hedge its exposure to
fluctuations in foreign currency exchange rates and interest
rates. Some of these instruments and contracts may involve
elements of market and credit risk in excess of the amounts
recognized in the Consolidated Financial Statements. For
additional information about risk on financial instruments, see
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operation Market Risk. Further, Dells
revenue from its international operations may decrease if it
does not effectively hedge its exposure to currency fluctuations. |
|
|
Dells continued business success may depend on
obtaining licenses to intellectual property developed by others
on commercially reasonable and competitive terms. If Dell or
its suppliers are unable to obtain desirable technology
licenses, Dell may be prevented from marketing products, could
be forced to market products without desirable features, or
could incur substantial costs to redesign its products, defend
legal actions, or pay damages. While Dells suppliers may
be contractually obligated to indemnify Dell against such
expenses, those suppliers could be unable |
14
|
|
|
to meet their obligations. Also, Dells operating costs
could increase because of copyright levies or similar fees by
rights holders and collection agencies in EMEA and other
countries. |
|
|
Dells failure to attract and retain qualified personnel
could lead to a loss of revenue or profitability. Dell might
not attract and retain enough qualified personnel to support its
anticipated rapid international growth and its increasingly
complex product and service offerings. Dell relies in part on
equity awards to attract and retain qualified personnel. Due to
new accounting regulations requiring the expensing of stock
options, if Dell continues to rely on equity compensation to
attract and retain qualified personnel, Dells compensation
costs may increase. |
|
|
Loss of government contracts could harm Dells
business. Government contracts are subject to future funding
that may affect the extension or termination of programs, and
are subject to the right of the government to terminate for
convenience or non-appropriation. In addition, if Dell violates
legal or regulatory requirements, the government could suspend
or disbar Dell as a contractor. Dells suspension or
disbarment as a government contractor would unfavorably affect
Dells net revenue and profitability. |
|
|
If DFS is unable to facilitate financing for Dells
customers, Dell may be required to self-finance these activities
or use alternative sources of financing. Dell depends on
DFS, a joint venture with CIT, to facilitate financing for a
significant number of customers. DFS depends, in part, on CIT to
fund these transactions through the capital markets. If CIT is
unable to access the capital markets or ceases to operate as a
finance company, DFS may not be able to fully facilitate the
funding of Dell customer financing arrangements. As a result,
Dell may be required to self-finance these activities or use
alternative sources of financing for its customers. |
|
|
Dells net revenue may not meet expectations if it is
unable to accurately predict the effect of seasonality on its
business. There are seasonal sales trends. During
Dells third fiscal quarter, sales to government customers
(particularly the U.S. federal government) are typically
stronger than in other quarters, while sales in EMEA are often
weaker than in other quarters. Consumer sales are typically
strongest during Dells fourth fiscal quarter. As Dell
sales in the highly seasonal consumer sector increase, this
seasonal effect may increase. If Dell fails to accurately
anticipate seasonal trends, Dells net revenue and
profitability could be less than expected. |
|
|
Current environmental laws, or laws enacted in the future,
may harm Dells business. Dells operations are
subject to environmental regulation in all of the areas in which
Dell conducts business. Some of Dells manufacturing
operations use regulated substances such as lead. If Dell does
not comply with the rules and regulations regarding the use and
sale of such regulated substances, Dell could be subject to
liability. Dell could also face substantial costs and
liabilities in connection with product take-back legislation.
Beginning in August 2005, Dell was subject to the European Union
Waste Electrical and Electronic Equipment Directive as enacted
by individual European Union countries (WEEE
Legislation). The WEEE Legislation makes producers of
electrical goods, including computers and printers, responsible
for collection, recycling, treatment, and disposal of recovered
products. Dell does not expect that the impact of the WEEE
Legislation and other similar legislation adopted in the U.S.
and other countries will have a substantial unfavorable impact
on Dells business. |
|
|
Armed hostilities, terrorism, natural disasters, or public
health issues could harm Dells business. Armed
hostilities, terrorism, natural disasters, or public health
issues, whether in the U.S. or abroad, could cause damage
or disruption to Dell, its suppliers or customers, or could
create political or economic instability, any of which could
harm Dells business. These events could cause a decrease
in demand for Dells products, could make it difficult or
impossible for Dell to deliver products or for its suppliers to
deliver components, and could create delay and inefficiencies in
Dells supply chain. |
15
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
As of February 3, 2006, Dell owned or leased a total of
approximately 14.8 million square feet of office,
manufacturing, and warehouse space worldwide, approximately
8.6 million square feet of which is located in the U.S. and
the remainder located in other countries. Dell believes its
properties are adequate for its current needs and that it can
readily meet its requirements for additional space at
competitive rates by extending expiring leases or by finding
alternative space.
Americas Properties
Dells principal offices in Dells Americas region are
located in Round Rock, Texas (north of Austin), and its
U.S. manufacturing facilities are located in Austin, Texas;
Lebanon, Tennessee; and Winston-Salem, North Carolina which
support both Dells U.S. Consumer and Americas
Business regions.
Dell owns approximately 340 acres of land in Round Rock,
Texas, on which are located six office buildings. These
buildings, comprising Dells Round Rock campus, contain an
aggregate of approximately 2.1 million square feet of
office and lab space. Dells sales, marketing, and support
staff for the Americas region, as well as the corporate
headquarters and support functions, are located on the Round
Rock campus.
Dell also owns approximately 550 acres of land in Austin,
Texas, referred to as the Parmer Campus. Approximately
2.2 million square feet of office, lab, manufacturing, and
distribution space are located on the campus, including office
and lab buildings totaling 1.3 million square feet and
manufacturing/distribution facilities totaling
900,000 square feet.
Dell owns approximately 1.1 million square feet of space in
Nashville and Lebanon, Tennessee. This includes a
559,000 square foot office building in Nashville, Tennessee
that houses sales, technical support, and administrative
support; a 300,000 square foot manufacturing facility in
Lebanon, Tennessee; and a 303,000 square foot distribution
manufacturing facility in Nashville, Tennessee.
In addition to the campuses, Dell also leases approximately
3.3 million square feet of additional space, in various
locations within the Americas region. Approximately
1.6 million square feet is used for manufacturing and
distribution with the remaining 1.7 million square feet
used for office and lab buildings, customer-contact centers and
professional service sites.
Dell has established technical and customer support and related
operations in Canada, Panama City, Panama and San Salvador,
El Salvador as well as a design center in Brazil.
In fiscal 2006, Dell completed construction of a new
750,000 square feet manufacturing facility in
Winston-Salem, North Carolina. In addition, Dell will complete
construction of a 120,000 square feet facility in Oklahoma
City, Oklahoma on approximately 56 acres that will be fully
operational in early fiscal 2007.
EMEA Properties
Dells principal offices in Dells EMEA region are
located in Bracknell, England, and its manufacturing facilities
are located in Limerick, Ireland.
As of February 3, 2006, properties located in Dells
EMEA region consisted of approximately 2.3 million square
feet of office and manufacturing space in approximately 28
countries. These countries include Germany, France, Italy, and
the United Kingdom. Approximately 1.3 million square feet
of this space is leased property, with lease expiration dates
ranging from February 2006 to June
16
2024. Dell owns approximately 1.0 million square feet of
space. Dell has approximately 978,000 square feet of office
and manufacturing space in Ireland, the majority of which is
owned.
APJ Properties
Dells principal offices in Dells APJ region are
located in Singapore, and its manufacturing facilities are
located in Penang, Malaysia and Xiamen, China.
As of February 3, 2006, properties located in Dells
APJ region consist of an aggregate of approximately
3.9 million square feet of office and manufacturing space
in approximately 10 countries. Approximately 2.7 million
square feet of this space is leased property, with lease
expiration dates ranging from February 2006 to June 2024. Dell
owns approximately 1.2 million square feet of space.
Dell owns two facilities in Penang, Malaysia totaling
580,000 square feet of office and manufacturing space. Both
facilities are located on land leased from the State Authority
of Penang. Dell owns approximately 595,000 square feet of
office and manufacturing space in Xiamen, China. Dell also
leases approximately 1.7 million square feet of office
space in Bangalore, Mohali, Chandigarh and Hyderabad, India.
ITEM 3 LEGAL PROCEEDINGS
Dell is subject to various legal proceedings and claims arising
in the ordinary course of business. Dells management does
not expect that the results in any of these legal proceedings
will have a material adverse effect on Dells financial
condition, results of operations, or cash flows.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No matter was submitted to a vote of Dells stockholders,
through the solicitation of proxies or otherwise, during the
fourth quarter of fiscal 2006.
PART II
|
|
ITEM 5 |
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES |
Market Information
Dells common stock is listed on The Nasdaq National Market
under the symbol DELL. Information regarding the market prices
of Dells common stock may be found in Note 11 of
Notes to Consolidated Financial Statements included in
Item 8 Financial Statements and
Supplementary Data.
Holders
As of February 21, 2006, there were 33,465 holders of
record of Dells common stock.
Dividends
Dell has never declared or paid any cash dividends on shares of
its common stock and currently does not anticipate paying any
cash dividends in the immediate future. Any future determination
to pay cash dividends will be at the discretion of Dells
Board of Directors.
17
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Dell has a share repurchase program that authorizes it to
purchase shares of common stock in order to both distribute cash
to stockholders and manage dilution resulting from shares issued
under Dells equity compensation plans. However, Dell does
not currently have a policy that requires the repurchase of
common stock in conjunction with share-based payment
arrangements. As of February 3, 2006, Dells share
repurchase program authorized the purchase of up to
1.5 billion shares of common stock at an aggregate cost not
to exceed $30 billion. As of February 3, 2006,
123 million shares of common stock at an aggregate cost of
$4.4 billion were available for future purchases under the
share repurchase program. The following are details of
repurchases under this program for the fourth quarter of fiscal
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Maximum | |
|
|
|
|
|
|
Number | |
|
Number of | |
|
|
|
|
|
|
of Shares | |
|
Shares that | |
|
|
|
|
|
|
Repurchased | |
|
May Yet Be | |
|
|
|
|
|
|
as Part of | |
|
Repurchased | |
|
|
Total Number | |
|
Average | |
|
Publicly | |
|
Under the | |
|
|
of Shares | |
|
Price Paid | |
|
Announced | |
|
Announced | |
Period |
|
Repurchased(a) | |
|
per Share | |
|
Plan | |
|
Plan(b) | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except average price paid per share) | |
Repurchases from October 29,
2005 through November 25, 2005
|
|
|
28 |
|
|
$ |
29.76 |
|
|
|
28 |
|
|
|
161 |
|
Repurchases from November 26,
2005 through December 30, 2005
|
|
|
16 |
|
|
$ |
31.33 |
|
|
|
16 |
|
|
|
145 |
|
Repurchases from December 31,
2005 through February 3, 2006
|
|
|
22 |
|
|
$ |
30.20 |
|
|
|
22 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
66 |
|
|
$ |
30.29 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
All shares were purchased in open-market transactions. |
|
(b) |
|
Dells share repurchase program was announced on
February 20, 1996; up to 1.5 billion shares of common
stock at an aggregate cost not to exceed $30 billion are
currently authorized to be purchased. |
18
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operation and Item 8 Financial
Statements and Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
January 31, | |
|
February 1, | |
|
|
2006(a) | |
|
2005(b) | |
|
2004 | |
|
2003 | |
|
2002(d) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except per share data) | |
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
55,908 |
|
|
$ |
49,205 |
|
|
$ |
41,444 |
|
|
$ |
35,404 |
|
|
$ |
31,168 |
|
|
Gross margin
|
|
|
9,950 |
|
|
|
9,015 |
|
|
|
7,552 |
|
|
|
6,349 |
|
|
|
5,507 |
|
|
Operating income
|
|
|
4,347 |
|
|
|
4,254 |
|
|
|
3,544 |
|
|
|
2,844 |
|
|
|
1,789 |
|
Net income
|
|
$ |
3,572 |
|
|
$ |
3,043 |
|
|
$ |
2,645 |
|
|
$ |
2,122 |
|
|
$ |
1,246 |
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.49 |
|
|
$ |
1.21 |
|
|
$ |
1.03 |
|
|
$ |
0.82 |
|
|
$ |
0.48 |
|
|
|
Diluted
|
|
$ |
1.46 |
|
|
$ |
1.18 |
|
|
$ |
1.01 |
|
|
$ |
0.80 |
|
|
$ |
0.46 |
|
Number of weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,403 |
|
|
|
2,509 |
|
|
|
2,565 |
|
|
|
2,584 |
|
|
|
2,602 |
|
|
|
Diluted
|
|
|
2,449 |
|
|
|
2,568 |
|
|
|
2,619 |
|
|
|
2,644 |
|
|
|
2,726 |
|
Cash Flow and Balance Sheet
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$ |
4,839 |
|
|
$ |
5,310 |
|
|
$ |
3,670 |
|
|
$ |
3,538 |
|
|
$ |
3,797 |
|
|
Cash, cash equivalents and
investments(c)
|
|
|
11,749 |
|
|
|
14,101 |
|
|
|
11,922 |
|
|
|
9,905 |
|
|
|
8,287 |
|
|
Total assets
|
|
|
23,109 |
|
|
|
23,215 |
|
|
|
19,311 |
|
|
|
15,470 |
|
|
|
13,535 |
|
|
Long-term debt
|
|
|
504 |
|
|
|
505 |
|
|
|
505 |
|
|
|
506 |
|
|
|
520 |
|
|
Total stockholders equity
|
|
$ |
4,129 |
|
|
$ |
6,485 |
|
|
$ |
6,280 |
|
|
$ |
4,873 |
|
|
$ |
4,694 |
|
|
|
|
(a) |
|
Results for fiscal 2006 include charges aggregating
$442 million ($338 million of other product charges
and $104 million in selling, general and administrative
expenses) related to the cost of servicing or replacing certain
OptiPlextm
systems that include a vendor part that failed to perform to
Dells specifications, workforce realignment, product
rationalizations, excess facilities and a write-off of goodwill
recognized in the third quarter. The related tax effect of these
items was $104 million. Fiscal 2006 also includes an
$85 million income tax benefit related to a revised
estimate of taxes on the repatriation of earnings under the
American Jobs Creation Act of 2004 recognized in the second
quarter. |
|
(b) |
|
Results for the year ended January 28, 2005 include an
income tax charge of $280 million related to the
repatriation of earnings under the American Jobs Creation Act of
2004 recorded in the fourth quarter. |
|
(c) |
|
Financing receivables have been separately classified on the
balance sheet as of February 3, 2006. As a result, certain
balances previously included in investments have been
reclassified as financing receivables to conform to the fiscal
2006 presentation. These reclassifications have no effect on the
results of operations or stockholders equity as previously
reported. |
|
(d) |
|
Includes a pre-tax charge of $742 million. Approximately
$482 million relates to employee termination benefits,
facilities closure costs, and other asset impairments and exit
costs, while the balance of $260 million relates to
other-than-temporary declines in the fair value of equity
securities. |
19
|
|
ITEM 7 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION |
Overview
Our Company
We are a leading global diversified technology provider, focused
on providing custom solutions and the best customer experience
in the industry. Through our direct business model, we design,
develop, manufacture, market, sell, and support a broad range of
information technology systems and services that are uniquely
designed to satisfy specific customer requirements. Our direct
model begins and ends with our customers. We believe in entering
the market quickly with new and relevant technology to meet
changing customer needs, building systems to order, providing
expert services tailored to differing customer needs, and
maintaining low levels of inventory and capital investment. The
unique strengths of our direct model facilitate our consistent
delivery of profitability and strong performance across our
business segments.
Areas of Emphasis
Our objective is to maximize stockholder value by maintaining a
balance of three key financial metrics: liquidity,
profitability, and growth. Our strategy combines our direct
business model with a highly efficient manufacturing and supply
chain management organization and an emphasis on standards-based
technologies. Our business model provides us with a constant
flow of information about trends in customers plans and
requirements. These trends have shown an increased use of
standards-based technologies as well as a push towards
standardization of services. Unlike proprietary technologies
promoted by some of our top competitors, standards-based
technologies provide customers with flexibility and choice while
allowing their purchasing decisions to be based on performance,
cost, and customer service. Our business strategy continues to
focus on our enterprise business and expanding our capabilities
toward smaller, more powerful standardized systems where Dell is
uniquely positioned.
Business Environment
We believe that our business environment in fiscal 2007 will be
similar to that of fiscal 2006. Our business environment is
competitive, yet our growth potential remains strong. Recent
reports indicate the U.S. economy is reaching a level of
sustainable and healthy economic expansion, resulting in a
favorable IT spending outlook in fiscal 2007. Economic
conditions in our international markets, which are key to our
expansion goals, continue to improve, highlighted by
strengthening economies in Western Europe, expansion in
Asia-Pacific, and continued development in Latin America.
We believe that ample growth opportunities exist as
standards-based technologies become more prevalent and we
increase our presence in new and existing geographical regions,
expand into new locations, and pursue additional product and
service opportunities.
We conduct operations worldwide, and we manage our business in
three geographic segments: the Americas, EMEA, and APJ regions.
During the year, we began shipping products from our third
U.S. manufacturing facility located in North Carolina, and
opened new customer-contact facilities in Oklahoma City, Canada,
India, Germany and El Salvador. We expect to continue our
global expansion in the years ahead. Our investment in
international growth opportunities contributed to an increase in
our
non-U.S. revenue,
as a percentage of consolidated net revenue, from 38% in fiscal
2005 to 41% during fiscal 2006.
At calendar year end 2005, we were selling one of every three
PCs sold in the United States. While desktop sales
experience record low prices, we continue to see notebook
adoption accelerate. This trend of notebook adoption in the
U.S. market is expected to remain strong well into the
future. We expect the competitive pricing environment to
continue to be challenging mainly in desktop PCs and
20
mobility and expect to continue to reduce our pricing as
necessary in response to future competitive and economic
conditions. We are focused on attracting and retaining key
personnel as well as further investing in our global information
technology infrastructure to support our rapid global growth and
the increased complexity of our product and service offerings.
