UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended February 3, 2012 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period fromto | ||
Commission file number: 0-17017
Dell Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 74-2487834 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Dell Way, Round Rock, Texas 78682
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:1-800-BUY-DELL
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, par value $.01 per share | The NASDAQ Stock Market LLC ( | |
Securities Registered Pursuantregistered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þo No oR
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 þR
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 þR No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þR No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check One):
Our company is a Delaware corporation and was founded in 1984 by Michael Dell on a simple concept: by selling computer systems directly to customers, we can best understand their needs and efficiently provide the most effective computing solutions to meet those needs. Over time we have expanded our business model to include a broader portfolio of products and services delivered directly by Dell and we have also added newthrough other distribution channels, such as retail, system integrators, value-added resellers,channels. We are focused on providing technology solutions that are more efficient, more accessible, and distributors, which allow useasier to reach even more end-users around the world. To optimize our global supply chain to best serve our global customer base, we have transitioned a portion of our production capabilities to contract manufacturers.manage.Our global corporate headquarters are located in Round Rock, Texas. Dell Inc. is a holding company that conducts its business worldwide through its subsidiaries. Our global corporate headquarters is located in Round Rock, Texas. When we refer to our company and its business in this report, we are referring to the business and activities of our consolidated subsidiaries. We operate principally in one industry, and we manage our business in four global customer oriented operating segments that we identify as Large Enterprise, Public, Small and Medium Business, and Consumer.
We are committed to managing and operating our business in a responsible and sustainable manner around the globe. This includes our commitment to environmental responsibility in all areas of our business. See “Government Regulation and Sustainability” below for additional information. This also includes our focus on maintaining a strong control environment, high ethical standards, and financial reporting integrity. See “Part II — Item 9A — Controls and Procedures” for a discussion of our internal control over financial reporting.
By successfully executing our strategy and drivingwill benefit our customers, drive greater efficiency and productivity, in how we operate, we believe we can help customers grow and thrive.create value for our shareholders.
All of our goals beginWe operate in the information technology industry, and end with the customer. Striving to meet and exceed customer needs is at the heart of everything we do. During the first quarter of Fiscal 2010, we reorganized the manner in which we manage our business from geographic commercialin four global customer-centric operating segments identified as Americas Commercial, EMEA Commercial, and APJ Commercial, to global commercial business unitsthat we refer toidentify as Large Enterprise, Public, and Small and Medium Business, (“SMB”). Our global Consumerand Consumer. We believe our business unit remained the same. This alignment creates a clear customer-centric focus, which we believe allowssegments allow us to serve our customers with faster innovation and greater responsiveness,responsiveness.
ProductsDuring Fiscal 2012, we acquired Dell Financial Services Canada Limited from CIT Group Inc. and ServicesOur aimwe announced our entry into a definitive agreement to acquire CIT Vendor Finance's Dell-related assets and its sales and servicing functions in Europe. CIT Vendor Finance is currently a Dell financing preferred vendor operating in more than 25 countries and will continue to support Dell for the transition period in Europe. CIT Vendor Finance will also continue to provide customersfinancing programs with integrated business solutions. We design, develop, manufacture, market, sell, and support a wide rangeDell in select countries around the world, including programs in Latin America, after completion of products and services that can be customized to individual customer requirements. Our products and services are organized between enterprise solutions and client categories. Enterprise solutions include servers, storage, and related services, software and peripherals. Client includes mobility, desktop products, and also related services, software and peripherals. Our services include a broad range of configurable IT and business services, including infrastructure technology, consulting and applications, and business process services. We also offer or arrange various customer financial services for our business and consumer customers in the U.S.this transaction.
Our PowerConnecttm switches connect computers and servers in small to medium-sized networks. PowerConnecttm products offer customers enterprise-class features and reliability at a high value to our customers.
Desktop PCs — We target sales of the Alienwaretm line of desktop computers to customers seeking features ranging from multimedia capability to high performance gaming. The Studiotm line of compact and stylish consumer desktops includes the Hybrid, our most power efficient consumer desktop. We have designed the Inspirontm line of desktop computers for mainstream PC users requiring the latest features for their productivity and entertainment needs. We offer the OptiPlextm line to help business, government, and institutional customers manage their total cost of ownership by offering a portfolio of secure, manageable, and stable lifecycle products. The Vostrotm line is designed to provide technology and services to suit the specific needs of small businesses. Dell Precisiontm desktop workstations are intended for professional users who demand exceptional performance from hardware platforms optimized and certified to run sophisticated applications, such as those needed for three-dimensional computer-aided design, digital content creation, geographic information systems, computer animation, software development, computer-aided engineering, game development, and financial analysis.
We offer or arrange various customer financial services for our business and consumer customers in the U.S. through Dell Financial Services L.L.C. (“DFS”), a wholly-owned subsidiary of Dell. DFS offers a wide range of financial services, including originating, collecting, and servicing customer receivables related to the purchase of Dell products. DFS offers private label credit financing programs through an unrelated, nationally chartered bank, to qualified consumer and Commercial customers and offers leases and fixed-term financing to Commercial customers. Financing through DFS is one of many sources of funding that our customers may select. For additional information about our financing arrangements, see “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Receivables” and Note 4 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”To support the financing needs of our customers internationally, we have aligned with a select number of third party financial services companies. These financial services companies work directly with our customers to originate and service financing arrangements, enabling customers to finance and purchase Dell products and services.For additional information about our products and services, see “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Segment Discussion — Revenue by Product and Services Categories,” and Notes 4 and 14 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”We are committed to balancing our mix of products and services to optimize profitability, liquidity, and growth. We believe this strategy will help us achieve higher margins, but may put pressure on our industry unit share position for personal computers and servers at certain times.
We market our products and services to small and medium-sized businesses and consumers primarily by advertising on television and through the Internet, advertising in a variety
We also sell our products and services through indirect sales channels. In the U.S., we sell products indirectly through third-party solution providers, system integrators, and third-party resellers. We also offer select consumer products in retail stores in several countries in the Americas, Europe, the Middle East, and Africa, which we refer to as “EMEA,” and Asia-Pacific Japan (“APJ”). Outside the U.S., we sell products indirectly through selected retailers to benefit from the retailer’s existing end-user customer relationships and valuable knowledge of traditional customs and logistics in the country and to mitigate credit and country risk as well as because sales in some countries may be too small to warrant a direct sales business unit. Our goal is to have strategic relationships with a number of major retailers in larger geographic regions. During Fiscal 2010, we continued to expand our global retail presence, and we now reach over 56,000 retail locations worldwide. Our retailers include Best Buy, Staples, Wal-Mart, DSGI, GOME, and Carrefour, among others.
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We are committed to becoming carbon neutral in our operations. We have set business requirements for our suppliers to disclose and reduce their greenhouse gas, or “GHG,” impacts. We were the first company in our industry to offer a free worldwide recycling program for our consumers. We also provide consumers with no-charge recycling of any brand of computer or printer with the purchase of a new Dell computer or printer. We have streamlined our transportation network to reduce transit times, minimize air freight and reduce emissions. Our packaging is designed to minimize box size and to increase recycled content of materials along with recyclability. When developing and designing products, we select materials guided by a precautionary approach in which we seek to eliminate environmentally sensitive substances (where reasonable alternatives exist) from our products and work towards developing reliable, environmentally sound, and commercially scalable solutions. We also have created a series of tools that help customers assess their current IT operations and uncover ways to reduce both the costs of those operations and their impact on the environment.
OurThe mailing address of our principal executive offices are located atis One Dell Way, Round Rock, Texas 78682, and our78682. Our telephone number at that address is1-800-BUY-DELL.
Our financial services activities are negatively affected in the current adverse economic environment by loan delinquencies and defaults. Although the trend of increasing loan delinquencies and defaults has slowed, defaults impact our net credit losses and we may need to increase our reserves for customer receivables in the future. In addition, anticipated changes in financial services regulation could unfavorably impact the profitability and cash flows of our consumer financing activities.
A varietyWe maintain several single-source or limited-source supplier relationships, either because multiple sources are not readily available or because the relationships are advantageous to us due to performance, quality, support, delivery, capacity, or price considerations. If the supply of factors could prevent us from achieving our goal of better aligning oura critical single- or limited-source product and service offerings and cost structure with customer needs in the current business environment. We are currently focused on reducing our operating expenses, reducing total costs in procurement, product design, transformation, and simplifying our structure. For example, we may experience delays in the anticipated timing of activities related to our cost savings plans and higher than expected or unanticipated costs to implement the plans. As a result,component is delayed or curtailed, we may not achieve our expected cost savingsbe able to ship the related product in desired quantities, configurations, or in a timely manner. Even where multiple sources of supply are available, qualification of the time anticipated, or at all. In such case, our resultsalternative suppliers and establishment of operations and profitability may be negatively impacted, making us less competitive and potentially causing us to lose industry unit share.
Continuing improvements in technology result in frequent new productdelays and services introductions, short product life cycles, and improvements in product performance characteristics. In addition, we are increasingly sourcing new products and transitioning existing products througha possible loss of sales, which could harm our contract manufacturers and manufacturing outsourcing relationships in order to generate cost efficiencies, deliver products faster and better serve our customers in certain segments and geographical areas. The success of product transitions depends on a number of factors, including the availability of products in appropriate quantities and costs to meet demand, and the risk that new or upgraded products have quality or other defects. These product transitions present execution challenges and risks. If we are unable to effectively manage a new product transition, our business and results of operations could be unfavorably affected.