Fiscal Year Performance Highlights
|
|
|
|
|
Share position
|
|
|
|
We shipped an industry record
37.3 million units, resulting in a worldwide PC share
position of 18.2%.
|
Revenue
|
|
|
|
Revenue increased 14%
year-over-year to $55.9 billion, with unit shipments up 19%
year-over-year.
|
Operating Income(a)
|
|
|
|
Operating income exceeded
$4.3 billion for fiscal 2006, or 7.8% of revenue compared
to $4.3 billion or 8.6% of revenue in fiscal 2005.
|
Net Income(a)
|
|
|
|
Net income was $3.6 billion
for fiscal 2006, or 6.4% of revenue compared to
$3.0 billion or 6.2% of revenue in fiscal 2005.
|
Earnings Per Share(a)
|
|
|
|
Earnings per share increased 24% to
$1.46 for fiscal 2006 compared to $1.18 for fiscal 2005.
|
Share Repurchases
|
|
|
|
We spent $7.2 billion to
repurchase 204 million shares in fiscal 2006.
|
Results of Operations
The following table summarizes our consolidated results of
operations for each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
|
|
February 3, |
|
% of |
|
January 28, |
|
% of |
|
January 30, |
|
% of |
|
|
2006(a) |
|
Revenue |
|
2005(b) |
|
Revenue |
|
2004 |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
Net revenue
|
|
$ |
55,908 |
|
|
|
100.0 |
% |
|
$ |
49,205 |
|
|
|
100.0 |
% |
|
$ |
41,444 |
|
|
|
100.0 |
% |
Gross margin
|
|
$ |
9,950 |
|
|
|
17.8 |
% |
|
$ |
9,015 |
|
|
|
18.3 |
% |
|
$ |
7,552 |
|
|
|
18.2 |
% |
Operating expenses
|
|
$ |
5,603 |
|
|
|
10.0 |
% |
|
$ |
4,761 |
|
|
|
9.7 |
% |
|
$ |
4,008 |
|
|
|
9.7 |
% |
Operating income
|
|
$ |
4,347 |
|
|
|
7.8 |
% |
|
$ |
4,254 |
|
|
|
8.6 |
% |
|
$ |
3,544 |
|
|
|
8.6 |
% |
Income tax provision
|
|
$ |
1,002 |
|
|
|
1.8 |
% |
|
$ |
1,402 |
|
|
|
2.8 |
% |
|
$ |
1,079 |
|
|
|
2.6 |
% |
Net income
|
|
$ |
3,572 |
|
|
|
6.4 |
% |
|
$ |
3,043 |
|
|
|
6.2 |
% |
|
$ |
2,645 |
|
|
|
6.4 |
% |
Earnings per share
diluted
|
|
$ |
1.46 |
|
|
|
|
|
|
$ |
1.18 |
|
|
|
|
|
|
$ |
1.01 |
|
|
|
|
|
Consolidated Operations
In fiscal 2006, we grew revenue across all regions and product
categories over the prior year periods, other than Desktop PCs
in the Americas region, which declined 2% in fiscal
2006 compared to the prior year. This decline in Americas
Desktop PC revenue reflects continuing reductions in average
selling prices and an industry-wide shift to mobility products.
In fiscal 2006, consolidated net revenue increased 14% to
$55.9 billion, which included an extra week of operations
that contributed to almost one percentage point of added growth
for the year and almost three percentage points for the fourth
quarter of fiscal 2006. International performance was also an
important driver of this growth. Revenue outside the
U.S. represented 41% of fiscal 2006 consolidated revenue
compared to 38% in the prior year. Outside the U.S., we
produced 21% year-over-year revenue growth for fiscal 2006.
|
|
|
(a) |
|
Results for fiscal 2006 include charges aggregating
$442 million ($338 million of other product charges
and $104 million in selling, general, and administrative
expenses) related to the cost of servicing or replacing certain
OptiPlextm
systems that include a vendor part that failed to perform to our
specifications, workforce realignment, product rationalizations,
excess facilities, and a write-off of goodwill recognized in the
third quarter. The related tax effect of these items was
$104 million. Fiscal 2006 also includes an $85 million
income tax benefit related to a revised estimate of taxes on the
repatriation of earnings under the American Jobs Creation Act of
2004 recognized in the second quarter. |
|
(b) |
|
Results for fiscal 2005 include an income tax charge of
$280 million related to the repatriation of earnings under
the American Jobs Creation Act of 2004 recorded in the fourth
quarter. |
21
Our focus on balancing growth and profitability resulted in
record operating and net income of $4.3 billion and
$3.6 billion for fiscal 2006, respectively. Operating and
net income for fiscal 2005 were $4.3 billion and
$3.0 billion, respectively. Net income for fiscal 2006 and
fiscal 2005 includes an income tax repatriation benefit of
$85 million and a charge of $280 million,
respectively, pursuant to a favorable tax incentive provided by
the American Jobs Creation Act of 2004. The tax benefit and
charge relate to the fiscal 2006 repatriation of
$4.1 billion in foreign earnings.
Revenues by Segment
We conduct operations worldwide and manage our business in three
geographic segments: the Americas, EMEA, and APJ regions. The
Americas region covers the U.S., Canada, and Latin America.
Within the Americas, we are further segmented into Business and
U.S. Consumer. The Americas Business segment includes sales
to corporate, government, healthcare, education, and small and
medium business customers within the Americas region, while the
U.S. Consumer segment includes sales primarily to
individual consumers within the U.S. The EMEA region covers
Europe, the Middle East, and Africa. The APJ region covers Asia
and the Pacific Rim, including Australia and New Zealand. We are
consolidating our U.S. Consumer segment into our Americas
Business segment in the first quarter of fiscal 2007, and we
expect to reevaluate our segment reporting at that time.
The following table summarizes our net revenue by reportable
segment for each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
|
|
February 3, |
|
% of |
|
January 28, |
|
% of |
|
January 30, |
|
% of |
|
|
2006 |
|
Revenue |
|
2005 |
|
Revenue |
|
2004 |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$ |
28,481 |
|
|
|
51% |
|
|
$ |
25,339 |
|
|
|
52% |
|
|
$ |
21,888 |
|
|
|
53% |
|
|
U.S. Consumer
|
|
|
7,930 |
|
|
|
14% |
|
|
|
7,601 |
|
|
|
15% |
|
|
|
6,715 |
|
|
|
16% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
36,411 |
|
|
|
65% |
|
|
|
32,940 |
|
|
|
67% |
|
|
|
28,603 |
|
|
|
69% |
|
EMEA
|
|
|
12,873 |
|
|
|
23% |
|
|
|
10,787 |
|
|
|
22% |
|
|
|
8,495 |
|
|
|
21% |
|
Asia Pacific-Japan
|
|
|
6,624 |
|
|
|
12% |
|
|
|
5,478 |
|
|
|
11% |
|
|
|
4,346 |
|
|
|
10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$ |
55,908 |
|
|
|
100% |
|
|
$ |
49,205 |
|
|
|
100% |
|
|
$ |
41,444 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Americas revenues
increased 11% on unit growth of 13% in fiscal 2006 compared
to 15% on unit growth of 17% in fiscal 2005. The fiscal 2006
increase includes 12% growth in our Americas Business segment
and a 4% increase in our U.S. Consumer segment during the
same periods. Mobility led the segments revenue growth in
both fiscal 2006 and 2005, supported by an improvement in
corporate spending during the year. During fiscal 2006, we began
shipping products from our third U.S. manufacturing
facility located in North Carolina, opened new customer contact
facilities in Oklahoma City, Canada, and El Salvador, and
expanded our small parts hub in Ohio. |
|
|
|
|
|
Business Americas Business revenue
increased 12% in fiscal 2006 compared to 16% revenue growth in
fiscal 2005. Corporate growth and Americas International, which
includes countries in the North and South America other than the
United States, drove the majority of the increase in revenue in
the Americas. Americas International produced strong revenue
growth of 30% year-over-year for fiscal 2006. Our federal
business experienced weak demand for most of fiscal 2006,
resulting in a year-over-year decline in fiscal 2006. |
|
|
|
Consumer U.S. Consumer revenue
grew 4% in fiscal 2006 compared to 13% in fiscal 2005.
U.S. Consumer revenue growth slowed as compared to fiscal
2005 due to a 14% decline in desktop revenue and overall
competitive price pressure. As |
22
|
|
|
|
|
notebooks become more affordable, we continue to see a positive
shift to mobility products in U.S. Consumer and our other
segments. We produced strong unit growth in our mobility
products of 55% during fiscal 2006; however, this growth was
partially offset by a 20% decline in average revenue per-unit
sold as product mix continued to shift toward lower-priced
products. |
|
|
|
EMEA EMEA revenue grew 19% on unit
growth of 28% in fiscal 2006 compared to 27% revenue growth
on 31% unit growth in fiscal 2005. Revenue growth occurred
primarily in the United Kingdom, France, and Germany in fiscal
2006, with Germany driving the regions growth.
Year-over-year revenue growth for the United Kingdom slowed to
12% for fiscal 2006 as compared to 32% for fiscal 2005, due to
weaker performance in our relationship business, which consists
primarily of sales to corporate business accounts. All product
categories in this region experienced growth for fiscal 2006
with mobility, enhanced services and software and peripherals
revenues posting strong gains. |
|
|
Asia Pacific-Japan In fiscal 2006,
year-over-year net revenue growth was 21% on unit growth of 30%
in fiscal 2006 compared to 26% revenue growth on 29% unit
growth in fiscal 2005. The regions strong revenue growth
in fiscal 2006 was led by growth in China. In fiscal 2006, South
Korea, India, Malaysia, and Singapore produced significant
year-over-year growth at a higher rate than the overall region.
All product categories in this region experienced growth for
fiscal 2006. Driving the growth were increases in enhanced
services, software and peripherals, and mobility. |
For additional information regarding our segments, see
Note 9 of Notes to Consolidated Financial
Statements included in Item 8
Financial Statements and Supplementary Data.
Revenues by Product and Services Categories
Beginning the first quarter of fiscal 2006 we began providing
new supplemental revenue reporting by product and services
categories as illustrated in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
|
|
February 3, 2006 |
|
January 28, 2005 |
|
January 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
% of |
|
|
|
% of |
|
|
Dollars |
|
Revenue |
|
Dollars |
|
Revenue |
|
Dollars |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in billions, except percentages) |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs
|
|
$ |
21.1 |
|
|
|
38% |
|
|
$ |
20.8 |
|
|
|
42% |
|
|
$ |
18.7 |
|
|
|
45% |
|
|
Mobility
|
|
|
14.1 |
|
|
|
25% |
|
|
|
11.8 |
|
|
|
24% |
|
|
|
9.7 |
|
|
|
23% |
|
|
Software & Peripherals
|
|
|
8.5 |
|
|
|
15% |
|
|
|
6.7 |
|
|
|
14% |
|
|
|
4.9 |
|
|
|
12% |
|
|
Servers & Networking
|
|
|
5.4 |
|
|
|
10% |
|
|
|
4.9 |
|
|
|
10% |
|
|
|
4.3 |
|
|
|
10% |
|
|
Enhanced Services
|
|
|
4.9 |
|
|
|
9% |
|
|
|
3.7 |
|
|
|
7% |
|
|
|
2.7 |
|
|
|
7% |
|
|
Storage
|
|
|
1.9 |
|
|
|
3% |
|
|
|
1.3 |
|
|
|
3% |
|
|
|
1.1 |
|
|
|
3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
55.9 |
|
|
|
100% |
|
|
$ |
49.2 |
|
|
|
100% |
|
|
$ |
41.4 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs Revenue from sales of
Desktop PCs consists of Dell
XPStm,
OptiPlextm,
and
Dimensiontm
desktop computer systems, and Dell
Precisiontmdesktop
workstations. In fiscal 2006, revenue from desktop PCs increased
2% year-over-year on unit growth of 10% compared to an 11%
increase on unit growth of 17% year-over-year in fiscal 2005.
Business and consumer demand continues to shift toward mobility
products as notebook computers become more affordable. |
|
|
Mobility Revenue from mobility
products consists of Dell
XPStm,
Latitudetm
and
Inspirontm
notebooks, Dell
Precisiontm
mobile workstations, Dell MP3 music players, and Dell
Aximtm
handhelds. In fiscal 2006, revenue from mobility grew by 19%
year-over-year on unit growth of 43% compared to a 22% increase
on unit growth of 33% year-over-year in fiscal 2005. We |
23
|
|
|
continue to capitalize on the growth of mobile computing with
notebooks producing strong revenue and unit growth. As notebooks
become more affordable and wireless products become
standardized, demand for our mobility products continues to be
strong. |
|
|
|
Software & Peripherals
Revenue from sales of software and peripherals
(S&P) consists of Dell-branded printers,
monitors (not sold with systems), plasma and LCD televisions,
projectors, and a multitude of competitively priced third-party
printers, software, digital cameras, and other products. In
fiscal 2006, software and peripherals revenue grew 27%
year-over-year compared to a 36% increase in fiscal 2005. This
revenue increase was led by digital displays, as well as imaging
and printing products. We experienced strong laser printer
demand during the year, driven by color lasers, contributing to
an overall 33% increase in our imaging and printer revenue.
Revenue of replacement ink and toner cartridges more than
doubled year-over-year. |
|
|
Servers & Networking Revenue
from sales of servers and networking products consists of our
standards-based
PowerEdgetm
line of network hardware and
PowerConnecttm
networking solutions. In fiscal 2006, servers and networking
revenue grew 11% on unit growth of 20% year-over-year, compared
to 14% increase in fiscal 2005 on 24% unit growth
year-over-year. Servers and networking remains a strategic focus
area. We competitively price our server products to facilitate
additional sales of storage products and higher margin enhanced
services. As a result, in fiscal 2006, we grew the enhanced
services revenue related to enterprise products by 40%
year-over-year. During the year we unveiled our portfolio of
single, dual, and four-socket
PowerEdgetm
servers with Intels
Xeon®
technology. |
|
|
Enhanced Services Enhanced services
consists of a wide range of services including assessment,
design and implementation, deployment, asset recovery and
recycling, training, enterprise support, client support, and
managed lifecycle. In fiscal 2006, enhanced services revenue
increased 33% year-over-year compared to a 35% increase in
fiscal 2005. We are expanding our services offerings and
capabilities globally, resulting in a 61% year-over-year growth
in revenues outside the Americas. Enhanced services include the
sale and servicing of our standard and extended product
warranties. Due to the growth in extended warranty sales, we
increased our deferred revenue balance by nearly
$799 million, 28% over fiscal 2005, to approximately
$3.6 billion. |
|
|
Storage Revenue from sales of storage
products consists of
DellIEMC and Dell
PowerVaulttm
storage devices. In fiscal 2006, revenue increased 38%
year-over-year compared to 20% growth in fiscal 2005. In
fiscal 2006, Americas led the revenue growth in storage with a
40% increase. In fiscal 2007, we expect to launch PowerVault and
DellIEMC solutions that
will utilize new technologies intended to drive significant
additional increases in performance of these products. These
improvements are propelling lower cost solutions for our
customers. |
Gross Margin
The following table presents information regarding our gross
margin during each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
|
|
February 3, 2006 |
|
January 28, 2005 |
|
January 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
% of |
|
|
|
% of |
|
|
Dollars |
|
Revenue |
|
Dollars |
|
Revenue |
|
Dollars |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except percentages) |
Revenue
|
|
$ |
55,908 |
|
|
|
100.0 |
% |
|
$ |
49,205 |
|
|
|
100.0 |
% |
|
$ |
41,444 |
|
|
|
100.0 |
% |
Gross Margin
|
|
|
9,950 |
|
|
|
17.8 |
% |
|
|
9,015 |
|
|
|
18.3 |
% |
|
|
7,552 |
|
|
|
18.2 |
% |
In fiscal 2006, our gross margin declined as a percentage of
revenue while gross margin increased in absolute dollars as
compared to fiscal 2005. Our year-over-year decline is primarily
due to a product charge of $338 million for estimated
warranty costs of servicing or replacing certain
OptiPlextmsystems
that included a vendor part that failed to perform to our
specifications, as well as
24
additional charges for product rationalizations and workforce
realignment recognized in the third quarter. These charges were
offset by favorable pricing on certain commodity components,
higher revenue to leverage fixed production costs, and a
favorable shift in product mix as compared to the prior year
periods. In fiscal 2005, gross margin as a percentage of net
revenue improved slightly to 18.3% compared to 18.2% for fiscal
2004. This year-over-year improvement was primarily driven by
our continued cost savings initiatives.
As part of our focus on improving margins, we remain committed
to reducing costs in three primary areas: warranty costs,
structural materials, and infrastructure. Cost savings
initiatives include providing certain customer technical support
and back-office functions from cost-effective locations as well
as driving more efficient processes and tools globally. We
routinely pass cost reductions on to our customers to improve
customer value and increase sales.
Operating Expenses
The following table presents information regarding our operating
expenses during each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, 2006 | |
|
January 28, 2005 | |
|
January 30, 2004 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
Dollars | |
|
Revenue | |
|
Dollars | |
|
Revenue | |
|
Dollars | |
|
Revenue | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except percentages) | |
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$ |
5,140 |
|
|
|
9.2% |
|
|
$ |
4,298 |
|
|
|
8.7% |
|
|
$ |
3,544 |
|
|
|
8.6% |
|
Research, development, and
engineering
|
|
|
463 |
|
|
|
0.8% |
|
|
|
463 |
|
|
|
1.0% |
|
|
|
464 |
|
|
|
1.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$ |
5,603 |
|
|
|
10.0% |
|
|
$ |
4,761 |
|
|
|
9.7% |
|
|
$ |
4,008 |
|
|
|
9.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and Administrative
During fiscal 2006, selling, general, and administrative
expenses increased 20% to $5.1 billion compared to
$4.3 billion for fiscal 2005. Costs increased over fiscal
year 2005 primarily related to increased advertising costs,
headcount growth, as well as charges of $104 million
related to workforce realignment costs ($50 million), costs
of operating leases on office space no longer utilized
($25 million), and a write-off of goodwill
($29 million) recognized in the third quarter of fiscal
2006. The goodwill relates to an acquisition in June 2002. As a
result of the previously mentioned product rationalization
review, we decided to end the service offerings acquired with
this business. Therefore, the related goodwill was deemed
impaired in the third quarter of fiscal 2006. During fiscal
2005, selling, general, and administrative expenses, as a
percentage of net revenue, increased slightly compared to fiscal
2004. This increase is primarily due to our global expansion
efforts and a greater mix of business outside the
U.S. during fiscal 2005, which typically carries a slightly
higher operating expense. The primary component of the overall
increase was compensation costs as management focuses on
attracting and retaining key personnel in order to support our
growth. |
|
|
Research, Development, and Engineering
During fiscal 2006, research, development, and engineering
expenses decreased, as a percentage of net revenue, compared to
fiscal 2005 and 2004. We manage our research, development, and
engineering spending by targeting those innovations and products
most valuable to our customers and by relying upon the
capabilities of our strategic partners. We will continue to
invest in research, development, and engineering activities to
support our growth and to provide for new, competitive products.