Our growth strategy involves reaching more customers worldwide through new distribution channels, such as consumer retail, expanding our relationships with value-added resellers, and augmenting select areas of our business through targeted acquisitions. As we reach more customers worldwide through an increasing number of new distribution channels, such as consumer retail, and continue to expand our relationships with value-added resellers, inventory management becomes more challenging and successful demand forecasting becomes more difficult. Our goal continues to be to optimize the balance of liquidity, profitability, and growth with a focus on moving the weight of the product portfolio to higher margin products and recurring revenue streams. Our ability to grow sales of these higher margin products, services
and solutions depends on our ability to successfully transition our sales capabilities in accordance with our strategy and to add to the breadth of our higher margin offerings through selective acquisitions of other businesses. If we are unable to effectively manage the growth of our distribution capabilities and grow our product and services offerings, our business and results of operations could be unfavorably affected.
Our profitability is affected by our ability to achieve favorable pricing with our vendors and contract manufacturers, including through negotiations for vendor rebates, marketing funds, and other vendor funding received in the normal course of business. Because these supplier negotiations are continuous and reflect the ongoing competitive environment, the variability in timing and amount of incremental vendor discounts and rebates can affect our profitability. These vendor programs may change periodically, potentially resulting in adverse profitability trends. Our inability to establish a cost and product advantage, or determine alternative means to deliver value to our customers, may adversely affect our industry unit share position, revenue, and profitability.
We maintain several single-sourceOur profitability is affected by our ability to achieve favorable pricing from our vendors and contract manufacturers, including through negotiations for vendor rebates, marketing funds, and other vendor funding received in the normal course of business. Because these supplier negotiations are continuous and reflect the ongoing competitive environment, the variability in timing and amount of incremental vendor discounts and rebates can affect our profitability. These vendor programs may change periodically, potentially resulting in adverse profitability trends if we cannot adjust pricing or limited-source supplier relationships, either because multiple sources are not availablecost variables. Our inability to establish a cost and product advantage, or because the relationships are advantageousdetermine
Contracts withOur financial services activities are negatively affected by an adverse economic environment through related loan delinquencies and defaults. Although loan delinquencies and defaults have improved from higher levels in recent periods, an increase in defaults would result in greater net credit losses, which may require us to increase our reserves for customer receivables in the U.S. Governmentfuture. In addition, the implementation of new financial services regulation, or the application of existing financial services regulation in new countries where we expand our financial services activities and foreign governmentsrelated supporting activities, could unfavorably impact the profitability and cash flows of our consumer financing activities.
These customerto take the following actions that may adversely affect our revenue and profitability.profitability:
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We enter into numerous financing arrangements, including foreign currency option contractsThe expiration of tax holidays or favorable tax rate structures, or unfavorable outcomes in tax audits and forward contracts, with a wide array of bank counterparties. As aother tax compliance matters, could result we are subject to the risk that the counterparty to onein an increase in our current tax expense or more of these contracts will default, either voluntarily or involuntarily, on its performance under the contract. In times of market distress, a counterparty may default rapidly and without notice to us, and we may be unable to take action to cover our exposure, either because we lack the contractual ability or because market conditions make it difficult to take effective action. In the event of a counterparty default, we could incur significant losses, which could harm our business, results of operations, and financial condition. In the event that one of our counterparties becomes insolvent or files for bankruptcy, our ability eventually to recover any losses suffered as a result of that counterparty’s default may be limited by the liquidity of the counterparty or the applicable legal regime governing the bankruptcy proceeding. In addition, our deposits at financial institutions are at risk.
We are involved in various claims, suits, investigations, and legal proceedings that arise from time to timeincome tax rate in the ordinary course of our business and that are not yet resolved, including those described elsewhere in this Report. Additional legal claims or regulatory matters may arise in the future and could involve stockholder, consumer, antitrust, tax and other issues on a global basis. Litigation is inherently unpredictable. Regardless of the merit of the claims, litigation may be both time-consuming and disruptive to our business. Therefore, we could incur judgments or enter into settlements of claims that could adversely affect our operating results or cash flows in a particular period. For example, we could be exposed to enforcement or other actions with respect to the continuing SEC investigation into certain accounting and financial reporting matters. In addition, our business, operating results and financial condition could be adversely affected if any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions.future.
If we or our suppliers are unable to obtain desirable technology licenses, we may be prevented from marketing products, could be forced to market products without desirable features, or could incur substantial costs to redesign products, defend legal actions, or pay damages. Although our suppliers might be contractually obligated to obtain such licenses and indemnify us against such expenses, those suppliers could be unable to meet their obligations. In addition, our operating costs could increase because of copyright levies or similar fees by rights holders and collection agencies in European and other countries.
We dependThe earthquake and tsunami in Japan and severe flooding in Thailand which occurred during Fiscal 2012 caused damage to infrastructure and factories that disrupted the supply chain for a variety of components used in our products. In particular, the flooding in Thailand resulted in a significant shortage in the supply of hard disk drives that has adversely affected our operations. If we are unsuccessful in our continuing efforts to minimize the impact of these events on our information technologycustomers and manufacturing infrastructure to achieveoperations, our business objectives. If a disruption, such as a computer virus, natural disaster, failure of a manufacturing or telecommunications system, lost connectivity, or intentional tampering or data-breach by a third party impairs our infrastructure, we may be unable to receive or process orders, manufacture and ship products in a timely manner, or otherwise conduct our business as usual. A disruptionfinancial results could cause us to lose customers and revenue, particularly during a period of disproportionately heavy demand, and could result in the unintentional disclosure of company or customer information and could damage our reputation. We also could incur significant expense in remediating these problems and in addressing related data security and privacy concerns.
We rely on key personnel to support anticipated continued rapid international growth and increasingly complex product and service offerings. We may not be able to attract, retain, and motivate the key professional, technical, marketing, and staff resources we need.suffer.
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Our acquisition of Perot Systems Corporation duringDuring Fiscal 2010 added over 3.0 million square feet of office2012, we opened a research and development center in Santa Clara, California as well as a data center space worldwide, which is included above. During Fiscal 2010, we closed a manufacturing plant in Limerick, Ireland and a business center in Twin Falls, Idaho, and we sold our remanufacturing facility in Lebanon, Tennessee and business center in Pasay City, Philippines.Washington. At the end of Fiscal 2010,February 3, 2012, a business center in Coimbatore, India was under construction.We plan to close our Winston-Salem, North Carolina manufacturing facility in Fiscal 2011 and have announced the sale of our Lodz, Poland manufacturing facility. We may continue to sell, close, and consolidate additional facilities depending on a number of factors, including end-user demand, capabilities, and progress in our continuous evaluation of our overall cost structure. We believe that our existing properties are suitable and adequate for our current needs and that we can readily meet our requirements for additional space at competitive rates by extending expiring leases or by finding alternative space.
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PART II
Holders
AtAt March 5, 2010,7, 2012, there were 30,125 holders28,041 holders of record of Dell common stock.
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OUR COMPANYWe built our reputation as a leading technology provider through listening to customers and developing solutions that meet customer needs. We are focused on providing long-term value creation through the delivery of customized solutions that make technology more efficient, more accessible, and easyeasier to use. Customer needs are increasingly being defined by how they use technology rather than where they use it, which is why in the first quarter of Fiscal 2010, we transitioned from a global business that is managed regionally to businesses that are globally organized. We reorganized our geographic commercial segments to global business units to reflect the impact of globalization on our customer base.manage. Our four customer-centric, global business segments are Large Enterprise, Public, Small and Medium Business, (“SMB”), and Consumer. We also refer to our Large Enterprise, Public, and SMB segments as “Commercial.”
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In
During Fiscal 2010, we focused on balancing liquidity, profitability, and growth by emphasizing areas that provided profitable growth opportunities.sell. We also took actions in this challenging demand environment to shift towards a more variable cost manufacturing structure, reduce operating expenses, and improve our working capital management. We are beginning to see the positive impact of these efforts and expect that the benefits of our strategy will carry into Fiscal 2011, with anticipated enhanced operating leverage should revenue growth return. We will continue to work on additional cost reduction and efficiency efforts.We will continue to focus our efforts on providing best-value solutionsprioritized high end-drives to our strategic customers, which reduced profitability in all areas of enterprise, including servers, storage, services, and software. We believe these solutions are customized to the needs of users, easy to use, and affordable.our Consumer segment. During the fourth quarter of Fiscal 2010,2012, we acquired Perot Systems, a worldwide providerentered into purchase commitments with certain HDD suppliers to ensure continuity of supply for these components. We expect the impact of the HDD situation to improve as we move through Fiscal 2013. See "Liquidity, Capital Commitments, and Contractual Cash Obligations — Contractual Cash Obligations" for more information technology and business solutions, and we expect to increaseabout our portfolio of solutions offerings to our customers. Additionally,purchase commitments.
Revenue
Overall, our average selling price (total net revenue per unit sold) during Fiscal 2010 decreased 8%year-over-year mostly due to competitive pricing pressuresLarge Enterprise and a changeSMB segments were offset by decreases from our Public and Consumer segments. The decline in product mix towards lower-priced offerings, particularlyrevenue from our Public segment was driven by weakened demand, while the decrease in our Consumer segment. Average selling prices in Consumer declined 21% during Fiscal 2010, mostly duesegment revenue was largely attributable to our expansion into retail and a continuing shift in mix to lower-priced products. In the Consumer business, our market strategy is to expand our product offerings and customer coverage, by focusing on optimized products and services that have the features that customers value. We continue to see competitive pressure, particularly for lower priced desktops and notebooks. We expect this competitive pricing environment will continue for the foreseeable future. The average selling prices, partially offset by an increase in sales of higher-value products.
Outside the U.S., we experienced a 16%year-over-year revenue decline for Fiscal 2010 as compared to an approximate decline of 11% in revenue for the U.S. during the same period. Revenue outside the U.S. increased 7% to $31.7 billion and represented approximately 47%51% of total net revenue while revenue from the U.S. decreased 5% to $30.4 billion. Revenue from Growth Countries increased 12% overall year-over-year. In particular, revenue from BRIC increased 15% year-over-year during Fiscal 2012 and represented 14.2% of our total net revenue for Fiscal 2010. At a consolidated level, BRIC revenue increased 4% during Fiscal 2010 and has been increasing sequentially since2012, compared to 12.3% for the fourth quarter of Fiscal 2009.prior year. We are continuing to expand into these and other emerging markets by tailoringcountries that represent the vast majority of the world's population, tailor solutions to meet specific regional needs, of these customers, and enhancingenhance relationships to provide customer choice and flexibility.
During Fiscal 2010 and Fiscal 2009, the principal currencies in which we transact business experienced more volatility primarily due to macroeconomic conditions, including the global recession. However, weWe manage our business on a U.S. Dollardollar basis and factor foreign currency exchange rate movements into our pricing decisions. In addition, we utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over
The following table presents information regarding our gross margin during each of the past three fiscal years:
We continue to actively review all aspects of our facilities, logistics, supply chain,Total gross margin for Fiscal 2012 increased 21% on both a GAAP and manufacturing footprints. This review is focused on identifying efficiencies and cost reduction opportunities while maintaining a strong customer experience. As a result of this review to date, we have begun using contract manufacturers in an effort to migrate towards a more variable cost manufacturing model. This shift has resulted in the announced closures of our North Carolina manufacturing plant, as well as the pending sale of our Poland facility and the closure of the Limerick, Ireland, facility. During Fiscal 2010 and 2009, the cost of these individual severance and facility actions was $481 million and $282 million, respectively, of which approximately $237 million and $146 million, respectively, affectednon-GAAP basis. Total gross margin. We continue to actively evaluate our overall cost structure, including product design and manufacturing costs. We expect that we will continue our overall cost reduction activities, which may include selected headcount reductions, as well as other cost reduction programs. While we believe that we will have completed a significant portion of our manufacturing transformation once we finalize the closures of our North Carolina and Poland facilities, we expect to implement additional cost reduction measures dependingmargin on a numberGAAP basis for Fiscal 2012 was $13.8 billion, compared to $14.2 billion on a non-GAAP basis. Gross margin on a GAAP basis for Fiscal 2012 and Fiscal 2011 includes the effects of factors, including end-user demand, capabilities,amortization of intangible assets and our continued simplification of our supply and logistics chain. See Note 8 of the Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional information on severance and facility action costs.costs and acquisition-related charges. As set forth in the reconciliation under "Non-GAAP Financial Measures" below, these items are excluded from the calculation of non-GAAP gross margin for Fiscal 2012 and Fiscal 2011. Amortization of intangible assets included in gross margin increased 10% to $305 million for Fiscal 2012. Severance and facility action costs and acquisition-related charges included in gross margin decreased 14% to $49 million during Fiscal 2012. The overall decrease in severance and facility action costs and acquisition-related charges was primarily due to a decrease in charges related to facility closures in Fiscal 2011, which was slightly offset by an increase in acquisition-related charges during Fiscal 2012.
time period to time.period. Since we manage our component costs on a total net cost basis, any fluctuations in the timing and amount of rebates and other discounts we receive from vendors may not necessarily result in material changes to our gross margin. We monitor our component costs and seek to address the effects of any changes to terms that might arise under our vendor rebate programs. Our gross margins for Fiscal 2012, Fiscal 2011 and Fiscal 2010, were not materially affected by any changes to the terms of our vendor rebate programs, as the amounts we received under these programs were generally stable relative to our total net cost. We are not aware of any significant programmatic changes to vendor pricing and rebate programs that will impact our results in the near term.
In general, gross margin and margins on individual products and services will remain under downward pressure due to a variety
Fiscal 2009 compared to Fiscal 2008During Fiscal 2009, our gross margin decreased in absolute dollars and in gross margin percentage as a result of decreases in average selling prices from competitive pricing pressures and further expansion into retail through an increased number of worldwide retail locations. Theyear-over-year gross margin percentage decline can be further attributed to the fact that Fiscal 2008 witnessed unusually high component cost declines, whereas Fiscal 2009 component cost declines returned to more typical levels. During Fiscal 2009, we closed our desktop manufacturing facility in Austin, Texas, and sold our call center in El Salvador.
CompensationThese decreases were partially offset by an increase in accounts receivable bad debt of $40 million resulting from the challenging business environment. SG&A expenses related to headcount and infrastructure reductions through our on-going cost optimization efforts were $237 million for Fiscal 2010 compared to $136 million for Fiscal 2009.selling-related expenses. In addition, higher SG&A expenses for Fiscal 20102012 reflected increases in acquisition-related charges, which were offset in part by decreases in severance and facility action costs, discussed below.
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Fiscal 2009 compared to Fiscal 2008
Operating and Net IncomeFiscal 2010 compared to Fiscal 2009
Fiscal 2009 compared to Fiscal 2008
SEGMENT DISCUSSION
Large accelerated filer | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o No þR
| Approximate aggregate market value of the registrant’s common stock held by non-affiliates as of July | $ | ||
| Number of shares of common stock outstanding as of March | |||
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 registrant’sregistrant's proxy statement relating to the annual meeting of stockholders in 2010.2012. Such 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.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.statements.” The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim”“aim,” “seek” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks discussed in this report under “Part I —- Item 1A —- Risk Factors.” Any forward-looking statement speaks only as of the date onas of which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances, including unanticipated events, after the date onas of which such statement iswas made.
PART I
All percentage amounts and ratios were calculated using the underlying data in thousands. Unless otherwise noted, all references to time periods refer to our fiscal years. Our fiscal year is the 52 or 53 week period ending on the Friday nearest January 31. The fiscal year ended February 3, 2012 ("Fiscal 2012") was a 53 week period.
Unless the context indicates otherwise, references in this report to “we,” “us,” “our” and “Dell” mean Dell Inc. and our consolidated subsidiaries.
ITEM 1 — BUSINESS
General
Dell delivers innovative technology and services which customers trust and value. Asis a leadingglobal information technology company we offerthat offers its customers a broad range of product categories, including mobility products, desktop PCs, software and peripherals, servers and networking, and storage. Our services include a broad range of configurable IT and business related services, including infrastructure technology, consulting and applications, and business process services.
Business Strategy
Dell built its reputation as a leading technology provider through listening to customers and developing solutions that meet customer needs. We are focused on providing long-term value creation throughA few years ago, we initiated a broad transformation of the delivery of customizedcompany to become an end-to-end technology solutions that make technology more efficient, more accessible, and easier to use.
company.
We are expanding our enterprise solutions, which include servers, networking, and storage offerings. In services, we are adding more capabilities to provide end-to-end technology solutions to our customers, including managed security services focused on improvingthreat intelligence and security consulting. We are also focused on growing our coreend-user computing business, shifting our portfolio to higher-marginwhich includes desktop and recurring revenue streams over time,mobility offerings. Software is a critical part of enterprise solutions and maintaining a balance of liquidity, profitability,end-user computing, and growth. We consistently focus on generating strong cash flow returns, allowing us to expandwe are expanding our capabilities in this business. Since the beginning of Fiscal 2011, we have acquired more than ten companies whose offerings and acquire new ones.intellectual property enhance our solutions business. We will continue to focus our organic and inorganic investments on opportunities that we believe will enhance our solutions capabilities.
We are committed to this transformation as we have experienced its benefits. We seek to growbalance revenue over the long term while improvinggrowth with an appropriate level of profitability. In addition, we will continue to manage our businesses to grow operating income and cash flow growth.flows over the long-term. We have three primary components to our strategy:
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Operating Business Segments
Large Enterprise— Our Large Enterprise customers include large global and enables usnational corporate businesses. We believe that a single large-enterprise unit enhances our knowledge of our customers and improves our advantage in delivering globally consistent solutions and services to better understandmany of the world's largest IT users. Our efforts in this segment will be increasingly focused on delivering innovative solutions and services through data center and cloud computing solutions.
Public — Our Public customers, which include educational institutions, government, health care, and law enforcement agencies, operate in their own communities. These customers have a broad range of unique IT needs and we strive to expand our leadership and address their challenges.urgent IT challenges through the delivery of technology solutions that help them achieve their mission.
Small and Medium Business ("SMB") — Our four global businessSMB segment is focused on helping small and medium-sized businesses get the most out of their technology by offering scalable products, services, and solutions. As cloud computing and workforce mobility become a routine part of a growing business's operations, server and storage virtualization facilitate achievement of the organization's IT goals. Our SMB segment continues to create and
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deliver SMB-specific solutions so customers worldwide can take advantage of these emerging technologies and grow their businesses.
Consumer — Our Consumer segment is focused on delivering what customers want from the total technology experience of entertainment, mobility, gaming, and design. We are designing new, innovative products and experiences with fast development cycles and competitive features and will continue our efforts to deliver high quality products and services to Consumer customers around the world.