We have obtained 1,581 worldwide patents and have applied for
1,416 additional worldwide patents as of February 3,
2006. |
25
Investment and Other Income, net
The following table summarizes our investment and other income,
net for each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Investment income, primarily
interest
|
|
$ |
308 |
|
|
$ |
226 |
|
|
$ |
200 |
|
Gains on investments, net
|
|
|
4 |
|
|
|
6 |
|
|
|
16 |
|
Interest expense
|
|
|
(28 |
) |
|
|
(16 |
) |
|
|
(14 |
) |
CIT minority interest
|
|
|
(26 |
) |
|
|
(16 |
) |
|
|
(4 |
) |
Other
|
|
|
(31 |
) |
|
|
(9 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
Investment and other income, net
|
|
$ |
227 |
|
|
$ |
191 |
|
|
$ |
180 |
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2006, investment income increased year-over-year
primarily due to rising interest rates offset by lower average
cash and investment balances. In fiscal 2005, investment income
increased from fiscal 2004 primarily due to an increase in
interest income earned on higher average balances of cash
equivalents and investments.
Income Taxes
Our effective tax rate was 21.9%, 31.5% and 29.0% for fiscal
2006, 2005 and 2004, respectively.
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. Among other items,
the Act created a temporary incentive for
U.S. multinationals to repatriate accumulated income earned
outside the U.S. at an effective tax rate of 5.25%, versus
the U.S. federal statutory rate of 35%. In the fourth
quarter of fiscal 2005, we recorded an initial estimated income
tax charge of $280 million based on the decision to
repatriate $4.1 billion of foreign earnings. This tax
charge included an amount relating to a drafting oversight that
Congressional leaders expected to correct in calendar year 2005.
On May 10, 2005, the Department of Treasury issued further
guidance that addressed the drafting oversight. In the second
quarter of fiscal 2006, we reduced our original estimate of the
tax charge by $85 million as a result of the guidance
issued by the Treasury Department. As of February 3, 2006,
we completed the repatriation of the expected $4.1 billion
in foreign earnings.
The differences between our effective tax rate and the
U.S. federal statutory rate of 35% principally result from
our geographical distribution of taxable income, and permanent
differences between the book and tax treatment of certain items.
We reported an effective tax rate of approximately 21.9% for
fiscal 2006, as compared to 31.5% for fiscal 2005. The decline
in our effective tax rate is primarily due to the
$85 million tax expense reduction related to the Act and
regulatory guidance issued by the IRS, as compared to
$280 million related expense in fiscal 2005, as well as a
higher proportion of our operating profits being generated in
lower foreign tax jurisdictions during fiscal 2006 as compared
to a year ago. Our foreign earnings are taxed at lower rates
than in the United States. As our mix of earnings changes and
foreign earnings become a larger percentage of our total, we
expected that our effective tax rate will continue to decline.
Accelerated Vesting of
Out-of-Money
Stock Options On January 5, 2006, our Board
of Directors approved the acceleration of vesting of
out-of-money
stock options with exercise prices equal to or greater than
$30.75 per share previously awarded under our equity
compensation plans. Options to purchase approximately
101 million shares of common stock or 29% of our
outstanding unvested options were subject to the acceleration.
The weighted average exercise price of the options that were
accelerated was $36.37. The purpose of the acceleration was to
enable us to reduce future compensation expense associated with
these options upon the adoption of SFAS 123R effective
February 4, 2006.
26
Consolidation of Leasing Affiliate We are
currently a partner in Dell Financial Services, L.P.
(DFS), a joint venture with CIT Group Inc.
(CIT). The joint venture allows us to provide our
customers with various financing alternatives. We began
consolidating DFSs financial results at the beginning of
the third quarter of fiscal 2004 due to the adoption of
Financial Accounting Standards Board (FASB)
Interpretation No. 46R (FIN 46R). See
Note 6 of Notes to Consolidated Financial
Statements included in Item 8
Financial Statements and Supplementary Data.
Off-Balance Sheet Arrangements
Financing Asset Securitization During fiscal
2006, we continued to sell fixed-term loans and leases and
revolving loans to unconsolidated qualifying special purpose
entities. The qualifying special purpose entities are bankruptcy
remote legal entities with assets and liabilities separate from
ours. The sole purpose of the qualifying special purpose
entities is to facilitate the funding of finance receivables in
the capital markets. The qualifying special purpose entities
have entered into financing arrangements with three multi-seller
conduits that, in turn, issue asset-backed debt securities in
the capital markets. Transfers of financing receivables are
recorded in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities. We expect to continue to
purchase loan and lease receivables in the future and expect
that the amount of Dell-funded loan and lease receivables will
increase over time. See Note 6, Financial
Services for further discussion.
Liquidity, Capital Commitments, and Contractual Cash
Obligations
Liquidity
In fiscal 2006, we continued to maintain strong liquidity with
cash flow from operations of $4.8 billion, compared to
$5.3 billion in fiscal 2005. We ended fiscal 2006 with
$11.7 billion in cash and investments, a decrease of
$2.4 billion over the prior fiscal year end. The following
table summarizes our ending cash, cash equivalents, and
investments and the results of our consolidated statements of
cash flows for the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Cash, cash equivalents, and
investments(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
7,042 |
|
|
$ |
4,747 |
|
|
$ |
4,317 |
|
|
Debt securities
|
|
|
4,607 |
|
|
|
9,253 |
|
|
|
7,454 |
|
|
Equity and other securities
|
|
|
100 |
|
|
|
101 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
investments
|
|
$ |
11,749 |
|
|
$ |
14,101 |
|
|
$ |
11,922 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
4,839 |
|
|
$ |
5,310 |
|
|
$ |
3,670 |
|
|
Investing activities
|
|
|
3,878 |
|
|
|
(2,317 |
) |
|
|
(2,814 |
) |
|
Financing activities
|
|
|
(6,226 |
) |
|
|
(3,128 |
) |
|
|
(1,383 |
) |
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(196 |
) |
|
|
565 |
|
|
|
612 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
$ |
2,295 |
|
|
$ |
430 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Financing receivables have been separately classified on the
balance sheet as of February 3, 2006. As a result, certain
items previously included in investments have been reclassified
as financing receivables to conform to the fiscal 2006
presentation. These reclassifications have no effect on the
results of operations or stockholders equity as previously
reported. |
27
|
|
|
Operating Activities Cash flows from
operating activities during fiscal 2006, 2005, and 2004 resulted
primarily from net income, which represents our principal source
of cash. In fiscal 2006, the decrease in operating cash flows
was primarily led by changes in operating working capital
accounts, including income taxes payable. In fiscal 2005, the
increase in operating cash flows was primarily led by an
increase in operating income and the improvement in our cash
conversion cycle. |
|
|
Operating cash flows have historically been impacted by income
tax benefits that result from the exercise of employee stock
options. These tax benefits totaled $261 million,
$249 million, and $181 million in fiscal 2006, 2005,
and 2004, respectively. These benefits are the tax effects of
corporate income tax deductions (that are considered taxable
income to the employee) that represent the amount by which the
fair value of our stock exceeds the option strike price on the
day the employee exercises a stock option. Upon adoption of
Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment in the first quarter
of fiscal 2007, cash flow from operations will be reduced by the
excess tax benefit associated with employee stock option
exercises. |
|
|
Key Performance Metrics Our direct business
model allows us to maintain a leading asset management system in
comparison to our major competitors. We are capable of
minimizing inventory risk while collecting amounts due from
customers before paying vendors, thus allowing us to generate
annual cash flows from operating activities that typically
exceed net income. The following table presents the components
of our cash conversion cycle for each of the past three fiscal
years: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Days of sales outstanding(a)(d)
|
|
|
29 |
|
|
|
27 |
|
|
|
27 |
|
Days of supply in inventory(b)
|
|
|
4 |
|
|
|
4 |
|
|
|
3 |
|
Days in accounts payable(c)
|
|
|
(77 |
) |
|
|
(73 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(44 |
) |
|
|
(42 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Days of sales outstanding (DSO) is based on the
ending net trade receivables and most recent quarterly revenue
for each period. DSO includes the effect of product costs
related to customer shipments not yet recognized as revenue that
are classified in other current assets. At February 3,
2006, January 28, 2005 and January 30, 2004, days of
sales in accounts receivable and days of customer shipments not
yet recognized were 26 and 3 days, 24 and 3 days and
24 and 3 days, respectively. |
|
(b) |
|
Days supply of inventory is based on ending inventory and most
recent quarterly cost of sales for each period. |
|
(c) |
|
Days in accounts payable is based on ending accounts payable and
most recent quarterly cost of sales for each period. |
|
(d) |
|
Financing receivables have been separately classified on the
balance sheet as of February 3, 2006. Prior period balances
have been reclassified to conform to the current presentation.
Days sales outstanding have also been recalculated for all
periods presented to reflect the reclassifications of certain
items previously included in accounts receivable to financing
receivables. |
|
|
|
Our cash conversion cycle improved two days at February 3,
2006 from January 28, 2005. This improvement is due to two
contributing factors: (i) a four day increase in days in
accounts payable largely attributed to the timing of payments to
vendors at the end of the period compared to the prior year and
an extra week of operations in fiscal 2006, and (ii) a two
day decline in days of sales outstanding attributed to increased
international revenue where typical customer payment terms are
longer. |
|
|
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 days of sales
outstanding because we believe it presents a more accurate
presentation of our days of sales outstanding and cash
conversion cycle. These deferred costs are recorded in other
current assets in our consolidated statement of financial
position and totaled $420 million, $430 million, and
$387 million as of February 3, 2006, January 28,
2005 and January 30, 2004, respectively. |
28
|
|
|
Investing Activities Cash provided by
investing activities during fiscal 2006 was $3.9 billion,
as compared to $2.3 billion cash used in fiscal 2005 and
$2.8 billion cash used in fiscal 2004. Cash generated or
used in investing activities principally consists of net
maturities and sales or purchases of investments, and capital
expenditures for property, plant, and equipment. In fiscal 2006,
we re-invested a lower amount of proceeds from maturities and
sales of investments to build liquidity for share repurchases,
which totaled $7.2 billion for fiscal 2006 as compared to
$4.2 billion during the same period last year. This was
partially offset by an increase in capital expenditures during
fiscal 2006 as we continued to focus on investing in our global
infrastructure in order to support our rapid global growth. In
fiscal 2005, the decrease in cash used in investing activities
compared to fiscal 2004, was primarily due to the purchase of
$636 million in assets during fiscal 2004 that were held in
master lease facilities. |
|
|
We historically maintained master lease facilities which
provided us with the ability to lease certain real property,
buildings, and equipment to be constructed or acquired. These
leases were accounted for as operating leases. During fiscal
2004, we paid $636 million to purchase all of the assets
covered by our master lease facilities. Accordingly, the assets
formerly covered by these facilities are included in our
consolidated statement of financial position and we have no
remaining lease commitments. |
|
|
Financing Activities Cash used in
financing activities during fiscal 2006 was $6.2 billion,
as compared to $3.1 billion in fiscal 2005 and
$1.4 billion in fiscal 2004. Financing activities primarily
consist of the repurchase of our common stock, partially offset
by proceeds from the issuance of common stock under employee
stock plans and other items. In fiscal 2006, the
year-over-year increase in cash used in financing activities is
due primarily to the increase in share repurchases of
204 million shares at an aggregate cost of
$7.2 billion, compared to 119 million shares at an
aggregate cost of $4.2 billion in fiscal 2005 and
63 million at an aggregate costs of $2.0 billion in
fiscal 2004. In fiscal 2005, the increase in share repurchases
compared to fiscal 2004 drove the year-over-year increase in
cash used in financing activities. |
|
|
We typically generate annual cash flows from operating
activities in amounts greater than net income, driven mainly by
our efficient cash conversion cycle, the growth in accrued
service liabilities and deferred revenue, and non-cash
depreciation and amortization expenses. We currently believe
that our fiscal 2007 cash flows from operations will exceed net
income and be more than sufficient to support our operations and
capital requirements. We currently anticipate that we will
continue to utilize our strong liquidity and cash flows from
operations to repurchase our common stock, make capital
investments, and fund various financing assets on Dells
balance sheet. However, we may access the capital markets later
in fiscal 2007 to fund DFS funding requirements as well as other
potential uses for cash. |
Capital Commitments
Share Repurchase Program We have a share
repurchase program that authorizes us to purchase shares of
common stock in order to both distribute cash to stockholders
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. As of
February 3, 2006, Dells share repurchase program
authorized the purchase of up to 1.5 billion shares of
common stock at an aggregate cost not to exceed $30 billion.
We expect to continue to repurchase shares of common stock
through a systematic program of open market purchases. As of the
end of fiscal 2006, we had cumulatively repurchased
1.4 billion shares for an aggregate cost of approximately
$25.6 billion. During fiscal 2006, we repurchased
204 million shares of common stock for an aggregate cost of
$7.2 billion. During fiscal 2005, we repurchased
119 million shares of common stock for an aggregate cost of
$4.2 billion. We currently expect to spend at least
$1.2 billion in share repurchases for the first quarter of
fiscal 2007.
29
Capital Expenditures During fiscal 2006, we
spent $728 million on property, plant, and equipment
primarily on our global expansion efforts and infrastructure
investments in order to support future growth. Product demand
and mix, as well as ongoing efficiencies in operating and
information technology infrastructure, influence the level and
prioritization of our capital expenditures. Capital expenditures
for fiscal 2007 related to our infrastructure are currently
expected to be approximately $800 million. Capital
expenditures during fiscal 2007 are expected to be funded by
cash flows from operating activities and are estimated to
increase compared to recent years due to our continued expansion
worldwide and the need for additional manufacturing capacity.
Restricted Cash Pursuant to an agreement
between DFS and CIT, DFS is required to maintain certain escrow
cash accounts associated with revolving loans originated by CIT
and serviced by DFS. Due to the consolidation of DFS,
$453 million and $438 million in restricted cash is
included in other current assets on our consolidated statement
of financial position as of February 3, 2006 and
January 28, 2005, respectively.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations
as of February 3, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
Fiscal |
|
Fiscal 2008- |
|
Fiscal 2010- |
|
|
|
|
Total |
|
2007 |
|
2009 |
|
2011 |
|
Beyond |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Long-term debt, including current
portion
|
|
$ |
505 |
|
|
$ |
1 |
|
|
$ |
204 |
|
|
$ |
3 |
|
|
$ |
297 |
|
Operating leases
|
|
|
346 |
|
|
|
67 |
|
|
|
109 |
|
|
|
63 |
|
|
|
107 |
|
Advances under credit facilities
|
|
|
133 |
|
|
|
78 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
556 |
|
|
|
482 |
|
|
|
59 |
|
|
|
15 |
|
|
|
|
|
DFS purchase commitment
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
1,640 |
|
|
$ |
628 |
|
|
$ |
427 |
|
|
$ |
181 |
|
|
$ |
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt As of February 3, 2006,
we had outstanding $200 million in Senior Notes due
April 15, 2008 and $300 million in Senior Debentures
due April 15, 2028. For additional information regarding
these issuances, see Note 2 of Notes to Consolidated
Financial Statements included in Item 8
Financial Statements and Supplementary Data.
Concurrent with the issuance of the Senior Notes and Senior
Debentures, we entered into interest rate swap agreements
converting our interest rate exposure from a fixed rate to a
floating rate basis to better align the associated interest rate
characteristics to our cash and investments portfolio. The
interest rate swap agreements have an aggregate notional amount
of $200 million maturing April 15, 2008 and
$300 million maturing April 15, 2028. The floating
rates are based on three-month London Interbank Offered Rates
plus 0.41% and 0.79% for the Senior Notes and Senior Debentures,
respectively. As a result of the interest rate swap agreements,
our effective interest rates for the Senior Notes and Senior
Debentures were 4.108% and 4.448%, respectively, for fiscal 2006.
Operating Leases We lease property and
equipment, manufacturing facilities, and office space under
non-cancellable leases. Certain of these leases obligate us to
pay taxes, maintenance, and repair costs.
Advances Under Credit Facilities DFS
maintains credit facilities with CIT, which provide DFS with a
funding capacity of up to $750 million. Outstanding
advances under these facilities totalled $133 million and
$158 million as of February 3, 2006 and
January 28, 2005, respectively, and are included in other
current and non-current liabilities on our consolidated
statement of financial position.
Purchase Obligations Purchase obligations are
defined as contractual obligations to purchase goods or services
that are enforceable and legally binding on us and that specify
all significant terms, including fixed or minimum quantities to
be purchased; fixed, minimum, or variable price
30
provisions; and the approximate timing of the transaction.
Purchase obligations do not include contracts that may be
cancelled without penalty.
We utilize several suppliers to manufacture sub-assemblies for
our products. Our highly efficient supply chain management
allows us to enter into flexible and mutually beneficial
purchase arrangements with our suppliers in order to minimize
inventory risk. Consistent with industry practice, we acquire
raw materials or other goods and services, including product
components, by issuing suppliers authorizations to purchase
based on our projected demand and manufacturing needs. These
purchase orders are typically fulfilled within 30 days and
are entered into during the ordinary course of business in order
to establish best pricing and continuity of supply for our
production. Purchase orders are not included in the table above
as they typically represent our authorization to purchase rather
than binding purchase obligations.
DFS Purchase Commitment Included in the table
above is our minimum purchase obligation to purchase CITs
30% interest in DFS at the expiration of the joint venture on
January 29, 2010, for a purchase price ranging from
approximately $100 million to $345 million. See
Note 6 of Notes to Consolidated Financial
Statements included in Item 8
Financial Statements and Supplementary Data.
Market Risk
We are exposed to a variety of risks, including foreign currency
exchange rate fluctuations and changes in the market value of
our investments. In the normal course of business, we employ
established policies and procedures to manage these risks.
Foreign Currency Hedging Activities
Our objective in managing our exposures to foreign currency
exchange rate fluctuations is to reduce the impact of adverse
fluctuations on earnings and cash flows associated with foreign
currency exchange rate changes. Accordingly, we utilize foreign
currency option contracts and forward contracts to hedge our
exposure on forecasted transactions and firm commitments in over
20 currencies in which we transact business. The principal
currencies hedged during fiscal 2006 were the Euro, British
Pound, Japanese Yen, and Canadian Dollar. We monitor our foreign
currency exchange exposures to ensure the overall effectiveness
of our foreign currency hedge positions. However, there can be
no assurance that our foreign currency hedging activities will
substantially offset the impact of fluctuations in currency
exchange rates on our results of operations and financial
position.