We refer to our Large Enterprise, Public, and SMB segments are:
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as "Commercial." For financial information about the results of our reportable operating segments for each of the last three fiscal years, see “Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Segment Discussion” and Note 15 of the Notes to Consolidated Financial Statements included in “Part II - Item 8 - Financial Statements and Supplementary Data.”
Products and Services
We design, develop, manufacture, market, sell, and support a wide range of products, solutions, and services. We also provide various customer financial services to our Commercial and Consumer customers.
Enterprise Solutions and Services
Enterprise Solutions
Our enterprise solutions include servers, networking, and storage products.
| • | Servers and Networking— Our PowerEdge line of servers is designed to offer customers affordable performance, reliability, and scalability. Our portfolio includes high performance rack, blade, and tower servers for enterprise customers and value tower servers for small organizations, networks, and remote offices. During Fiscal 2012, we expanded our PowerConnect campus networking product offerings with a full suite of Dell Force10 data center networking solutions. We have also recently introduced our 12th generation of PowerEdge servers, which will help customers run their applications more effectively and their data centers more efficiently. These products support our mission to help companies of all sizes simplify their IT environments. |
Storage— We offer a comprehensive portfolio of advanced storage solutions, including storage area networks, network-attached storage, direct-attached storage, and various backup systems. Our acquisition of Compellent Technologies, Inc. in early Fiscal 2012 has further expanded our network storage offerings, and we have added a variety of increasingly flexible new Dell EqualLogic ("EqualLogic"), Dell PowerVault, and Dell DX Object storage choices that allow customers to grow capacity, add performance, and protect their data in a more economical manner. The flexibility and scalability offered by our Dell PowerVault and EqualLogic storage systems help organizations optimize storage for diverse environments with varied requirements. During Fiscal 2012, we shifted more of our portfolio of storage solutions to Dell-owned storage products. We believe that, along with our solid position with the EqualLogic product line, our recent acquisitions allow us to expand our customer base for mid-range and high-end storage solutions and deliver integrated data management solutions to our customers.
Services
Our services include a broad range of configurable IT and business services, including infrastructure technology, consulting and applications, and product-related support services. Historically, we have provided the following categories of services to our customers either on a stand-alone basis or bundled within a comprehensive solution. We manage our services based on a customer engagement model, which groups our services with similar demand, economic, and delivery profiles into three categories of services: transactional; outsourcing; and project-based. Within those categories, we offer a variety of services to our customers as part of an overall solution.
Transactional— We offer services that are closely tied to the sale of our servers, storage, and client offerings. These services include support and extended warranty services, managed deployment, enterprise installation, and configuration services.
Outsourcing— Our outsourcing services business is designed to reduce customer costs and increase the efficiency and improve the quality of customer business operations. Our outsourcing services include data center and systems management, network management, life cycle application development and management
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services, and business process outsourcing services. A significant portion of the revenue we derive from our outsourcing services contracts is typically recurring in nature.
Project-based— We also offer short-term services that address a wide array of client needs, including IT infrastructure, applications, business process, and business consulting.
Beginning in Fiscal 2013, we will transition to new classifications for our services business that are aligned with the types of service offerings we provide to our customers. This change reinforces our commitment to developing and delivering innovative solutions that meet our customers' needs. We will classify our services as Support and Deployment services, Infrastructure, Cloud, and Security services, and Applications and Business Process services.
Support and Deployment Services —Support and deployment services are closely tied to the sale of our servers, storage, networking and client offerings, as well as multivendor support services. These services include the majority of the services we currently classify as transactional services above.
Infrastructure, Cloud, and Security Services — Infrastructure, Cloud, and Security services may be performed under multi-year outsourcing arrangements, subscription services, or short-term consulting contracts. These services include infrastructure and security managed services, cloud computing, infrastructure consulting, and security consulting and threat intelligence. We are often responsible for defining the infrastructure technology strategies for our customers through the identification and delivery of new technology offerings and innovations that deliver value to our customers.
Applications and Business Process Services — Applications services include such services as application development and maintenance, application migration and management services, package implementation, testing and quality assurance functions, business intelligence and data warehouse solutions, and application consulting services. Business process services involve assuming responsibility for certain customer business functions, including back office administration, call center management, and other technical and administration services.
Software and Peripherals
We offer Dell-branded printers and displays and a multitude of competitively priced third-party peripheral products such as printers, televisions, notebook accessories, mice, keyboards, networking and wireless products, digital cameras, and other products. We also sell 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. We are focusing our participation in this area on higher-value offerings.
Client Products
We offer a wide variety of mobility and desktop products, including notebooks, workstations, tablets, smartphones, and desktop PCs, to our Commercial and Consumer customers.
Commercial — Our Latitude, Optiplex, Vostro, and Dell Precision workstation lines of mobility notebooks and desktop PCs are designed with our Commercial customers in mind. The Latitude line of notebooks and the Optiplex line of desktop PCs deliver industry leading design, durability, security, and manageability to drive enterprise efficiency and reduce the total cost of ownership. The Vostro line is designed to customize technology, services, and expertise to suit the specific needs of small businesses. We also offer the Precision line of mobile and desktop workstations for professional users who demand advanced workstation performance capabilities to run sophisticated applications. During Fiscal 2012, we introduced the new Vostro 3000 series notebooks, and the Dell Precision M4600 and M6600 mobile workstations, and made enhancements to our Dell Latitude E-family of notebooks.
Consumer— For our Consumer customers, we offer the Inspiron, XPS, and Alienware lines of notebooks and desktop PCs. The Inspiron line is designed for the mainstream user seeking a personalized smart investment that is easy to use, while the XPS line is designed for customers seeking un-compromised form plus function, with high performance and craftsmanship. We target sales of our Alienware line to customers seeking advanced multimedia capabilities for high performance gaming. During Fiscal 2012, we introduced new desktops and notebooks in each of our consumer brands, including thin and powerful Inspiron and XPS notebooks.
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For additional information about the above products and services, see “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Segment Discussion”Revenue by Product and Services Categories.”
In early Fiscal 2013, we launched our newly formed Software Group, which will expand our ability to execute in strategic areas that are important to our customers. The formation of this group, in conjunction with enhancements to our software capabilities across Dell, will help support our strategic transformation as an end-to-end technology solutions company.
Financial Services
We offer or arrange various financing options and services for our Commercial and Consumer customers in the U.S. and Canada through Dell Financial Services ("DFS"). DFS offers a wide range of financial services, including originating, collecting, and servicing customer receivables primarily related to the purchase of Dell products. DFS offers private label credit financing programs to qualified Consumer and Commercial customers and offers leases and fixed-term financing primarily to Commercial customers. Financing through DFS is one of many sources of funding that our customers may select. For additional information about our financing arrangements, see “Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Dell Financial Services and Financing Receivables” and Note 144 of the Notes to Consolidated Financial Statements included in “Part II — -Item 8 —- Financial Statements and Supplementary Data.”
Product Development
We focus on developing modular and scalable technologies that incorporate highly desirable features and capabilities at competitive prices. We employ a collaborative approach to product design and development in which our engineers, with direct customer input, design innovative solutions and work with a global network of technology companies to architect new system designs, influence the direction of future development, and integrate new technologies into our products. We manage our research, development, and engineering ("RD&E") spending by targeting those innovations and products that we believe are most valuable to our customers and by relying on the capabilities of our strategic relationships. Through this collaborative, customer-focused approach, we strive to deliver new and relevant products and services to the market quickly and efficiently.
We are increasing our focus on research and development and will continue to shift our investment in RD&E activities to support initiatives that enhance our enterprise solutions and services offerings. In Fiscal 2012, we opened the Dell Silicon Valley Research and Development Center, bringing the total number of global research and development centers we operate to 12. Our total research, development, and engineering expenses were $856 million, $661 million, and $624 million for Fiscal 2012, Fiscal 2011, and Fiscal 2010, $665 million for Fiscal 2009,respectively.
Manufacturing and $693 million for Fiscal 2008, including acquisition related in-process research and development expenses of $2 million for Fiscal 2009 and $83 million for Fiscal 2008.Materials
Third parties manufacture somethe majority of the client products we sell under the Dell brand. We have expanded our use of contract manufacturers and manufacturing outsourcing relationships to achieve our goals of generating cost efficiencies, delivering products faster, better serving our customers, in certain segments and geographical areas, and deliveringbuilding a world-class supply chain. Our manufacturing and distribution facilities are located in Austin, Texas; Winston-Salem, North Carolina; Nashville, Tennessee; Penang, Malaysia; Xiamen, China; Hortolândia, Brazil; Chennai, India; and Lodz, Poland. Beginning in Fiscal 2009, we have reduced our fixed costs by selling, closing and consolidating manufacturing and other facilities, and have moved towards a more variable cost manufacturing model. In connection with our implementation of this model, we have announced the closure of our Winston-Salem manufacturing facility and the sale of our Poland facility, both expected to be finalized in Fiscal 2011. See “Part I —- Item 2 —- Properties” for information about our manufacturing and distribution locations.
Our manufacturing process consists of assembly, software installation, functional testing, and quality control. Testing and quality control processes are also applied to components, parts,sub-assemblies, and
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systems obtained from third-party suppliers. Quality control is maintained through the testing of components,sub-assemblies, and systems at various stages in the manufacturing process. Quality control also includes a burn-in period for completed units after assembly, ongoing production reliability audits, failure tracking for early identification of production and component problems, and information from customers obtained through services and support programs. We are certified to the ISO (International
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Organization for Standardization) 9001: 2008 Quality management systems standard. This certification includes most of our global sites that design, manufacture, and service our products.