Based on our foreign currency cash flow hedge instruments
outstanding at February 3, 2006 and January 28, 2005,
we estimate a maximum potential one-day loss in fair value of
approximately $46 million and $43 million,
respectively, using a Value-at-Risk (VAR) model. The
VAR model estimates were made assuming normal market conditions
and a 95% confidence level. We used a Monte Carlo simulation
type model that valued our foreign currency instruments against
a thousand randomly generated market price paths. Forecasted
transactions, firm commitments, fair value hedge instruments,
and accounts receivable and payable denominated in foreign
currencies were excluded from the model. The VAR model is a risk
estimation tool, and as such, is not intended to represent
actual losses in fair value that will be incurred. Additionally,
as we utilize foreign currency instruments for hedging
forecasted and firmly committed transactions, a loss in fair
value for those instruments is generally offset by increases in
the value of the underlying exposure. As a result of our hedging
activities, foreign currency fluctuations did not have a
material impact on our results of operations and financial
position during fiscal 2006, 2005, and 2004.
Cash and Investments
At February 3, 2006, we had $11.7 billion of total
cash and investments (including investments in equity securities
discussed below), all of which are stated at fair value. Our
investment policy is to
31
manage our total cash and investments balances to preserve
principal and liquidity while maximizing the return on the
investment portfolio through the full investment of available
funds. We diversify our investment portfolio by investing in
multiple types of investment-grade securities and through the
use of third-party investment managers. Based on our investment
portfolio and interest rates at February 3, 2006, a
100 basis point increase or decrease in interest rates
would result in a decrease or increase of approximately
$60 million in the fair value of the investment portfolio.
Changes in interest rates may affect the fair value of the
investment portfolio; however, unrealized gains or losses are
not recognized in net income unless the investments are sold or
the loss is considered to be other than temporary.
Debt
We have entered into interest rate swap arrangements that
convert our fixed interest rate expense to a floating rate basis
to better align the associated interest rate characteristics to
our cash and investments portfolio. The interest rate swaps
qualify for hedge accounting treatment pursuant to
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. We have designated the
issuance of the Senior Notes and Senior Debentures and the
related interest rate swap agreements as an integrated
transaction. The difference between our carrying amounts and
fair value of our long-term debt and related interest rate swaps
was not material at February 3, 2006 and January 28,
2005. The differential to be paid or received on the interest
rate swap agreements is accrued and recognized as an adjustment
to interest expense as interest rates change.
Risk Factors Affecting Dells Business and Prospects
There are numerous risk factors that affect our business and the
results of our operations. These risk factors include general
economic and business conditions; the level of demand for our
products and services; the level and intensity of competition in
the technology industry and the pricing pressures that have
resulted; our ability to timely and effectively manage periodic
product transitions, as well as component availability and cost;
our ability to develop new products based on new or evolving
technology and the markets acceptance of those products;
our ability to manage our inventory levels to minimize excess
inventory, declining inventory values, and obsolescence; the
product, customer, and geographic sales mix of any particular
period; our ability to effectively manage our operating costs;
and the effect of armed hostilities, terrorism, natural
disasters, or public health issues on the economy generally, on
the level of demand for our products and services, and on our
ability to manage our supply and delivery logistics in such an
environment. For a discussion of these and other risk factors
affecting Dells business and prospects, see
Item 1A Risk Factors.
Critical Accounting Policies
We prepare our financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP). The preparation of GAAP financial
statements requires certain estimates, assumptions, and
judgments to be made that may affect our consolidated statement
of financial position and results of operations. We believe our
most critical accounting policies relate to revenue recognition,
warranty accruals, and income taxes. We have discussed the
development, selection, and disclosure of our critical
accounting policies with the Audit Committee of Dells
Board of Directors. These critical accounting policies and our
other accounting policies are described in Note 1 of
Notes to Consolidated Financial Statements included
in Item 8 Financial Statements and
Supplementary Data.
Revenue Recognition Dell frequently enters
into sales arrangements with customers that contain multiple
elements or deliverables such as hardware, software,
peripherals, and services. Judgments and estimates are critical
to ensure compliance with GAAP. These judgments relate to the
allocation of the proceeds received from an arrangement to the
multiple elements, the determination of whether any undelivered
elements are essential to the functionality of the delivered
elements, and
32
the appropriate timing of revenue recognition. Dell offers
extended warranty and service contracts to customers that extend
and/or enhance the technical support, parts, and labor coverage
offered as part of the base warranty included with the product.
Revenue from extended warranty and service contracts, for which
Dell is obligated to perform, is recorded as deferred revenue
and subsequently recognized over the term of the contract or
when the service is completed. Revenue from sales of third-party
extended warranty and service contracts, for which Dell is not
obligated to perform, is recognized on a net basis at the time
of sale.
Estimates that further impact revenue recognition relate
primarily to customer sales returns and allowance for doubtful
accounts. Both estimates are relatively predictable based on
historical experience. The primary factors affecting Dells
accrual for estimated customer returns include estimated return
rates as well as the number of units shipped that still have a
right of return as of the balance sheet date. During recent
fiscal years, customer returns as a percentage of revenues have
been approximately 1%. Factors affecting Dells allowance
for doubtful accounts include historical and anticipated
customer default rates of the various aging categories of
accounts receivable. Each quarter, Dell reevaluates its
estimates to assess the adequacy of its recorded accruals for
customer returns and allowance for doubtful accounts and adjusts
the amounts as necessary.
Warranty We record warranty liabilities at
the time of sale for the estimated costs that may be incurred
under its limited warranty. The specific warranty terms and
conditions vary depending upon the product sold and country in
which Dell does business, but generally includes technical
support, parts, and labor over a period ranging from
90 days to three years. Factors that affect our warranty
liability include the number of installed units currently under
warranty, historical and anticipated rates of warranty claims on
those units, and cost per claim to satisfy our warranty
obligation. The anticipated rate of warranty claims is the
primary factor impacting our estimated warranty obligation. The
other factors are less significant due to the fact that the
average remaining aggregate warranty period of the covered
installed base is approximately 20 months, repair parts are
generally already in stock or available at pre-determined
prices, and labor rates are generally arranged at
pre-established amounts with service providers. Warranty claims
are relatively predictable based on historical experience of
failure rates. If actual results differ from our estimates, we
revised our estimated warranty liability to reflect such
changes. Each quarter, we reevaluate our estimates to assess the
adequacy of the recorded warranty liabilities and adjust the
amounts as necessary.
Income Taxes We calculate a provision for
income taxes using the asset and liability method, under which
deferred tax assets and liabilities are recognized by
identifying the temporary differences arising from the different
treatment of items for tax and accounting purposes. In
determining the future tax consequences of events that have been
recognized in our financial statements or tax returns, judgment
is required. Differences between the anticipated and actual
outcomes of these future tax consequences could have a material
impact on our consolidated results of operations or financial
position.
Recently Issued Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial
Statements. in Item 8 for a description of recent
accounting pronouncements, including the expected dates of
adoption and estimated effects on results of operations and
financial condition, which is incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Response to this item is included in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Market Risk.
33
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Page | |
|
|
| |
Financial Statements:
|
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
35 |
|
|
Consolidated Statements of
Financial Position at February 3, 2006 and January 28,
2005
|
|
|
37 |
|
|
Consolidated Statements of Income
for the fiscal years ended February 3, 2006,
January 28, 2005 and January 30, 2004
|
|
|
38 |
|
|
Consolidated Statements of Cash
Flows for the fiscal years ended February 3, 2006,
January 28, 2005 and January 30, 2004
|
|
|
39 |
|
|
Consolidated Statements of
Stockholders Equity for the fiscal years ended
February 3, 2006, January 28, 2005 and
January 30, 2004
|
|
|
40 |
|
|
Notes to Consolidated Financial
Statements
|
|
|
41 |
|
Financial Statement Schedule:
|
|
|
|
|
|
Schedule II
Valuation and Qualifying Accounts for the fiscal years ended
February 3, 2006, January 28, 2005 and
January 30, 2004
|
|
|
67 |
|
All other schedules are omitted because they are not applicable.
34
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Dell Inc.
We have completed integrated audits of the 2006 and 2005
consolidated financial statements of Dell Inc. (the
Company) and of its internal control over financial
reporting as of February 3, 2006 and an audit of its 2004
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions based on our audits, are presented
below.
Consolidated Financial Statements and Financial Statement
Schedule
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Dell Inc. and its subsidiaries at
February 3, 2006 and January 28, 2005, and the results
of their operations and their cash flows for each of the three
years in the period ended February 3, 2006 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal Control Over Financial Reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A Controls and
Procedures, that the Company maintained effective internal
control over financial reporting as of February 3, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of February 3, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements
35
for external purposes in accordance with generally accepted
accounting principles. A companys internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Austin, Texas
March 15, 2006
36
DELL INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, | |
|
January 28, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
7,042 |
|
|
$ |
4,747 |
|
|
Short-term investments
|
|
|
2,016 |
|
|
|
5,060 |
|
|
Accounts receivable, net
|
|
|
4,089 |
|
|
|
3,563 |
|
|
Financing receivables, net
|
|
|
1,363 |
|
|
|
985 |
|
|
Inventories
|
|
|
576 |
|
|
|
459 |
|
|
Other
|
|
|
2,620 |
|
|
|
2,083 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
17,706 |
|
|
|
16,897 |
|
|
Property, plant, and equipment, net
|
|
|
2,005 |
|
|
|
1,691 |
|
|
Investments
|
|
|
2,691 |
|
|
|
4,294 |
|
|
Long-term financing receivables, net
|
|
|
325 |
|
|
|
199 |
|
|
Other non-current assets
|
|
|
382 |
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
23,109 |
|
|
$ |
23,215 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
9,840 |
|
|
$ |
8,895 |
|
|
Accrued and other
|
|
|
6,087 |
|
|
|
5,241 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15,927 |
|
|
|
14,136 |
|
Long-term debt
|
|
|
504 |
|
|
|
505 |
|
Other non-current liabilities
|
|
|
2,549 |
|
|
|
2,089 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
18,980 |
|
|
|
16,730 |
|
|
|
|
|
|
|
|
Commitments and contingent
liabilities (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock and capital in
excess of $.01 par value; shares issued and outstanding:
none
|
|
|
|
|
|
|
|
|
|
Common stock and capital in excess
of $.01 par value; shares authorized: 7,000; shares issued:
2,818 and 2,769, respectively
|
|
|
9,540 |
|
|
|
8,195 |
|
|
Treasury stock, at cost; 488 and
284 shares, respectively
|
|
|
(18,007 |
) |
|
|
(10,758 |
) |
|
Retained earnings
|
|
|
12,746 |
|
|
|
9,174 |
|
|
Other comprehensive loss
|
|
|
(103 |
) |
|
|
(82 |
) |
|
Other
|
|
|
(47 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,129 |
|
|
|
6,485 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$ |
23,109 |
|
|
$ |
23,215 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
37
DELL INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net revenue
|
|
$ |
55,908 |
|
|
$ |
49,205 |
|
|
$ |
41,444 |
|
Cost of revenue
|
|
|
45,958 |
|
|
|
40,190 |
|
|
|
33,892 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
9,950 |
|
|
|
9,015 |
|
|
|
7,552 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
|
5,140 |
|
|
|
4,298 |
|
|
|
3,544 |
|
|
Research, development, and
engineering
|
|
|
463 |
|
|
|
463 |
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,603 |
|
|
|
4,761 |
|
|
|
4,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,347 |
|
|
|
4,254 |
|
|
|
3,544 |
|
Investment and other income, net
|
|
|
227 |
|
|
|
191 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4,574 |
|
|
|
4,445 |
|
|
|
3,724 |
|
Income tax provision
|
|
|
1,002 |
|
|
|
1,402 |
|
|
|
1,079 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,572 |
|
|
$ |
3,043 |
|
|
$ |
2,645 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.49 |
|
|
$ |
1.21 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
1.46 |
|
|
$ |
1.18 |
|
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,403 |
|
|
|
2,509 |
|
|
|
2,565 |
|
|
Diluted
|
|
|
2,449 |
|
|
|
2,568 |
|
|
|
2,619 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
38
DELL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,572 |
|
|
$ |
3,043 |
|
|
$ |
2,645 |
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
393 |
|
|
|
334 |
|
|
|
263 |
|
|
|
Tax benefits of employee stock plans
|
|
|
261 |
|
|
|
249 |
|
|
|
181 |
|
|
|
Effects of exchange rate changes on
monetary assets and liabilities denominated in foreign currencies
|
|
|
70 |
|
|
|
(602 |
) |
|
|
(677 |
) |
|
|
Other
|
|
|
188 |
|
|
|
78 |
|
|
|
113 |
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating working capital
|
|
|
(67 |
) |
|
|
1,755 |
|
|
|
872 |
|
|
|
Non-current assets and liabilities
|
|
|
422 |
|
|
|
453 |
|
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
4,839 |
|
|
|
5,310 |
|
|
|
3,670 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(7,562 |
) |
|
|
(12,261 |
) |
|
|
(12,099 |
) |
|
|
Maturities and sales
|
|
|
12,168 |
|
|
|
10,469 |
|
|
|
10,078 |
|
|
Capital expenditures
|
|
|
(728 |
) |
|
|
(525 |
) |
|
|
(329 |
) |
|
Purchase of assets held in master
lease facilities
|
|
|
|
|
|
|
|
|
|
|
(636 |
) |
|
Cash assumed in consolidation of
Dell Financial Services L.P.
|
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
3,878 |
|
|
|
(2,317 |
) |
|
|
(2,814 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(7,249 |
) |
|
|
(4,219 |
) |
|
|
(2,000 |
) |
|
Issuance of common stock under
employee plans and other
|
|
|
1,023 |
|
|
|
1,091 |
|
|
|
617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(6,226 |
) |
|
|
(3,128 |
) |
|
|
(1,383 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(196 |
) |
|
|
565 |
|
|
|
612 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
2,295 |
|
|
|
430 |
|
|
|
85 |
|
Cash and cash equivalents at
beginning of period
|
|
|
4,747 |
|
|
|
4,317 |
|
|
|
4,232 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$ |
7,042 |
|
|
$ |
4,747 |
|
|
$ |
4,317 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
39
DELL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Capital in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of Par |
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
Treasury Stock |
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Retained |
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Earnings |
|
Income (Loss) |
|
Other |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 31, 2003
|
|
|
2,681 |
|
|
$ |
6,018 |
|
|
|
102 |
|
|
$ |
(4,539 |
) |
|
$ |
3,486 |
|
|
$ |
(33 |
) |
|
$ |
(59 |
) |
|
$ |
4,873 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,645 |
|
|
|
|
|
|
|
|
|
|
|
2,645 |
|
|
Change in net unrealized gain on
investments, net of taxes of $19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35 |
) |
|
|
|
|
|
|
(35 |
) |
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
Change in net unrealized loss on
derivative instruments, net of taxes of $5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,595 |
|
|
Stock issuances under employee
plans, including tax benefits
|
|
|
40 |
|
|
|
805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
805 |
|
|
Repurchases
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,000 |
) |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 30, 2004
|
|
|
2,721 |
|
|
|
6,823 |
|
|
|
165 |
|
|
|
(6,539 |
) |
|
|
6,131 |
|
|
|
(83 |
) |
|
|
(52 |
) |
|
|
6,280 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,043 |
|
|
|
|
|
|
|
|
|
|
|
3,043 |
|
|
Change in net unrealized gain on
investments, net of taxes of $16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
(52 |
) |
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
Change in net unrealized loss on
derivative instruments, net of taxes of $21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,044 |
|
|
Stock issuances under employee
plans, including tax benefits
|
|
|
48 |
|
|
|
1,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,372 |
|
|
Repurchases
|
|
|
|
|
|
|
|
|
|
|
119 |
|
|
|
(4,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,219 |
) |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 28, 2005
|
|
|
2,769 |
|
|
|
8,195 |
|
|
|
284 |
|
|
|
(10,758 |
) |
|
|
9,174 |
|
|
|
(82 |
) |
|
|
(44 |
) |
|
|
6,485 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,572 |
|
|
|
|
|
|
|
|
|
|
|
3,572 |
|
|
Change in net unrealized gain on
investments, net of taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
Change in net unrealized loss on
derivative instruments, net of taxes of $4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,551 |
|
|
Stock issuances under employee
plans, including tax benefits
|
|
|
49 |
|
|
|
1,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,345 |
|
|
Repurchases
|
|
|
|
|
|
|
|
|
|
|
204 |
|
|
|
(7,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,249 |
) |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 3, 2006
|
|
|
2,818 |
|
|
$ |
9,540 |
|
|
|
488 |
|
|
$ |
(18,007 |
) |
|
$ |
12,746 |
|
|
$ |
(103 |
) |
|
$ |
(47 |
) |
|
$ |
4,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Description of Business and Summary
of Significant Accounting Policies
Description of Business Dell Inc., a Delaware
corporation, and its consolidated subsidiaries (collectively
referred to as Dell) designs, develops,
manufactures, markets, sells, and supports a wide range of
computer systems and services that are customized to customer
requirements. These include enterprise systems (servers,
storage, workstations, and networking products), client systems
(notebook and desktop computer systems), printing and imaging
systems, software and peripherals, and global services. Dell
markets and sells its products and services directly to its
customers, which include large corporate, government,
healthcare, and education accounts, as well as
small-to-medium
businesses and individual customers.
Fiscal Year Dells fiscal year is the
52- or
53-week period ending
on the Friday nearest January 31. The fiscal year ending
February 3, 2006 included 53 weeks, and the fiscal
years ending January 28, 2005 and January 30, 2004
included 52 weeks.
Principles of Consolidation The accompanying
consolidated financial statements include the accounts of Dell
and its wholly-owned and controlled majority-owned subsidiaries
and have been prepared in accordance with accounting principles
generally accepted in the United States of America
(GAAP). All significant intercompany transactions
and balances have been eliminated.
Dell is currently a partner in Dell Financial Services L.P.
(DFS), a joint venture with CIT Group Inc.
(CIT). The joint venture allows Dell to provide its
customers with various financing alternatives. Dell began
consolidating DFSs financial results at the beginning of
the third quarter of fiscal 2004 due to the adoption of
Financial Accounting Standards Board (FASB)
Interpretation No. 46R (FIN 46R). The
consolidation of DFS had no impact on Dells net income or
earnings per share because Dell had historically been recording
its 70% equity interest in DFS under the equity method. See
Note 6 of Notes to Consolidated Financial
Statements.
Use of Estimates The preparation of financial
statements in accordance with GAAP requires the use of
managements estimates. These estimates are subjective in
nature and involve judgments that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at fiscal year end, and the reported amounts of
revenues and expenses during the fiscal year. Actual results
could differ from those estimates.
Cash and Cash Equivalents All highly liquid
investments with original maturities of three months or less at
date of purchase are carried at cost plus accrued interest,
which approximates fair value, and are considered to be cash
equivalents. All other investments not considered to be cash
equivalents are separately categorized as investments.
Investments Dells investments in debt
securities and publicly traded equity securities are classified
as available-for-sale and are reported at fair market value
(based on quoted market prices) using the specific
identification method. Unrealized gains and losses, net of
taxes, are reported as a component of stockholders equity.
Realized gains and losses on investments are included in
investment and other income, net when realized. All other
investments are initially recorded at cost. An impairment loss
to reduce an investments carrying amount to its fair
market value is recognized in income when a decline in the fair
market value of an individual security below its cost or
carrying value is determined to be other-than-temporary.
Finance Receivables Financing receivables
primarily consist of fixed-term loans and leases and revolving
loans. Dell sells certain finance receivables to unconsolidated
qualifying special purpose entities in securitization
transactions. The receivables are removed from the statement of
financial position at the time they are sold. Receivables are
considered sold when the receivables are transferred beyond the
reach of Dells creditors, the transferee has the right to
pledge or exchange
41
the assets, and Dell has surrendered control over the rights and
obligations of the receivables. Gains and losses from the sale
of fixed-term loans and leases and revolving loans are
recognized in the period the sale occurs, based upon the
relative fair value of the assets sold and the remaining
retained interests. The retained interests are recorded in
financing receivables at fair value. Dell estimates fair value
based on the present value of future expected cash flows using
assumptions for estimated credit losses and prepayment rates.
Inventories Inventories are stated at the
lower of cost or market with cost being determined on a
first-in, first-out
basis.
Property, Plant, and Equipment Property,
plant, and equipment are carried at depreciated cost.
Depreciation is provided using the straight-line method over the
estimated economic lives of the assets, which range from ten to
thirty years for buildings and two to five years for all other
assets. Leasehold improvements are amortized over the shorter of
five years or the lease term. Gains or losses related to
retirements or disposition of fixed assets are recognized in the
period incurred. Dell performs reviews for the impairment of
fixed assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Dell capitalizes eligible internal-use software
development costs incurred subsequent to the completion of the
preliminary project stage. Development costs are amortized over
the shorter of the expected useful life of the software or five
years.
Foreign Currency Translation The majority of
Dells international sales are made by international
subsidiaries, most of which have the U.S. dollar as their
functional currency. Local currency transactions of
international subsidiaries that have the U.S. dollar as the
functional currency are remeasured into U.S. dollars using
current rates of exchange for monetary assets and liabilities
and historical rates of exchange for nonmonetary assets and
liabilities. Gains and losses from remeasurement of monetary
assets and liabilities are included in investment and other
income, net. Dells subsidiaries that do not have the
U.S. dollar as their functional currency translate assets
and liabilities at current rates of exchange in effect at the
balance sheet date. Revenue and expenses from these
international subsidiaries are translated using the monthly
average exchange rates in effect for the period in which the
items occur. The resulting gains and losses from these foreign
currency translation adjustments are included as a component of
stockholders equity.
Hedging Instruments Dell applies Statement of
Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended, which establishes accounting and
reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires Dell to recognize
all derivatives as either assets or liabilities in its
consolidated statement of financial position and measure those
instruments at fair value.
Treasury Stock Effective with the beginning
of the second quarter of fiscal 2002, Dell began holding
repurchased shares of its common stock as treasury stock. Prior
to that date, Dell retired all such repurchased shares, which
were recorded as a reduction to retained earnings. Dell accounts
for treasury stock under the cost method and includes treasury
stock as a component of stockholders equity.
Revenue Recognition Net revenue includes
sales of hardware, software and peripherals, and services
(including extended service contracts and professional
services). These products and services are sold either
separately or as part of a multiple-element arrangement. Dell
allocates revenue from multiple-element arrangements to the
elements based on the relative fair value of each element, which
is generally based on the relative sales price of each element
when sold separately. The allocation of fair value for a
multiple-element software arrangement is based on vendor
specific objective evidence (VSOE) or in absence of
VSOE for delivered elements, the residual method. In the absence
of VSOE for undelivered elements, revenue is deferred and
subsequently recognized over the term of the arrangement. For
sales of extended warranties with a separate contract price,
Dell defers revenue equal to the separately stated price.
Revenue associated with undelivered elements is deferred and
recorded when delivery occurs. Product revenue is recognized,
net of an
42
allowance for estimated returns, when both title and risk of
loss transfer to the customer, provided that no significant
obligations remain. Revenue from extended warranty and service
contracts, for which Dell is obligated to perform, is recorded
as deferred revenue and subsequently recognized over the term of
the contract or when the service is completed. Revenue from
sales of third-party extended warranty and service contracts,
for which Dell is not obligated to perform, is recognized on a
net basis at the time of sale.
Dell defers the cost of shipped products awaiting revenue
recognition until the goods are delivered and revenue is
recognized. In-transit product shipments to customers totaled
$420 million and $430 million as of February 3,
2006 and January 28, 2005, respectively, and are included
in other current assets on Dells consolidated statement of
financial position.
Warranty Dell records warranty liabilities at
the time of sale for the estimated costs that may be incurred
under its limited warranty. The specific warranty terms and
conditions vary depending upon the product sold and country in
which Dell does business, but generally includes technical
support, parts, and labor over a period ranging from
90 days to three years. Factors that affect Dells
warranty liability include the number of installed units
currently under warranty, historical and anticipated rates of
warranty claims on those units, and cost per claim to satisfy
Dells warranty obligation. The anticipated rate of
warranty claims is the primary factor impacting the estimated
warranty obligation. The other factors are less significant due
to the fact that the average remaining aggregate warranty period
of the covered installed base is approximately 20 months,
repair parts are generally already in stock or available at
pre-determined prices, and labor rates are generally arranged at
pre-established amounts with service providers. Warranty claims
are relatively predictable based on historical experience of
failure rates. If actual results differ from the estimates, Dell
would adjust the estimated warranty liability. Each quarter,
Dell reevaluates its estimates to assess the adequacy of its
recorded warranty liabilities and adjusts the amounts as
necessary.
Shipping Costs Dells shipping and
handling costs are included in cost of sales in the accompanying
consolidated statement of income for all periods presented.
Selling, General, and Administrative Selling
expenses include items such as sales commissions, marketing and
advertising costs, and contractor services. Advertising costs
are expensed as incurred and were $773 million,
$576 million, and $473 million during fiscal 2006,
2005, and 2004, respectively. General and administrative
expenses include items for Dells administrative functions,
such as Finance, Legal, Human Resources, and information
technology support. These functions include costs for items such
as salaries, maintenance and supplies, insurance, depreciation
expense, and allowance for doubtful accounts.
Research, Development, and Engineering Costs
Research, development, and engineering costs are expensed as
incurred, in accordance with SFAS No. 2, Accounting
for Research and Development Costs. Research, development,
and engineering expenses primarily include payroll and headcount
related costs, contractor fees, infrastructure costs, and
administrative expenses directly related to research and
development support.
Website Development Costs Dell expenses, as
incurred, the costs of maintenance and minor enhancements to the
features and functionality of its websites.
Income Taxes Deferred tax assets and
liabilities are recorded based on the difference between the
financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Comprehensive Income Dells
comprehensive income is comprised of net income, foreign
currency translation adjustments, unrealized gains and losses on
derivative financial instruments related to foreign currency
hedging, and unrealized gains and losses on marketable
securities classified as available-for-sale.
43
Earnings Per Common Share Basic earnings per
share is based on the weighted 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
weighted average shares outstanding if the effect of including
such instruments is antidilutive to earnings per share.
Accordingly, certain employee stock options and equity put
contracts (during fiscal 2004) have been excluded from the
calculation of diluted weighted average shares totaling
127 million, 103 million, and 138 million shares
during fiscal 2006, 2005, and 2004, respectively.
The following table sets forth the computation of basic and
diluted earnings per share for each of the past three fiscal
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions, except per share amounts) | |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,572 |
|
|
$ |
3,043 |
|
|
$ |
2,645 |
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,403 |
|
|
|
2,509 |
|
|
|
2,565 |
|
|
|
Employee stock options and other
|
|
|
46 |
|
|
|
59 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
2,449 |
|
|
|
2,568 |
|
|
|
2,619 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.49 |
|
|
$ |
1.21 |
|
|
$ |
1.03 |
|
|
Diluted
|
|
$ |
1.46 |
|
|
$ |
1.18 |
|
|
$ |
1.01 |
|
Pro Forma Effects of Stock-Based Compensation
As of February 3, 2006, Dell had four stock-based
compensation plans and an employee stock purchase plan with
outstanding stock or stock options. See Note 5 of
Notes to Consolidated Financial Statements. Dell
currently applies the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations
in accounting for those plans.
On January 5, 2006, Dells Board of Directors approved
the acceleration of vesting of certain unvested and
out-of-money
stock options with exercise prices equal to or greater than
$30.75 per share previously awarded under equity
compensation plans. Options to purchase approximately
101 million shares of common stock or 29% of the
outstanding unvested options were subject to the acceleration.
The weighted average exercise price of the options that were
accelerated was $36.37. The purpose of the acceleration was to
enable Dell to reduce future compensation expense associated
with these options in the consolidated statements of operations
upon the adoption of SFAS No. 123 (revised 2004),
(SFAS No. 123(R)), Share-Based Payment
effective February 4, 2006.
44
The following table illustrates the effect on net income and
earnings per share for each of the past three fiscal years as if
Dell had applied the fair value recognition provisions of
SFAS No. 123 to share-based employee compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions, except per share amounts) | |
Net income as reported
|
|
$ |
3,572 |
|
|
$ |
3,043 |
|
|
$ |
2,645 |
|
Deduct: Total share-based employee
compensation determined under fair value method for all awards,
net of related tax effects
|
|
|
(1,094 |
) |
|
|
(812 |
) |
|
|
(829 |
) |
|
|
|
|
|
|
|
|
|
|
Net income pro forma
|
|
$ |
2,478 |
|
|
$ |
2,231 |
|
|
$ |
1,816 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
1.49 |
|
|
$ |
1.21 |
|
|
$ |
1.03 |
|
|
Basic pro forma
|
|
$ |
1.03 |
|
|
$ |
0.89 |
|
|
$ |
0.71 |
|
|
Diluted as reported
|
|
$ |
1.46 |
|
|
$ |
1.18 |
|
|
$ |
1.01 |
|
|
Diluted pro forma
|
|
$ |
1.02 |
|
|
$ |
0.88 |
|
|
$ |
0.68 |
|
Under the Black-Scholes option pricing model, the weighted
average fair value of stock options at date of grant was $10.22,
$10.72, and $10.25, per option for options granted during fiscal
2006, 2005, and 2004, respectively.
Additionally, the weighted average fair value of the purchase
rights under the employee stock purchase plan granted in fiscal
2006, 2005, and 2004 was $6.30, $9.77, and $7.88 per right,
respectively. The weighted average fair value of options and
purchase rights under the employee stock purchase plan was
determined based on the Black-Scholes model weighted for all
grants during the period, utilizing the assumptions below. In
addition, the amount of stock-based compensation expense to be
incurred in future periods will be reduced as a result of the
acceleration of certain unvested and
out-of-the-money
stock options in fiscal 2006. Consequently, the total
share-based employee compensation determined under the fair
value method for all awards, net of related tax effects
increased $384 million for fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
|
|
February 3, |
|
January 28, |
|
January 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Expected term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3.8 years |
|
|
|
3.8 years |
|
|
|
3.8 years |
|
|
Employee stock purchase plan
|
|
|
3 months |
|
|
|
6 months |
|
|
|
6 months |
|
Risk-free interest rate
|
|
|
3.9 |
% |
|
|
2.89 |
% |
|
|
2.99 |
% |
Volatility
|
|
|
25 |
% |
|
|
36 |
% |
|
|
43 |
% |
Dividends
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Dell periodically evaluates the stock option exercise behavior
of its employees, among other relevant factors, and has
determined that the best estimate of the expected term of stock
options granted in fiscal 2006, 2005, and 2004 was
3.8 years. Dell revised the assumptions surrounding the
expected term of the employee stock purchase plan for revisions
made to the participation period of its employee stock purchase
plan from six months in fiscal 2005 and 2004 to three months in
fiscal 2006. Dell used a blend of expected implied and
historical volatility, as well as other economic data, to
estimate the volatility for fiscal 2006, 2005, and 2004 option
grants, because management believes such volatility is more
representative of prospective trends.
Recently Issued Accounting Pronouncements In
December 2004, the FASB issued SFAS No. 123 (revised
2004) (SFAS No. 123(R)), Share-Based
Payment, which replaced SFAS No. 123,
Accounting for Stock-Based Compensation, and superseded
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS No. 123(R)
requires all share-based
45
payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on
their fair values. The pro forma disclosures previously
permitted under SFAS No. 123 will no longer be an
alternative to financial statement recognition. Under
SFAS No. 123(R), Dell must determine the appropriate
fair value method to be used for valuing share-based payments,
the amortization method of compensation cost and the transition
method to be used at the date of adoption.
In April 2005, the Securities Exchange Commission
(SEC) amended Rule 401(a) of
Regulation S-X to
delay the effective date for compliance with
SFAS No. 123(R). Based on the amended rule, we are
required to adopt SFAS No. 123(R) beginning with our
fiscal 2007. Dell has evaluated the requirements of
SFAS No. 123(R) and will adopt
SFAS No. 123(R) beginning in the first quarter of
fiscal 2007. Dell currently estimates this adoption to have a
three cent impact on earnings per share in the first quarter of
fiscal 2007. Dell will apply the modified prospective method,
which requires that it record compensation expense for all
unvested stock option and restricted stock awards as required by
SFAS 123(R) in the periods beginning with fiscal 2007.
In June 2005, the FASB issued
FSP FAS 143-1,
Accounting for Electronic Equipment Waste
Obligations
(FSP 143-1),
which provides guidance on the accounting for certain
obligations associated with the Waste Electrical and Electronic
Equipment Directive (the Directive), adopted by the
European Union (EU). Under the Directive, the waste
management obligation for historical equipment (products put on
the market on or prior to August 13, 2005) remains with the
commercial user until the customer replaces the equipment.
FSP 143-1 is
required to be applied to the later of the first reporting
period ending after June 8, 2005 or the date of the
Directives adoption into law by the applicable
EU member countries in which the manufacturers have
significant operations. Dell adopted
FSP 143-1 in the
first quarter of fiscal 2006 and has determined that its effect
did not have a material impact on its consolidated results of
operations and financial condition for fiscal 2006.
In November 2005, the FASB issued
FSP FAS 115-1
and FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain
Investments(FSP 115-1),
which provides guidance on determining when investments in
certain debt and equity securities are considered impaired,
whether that impairment is other-than-temporary, and on
measuring such impairment loss.
FSP 115-1 also
includes accounting considerations subsequent to the recognition
of an other-than temporary impairment and requires certain
disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments.
FSP 115-1 is
required to be applied to reporting periods beginning after
December 15, 2005 and is required to be adopted by Dell in
the first quarter of fiscal 2007. Dell is currently evaluating
the effect that the adoption of
FSP 115-1 will
have on its consolidated results of operations and financial
condition, but does not expect it to have a material impact.
Reclassifications Financing receivables have
been separately classified on the balance sheet as of
February 3, 2006. Prior periods have been reclassified to
conform to the current presentation. These reclassifications
have no effect on the results of operations or
stockholders equity as previously reported.
NOTE 2 Financial Instruments
Disclosures About Fair Values of Financial Instruments
The fair value of investments, long-term debt, and related
interest rate derivative instruments has been estimated based
upon market quotes from brokers. The fair value of foreign
currency forward contracts has been estimated using market
quoted rates of foreign currencies at the applicable balance
sheet date. The estimated fair value of foreign currency
purchased option contracts is based on market quoted rates at
the applicable balance sheet date and the Black-Scholes option
pricing model. The estimates presented herein are not
necessarily indicative of the amounts that Dell could realize in
a current market exchange. Changes in assumptions could
significantly affect the estimates.
46
Cash and cash equivalents, accounts receivable, accounts
payable, and accrued and other liabilities are reflected in the
accompanying consolidated statement of financial position at
cost, which approximates fair value because of the short-term
maturity of these assets and liabilities.
Investments
The following table summarizes by major security type the fair
value and cost of Dells investments. All investments with
remaining maturities in excess of one year are recorded as
long-term investments in the accompanying consolidated statement
of financial position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2006 | |
|
January 28, 2005 | |
|
|
| |
|
| |
|
|
Fair | |
|
|
|
Unrealized | |
|
Fair | |
|
|
|
Unrealized | |
|
|
Value | |
|
Cost | |
|
Gain (Loss) | |
|
Value | |
|
Cost | |
|
Gain (Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions) | |
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$ |
2,501 |
|
|
$ |
2,547 |
|
|
$ |
(46 |
) |
|
$ |
7,973 |
|
|
$ |
8,012 |
|
|
$ |
(39 |
) |
|
U.S. corporate
|
|
|
1,638 |
|
|
|
1,657 |
|
|
|
(19 |
) |
|
|
1,012 |
|
|
|
1,021 |
|
|
|
(9 |
) |
|
International corporate
|
|
|
352 |
|
|
|
359 |
|
|
|
(7 |
) |
|
|
243 |
|
|
|
245 |
|
|
|
(2 |
) |
|
State and municipal governments
|
|
|
115 |
|
|
|
115 |
|
|
|
|
|
|
|
25 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
4,606 |
|
|
|
4,678 |
|
|
|
(72 |
) |
|
|
9,253 |
|
|
|
9,303 |
|
|
|
(50 |
) |
Equity and other securities
|
|
|
101 |
|
|
|
101 |
|
|
|
|
|
|
|
101 |
|
|
|
98 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$ |
4,707 |
|
|
$ |
4,779 |
|
|
$ |
(72 |
) |
|
$ |
9,354 |
|
|
$ |
9,401 |
|
|
$ |
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$ |
2,016 |
|
|
$ |
2,028 |
|
|
$ |
(12 |
) |
|
$ |
5,060 |
|
|
$ |
5,068 |
|
|
$ |
(8 |
) |
Long-term
|
|
|
2,691 |
|
|
|
2,751 |
|
|
|
(60 |
) |
|
|
4,294 |
|
|
|
4,333 |
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$ |
4,707 |
|
|
$ |
4,779 |
|
|
$ |
(72 |
) |
|
$ |
9,354 |
|
|
$ |
9,401 |
|
|
$ |
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 3, 2006, Dell had approximately 385 debt
investment positions that had fair values below their carrying
values for a period of less than 12 months. The fair value
and unrealized losses on these investment positions totaled
$2 billion and $27 million, respectively, as of
February 3, 2006. As of February 3, 2006, Dell had
approximately 660 investment positions that had fair values
below their carrying values for a period of more than
12 months. The fair value and unrealized losses on these
investment positions totaled $2 billion and
$45 million, respectively, as of February 3, 2006. The
unrealized losses are due to changes in interest rates and are
expected to be recovered over the contractual term of the
instrument.