We purchase materials, supplies, product components, and products from a large number of vendors. In some cases, where multiple sources of supply are not available, and hence we have to rely on single-source vendors. In other cases, we may establish a working relationship with a single source or a limited number of sources of supply if we believe it is advantageous to do so due to performance, quality, support, delivery, capacity, or price considerations. This relationship and dependency has not caused material supply disruptions in the past, and weWe believe that any disruption that may occur because of our dependency on single- or limited-source vendors would not disproportionately disadvantage us relative to our competitors. See “Part I —- Item 1A —- Risk Factors” for information about the risks associated with single- or limited-source suppliers.
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Geographic Operations
Our global corporate headquarters areis located in Round Rock, Texas. We have operations all over the world and conduct business in many countries located in the Americas, Europe, the Middle East, Asia and other geographic regions. We have investedcontinue to expand and invest in high growth countries suchGrowth Countries, which we define as non-U.S. markets excluding Western Europe, Canada, and Japan. In particular, we are focused on the BRIC region, which consists of Brazil, Russia, India, and China, or “BRIC,” and we expect to continue our global expansion in the years ahead.China. Our continued expansion outside of the U.S. creates additional complexity in coordinating the design, development, procurement, manufacturing, distribution, and support of our increasingly complex product and service offerings. We intend to continue to expand our global capabilities as our international business continues to grow. For additional information on our product and service offerings, see “Products and Services —- Manufacturing and Materials” and “Part I —- Item 2 —- Properties.” For information about percentages of revenue we generated from our operations outside of the U.S. and other financial information for each of the last three fiscal years, see “Part II —- Item 7 — Management’s- Management's Discussion and Analysis of Financial Condition and Results of Operations —- Results of Operations.”Operations” and Note 15 of the Notes to Consolidated Financial Statements included in “Part II - Item 8 - Financial Statements and Supplementary Data."
Competition
We operate in an industry in which there are rapid technological advances in hardware, software, and service offerings and we face on-goingongoing product and price competition in all areas of our business fromincluding both branded and generic competitors. We compete based on our ability to offer profitable and competitive solutions to our customers competitive, scalable, and integrated solutions that provide the most current and desired product features, as well as on customer service, quality, and reliability. This is enabled byservices features. We believe that our directstrong relationships with our customers whichand our distribution channels, such as retail, system integrators, value-added resellers, distributors, and other channel partners, allow us to recognizerespond to changing customer needs faster than many of our competitors. This connection with our customers allows us to best serve customer needs and is one of our competitive advantages.
Sales and Marketing
We sell our products and services directly to customers through our online store atwww.dell.com, dedicated sales representatives, telephone-based sales, and through a variety of indirectvarious other sales channels.distribution channels, such as retailers, third-party solution providers, system integrators, and third-party resellers. Our customers include large
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global and national corporate businesses, public institutions includingthat include government, education, and healthcare organizations, and law enforcement agencies. Our customers also includeagencies, small and medium-sized businesses, individual customers,medium business, and retailers. Within each geographic region, we have divided our sales resources among these various customer groups.consumers. No single customer accounted for more than 10% of our consolidated net revenue during any of the last three fiscal years.
Our sales and marketing efforts are organized around the evolving needs of our customers.customers, and our marketing initiatives reflect this focus. Our direct business model providesemphasizes direct communication with our customers, thereby allowing us to refine our products and marketing programs for specific customer groups. We market our products and services to small and medium-sized businesses and consumers through various advertising media. Customers may offer suggestions for current and future Dell products, services, and operations on an interactive portion of our Internet website called Dell IdeaStorm. This constant flowIn order to react quickly to our customers' needs, we track our Net Promoter Score, a customer loyalty metric that is widely used across various industries. Increasingly, we also engage with customers through our social media communities on www.dell.com and in external social media channels. In Fiscal 2012, in an effort to create a more responsive and efficient sales organization, we announced the unification of communication allows us to rapidly gauge customer satisfactionour global sales and target new or existing products.marketing teams. We believe that this change will create a sales organization that is more customer-focused, collaborative, and innovative.
For large business and institutional customers, we maintain a field sales force throughout the world. Dedicated account teams, which include field-based system engineers and consultants,enterprise solution specialists, form long-term relationships to provide our largest customers with a single source of assistance, develop specific tailored solutions for these customers, and provide us with customer feedback. For large, multinationalthese customers, we offer several programs designed to provide single points of contact and accountability with global account specialists, special global pricing, and consistent global service and support programs. We also maintain specific sales and marketing programs targeted at federal, state, and local governmental agencies, as well as healthcare and educational customers.
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Patents, Trademarks, and Licenses
At January 29, 2010,February 3, 2012, we held a worldwide portfolio of 2,5773,449 patents and had an additional 2,4181,660 patent applications pending. We also hold licenses to use numerous third-party patents. To replace expiring patents, we obtain new patents through our ongoing research and development activities. The inventions claimed in our patents and patent applications cover aspects of our current and possible future computer system products, manufacturing processes, and related technologies. Our product, business method, and manufacturing process patents may establish barriers to entry in many product lines. While we use our patented inventions and also license them to others, we are not substantially dependent on any single patent or group of related patents. We have entered into a variety of intellectual property licensing and cross-licensing agreements. We have also entered into various software licensing agreements with other companies. We anticipate that our worldwide patent portfolio will be of value in negotiating intellectual property rights with others in the industry.
We have obtained U.S. federal trademark registration for the DELL word mark and the Dell logo mark. We own
registrations for 81107 of our other markstrademarks in the U.S. At January 29, 2010,February 3, 2012, we had pending applications for registration of 2414 other trademarks. We believe that establishment of the DELL word mark and logo mark in the U.S. is material to our operations. We have also applied for or obtained registration of the DELL word mark and several other marks in approximately 195183 other countries.
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 our business. We evaluate each claim relating to our products and, if appropriate, seek a license to use the protected technology. The licensing agreements generally do not require the licensor to assist us in duplicating its patented technology, nor do these agreements protect us from trade secret, copyright, or other violations by us or our suppliers in developing or selling these products.
Government Regulation and Sustainability
Government Regulation
Our business is subject to regulation by various U.S. federal and state governmental agencies and other 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, the U.S. Department of Justice, and the European Union; the consumer protection laws and financial services regulations of the U.S. Federal Trade Commission and various state governmental agencies; 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;Commission and the U.S. Department of Transportation; the investor protection and capital markets regulatory activities of the U.S. Securities and Exchange Commission; and the environmental, employment and labor, and other regulatory activities of a variety of governmental authorities in each of the countries in which we conduct business. We were not assessed any material environmental fines, nor did we have any material environmental remediation or other environmental costs, during Fiscal 2010.2012.
Sustainability
Environmental stewardship and social responsibility are both integral parts of how we manage our business, and complement our focus on business efficiencies and customer satisfaction. We use open dialogue with our stockholders, customers, vendors, and other stakeholders as part of our sustainability governance process wherein which we takesolicit candid feedback and offer honest discussions on the challenges we face globally. Our environmental initiatives take many forms, including maximizing product energy efficiency, reducing and eliminating sensitive materials from our products, and providing responsible, convenient computer recycling options for customers.
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Product Backlog
We believe that product backlog is not a meaningful indicator of net revenue that can be expected for any period. TheOur business model generally gives us flexibility to manage product backlog at any point in time by expediting shipping or prioritizing customer orders toward products that have shorter lead times, thereby reducing product backlog and increasing current period revenue. Moreover, product backlog at any point in time may not translate into net revenue in any subsequent period, as unfilled orders can generally be canceled at any time by the customer. Our business model generally gives us flexibility to manage backlog at any point in time by expediting shipping or prioritizing customer orders toward products that have shorter lead times, thereby reducing backlog and increasing current period revenue. Although backlog at the end of Fiscal 2010 was higher than at the end of Fiscal 2009 and Fiscal 2008, the difference was not material when compared to our annual revenue during Fiscal 2010.
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Trademarks and Service Marks
Unless otherwise noted, trademarks appearing in this report are trademarks owned by us. We disclaim proprietary interest in the marks and names of others. EMCFICO is a registered trademark of EMC Corporation.Fair Isaac and Company. Net Promoter Score is a trademark of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
Available Information
We maintain an Internet website atwww.dell.com. All of our reports filed with the SEC (including annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, and all amendments to those reports) are accessible through the Investor Relations section of our website atwww.dell.com/investor, free of charge, as soon as reasonably practicable after we electronically file the reports with the SEC. You may read and copy any materials that we file with the SEC at the SEC’sSEC's Public Reference Room at 100 F Street, NE, Room 1580,N.E., Washington, DCD.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-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 atwww.sec.gov. Information on our website is not incorporated by reference into this report and does not otherwise form a part of this report.
Employees
At the end of Fiscal 2010,2012, we had approximately 96,000109,400 total employees (consisting of 94,300106,700 regular employees and 1,700 temporary2,700 temporary employees), compared to approximately 78,900103,300 total employees (consisting of 76,500100,300 regular employees and 2,4003,000 temporary employees)employees) at the end of Fiscal 2009. Our acquisition2011. Approximately 39,900 of Perot Systems added 23,800 regular employees. Approximately 36,600 of theour regular employees at the end of Fiscal 20102012 were located in the U.S., and approximately 57,700 66,800 regular employees were located in other countries.
Executive Officers of Dell
The following table sets forth the name, age, and position of each of the persons who were serving as our executive officers as of March 5, 2010:9, 2012:
| Name | Age | |||||
Title | ||||||
| Michael S. Dell | 47 | Chairman | ||||
| Bradley R. Anderson | ||||||
| 52 | President, | |||||
| Jeffrey W. Clarke | 49 | Vice Chairman | ||||
| Stephen J. Felice | 54 | President, | ||||
| Brian T. Gladden | 47 | Senior Vice President and Chief Financial Officer | ||||
| 58 | Senior Vice President, Strategy and Business Development | |||||
| Steven H. Price | 50 | Senior Vice President, Human Resources | ||||
| Karen H. Quintos | 48 | Senior Vice President, Chief Marketing Officer | ||||
| Stephen F. Schuckenbrock | 51 | President, | ||||
| John A. Swainson | 57 | President, Software | ||||
| Lawrence P. Tu | 57 | Senior Vice President, General Counsel and Secretary | ||||
Our executive officers are elected annually by, and serve at the pleasure of, our Board of Directors.
Set forth below is biographical information about each of our executive officers.
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Michael S. Dell — Mr. Dell currently serves as Chairman of the Board of Directors and Chief Executive Officer.
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He has held the title of Chairman of the Board since he founded Dell in 1984. Mr. Dell also served as Chief Executive Officer of Dell from 1984 until July 2004 and resumed that role in January 2007. He serves on the Foundation Board of the World Economic Forum, the executive committee of the International Business Council, and is a member of the U.S. Business Council and the Business Roundtable, and serves as chairman of the Technology CEO Council. He also serves on the governing board of the Indian School of Business in Hyderabad, India, and is a board member of Catalyst, Inc.
Bradley R. Anderson— Mr. Anderson joined Dell in July 2005 and has served as President, Enterprise Solutions since January 2012. In this role, he is responsible for worldwide engineering, design, development, and marketing of Dell's enterprise products, including servers, networking, and storage systems. From July 2005 until January 2009, Mr. Anderson served as Senior Vice President, Business Product Group. 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 HP's 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 degree in Petroleum Engineering from Texas A&M University and a Master of Business Administration degree from Harvard University.
Jeffrey W. Clarke— Mr. Clarke serves as Vice Chairman and President, End User Computing Solutions & Operations. In this role, in which he has served since January 2009, he is responsible for worldwide engineering, design and development of Dell's business client products, including Dell OptiPlex Desktops, Latitude Notebooks and Precision Workstations, and production of all company products worldwide. From January 2003 until January 2009, Mr. Clarke served as Senior Vice President, Business Product Group. From November 2001 to January 2003, Mr. Clarke served as Vice President and General Manager, Relationship Product Group. In 1995, Mr. Clarke became the director of desktop development. Mr. Clarke joined Dell in 1987 as a quality engineer and has served in a variety of engineering and management roles. Mr. Clarke received a Bachelor's degree in Electrical Engineering from the University of Texas at San Antonio.
Stephen J. Felice— Mr. Felice was named President, Chief Commercial Officer in January 2012. From November 2009 until January 2012, he served as President, Consumer, Small and Medium Business. Mr. Felice leads the Dell organization that creates and delivers specific solutions and technology to Commercial customers globally and is responsible for Dell's portfolio of products, including desktops, laptops, software and peripherals as well as product design and sales. From January 2009 until November 2009, Mr. Felice served as President, Small and Medium Business, and from March 2007 until January 2009, as Senior Vice President and President, Asia Pacific-Japan, after having served as Vice President, Asia Pacific-Japan since August 2005. In those positions, Mr. Felice was responsible for Dell's operations throughout the APJ region, including sales and customer service centers in Penang, Malaysia, and Xiamen, China. From February 2002 until July 2005, Mr. Felice was Vice President, Corporate Business Group, Dell Americas. Mr. Felice joined us in February 1999 and has held various executive roles in our sales and consulting services organizations. Prior to joining Dell, Mr. Felice served as Chief Executive Officer and President of DecisionOne Corp. Mr. Felice also served as Vice President, Planning and Development, with Bell Atlantic Customer Services, and he spent five years with Shell Oil in Houston. Mr. Felice holds a Bachelor's degree in Business Administration from the University of Iowa and a Master of Business Administration degree from the University of Houston.
Brian T. Gladden— Mr. Gladden serves as Senior Vice President and Chief Financial Officer (“CFO”). In this role, in which he has served since June of 2008, he is responsible for all aspects of Dell's finance functions, including accounting, financial planning and analysis, tax, treasury, and investor relations, and is also responsible for Dell's information technology, global security and facilities functions. Prior to joining Dell, Mr. Gladden was President and CEO of SABIC Innovative Plastics Holding BV from August 2007 through May 2008. Prior to this role, Mr. Gladden spent nearly 20 years with General Electric Company (“GE”) in a variety of financial and management leadership roles. He is a member of the University of Texas McCombs School of Business Advisory Council. Mr. Gladden earned a Bachelor of Science degree in Business Administration and Finance from Millersville University in Millersville, Pennsylvania.
David L. Johnson —Mr. Johnson serves as Senior Vice President, Corporate Strategy and Business Development. He joined Dell in June of 2009 as Senior Vice President, Corporate Strategy. In this role, he works with Michael Dell on the development of short- and long-term strategy, and also with leaders of the company's global business units on their respective growth strategies. In June 2010, Mr. Johnson assumed responsibility for
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Dell's Business Development strategy, including responsibility for Dell's acquisition strategy and other strategic investments. Mr. Johnson previously spent 27 years at International Business Machines Corporation ("IBM") in a variety of corporate-development and finance roles, and was a member of the company's senior leadership team. Mr. Johnson holds both a Master of Business Administration and a Bachelor's degree in English from Boston College.
Steven H. Price— Mr. Price serves as Senior Vice President, Human Resources. In this role, he is responsible for overall human resources ("HR") strategy in support of the purpose, values and business initiatives of Dell. He is also responsible for developing and driving people strategy and fostering an environment where the global Dell team thrives. Mr. Price joined Dell in February 1997 and has played leadership roles throughout the HR organization, including Vice President of HR for the global Consumer business, Global Talent Management and Americas Human Resources. From November 2006 until June 2010, he served as Vice President, Human Resources Dell Global Consumer Group. From January 2003 until November 2006, he served as Vice President, Human Resources Dell Americas Business Group. From July 2001 until January 2003, he served as Vice President, Human Resources Global HR Operations. From May 1999 to July 2001, he served as Vice President, Human Resources Dell EMEA. Prior to joining Dell in 1997, Mr. Price spent 13 years with SC Johnson Wax, based in Racine, Wisconsin. Having started his career there in sales, he later moved into HR, where he held a variety of senior positions. Mr. Price is a member of the Executive Advisory Board for the Rawls College of Business at Texas Tech University and also serves on the Executive Advisory Board for The Wharton School at the University of Pennsylvania. He holds a Bachelor's degree in Business from Southwestern Oklahoma State University and a Master's degree in Business Administration from the University of Central Oklahoma.
Karen H. Quintos— Karen Quintos is Senior Vice President and Chief Marketing Officer (“CMO”) for Dell, where she is responsible for bringing the company's brand to life for Dell customers, team members, and stakeholders around the world. She leads Dell's branding, messaging, and marketing for all Dell customer segments, in addition to global communications, social media, and agency management. Before becoming CMO in September 2010, Ms. Quintos served as Vice President of Dell's global Public business, fromJanuary 2008 to September 2010, and was responsible for driving global marketing strategies, product and pricing programs, communications and channel plans. She has also held various executive roles in SMB marketing and Dell's Services and Supply Chain Management teams since joining Dell in 2000. She came to Dell from Citigroup, where she served as Vice President of Global Operations and Technology. She also spent 12 years with Merck & Co., where she held a variety of roles in marketing, planning, operations and supply chain management. Ms. Quintos holds a Master's degree in Marketing and International Business from New York University and a Bachelor of Science degree in Supply Chain Management from The Pennsylvania State University State College. She has served on multiple boards of directors and currently serves on the Susan G. Komen for the Cure, Penn State's Smeal Business School Board of Visitors, Association of National Advertisers, the Ad Council, and Dell's Women's Networking Board.
Stephen F. Schuckenbrock— Mr. Schuckenbrock serves as President, Services. In this role, he is responsible for developing and delivering a best-in-class suite of intelligent, end-to-end IT services and business solutions for global corporations, government, health care, educational institutions and medium-sized businesses in more than 180 countries around the world. Mr. Schuckenbrock joined Dell in January 2007 as Senior Vice President and President, Global Services. In September 2007, he assumed the additional role of Chief Information Officer, and he served in those roles until January 2009. In those roles, he was responsible for all aspects of Dell's services business, with worldwide responsibility for Dell enterprise service offerings, and was also responsible for Dell's global information systems and technology structure. From January 2009 until re-assuming the Services role in January 2011, Mr. Schuckenbrock was President, Large Enterprise, leading the delivery of innovative and globally consistent Dell solutions and services to the world's largest corporate IT users. Prior to joining Dell, Mr. Schuckenbrock served as Co-Chief Operating Officer and Executive Vice President of Global Sales and Services for Electronic Data Systems Corporation (“EDS”). Before joining EDS in 2003, he was Chief Operating Officer of The Feld Group, an information technology consulting organization. Mr. Schuckenbrock served as Global Chief Information Officer at PepsiCo from 1995 to 2000. Mr. Schuckenbrock earned a Bachelor's degree in Business Administration from Elon University.