The following table summarizes Dells recognized gains and
losses on investments, including impairments of certain
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Gains
|
|
$ |
13 |
|
|
$ |
40 |
|
|
$ |
94 |
|
Losses
|
|
|
(9 |
) |
|
|
(34 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains
|
|
$ |
4 |
|
|
$ |
6 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
Dell routinely enters into securities lending agreements with
financial institutions in order to enhance investment income.
Dell requires that the loaned securities be collateralized in
the form of cash or securities for values which generally exceed
the value of the loaned security. As of February 3, 2006,
there were no securities on loan.
Foreign Currency Instruments
Dell uses purchased option contracts and forward contracts
designated as cash flow hedges to protect against the foreign
currency exchange risk inherent in its forecasted transactions
denomi-
47
nated in currencies other than the U.S. dollar. Hedged
transactions include international sales by U.S. dollar
functional currency entities, foreign currency denominated
purchases of certain components and intercompany shipments to
some international subsidiaries. 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.
These contracts generally expire in twelve months or less.
Dell also uses forward contracts to hedge monetary assets and
liabilities, primarily receivables and payables, denominated in
a foreign currency. These contracts are not designated as
hedging instruments under GAAP, and therefore, the change in the
instruments fair value is recognized currently in earnings
and is reported as a component of investment and other income,
net. 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.
If the derivative is designated as a cash flow hedge, the
effective portion of the change in the fair value of the
derivative is initially deferred in other comprehensive income
(loss) net of tax. These amounts are subsequently recognized in
income as a component of net revenue or cost of revenue in the
same period the hedged transaction affects earnings. The
ineffective portion of the change in the fair value of a cash
flow hedge is recognized currently in earnings and is reported
as a component of investment and other income, net. Hedge
effectiveness is measured by comparing the hedging
instruments cumulative change in fair value from inception
to maturity to the forecasted transactions terminal value.
During fiscal 2006, 2005, and 2004, Dell did not discontinue any
cash flow hedges as substantially all forecasted foreign
currency transactions were realized in Dells actual
results. Furthermore, hedge ineffectiveness was not material.
At February 3, 2006, Dell held purchased foreign currency
option contracts with a notional amount of approximately
$3.3 billion, a net asset value of $145 million and a
net unrealized deferred gain of $1 million, net of taxes.
At February 3, 2006, Dell held foreign currency forward
contracts with a notional amount of approximately
$3.3 billion, a net asset value of $1 million and a
net unrealized deferred loss of $20 million, net of taxes.
At January 28, 2005, Dell held purchased foreign currency
option contracts with a notional amount of approximately
$2.0 billion, a net asset value of $53 million and a
net unrealized deferred loss of $52 million, net of taxes.
At January 28, 2005, Dell held foreign currency forward
contracts with a notional amount of approximately
$3.0 billion, a net liability value of $146 million
and a net unrealized deferred gain of $21 million, net of
taxes.
Long-Term Debt and Interest Rate Risk Management
In April 1998, Dell issued $200 million 6.55% fixed rate
senior notes due April 15, 2008 (the Senior
Notes) and $300 million 7.10% fixed rate senior
debentures due April 15, 2028 (the Senior
Debentures). Interest on the Senior Notes and Senior
Debentures is paid semi-annually, on April 15 and October 15.
The Senior Notes and Senior Debentures rank pari passu and are
redeemable, in whole or in part, at the election of Dell for
principal, any accrued interest and a redemption premium based
on the present value of interest to be paid over the term of the
debt agreements. The Senior Notes and Senior Debentures
generally contain no restrictive covenants, other than a
limitation on liens on Dells assets and a limitation on
sale-leaseback transactions involving Dell property.
Concurrent with the issuance of the Senior Notes and Senior
Debentures, Dell entered into interest rate swap agreements
converting Dells interest rate exposure from a fixed rate
to a floating rate basis to better align the associated interest
rate characteristics to its cash and investments portfolio. The
interest rate swap agreements have an aggregate notional amount
of $200 million maturing April 15, 2008 and
$300 million maturing April 15, 2028. The floating
rates are based on three-month
48
London Interbank Offered Rates plus 0.41% and 0.79% for the
Senior Notes and Senior Debentures, respectively. As a result of
the interest rate swap agreements, Dells effective
interest rates for the Senior Notes and Senior Debentures were
4.108% and 4.448%, respectively, for fiscal 2006.
The interest rate swap agreements are designated as fair value
hedges, and the terms of the swap agreements and hedged items
are such that effectiveness can be measured using the short-cut
method defined in SFAS No. 133. The differential to be
paid or received on the interest rate swap agreements is accrued
and recognized as an adjustment to interest expense as interest
rates change. The difference between Dells carrying
amounts and fair value of its long-term debt and related
interest rate swaps was not material at February 3, 2006
and January 28, 2005.
NOTE 3 Income Taxes
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
1,075 |
|
|
$ |
984 |
|
|
$ |
969 |
|
|
Foreign
|
|
|
259 |
|
|
|
209 |
|
|
|
132 |
|
Tax repatriation (benefit) charge
|
|
|
(85 |
) |
|
|
280 |
|
|
|
|
|
Deferred
|
|
|
(247 |
) |
|
|
(71 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
1,002 |
|
|
$ |
1,402 |
|
|
$ |
1,079 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes included approximately
$3.0 billion, $2.4 billion and $1.6 billion
related to foreign operations in fiscal 2006, 2005, and 2004,
respectively. On October 22, 2004, the American Jobs
Creation Act of 2004 (the Act) was signed into law.
Among other items, the Act creates a temporary incentive for
U.S. multinationals to repatriate accumulated income earned
outside the U.S. at an effective tax rate of 5.25%, versus
the U.S. federal statutory rate of 35%. In the fourth
quarter of fiscal 2005, Dell recorded an initial estimated
income tax charge of $280 million based on the decision to
repatriate $4.1 billion of foreign earnings. This tax
charge included an amount relating to a drafting oversight that
Congressional leaders expected to correct in calendar year 2005.
On May 10, 2005, the Department of Treasury issued further
guidance that addressed the drafting oversight. In the second
quarter of fiscal 2006, Dell reduced its original estimate of
the tax charge by $85 million as a result of the guidance
issued by the Treasury Department. As of February 3, 2006,
Dell had completed the repatriation of the expected
$4.1 billion in foreign earnings.
Deferred taxes have not been provided on excess book basis in
the amount of approximately $5.7 billion in the shares of
certain foreign subsidiaries because these basis differences are
not expected to reverse in the foreseeable future and are
essentially permanent in duration. These basis differences arose
primarily through the undistributed book earnings of the
subsidiaries that Dell intends to reinvest indefinitely. The
basis differences could reverse through a sale of the
subsidiaries, the receipt of dividends from the subsidiaries as
well as various other events. Net of available foreign tax
credits, residual income tax of approximately $1.6 billion
would be due upon a reversal of this excess book basis.
49
The components of Dells net deferred tax asset are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
February 3, | |
|
January 28, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(in millions) | |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$ |
290 |
|
|
$ |
241 |
|
|
Inventory and warranty provisions
|
|
|
254 |
|
|
|
232 |
|
|
Investment impairments and
unrealized gains
|
|
|
19 |
|
|
|
23 |
|
|
Provisions for product returns and
doubtful accounts
|
|
|
48 |
|
|
|
22 |
|
|
Capital loss
|
|
|
8 |
|
|
|
6 |
|
|
Leasing and financing
|
|
|
119 |
|
|
|
|
|
|
Other
|
|
|
123 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
861 |
|
|
|
623 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(109 |
) |
|
|
(156 |
) |
|
Leasing and financing
|
|
|
|
|
|
|
(10 |
) |
|
Other
|
|
|
(35 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
(144 |
) |
|
|
(192 |
) |
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
717 |
|
|
$ |
431 |
|
|
|
|
|
|
|
|
Current portion (included in other
current assets)
|
|
$ |
441 |
|
|
$ |
425 |
|
Non-current portion (included in
other non-current assets)
|
|
|
276 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
717 |
|
|
$ |
431 |
|
|
|
|
|
|
|
|
A portion of Dells operations operate at a reduced tax
rate or free of tax under various tax holidays which expire in
whole or in part during fiscal 2009 through 2019. Many of these
holidays may be extended when certain conditions are met. The
income tax benefits attributable to the tax status of these
subsidiaries were estimated to be approximately
$364 million ($0.15 per share) in fiscal 2006,
$280 million ($0.11 per share) in fiscal 2005, and
$210 million ($0.08 per share) in fiscal 2004.
The effective tax rate differed from the statutory
U.S. federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
|
|
February 3, |
|
January 28, |
|
January 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
U.S. federal statutory rate
|
|
|
35 |
.0% |
|
|
|
35 |
.0% |
|
|
|
35 |
.0% |
|
Foreign income taxed at different
rates
|
|
|
(13 |
.8) |
|
|
|
(11 |
.6) |
|
|
|
(7 |
.3) |
|
Tax repatriation (benefit) charge
|
|
|
(1 |
.9) |
|
|
|
6 |
.3 |
|
|
|
|
|
|
Other
|
|
|
2 |
.6 |
|
|
|
1 |
.8 |
|
|
|
1 |
.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
21 |
.9% |
|
|
|
31 |
.5% |
|
|
|
29 |
.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reduction in Dells fiscal 2006 effective tax rate,
compared to fiscal 2005 and fiscal 2004, is due to the
aforementioned tax repatriation charge and a higher proportion
of operating profits attributable to foreign jurisdictions which
are taxed at lower rates.
NOTE 4 Capitalization
Preferred Stock
Authorized Shares Dell has the authority to
issue five million shares of preferred stock, par value
$.01 per share. At February 3, 2006 and
January 28, 2005, no shares of preferred stock were issued
or outstanding.
Series A Junior Participating Preferred
Stock In conjunction with the distribution of
Preferred Share Purchase Rights (see below), Dells Board
of Directors designated 200,000 shares of
50
preferred stock as Series A Junior Participating Preferred
Stock (Junior Preferred Stock) and reserved such
shares for issuance upon exercise of the Preferred Share
Purchase Rights. The Preferred Share Purchase Rights expired on
November 29, 2005, and Dells Board of Directors
eliminated the previously designated and reserved shares on
February 1, 2006. At February 3, 2006 and
January 28, 2005, no shares of Junior Preferred Stock were
issued or outstanding.
Common Stock
Authorized Shares As of February 3,
2006, Dell is authorized to issue seven billion shares of common
stock, par value $.01 per share.
Share Repurchase Program Dell has a share
repurchase program that authorizes it to purchase shares of
common stock in order to both distribute cash to stockholders
and manage dilution resulting from shares issued under
Dells equity compensation plans. However, Dell does not
currently have a policy that requires the repurchase of common
stock in conjunction with share-based payment arrangements. As
of February 3, 2006, Dells share repurchase program
authorized the purchase of up to 1.5 billion shares of
common stock at an aggregate cost not to exceed
$30 billion. Dell expects to repurchase shares of common
stock through a systematic program of open market purchases. As
of the end of fiscal 2006, Dell had cumulatively repurchased
1.4 billion shares for an aggregate cost of approximately
$25.6 billion. During fiscal 2006, Dell repurchased
204 million shares of common stock for an aggregate cost of
$7.2 billion.
Preferred Share Purchase Rights
In December 1995, Dell distributed a dividend of one Preferred
Share Repurchase Right (a Right) for each
outstanding share of common stock. Dell issued shares of common
stock with accompanying Preferred Share Purchase Rights until
the rights expired on November 29, 2005.
NOTE 5 Benefit Plans
Stock Plans Dell has the following four
employee stock plans (collectively referred to as the
Stock Plans) under which options and restricted
stock were outstanding as of February 3, 2006:
|
|
|
The Dell Computer Corporation 1989 Stock Option Plan (the
1989 Option Plan) |
|
|
The Dell Computer Corporation Incentive Plan (the 1994
Incentive Plan) |
|
|
The Dell Computer Corporation 1998 Broad-Based Stock Option Plan
(the 1998 Broad-Based Plan), and |
|
|
The Dell Computer Corporation 2002 Long-Term Incentive Plan (the
2002 Incentive Plan) |
The Stock Plans are administered by the Compensation Committee
of Dells Board of Directors.
The 1989 Option Plan, the 1994 Incentive Plan, and the 1998
Broad-Based Plan have been terminated (except for options
previously granted under those plans that are still
outstanding). Consequently, awards are currently only being made
under the 2002 Incentive Plan.
The 2002 Incentive Plan provides for the granting of stock-based
incentive awards to Dells employees, non-employee
directors, and certain consultants and advisors to Dell. Awards
may be either incentive stock options within the meaning of
Section 422 of the Internal Revenue Code, nonqualified
options, or restricted stock. The right to purchase shares
pursuant to existing stock option agreements typically vests
pro-rata at each option anniversary date over a five-year
period. The options, which are generally granted with option
exercise prices equal to the fair market value of Dell shares on
the date of grant must be exercised within ten years from the
date of grant. Dell has not issued any options to consultants or
advisors to Dell since fiscal 1999.
There were 272 million, 291 million, and
327 million options to purchase Dells common stock
available for future grants under the Stock Plans as of
February 3, 2006, January 28, 2005, and
51
January 30, 2004, respectively. All of the shares available
for future grants as of February 3, 2006 are under the 2002
Incentive Plan.
The following table summarizes stock option activity for the
Stock Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
|
|
|
February 3, 2006 |
|
January 28, 2005 |
|
January 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Weighted- |
|
|
|
Weighted- |
|
|
Number |
|
Average |
|
Number |
|
Average |
|
Number |
|
Average |
|
|
of |
|
Exercise |
|
of |
|
Exercise |
|
of |
|
Exercise |
|
|
Options |
|
Price |
|
Options |
|
Price |
|
Options |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(share data in millions) |
Options outstanding
beginning of year
|
|
|
369 |
|
|
$ |
29.70 |
|
|
|
378 |
|
|
$ |
28.30 |
|
|
|
387 |
|
|
$ |
27.09 |
|
|
Granted
|
|
|
45 |
|
|
|
39.76 |
|
|
|
52 |
|
|
|
34.35 |
|
|
|
51 |
|
|
|
30.01 |
|
|
Exercised
|
|
|
(44 |
) |
|
|
20.47 |
|
|
|
(45 |
) |
|
|
22.30 |
|
|
|
(35 |
) |
|
|
14.92 |
|
|
Cancelled
|
|
|
(27 |
) |
|
|
34.05 |
|
|
|
(16 |
) |
|
|
32.39 |
|
|
|
(25 |
) |
|
|
31.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding end
of year
|
|
|
343 |
|
|
|
31.86 |
|
|
|
369 |
|
|
|
29.70 |
|
|
|
378 |
|
|
|
28.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable end
of year
|
|
|
288 |
|
|
$ |
33.04 |
|
|
|
171 |
|
|
$ |
28.99 |
|
|
|
154 |
|
|
$ |
26.74 |
|
The following is additional information relating to options for
the Stock Plans outstanding as of February 3, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
Weighted- |
|
|
Number |
|
Average |
|
Remaining |
|
Number |
|
Average |
|
|
of |
|
Exercise |
|
Contractual |
|
of |
|
Exercise |
|
|
Shares |
|
Price |
|
Life (Years) |
|
Shares |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
(share data in millions) |
$0.01-$1.49
|
|
|
3 |
|
|
$ |
1.26 |
|
|
|
0.35 |
|
|
|
3 |
|
|
$ |
1.08 |
|
$1.50-$14.99
|
|
|
10 |
|
|
$ |
8.35 |
|
|
|
1.52 |
|
|
|
10 |
|
|
$ |
6.85 |
|
$15.00-$24.99
|
|
|
55 |
|
|
$ |
22.83 |
|
|
|
5.34 |
|
|
|
38 |
|
|
$ |
21.01 |
|
$25.00-$34.99
|
|
|
123 |
|
|
$ |
29.17 |
|
|
|
6.56 |
|
|
|
85 |
|
|
$ |
27.62 |
|
$35.00-$39.99
|
|
|
83 |
|
|
$ |
36.97 |
|
|
|
5.86 |
|
|
|
83 |
|
|
$ |
37.55 |
|
$40.00 and over
|
|
|
69 |
|
|
$ |
42.55 |
|
|
|
6.69 |
|
|
|
69 |
|
|
$ |
40.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343 |
|
|
|
|
|
|
|
|
|
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan Dell has an
employee stock purchase plan that qualifies under
Section 423 of the Internal Revenue Code and permits
substantially all employees to purchase shares of Dells
common stock. Prior to July 1, 2005, participating
employees were permitted to purchase common stock through
payroll deductions at the end of each six-month participation
period at a purchase price equal to 85% of the lower of the fair
market value of the common stock at the beginning or the end of
the participation period. Effective July 1, 2005, the Dell
Employee Stock Purchase Plan was amended. The amended plan
allows participating employees to purchase common stock through
payroll deductions at the end of each three-month participation
period at a purchase price equal to 85% of the fair market value
of the common stock at the end of the participation period. Upon
adoption of SFAS No. 123(R), Dell will expense the 15%
discount received by the participating employees. Common stock
reserved for future employee purchases under the plan aggregated
16 million shares at February 3, 2006, 21 million
shares at January 28, 2005 and 25 million shares at
January 30, 2004. Common stock issued under this plan
totaled 5 million shares in fiscal 2006, 4 million
shares in fiscal 2005, and 4 million shares in fiscal 2004.
Restricted Stock Grants During fiscal 2006,
2005, and 2004, Dell granted 1.0 million, 0.4 million,
and 0.6 million shares of restricted stock, respectively.
The weighted average fair value of restricted stock granted in
fiscal 2006, 2005, and 2004 was $39.67, $35.14 and $27.92,
respectively. For substantially all restricted stock grants, at
the date of grant, the recipient has all rights of a
52
stockholder, subject to certain restrictions on transferability
and a risk of forfeiture. Restricted shares typically vest over
a seven-year period beginning on the date of grant. Dell records
unearned compensation in stockholders equity equal to the
market value of the restricted shares on the date of grant and
charges the unearned compensation to expense over the vesting
period.