John A. Swainson— Mr. Swainson joined Dell in March 2012. He currently serves as President of Dell's newly formed Software Group. Immediately prior to joining Dell, Mr. Swainson was a Senior Advisor to Silver Lake, a global private equity firm from May 2010 to February 2012. From February 2005 until December 2009, Mr. Swainson served as Chief Executive Officer and Director of CA, Inc., an enterprise software company. Prior to joining CA, Inc. Mr. Swainson worked for IBM for over 26 years, where he held various management positions
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in the U.S. and Canada, including seven years in the role of General Manager of the Application Integration Middleware Division. Mr. Swainson holds a Bachelor's degree in Engineering from the University of British Colombia, Canada. He currently serves on the boards of directors of Visa Inc., Broadcom Corporation, Assurant, Inc., and Cadence Design Systems, Inc. Mr. Swainson will be retiring from the boards of directors of Broadcom Corporation, Assurant, Inc. and Cadence Design Systems, Inc. in May 2012.
Lawrence P. Tu— Mr. Tu joined Dell as Senior Vice President, General Counsel and Secretary in July 2004, and is responsible for overseeing Dell's global legal, governmental affairs, and ethics and compliance departments. 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 O'Melveny & Myers LLP, where he focused on energy, technology, Internet, and media-related transactions. He also served five years as managing partner of the firm's Hong Kong office. Mr. Tu's 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 Master's degree from Oxford University, where he was a Rhodes Scholar.
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ITEM 1A — RISK FACTORS
Our business, operating results, financial condition, and prospects are subject to a variety of significant risks, many of which are beyond our control. The following is a description of some of the important risk factors that may cause our actual results in future periods to differ substantially from those we currently expect or desire.seek. The risks described below are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial that also may materially adversely affect our business, operating results, financial condition, or prospects.
We are a global company with customers in virtually every business and industry. Our performance depends significantly on global economic conditions. Commercial customers and consumersface intense competition, which may postpone spending amid concerns over reduced asset values, fluctuating energy costs, geopolitical issues, the availability and cost of credit, unemployment, and the stability and solvency of financial institutions, financial markets, businesses, and sovereign nations. Weak global economic conditions could have a number of adverse effects onadversely affect our business, including weaker customer demand, potential insolvency of key suppliers resulting in product delays, the inability of customers to obtain credit to finance purchases of our products on favorable terms, and potential customer insolvencies, all of which could negatively impact our liquidity and ultimately decrease our netindustry unit share position, revenue, and profitability.
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We operate in an industry in which there are rapid technological advances in hardware, software, and service offerings, and we face aggressive product and price competition from both branded and generic competitors. We compete based on our ability to profitably offer to our customers competitive integrated solutions withthat provide the most current and desired product features, as well as on customer service, quality and reliability.services features. We expect that competition will continue to be intense, and there is a risk that our competitors’competitors' products may be less costly, provide better performance or include additional features when compared to our products. OurAdditionally, there is a risk that our product portfolios may quickly become outdated or our market share may quickly erode. Moreover, our efforts to balance our mix of products and services to optimize profitability, liquidity, and growth may also put pressure on our industry unit share position inposition.
In addition to competitive factors we face as a result of the short-term.current state of our business and our industry, we confront additional competitive challenges as our business and industry continue to grow and evolve. As we continue to expand globally, we may see new and increased competition in different geographic regions. In addition,Moreover, the generally low barriers to entry in our businesses generallybusiness increase the potential for challenges from new industry competitors. We may also see increased competition from new types of products as the options for mobile and cloud computing solutions increase. Further, as our industry evolves and our company grows, companies with which we have strategic alliances may become competitors in other product areas or our current competitors may enter into new strategic relationships with new or existing competitors, all of which may further increase the competitive pressures we face.
Our reliance on vendors for products and components, many of whom are lowsingle-source or limited-source suppliers, could harm our business by adversely affecting product availability, delivery, reliability, and products can be distributed broadly and quickly at relatively low cost.
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operating results.
We obtain many of our products and all of our components from third party vendors.third-party vendors, many of which are located outside of the U.S. In addition, significant portions of the products we sell are continuingnow assembled by contract manufacturers, primarily in various parts of Asia. A significant concentration of this outsourced manufacturing is currently performed by only a few of our contract manufacturers, often in single locations. We sell components to expand our use ofthese contract manufacturers and manufacturing outsourcers. generate large non-trade accounts receivables, an arrangement that presents a risk of uncollectibility if the financial condition of a contract manufacturer should deteriorate.
While these relationships generate cost efficiencies, they reduce our direct control over production. Our manufacturing and supply chain efficiencies give us the ability to operate with reduced levels of component and finished goods inventories. Our increasing reliance on these vendors subjects us to a greater risk of shortages, and reduced control over delivery schedules of components and products, as well as a greater risk of increases in product and component costs. Because we maintain minimal levels of component and product inventories, a disruption in component or product availability could harm our financial performance and our ability to satisfy customer needs. In addition, defective parts and products from these vendors could reduce product reliability and harm our reputation.
If we fail to achieve favorable pricing from our vendors, our profitability could be adversely affected.
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alternative means to us duedeliver value to performance, quality, support, delivery, capacity, or price considerations. If the supply of a critical single- or limited-source product or component is delayed or curtailed, weour customers, may not be able to ship the related productadversely affect our revenue and profitability.
Adverse global economic conditions and instability in desired quantitiesfinancial markets may harm our business and in a timely manner. Even where multiple sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delaysreduced net revenue and profitability.
As a possible lossglobal company with customers in virtually every business and industry, our performance depends significantly on global economic conditions. Adverse economic conditions may negatively affect customer demand for our products and services and result in postponed or decreased spending amid customer concerns over unemployment, reduced asset values, volatile energy costs, geopolitical issues, the availability and cost of sales, whichcredit, and the stability and solvency of financial institutions, financial markets, businesses, local and state governments, and sovereign nations. Weak global economic conditions also could harm our business by contributing to potential product shortages or delays, insolvency of key suppliers, potential customer and counterparty insolvencies, and increased challenges in conducting our treasury operations. All of these possible effects of weak global economic conditions could negatively impact our net revenue and profitability.
The European sovereign debt crisis has negatively affected the financial markets in Europe. These conditions have resulted in reduced consumer and business confidence and spending in many countries in Europe, where we derived a significant portion of our consolidated net revenue for Fiscal 2012. A continuation or worsening of the European sovereign debt crisis will likely have a negative effect on our European operations, as well as on the businesses of our European customers, suppliers, and partners. Any of these conditions could harm our overall business and operating results.
We may not successfully execute our growth strategy if we fail to manage effectively the change involved in implementing our strategic initiatives.
Our growth strategy involves reaching more customers through new distribution channels, expanding our relationships with resellers, and augmenting select areas of our business through targeted acquisitions and other commercial arrangements. As we reach more customers through new distribution channels and expanded reseller relationships, we may fail to manage in an effective manner the increasingly difficult tasks of inventory management and demand forecasting. Our ability to accomplish the goals of our growth strategy depends on our success in transitioning our sales capabilities in accordance with our strategy, adding to the breadth of our higher margin offerings through selective acquisitions of other businesses, and managing the effects of these strategic initiatives. If we are unable to meet these challenges, our results of operations could be unfavorably affected.
We may not successfully implement our acquisition strategy.
We acquire companies as a part of our overall growth strategy. These acquisitions may involve significant new risks and uncertainties that could adversely affect our profitability or operations, including distraction of management attention away from a focus on our current business operations, insufficient new revenue to offset expenses, inadequate return of capital, integration challenges, retention of employees of acquired businesses, new regulatory requirements, and issuesliabilities and other exposures not discovered in our due diligence process. As a result, suchFurther, our acquisitions may adversely affectnegatively impact our profitability or operations.relationships with strategic partners if these acquisitions are seen as bringing us into competition with such partners. In addition, if we make changes in our business strategy or if external conditions adversely affect our business operations, we may be forcedrequired to record an impairment charge forto goodwill or intangibles,intangible assets.
If our cost efficiency measures are not successful, we may become less competitive.
We continue to focus on minimizing our operating expenses through cost improvements and simplifying our structure. However, certain factors may prevent the achievement of these goals, which would leadmay in turn negatively affect our competitive position. For example, we may experience delays or unanticipated costs in implementing our cost efficiency plans. As a result, we may not achieve our expected cost efficiencies in the time or to decreased assetsthe extent anticipated.
Our inability to manage solutions, product, and services transitions in an effective manner could reduce the demand for our solutions, products, and services and the profitability of our operations.
Continuing improvements in technology result in frequent new solutions, product, and services introductions, short product life cycles, and improvements in product performance characteristics. If we cannot manage in an effective manner the transition to new solutions offerings and these offerings' new products and services, customer demand for our solutions, products and services could diminish and our profitability could suffer. We are increasingly sourcing
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new products and transitioning existing products through our contract manufacturers and manufacturing outsourcing relationships in order to generate cost efficiencies, deliver products faster, and better serve our customers. The success of product transitions depends on a number of factors that include the availability of sufficient quantities of components at attractive costs. In addition, product transitions present execution challenges and risks, including the risk that new or upgraded products may have quality issues or other defects.
We may lose customers and experience diminished profitability if we fail to deliver products and services of consistent quality.