401(k) Plan Dell has a defined contribution
retirement plan that complies with Section 401(k) of the
Internal Revenue Code. Substantially all employees in the
U.S. are eligible to participate in the plan. Effective
January 1, 2005, Dell matches 100% of each
participants voluntary contributions, subject to a maximum
contribution of 4% of the participants compensation, and
participants vest immediately in all Dell contributions to the
Plan. Prior to January 1, 2005, Dell matched 100% of each
participants voluntary contributions, subject to a maximum
contribution of 3% of the participants compensation, and
participants vested 20% per year over a
5-year period in all
Dell contributions to the Plan. Dells contributions during
fiscal 2006, 2005 and 2004 were $66 million,
$48 million, and $42 million, respectively.
Dells contributions are invested according to each
participants elections in the investment options provided
under the Plan. Investment options include Dell stock, but
neither participant nor Dell contributions are required to be
invested in Dell stock.
NOTE 6 Financial Services
Joint Venture Agreement
Dell is a partner in Dell Financial Services L.P.
(DFS), a joint venture with CIT Group Inc.
(CIT). DFS enables customer acquisitions of product
and services sold by Dell through loan and lease financing
arrangements in the U.S. During the third quarter of fiscal
2004, Dell began consolidating DFSs financial results due
to the adoption of Financial Accounting Standards Board
(FASB) Interpretation No. 46R
(FIN 46R). Based on this guidance, Dell
concluded that DFS is a Variable Interest Entity
(VIE) and the primary beneficiary of DFSs
expected cash flows.
On September 8, 2004, Dell and CIT executed an agreement
that extended the term of the joint venture to January 29,
2010, and modified certain terms of the relationship. In
accordance with the extension agreement, net income and losses
generated by DFS are currently allocated 70% to Dell and 30% to
CIT. As of February 3, 2006, and January 28, 2005,
CITs equity ownership in the net assets of DFS was
$12 million and $13 million, respectively, which is
recorded as minority interest and included in other non-current
liabilities.
The extension agreement provides Dell with the option to
purchase CITs 30% interest in DFS in February 2008, for a
purchase price ranging from approximately $100 million to
$345 million. If Dell does not exercise this purchase
option, Dell is obligated to purchase CITs 30% interest
upon the occurrence of certain termination events, or upon
expiration of the joint venture on January 29, 2010.
Dell is dependent upon DFS to facilitate financing for a
significant number of customers who elect to finance products
sold by Dell. Historically, DFS relied solely on CIT to access
the capital markets to provide funding for these transactions.
However, during the fourth quarter of fiscal 2005, Dell began
funding loan and lease receivables facilitated by DFS on
substantially the same terms and conditions as CIT. Dells
funding of these assets allows Dell to retain a greater portion
of the assets future earnings. In fiscal 2006, Dell funded
approximately 20% of these financing transactions. The
percentage of transactions that Dell may purchase under the
extension agreement increases in future years, and, accordingly,
Dell expects to increase its funding of fixed-term loans and
leases, and revolving loans. Since CIT continues to purchase a
significant percentage of these transactions, Dell would be
required to self-finance these activities or find additional
alternative sources of financing for its customers if CIT were
unable to access the capital markets.
53
Financing Receivables
Financing receivables primarily consist of revolving loans,
leases and small business loans resulting from the sale of Dell
products. Financing through DFS is one of many sources of
funding that Dells customers may select. For customers who
desire revolving or term loan financing, Dell sells equipment
directly to customers who, in turn, enter into agreements with
CIT Bank, a subsidiary of CIT, to finance their purchases. For
customers who desire lease financing, Dell sells the equipment
to DFS, and DFS enters into direct financing lease arrangements
with the customers. As of February 3, 2006, the components
of financing receivables included the following:
|
|
|
Revolving loans which are offered through private label credit
financing programs through CIT Bank provide qualified customers
with a revolving credit line for the purchase of products and
services sold by Dell. 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, no interest is charged. These special programs
generally range from 3 to 24 months and have a weighted
average life of approximately 12 months. Other revolving
loans bear interest at a variable annual percentage rate that is
tied to the prime rate. |
|
|
Commercial leases and loans with business customers which are
offered by DFS and generally have a term of two to three years.
Fixed term loans are also offered to qualified small businesses
through CIT Bank for the purchase of products sold by Dell.
Commercial leases and loans are presented net of an allowance
for uncollectible accounts. Scheduled maturities of minimum
lease outstanding at February 3, 2006, are as follows:
2007: $52 million; 2008: $25 million; 2009:
$8 million; 2010: $0.3 million; 2011 and beyond: $-
million. |
|
|
For certain types of leases, DFS retains a residual interest in
the equipment. Estimated lease residual values are established
at the inception of the lease based upon estimates of the value
of the equipment at the end of the lease based on historical
studies, industry data and future value-at-risk demand valuation
methods. On a periodic 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 recognized immediately. |
|
|
Retained interests which represent the residual beneficial
interest Dell retains in certain pools of securitized finance
receivables. Retained interests are stated at the present value
of the estimated net beneficial cash flows after payment of all
senior interests. |
The following table summarizes the components of Dells
financing receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Financing receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving loans, net
|
|
$ |
1,026 |
|
|
$ |
731 |
|
|
$ |
455 |
|
|
|
Leases and loans, net
|
|
|
300 |
|
|
|
187 |
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customer receivables, net
|
|
|
1,326 |
|
|
|
918 |
|
|
|
620 |
|
|
Residual interests
|
|
|
272 |
|
|
|
241 |
|
|
|
212 |
|
|
Retained interest and other
|
|
|
90 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$ |
1,688 |
|
|
$ |
1,184 |
|
|
$ |
832 |
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$ |
1,363 |
|
|
$ |
985 |
|
|
$ |
712 |
|
Long-term
|
|
|
325 |
|
|
|
199 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financing receivables, net
|
|
$ |
1,688 |
|
|
$ |
1,184 |
|
|
$ |
832 |
|
|
|
|
|
|
|
|
|
|
|
54
Dell recognized revenue from the sale of products pursuant to
loan and lease financing transactions made by DFS of
$6.6 billion, $5.6 billion and $4.5 billion
during fiscal 2006, 2005, and 2004, respectively.
DFS Credit Facilities
DFS maintains credit facilities with CIT which provides DFS with
a funding capacity of up to $750 million. As of
February 3, 2006 and January 28, 2005, outstanding
advances from CIT totaled $133 million and
$158 million, respectively, and were included in other
current and other non-current liabilities on Dells
consolidated statement of financial position.
During fiscal 2006 and fiscal 2005, Dell sold $586 million
and $160 million, respectively, of fixed-term loans and
leases and revolving loans to unconsolidated qualifying special
purpose entities. The qualifying special purpose entities are
bankruptcy remote legal entities with assets and liabilities
separate from those of Dell. The sole purpose of the qualifying
special purpose entities is to facilitate the funding of
purchased receivables in the capital markets. The qualifying
special purpose entities have entered into financing
arrangements with three multi-seller conduits that, in turn,
issue asset-backed debt securities in the capital markets.
Transfers of financing receivables are recorded in accordance
with the provisions of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities.
NOTE 7 Deferred Revenue and Warranty
Liability
Revenue from extended warranty and service contracts, for which
Dell is obligated to perform, is recorded as deferred revenue
and subsequently recognized over the term of the contract or
when the service is completed. Dell records warranty liabilities
at the time of sale for the estimated costs that may be incurred
under its limited warranty. Changes in Dells aggregate
deferred revenue and warranty liability (basic and extended
warranties), which are included in other current and non-current
liabilities on Dells consolidated statement of financial
position, are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(in millions) | |
Aggregate deferred revenue and
warranty liability at beginning of period
|
|
$ |
3,594 |
|
|
$ |
2,694 |
|
|
Revenue deferred and costs accrued
for new warranties(a)
|
|
|
4,603 |
|
|
|
3,435 |
|
|
Service obligations honored
|
|
|
(1,651 |
) |
|
|
(1,176 |
) |
|
Amortization of deferred revenue
|
|
|
(1,974 |
) |
|
|
(1,359 |
) |
|
|
|
|
|
|
|
Aggregate deferred revenue and
warranty liability at end of period
|
|
$ |
4,572 |
|
|
$ |
3,594 |
|
|
|
|
|
|
|
|
Current portion
|
|
$ |
2,478 |
|
|
$ |
1,893 |
|
Non-current portion
|
|
|
2,094 |
|
|
|
1,701 |
|
|
|
|
|
|
|
|
Aggregate deferred revenue and
warranty liability at end of period
|
|
$ |
4,572 |
|
|
$ |
3,594 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the third quarter of fiscal 2006, Dell recognized a
product charge of $307 million for estimated costs of
servicing or replacing certain
OptiPlextm
systems that include a vendor part that failed to perform to
Dells specifications. At February 3, 2006,
$197 million of the accrued warranty obligation remains for
servicing or replacing additional
OptiPlextm
systems. |
55
NOTE 8 Commitments, Contingencies, and
Certain Concentrations
Lease Commitments Dell leases property and
equipment, manufacturing facilities, and office space under
non-cancelable leases. Certain of these leases obligate Dell to
pay taxes, maintenance, and repair costs. As of February 3,
2006, future minimum lease payments under these non-cancelable
leases were as follows: $67 million in fiscal 2007;
$58 million in fiscal 2008; $51 million in fiscal
2009; $35 million in fiscal 2010; $28 million in
fiscal 2011; and $107 million thereafter.
Dell historically maintained master lease facilities, which
provided Dell with the ability to lease certain real property,
buildings, and equipment to be constructed or acquired. These
leases were accounted for as operating leases by Dell. During
fiscal 2004, Dell paid $636 million to purchase all of the
assets covered by its master lease facilities. Accordingly, the
assets formerly covered by these facilities are included in
Dells consolidated statement of financial position, and
Dell has no remaining lease commitments under these master lease
facilities.
Rent expense under all leases totaled $70 million,
$60 million, and $76 million for fiscal 2006, 2005,
and 2004, respectively.
DFS Purchase Commitment Pursuant to the joint
venture agreement between Dell and CIT, Dell has a obligation to
purchase CITs 30% interest in DFS at the expiration of the
joint venture on January 29, 2010, for a purchase price
ranging from approximately $100 million to
$345 million. See Note 6 of Notes to
Consolidated Financial Statements.
Restricted Cash Pursuant to an agreement
between DFS and CIT, DFS is required to maintain certain escrow
cash accounts associated with revolving loans originated by CIT
and serviced by DFS. Due to the consolidation of DFS,
$453 million and $438 million in restricted cash is
included in other current assets on Dells consolidated
statement of financial position as of February 3, 2006 and
January 28, 2005, respectively.
Legal Matters Dell is subject to various
legal proceedings and claims arising in the ordinary course of
business. Dells management does not expect that the
outcome in any of these legal proceedings, individually or
collectively, will have a material adverse effect on Dells
financial condition, results of operations, or cash flows.
Certain Concentrations All of Dells
foreign currency exchange and interest rate derivative
instruments involve elements of market and credit risk in excess
of the amounts recognized in the consolidated financial
statements. The counterparties to the financial instruments
consist of a number of major financial institutions. In addition
to limiting the amount of agreements and contracts it enters
into with any one party, Dell monitors its positions with and
the credit quality of the counterparties to these financial
instruments. Dell does not anticipate nonperformance by any of
the counterparties.
Dells investments in debt securities are placed with high
quality financial institutions and companies. Dells
investments in debt securities have effective maturities of less
than five years. Management believes that no significant
concentration of credit risk for investments exists for Dell.
Dell markets and sells its products and services to large
corporate clients, governments, healthcare and education
accounts, as well as
small-to-medium
businesses and individuals. Dells receivables from such
parties are well diversified.
Dell purchases a number of components from single sources. In
some cases, alternative sources of supply are not available. In
other cases, Dell may establish a working relationship with a
single source if Dell believes it is advantageous due to
performance, quality, support, delivery, capacity, or price
considerations. If the supply of a critical single-source
material or component were delayed or curtailed, Dells
ability to ship the related product in desired quantities and in
a timely manner could be adversely affected. Even where
alternative sources of supply are available, qualification of
the alternative suppliers and establishment of reliable supplies
could result in delays and a possible loss of sales, which may
have an adverse effect on Dells operating results.
56
NOTE 9 Segment Information
Dell conducts operations worldwide and is managed in three
geographic segments: the Americas, Europe, Middle East and
Africa (EMEA), and Asia Pacific-Japan
(APJ) regions. The Americas region, which is based
in Round Rock, Texas, covers the U.S., Canada, and Latin
America. Within the Americas, Dell is further segmented into
Business and U.S. Consumer. The Americas Business segment
includes sales to corporate, government, healthcare, education,
and small and medium business customers while the
U.S. Consumer segment includes sales primarily to
individual consumers. The EMEA region, which is based in
Bracknell, England, covers Europe, the Middle East, and Africa.
The APJ region covers the Pacific Rim, including Australia and
New Zealand, and is based in Singapore.
The accounting policies of Dells reportable segments are
the same as those described in the summary of significant
accounting policies. Dell allocates resources to and evaluates
the performance of its segments based on operating income.
Corporate expenses are included in Dells measure of
segment operating income for management reporting purposes;
however, certain charges totaling $442 million, incurred in
the third quarter of fiscal 2006, are not allocated to the
business segments. The asset totals disclosed by geography are
directly managed by those regions and include accounts
receivable, inventory, certain fixed assets, and certain other
assets. Assets are not allocated specifically to the Business
and U.S. Consumer segments within the Americas. Corporate
assets primarily include cash and cash equivalents, investments,
deferred tax assets, and other assets.
Dell is consolidating its U.S. Consumer segment into its
Americas Business segment in the first quarter of fiscal 2007.
Dell expects to reevaluate its segment reporting at that time.
The table below presents information about Dells
reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$ |
28,481 |
|
|
$ |
25,339 |
|
|
$ |
21,888 |
|
|
|
U.S. Consumer
|
|
|
7,930 |
|
|
|
7,601 |
|
|
|
6,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
36,411 |
|
|
|
32,940 |
|
|
|
28,603 |
|
|
EMEA
|
|
|
12,873 |
|
|
|
10,787 |
|
|
|
8,495 |
|
|
Asia Pacific-Japan
|
|
|
6,624 |
|
|
|
5,478 |
|
|
|
4,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$ |
55,908 |
|
|
$ |
49,205 |
|
|
$ |
41,444 |
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$ |
3,015 |
|
|
$ |
2,579 |
|
|
$ |
2,194 |
|
|
|
U.S. Consumer
|
|
|
414 |
|
|
|
399 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
3,429 |
|
|
|
2,978 |
|
|
|
2,594 |
|
|
EMEA
|
|
|
857 |
|
|
|
818 |
|
|
|
637 |
|
|
Asia Pacific-Japan
|
|
|
503 |
|
|
|
458 |
|
|
|
313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated segment
operating income
|
|
$ |
4,789 |
|
|
$ |
4,254 |
|
|
$ |
3,544 |
|
|
|
|
|
|
|
|
|
|
|
57
The reconciliation of segment operating results to Dells
consolidated totals is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated segment
operating income
|
|
$ |
4,789 |
|
|
$ |
4,254 |
|
|
$ |
3,544 |
|
|
Other product charges(a)
|
|
|
(338 |
) |
|
|
|
|
|
|
|
|
|
Selling, general, and
administrative charges(b)
|
|
|
(104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated operating income
|
|
$ |
4,347 |
|
|
$ |
4,254 |
|
|
$ |
3,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other product charges include $307 million for estimated
warranty costs of servicing or replacing certain
OptiPlextm
systems that include a vendor part that failed to perform to
Dells specifications, as well as additional charges for
product rationalizations and workforce realignment. |
|
(b) |
|
Charges relate to workforce realignment expenses, primarily for
severance and related costs of $50 million, cost of
operating leases on office space no longer utilized of
$25 million, and a write-off of goodwill of
$29 million. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Depreciation and amortization
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$ |
156 |
|
|
$ |
125 |
|
|
$ |
102 |
|
|
|
U.S. Consumer
|
|
|
52 |
|
|
|
53 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
208 |
|
|
|
178 |
|
|
|
143 |
|
|
EMEA
|
|
|
106 |
|
|
|
88 |
|
|
|
71 |
|
|
Asia Pacific-Japan
|
|
|
79 |
|
|
|
68 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
expense
|
|
$ |
393 |
|
|
$ |
334 |
|
|
$ |
263 |
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
4,328 |
|
|
$ |
3,724 |
|
|
$ |
3,134 |
|
|
EMEA
|
|
|
2,041 |
|
|
|
1,817 |
|
|
|
1,510 |
|
|
Asia Pacific-Japan
|
|
|
1,396 |
|
|
|
1,075 |
|
|
|
860 |
|
|
Corporate assets
|
|
|
15,344 |
|
|
|
16,599 |
|
|
|
13,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
23,109 |
|
|
$ |
23,215 |
|
|
$ |
19,311 |
|
|
|
|
|
|
|
|
|
|
|
The following is net revenue and long-lived asset information by
geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
33,028 |
|
|
$ |
30,338 |
|
|
$ |
26,510 |
|
|
Foreign countries
|
|
|
22,880 |
|
|
|
18,867 |
|
|
|
14,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$ |
55,908 |
|
|
$ |
49,205 |
|
|
$ |
41,444 |
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
1,447 |
|
|
$ |
1,267 |
|
|
$ |
1,145 |
|
|
Foreign countries
|
|
|
558 |
|
|
|
424 |
|
|
|
372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$ |
2,005 |
|
|
$ |
1,691 |
|
|
$ |
1,517 |
|
|
|
|
|
|
|
|
|
|
|
58
The allocation between domestic and foreign net revenue is based
on the location of the customers. Net revenue and long-lived
assets from no single foreign country comprised more than 10% of
Dells consolidated net revenues or long-lived assets
during fiscal 2006, 2005, and 2004.
The following is net revenue by product groups:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in billions) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs
|
|
$ |
21.1 |
|
|
$ |
20.8 |
|
|
$ |
18.7 |
|
|
Mobility
|
|
|
14.1 |
|
|
|
11.8 |
|
|
|
9.7 |
|
|
Software & Peripherals
|
|
|
8.5 |
|
|
|
6.7 |
|
|
|
4.9 |
|
|
Servers & Networking
|
|
|
5.4 |
|
|
|
4.9 |
|
|
|
4.3 |
|
|
Enhanced Services
|
|
|
4.9 |
|
|
|
3.7 |
|
|
|
2.7 |
|
|
Storage
|
|
|
1.9 |
|
|
|
1.3 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
55.9 |
|
|
$ |
49.2 |
|
|
$ |
41.4 |
|
|
|
|
|
|
|
|
|
|
|
No single customer accounted for more than 10% of Dells
consolidated net revenue during fiscal 2006, 2005 and 2004.
59
NOTE 10 Supplemental Consolidated Financial
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, | |
|
January 28, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(in millions) | |
Supplemental Consolidated
Statements of Financial Position Information:
|
|
|
|
|
|
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
Gross accounts receivable
|
|
$ |
4,186 |
|
|
$ |
3,641 |
|
|
Allowance for doubtful accounts
|
|
|
(97 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,089 |
|
|
$ |
3,563 |
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
Production materials
|
|
$ |
329 |
|
|
$ |
228 |
|
|
Work-in-process
|
|
|
78 |
|
|
|
58 |
|
|
Finished goods
|
|
|
169 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
$ |
576 |
|
|
$ |
459 |
|
|
|
|
|
|
|
|
Property, plant, and equipment:
|
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
$ |
1,372 |
|
|
$ |
1,207 |
|
|
Computer equipment
|
|
|
1,275 |
|
|
|
1,053 |
|
|
Machinery and other equipment
|
|
|
917 |
|
|
|
757 |
|
|
|
|
|
|
|
|
|
|
Total property, plant, and equipment
|
|
|
3,564 |
|
|
|
3,017 |
|
|
Accumulated depreciation and
amortization
|
|
|
(1,559 |
) |
|
|
(1,326 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,005 |
|
|
$ |
1,691 |
|
|
|
|
|
|
|
|
Accrued and other current
liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred revenue and warranty
liability
|
|
$ |
2,478 |
|
|
$ |
1,893 |
|
|
Compensation
|
|
|
900 |
|
|
|
753 |
|
|
Income taxes
|
|
|
817 |
|
|
|
470 |
|
|
Other
|
|
|
1,892 |
|
|
|
2,125 |
|
|
|
|
|
|
|
|
|
|
$ |
6,087 |
|
|
$ |
5,241 |
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred revenue and warranty
liability
|
|
$ |
2,094 |
|
|
$ |
1,701 |
|
|
Other
|
|
|
455 |
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
$ |
2,549 |
|
|
$ |
2,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Supplemental Consolidated
Statements of Income Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, primarily
interest
|
|
$ |
308 |
|
|
$ |
226 |
|
|
$ |
200 |
|
|
Gains on investments, net
|
|
|
4 |
|
|
|
6 |
|
|
|
16 |
|
|
Interest expense
|
|
|
(28 |
) |
|
|
(16 |
) |
|
|
(14 |
) |
|
Other
|
|
|
(57 |
) |
|
|
(25 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
227 |
|
|
$ |
191 |
|
|
$ |
180 |
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
February 3, | |
|
January 28, | |
|
January 30, | |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Supplemental Consolidated
Statements of Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Flows Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating working
capital accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$ |
(652 |
) |
|
$ |
(550 |
) |
|
$ |
(597 |
) |
|
Financing receivables, net
|
|
|
(377 |
) |
|
|
(274 |
) |
|
|
(335 |
) |
|
Inventories
|
|
|
(119 |
) |
|
|
(130 |
) |
|
|
(53 |
) |
|
Accounts payable
|
|
|
1,004 |
|
|
|
1,595 |
|
|
|
1,283 |
|
|
Accrued and other liabilities
|
|
|
799 |
|
|
|
1,538 |
|
|
|
867 |
|
|
Other, net
|
|
|
(722 |
) |
|
|
(424 |
) |
|
|
(293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(67 |
) |
|
$ |
1,755 |
|
|
$ |
872 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$ |
996 |
|
|
$ |
575 |
|
|
$ |
699 |
|
Interest paid
|
|
$ |
39 |
|
|
$ |
31 |
|
|
$ |
30 |
|
NOTE 11 Unaudited Quarterly Results
The following tables contain selected unaudited consolidated
statements of income and stock sales price data for each quarter
of fiscal 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006 | |
|
|
| |
|
|
4th | |
|
3rd | |
|
2nd | |
|
1st | |
|
|
Quarter | |
|
Quarter(a) | |
|
Quarter(b) | |
|
Quarter | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except per share data) | |
Net revenue
|
|
$ |
15,183 |
|
|
$ |
13,911 |
|
|
$ |
13,428 |
|
|
$ |
13,386 |
|
Gross margin
|
|
$ |
2,709 |
|
|
$ |
2,251 |
|
|
$ |
2,499 |
|
|
$ |
2,491 |
|
Net income
|
|
$ |
1,012 |
|
|
$ |
606 |
|
|
$ |
1,020 |
|
|
$ |
934 |
|
Earnings per common share(d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.43 |
|
|
$ |
0.25 |
|
|
$ |
0.42 |
|
|
$ |
0.38 |
|
|
Diluted
|
|
$ |
0.43 |
|
|
$ |
0.25 |
|
|
$ |
0.41 |
|
|
$ |
0.37 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,350 |
|
|
|
2,395 |
|
|
|
2,418 |
|
|
|
2,456 |
|
|
Diluted
|
|
|
2,375 |
|
|
|
2,435 |
|
|
|
2,478 |
|
|
|
2,515 |
|
Stock sales prices per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
32.89 |
|
|
$ |
40.84 |
|
|
$ |
41.54 |
|
|
$ |
41.76 |
|
|
Low
|
|
$ |
29.00 |
|
|
$ |
31.06 |
|
|
$ |
34.96 |
|
|
$ |
34.83 |
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2005 | |
|
|
| |
|
|
4th | |
|
3rd | |
|
2nd | |
|
1st | |
|
|
Quarter(c) | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except per share data) | |
Net revenue
|
|
$ |
13,457 |
|
|
$ |
12,502 |
|
|
$ |
11,706 |
|
|
$ |
11,540 |
|
Gross margin
|
|
$ |
2,495 |
|
|
$ |
2,313 |
|
|
$ |
2,134 |
|
|
$ |
2,073 |
|
Net income
|
|
$ |
667 |
|
|
$ |
846 |
|
|
$ |
799 |
|
|
$ |
731 |
|
Earnings per common share(d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.27 |
|
|
$ |
0.34 |
|
|
$ |
0.32 |
|
|
$ |
0.29 |
|
|
Diluted
|
|
$ |
0.26 |
|
|
$ |
0.33 |
|
|
$ |
0.31 |
|
|
$ |
0.28 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,485 |
|
|
|
2,493 |
|
|
|
2,518 |
|
|
|
2,539 |
|
|
Diluted
|
|
|
2,553 |
|
|
|
2,546 |
|
|
|
2,574 |
|
|
|
2,593 |
|
Stock sales prices per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
42.38 |
|
|
$ |
36.66 |
|
|
$ |
36.66 |
|
|
$ |
36.31 |
|
|
Low
|
|
$ |
35.06 |
|
|
$ |
33.12 |
|
|
$ |
34.05 |
|
|
$ |
31.20 |
|
|
|
|
(a) |
|
Results for the third quarter include charges of
$442 million related to the cost of servicing certain
OptiPlextm
systems that include a vendor part that failed to perform to
Dells specifications, workforce realignment, product
rationalizations, excess facilities, and the write-off of
goodwill. |
|
(b) |
|
Results for the second quarter include the impact of an
$85 million income tax benefit related to a revised
estimate of taxes on the repatriation of earnings under the
American Jobs Creation Act of 2004. |
|
(c) |
|
During the fourth quarter of fiscal 2005, Dell recorded a tax
repatriation charge of $280 million pursuant to a favorable
tax incentive provided by the American Jobs Creation Act of
2005. This tax charge was related to Dells decision to
repatriate $4.1 billion in foreign earnings. |
|
(d) |
|
Earnings per common share are computed independently for each of
the quarters presented. Therefore, the sum of the quarterly per
common share information may not equal the annual earnings per
common share. |
|
|
ITEM 9 |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures Dells Chief Executive Officer
and Chief Financial Officer, after evaluating the effectiveness
of Dells disclosure controls and procedures (as defined in
Rule 13a-15(e) or
15d-15(e) under the
Exchange Act) as of the end of the period covered by this
report, have concluded that, based on the evaluation of these
controls and procedures, Dells disclosure controls and
procedures were effective.
Managements Report on Internal Control Over Financial
Reporting Dells management, under the
supervision of Dells Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting
(as defined in
Rule 13a-15(f) or
15d-15(f) under the
Exchange Act). Management evaluated the effectiveness of
Dells internal control over financial reporting based on
the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that
evaluation, management has concluded that Dells internal
control over financial reporting was effective as of
February 3, 2006.
Managements assessment of the effectiveness of Dells
internal control over financial reporting as of February 3,
2006 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in
their Report of Independent Registered Public Accounting Firm
included in Item 8 Financial Statements
and Supplementary Data.
Changes in Internal Control Over Financial
Reporting Dells management, with the
participation of Dells Chief Executive Officer and Chief
Financial Officer, has evaluated whether any change in
62
Dells internal control over financial reporting occurred
during the fourth quarter of fiscal 2006. Based on that
evaluation, management concluded that there has been no change
in Dells internal control over financial reporting during
the fourth quarter of fiscal 2006 that has materially affected,
or is reasonably likely to materially affect, Dells
internal control over financial reporting.
ITEM 9B OTHER INFORMATION
None.
PART III
The information called for by Part III of
Form 10-K
(Item 10 Directors and Executive Officers of
the Registrant, Item 11 Executive Compensation,
Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters, Item 13 Certain Relationships and
Related Transactions, and Item 14 Principal
Accounting Fees and Services), to the extent not set forth
herein under Item 1 Business
Executive Officers of Dell, is incorporated by reference
from Dells definitive proxy statement, which will be filed
with the Securities and Exchange Commission within 120 days
after the end of the fiscal year to which this report relates.
63
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
Financial Statements
The following financial statements are filed as a part of this
report under Item 8 Financial Statements
and Supplementary Data:
|
|
|
|
|
|
|
|
Page | |
|
|
| |
Financial Statements:
|
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
35 |
|
|
Consolidated Statements of
Financial Position at February 3, 2006 and January 28,
2005
|
|
|
37 |
|
|
Consolidated Statements of Income
for the fiscal years ended February 3, 2006,
January 28, 2005 and January 30, 2004
|
|
|
38 |
|
|
Consolidated Statements of Cash
Flows for the fiscal years ended February 3, 2006,
January 28, 2005 and January 30, 2004
|
|
|
39 |
|
|
Consolidated Statements of
Stockholders Equity for the fiscal years ended
February 3, 2006, January 28, 2005 and
January 30, 2004
|
|
|
40 |
|
|
Notes to Consolidated Financial
Statements
|
|
|
41 |
|
Financial Statement Schedule
The following financial statement schedule is filed as a part of
this report under Schedule II immediately preceding the
signature page: Schedule II Valuation and
Qualifying Accounts for the three fiscal years ended
February 3, 2006. All other schedules called for by
Form 10-K are
omitted because they are inapplicable or the required
information is shown in the consolidated financial statements,
or notes thereto, included herein.
64
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 January 31, 2006 (incorporated by reference to
Exhibit 3.1 of Dells Current Report on Form 8-K
filed on February 2, 2006, 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 6.55% Senior Notes Due 2008 (incorporated by
reference to Exhibit 99.3 of Dells Current Report on
Form 8-K filed April 28, 1998, Commission File
No. 0-17017)
|
|
4 |
.3 |
|
|
|
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 |
.4 |
|
|
|
Form of Dells
6.55% Senior Notes Due 2008 (incorporated by reference to
Exhibit 99.5 of Dells Current Report on Form 8-K
filed April 28, 1998, Commission File No. 0-17017)
|
|
4 |
.5 |
|
|
|
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)
|
|
10 |
.1* |
|
|
|
Dell Computer Corporation 1989
Stock Option Plan, as amended and restated (incorporated by
reference to Exhibit 10.4 of Dells Annual Report on
Form 10-K for the fiscal year ended January 31, 1993,
Commission File No. 0-17017)
|
|
10 |
.2* |
|
|
|
Amended and Restated Dell Computer
Corporation 1994 Incentive Plan (incorporated by reference to
Exhibit 99 of Dells Registration Statement on
Form S-8, filed October 31, 2000, Registration
No. 333-49014)
|
|
10 |
.3* |
|
|
|
Amended and Restated Dell Computer
Corporation 1998 Broad Based Stock Option Plan (incorporated by
reference to Exhibit 99 of Dells Registration
Statement on Form S-8, filed October 31, 2000,
Registration No. 333-49016)
|
|
10 |
.4* |
|
|
|
Dell Computer Corporation 2002 Long
Term Incentive Plan (incorporated by reference to
Exhibit 10.1 of Dells Quarterly Report on
Form 10-Q for the fiscal quarter ended August 2, 2002,
Commission File No. 0-17017)
|
|
10 |
.5* |
|
|
|
Amended and Restated Dell Inc.
401(k) Plan, adopted on December 19, 2003 (incorporated by
reference to Exhibit 10.5 to Dells Annual Report on
Form 10-K for the fiscal year ended January 30, 2004,
Commission File No. 0-17017)
|
|
10 |
.6* |
|
|
|
Amendment No. 1 to Amended and
Restated Dell Inc. 401(k) Plan, dated March 3, 2005
(incorporated by reference to Exhibit 10.6 to Dells
Annual Report on Form 10-K for the fiscal year ended
January 28, 2005, Commission File No. 0-17017)
|
65
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
No. |
|
|
|
Description of Exhibit |
|
|
|
|
|
|
10 |
.7* |
|
|
|
Amendment No. 2 to Amended and
Restated Dell Inc. 401(k) Plan, dated November 29, 2005
|
|
10 |
.8* |
|
|
|
Amended and Restated Dell Computer
Corporation Deferred Compensation Plan (incorporated by
reference to Exhibit 10.6 to Dells Annual Report on
Form 10-K for the fiscal year ended January 30, 2004,
Commission File No. 0-17017)
|
|
10 |
.9* |
|
|
|
Executive Incentive Bonus Plan,
adopted July 18, 2003 (incorporated by reference to
Exhibit 10.1 of Dells Quarterly Report on
Form 10-Q for the fiscal quarter ended August 1, 2003,
Commission File No. 0-17017)
|
|
10 |
.10* |
|
|
|
Form of Indemnification Agreement
between Dell and each Non-Employee Director of Dell
(incorporated by reference to Exhibit 10.11 to Dells
Annual Report on Form 10-K for the fiscal year ended
January 31, 2003, Commission File No. 0-17017)
|
|
10 |
.11* |
|
|
|
Form of Performance Based Stock
Unit Agreement under the 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 99.1 to Dells
Current Report on Form 8-K, filed on March 14, 2006,
Commission File No. 0-17017)
|
|
10 |
.12* |
|
|
|
Form of Nonstatutory Stock Option
Agreement under the 2002 Long Term Incentive Plan (incorporated
by reference to Exhibit 99.2 to Dells Current Report
on Form 8-K, filed on March 14, 2006, Commission File
No. 0-17017)
|
|
21 |
|
|
|
|
Subsidiaries of Dell
|
|
23 |
|
|
|
|
Consent of PricewaterhouseCoopers
LLP
|
|
31 |
.1 |
|
|
|
Certification of Kevin B. Rollins,
President and Chief Executive Officer, pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934
|
|
31 |
.2 |
|
|
|
Certification of James M.
Schneider, Senior Vice President and Chief Financial Officer,
pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934
|
|
32 |
.1 |
|
|
|
Certifications of Kevin B. Rollins,
President and Chief Executive Officer, and James M. Schneider,
Senior Vice President and Chief Financial Officer, pursuant to
18 U.S.C. Section 1350
|
|
|
|
|
* |
Identifies Exhibit that consists of or includes a management
contract or compensatory plan or arrangement. |
66
SCHEDULE II
DELL INC.
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Charged to | |
|
Write-Offs | |
|
Balance | |
|
|
|
|
Beginning | |
|
Bad Debt | |
|
Charged to | |
|
at End of | |
Fiscal Year |
|
Description |
|
of Period | |
|
Expense | |
|
Allowance | |
|
Period | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(in millions) | |
Trade Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Allowance for doubtful accounts
|
|
$ |
78 |
|
|
$ |
106 |
|
|
$ |
87 |
|
|
$ |
97 |
|
2005
|
|
Allowance for doubtful accounts
|
|
$ |
84 |
|
|
$ |
61 |
|
|
$ |
67 |
|
|
$ |
78 |
|
2004
|
|
Allowance for doubtful accounts
|
|
$ |
71 |
|
|
$ |
61 |
|
|
$ |
48 |
|
|
$ |
84 |
|
|
Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Allowance for doubtful accounts
|
|
$ |
1 |
|
|
$ |
22 |
|
|
$ |
1 |
|
|
$ |
22 |
|
2005
|
|
Allowance for doubtful accounts
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
2004
|
|
Allowance for doubtful accounts
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
Kevin B. Rollins |
|
President and Chief Executive Officer |
Date: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
|
|
|
|
/s/
MICHAEL S. DELL
Michael
S. Dell
|
|
Chairman of the Board of Directors
|
|
March 15, 2006
|
|
/s/
KEVIN B. ROLLINS
Kevin
B. Rollins
|
|
President, Chief Executive Officer
and Director (principal executive officer)
|
|
March 15, 2006
|
|
/s/
DONALD J. CARTY
Donald
J. Carty
|
|
Director
|
|
March 15, 2006
|
|
/s/
WILLIAM H.
GRAY, III
William
H. Gray, III
|
|
Director
|
|
March 15, 2006
|
|
/s/
JUDY C. LEWENT
Judy
C. Lewent
|
|
Director
|
|
March 15, 2006
|
|
/s/
KLAUS S. LUFT
Klaus
S. Luft
|
|
Director
|
|
March 15, 2006
|
|
/s/
ALEX J. MANDL
Alex
J. Mandl
|
|
Director
|
|
March 15, 2006
|
|
/s/
MICHAEL A. MILES
Michael
A. Miles
|
|
Director
|
|
March 15, 2006
|
|
/s/
SAMUEL A.
NUNN, JR.
Samuel
A. Nunn, Jr.
|
|
Director
|
|
March 15, 2006
|
|
/s/
JAMES M. SCHNEIDER
James
M. Schneider
|
|
Sr. Vice President and Chief
Financial Officer (principal financial officer)
|
|
March 15, 2006
|
|
/s/
JOAN S. HOOPER
Joan
S. Hooper
|
|
Vice President, Corporate Finance
(principal accounting officer)
|
|
March 15, 2006
|
68