In selling our extensive line of products and services, many of which include third-party components, we must identify and address any quality issues associated with our offerings. Although quality testing is performed regularly to detect any quality problems and implement required solutions, our failure to identify and correct significant product quality issues before sale could result in lower sales, increased warranty or replacement expenses, and reduced customer confidence that could harm our operating results.
Our ability to generate substantial non-U.S. net operating performance.revenue is subject to additional risks and uncertainties.
Sales outside the U.S. accounted for approximately 47%51% of our consolidated net revenue infor Fiscal 2010.2012. Our future growth rates and success are substantially dependent on the continued growth of our business outside the U.S., including in the key developing countries of Brazil, Russia, India, and China. Our international operations face many risks and uncertainties, including varied local economic and labor conditions, political
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instability, and changes in the U.S. and international regulatory environment,environments, trade protection measures, tax laws (including U.S. taxes on foreign operations), copyright levies, and foreign currency exchange rates. Any of these factors could adversely affect our operations and profitability.
Our profitability may be adversely affected by our product, customer, and geographic sales mix and by seasonal sales trends.
Our profit margins vary among products, customers, and geographic markets. In addition, our business is subject to certain seasonal sales trends. For example, sales to government customers (particularly the U.S. federal government) are typically stronger in our third fiscal quarter, sales in EMEA are often weaker in our third fiscal quarter, and consumer sales are typically strongest during our fourth fiscal quarter. As a result of these factors, our overall profitability for any particular period may be adversely affected by changes in the mix of products, customers, and geographic markets reflected in our sales for that period, as well as by seasonal trends. Our profit margins vary among products, services, customers, and geographic markets. For instance, our services offerings generally have a higher profit margin than our consumer products. In addition, parts of our business are subject to seasonal sales trends. Among the trends with the most significant impact on our operating results, sales to government customers (particularly the U.S. federal government) are typically stronger in our third fiscal quarter, sales in Europe, the Middle East, and Africa ("EMEA") are often weaker in our third fiscal quarter, and consumer sales are typically strongest during our fourth fiscal quarter.
We may lose revenue opportunities and experience gross margin pressure if our sales channel participants fail to perform as we expect.
In recent years, we have added third-party distributors, retailers, systems integrators, value-added resellers, and other sales channels to complement our direct sales organization so that we can reach even more end-users around the world. Our future operating results increasingly will depend on the performance of our sales channel participants and on our success in maintaining and developing our relationships with those sales channels. Our revenue and gross margins could be negatively affected if the financial condition or operations of our channel participants weaken as a result of adverse economic conditions or other business challenges, or if uncertainty regarding the demand for our products causes our channel participants to reduce their orders for our products. Further, some channel participants may consider the expansion of our direct sales initiatives to conflict with their business interests as distributors or resellers of our products, which could lead them to reduce their investment in the distribution and sale of our products, or to cease all sales of our products.
Our financial performance could suffer from any reduced access to the capital markets by us or some of our customers.
We are increasingly dependent on access to debt and capital sources to provide financing for our customers and to obtain funds in the U.S. for general corporate purposes, including working capital, acquisitions, capital expenditures, funding of customer receivables, and share repurchases. Additionally,In addition, we have customer financing relationships with some companies whose business modelsthat rely on accessingaccess to the debt and capital markets. Themarkets to meet significant funding needs. Any inability of these companies to access such markets could forcecompel us to self-fund transactions with them or foregoforgo customer financing opportunities, potentially harming our financial performance. The debt and capital markets may experience
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extreme volatility and disruption from time to time in the future, resultingwhich could result in higher credit spreads in the capitalsuch markets and higher funding costs for us. The cost of accessing debt and capital markets has increased in recent periods as many lenders and institutional investors require higher rates of return. Lenders have also tightened lending standards, and reduced or ceased their lending to certain borrowers. Deterioration in our business performance, a credit rating downgrade, volatility in the securitization markets, changes in financial services regulationsregulation, or adverse changes in the economy could lead to reductions in debt availability and could limit our ability to continue asset securitizations or other financings from debt or capital sources, reduce the amount of financing receivables that we originate, or negatively affect the costs or terms on which we may be able to obtain capital, anycapital. Any of whichthese developments could unfavorably affect our net revenue, profitability, and cash flows.
Developments in the European Union could have significant repercussions for the U.S. and international debt and capital markets. The current macroeconomic climate and related disruption of the financial markets have led to concerns over the solvency of certain European Union member states and of financial institutions that have significant direct or indirect exposure to debt issued by those countries. Certain of the major credit rating agencies have downgraded the sovereign debt of some of the European Union member states. The ratings downgrades and uncertainty regarding the effectiveness of the European Union and private sector actions to address such negative developments have increased concerns that other European Union member states could experience similar financial troubles.
Weak economic conditions and additional regulation could harm our financial services activities.
We are subject to future fundingcounterparty default risks.
We have numerous arrangements with financial institutions that may affect the extension or termination of programsinclude cash and investment deposits, interest rate swap contracts, foreign currency option contracts, and forward contracts. As a result, we are subject to the rightrisk that the counterparty to one or more of these arrangements will default, either voluntarily or involuntarily, on its performance under the terms of the governmentarrangement. In times of market distress, a counterparty may default rapidly and without notice to terminateus, and we may be unable to take action to cover our exposure, either because we lack the contractual ability or because market conditions make it difficult to take effective action. If one of our counterparties becomes insolvent or files for conveniencebankruptcy, our ability eventually to recover any losses suffered as a result of that counterparty's default may be limited by the liquidity of the counterparty or non-appropriation. In addition, if we violate legal or regulatory requirements, the applicable governmentlegal regime governing the bankruptcy proceeding. In the event of such default, we could suspendincur significant losses, which could harm our business and negatively impact our results of operations and financial condition.
The exercise by customers of certain rights under our services contracts, or disbar usour failure to perform as a contractor, which would unfavorablywe anticipate at the time we enter services contracts, could adversely affect our net revenue and profitability.
Many of our services contracts allow the customer to:
Terminate the contract if our performance does not meet specified service levels
Look to a benchmarker's opinion of market rates in order to request a rate reduction or alternatively terminate the contract
Reduce the customer's use of our services and, as a result, reduce our fees
Terminate the contract early upon payment of an agreed fee
In addition, we estimate our costs to deliver the services at the outset of the contract. If we fail to estimate accurately, our actual costs may significantly exceed our estimates, even for a time and materials contract, and we may incur losses on the services contracts.
Loss of government contracts could harm our business.
Contracts with the U.S. federal, state, and local governments and foreign governments are subject to future funding that may affect the extension or termination of programs and are subject to the right of governments to terminate for
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convenience or non-appropriation. In addition, if we violate legal or regulatory requirements, the applicable government could suspend or disbar us as a contractor, which would unfavorably affect our net revenue and profitability.
Our business could suffer if we do not develop and protect our own intellectual property or do not obtain or protect licenses to intellectual property developed by others on commercially reasonable and competitive terms.
If we or our suppliers are unable to develop or protect desirable technology or technology licenses, we may be prevented from marketing products, could be forced to market products without desirable features, or could incur substantial costs to redesign products, defend or enforce legal actions, or pay damages. Although our suppliers might be contractually obligated to obtain or protect such licenses and indemnify us against related expenses, those suppliers could be unable to meet their obligations. Similarly, we invest in research and development and obtain additional intellectual property through acquisitions, but these activities do not guarantee that we will develop or obtain intellectual property necessary for profitable operations. Costs involved in developing and protecting rights in intellectual property may have a negative impact on our business. In addition, our operating costs could increase because of copyright levies or similar fees by rights holders and collection agencies in European and other countries.
Infrastructure disruptions could harm our business.
We depend on our information technology and manufacturing infrastructure to achieve our business objectives. A disruption of our infrastructure could be caused by a natural disaster, manufacturing failure, telecommunications system failure, or defective or improperly installed new or upgraded business management systems. Portions of our IT infrastructure also may experience interruptions, delays, or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. In the event of any such disruption, we may be unable to receive or process orders, manufacture and ship products in a timely manner, or otherwise conduct our business in the normal course. Moreover, portions of our services business involve the processing, storage, and transmission of data, which would also be negatively affected by such an event. A disruption of our infrastructure could cause us to lose customers and revenue, particularly during a period of heavy demand for our products and services. We also could incur significant expense in repairing system damage and taking other remedial measures.
We could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm, and other serious negative consequences if we sustain cyber attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our customers or other third-parties.
We manage and store various proprietary information and sensitive or confidential data relating to our operations. In addition, our outsourcing services and cloud computing businesses routinely process, store, and transmit large amounts of data for our customers, including sensitive and personally identifiable information. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third-parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third-parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of the system.
The costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after a cyber incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers that may impede our sales, manufacturing, distribution, or other critical functions. We could lose existing or potential customers for outsourcing services or other information technology solutions in connection with any actual or perceived security vulnerabilities in our products. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or other third-parties, could expose us, our customers, or other third-parties affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise harm our business. In addition, we rely in certain limited capacities on third-party data management providers whose possible security problems and security vulnerabilities may have similar effects on us.
We are subject to laws, rules, and regulations in the U.S. and other countries relating to the collection, use, and
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security of user data. Our ability to execute transactions and to possess and use personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require us to notify customers or employees of a data security breach. We have incurred, and will continue to incur, significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards, or contractual obligations.
Our performance could be adversely affected by our failure to hedge effectively our exposure to fluctuations in foreign currency exchange rates and interest rates.
We utilize derivative instruments to hedge our 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 our financial statements. If we are not successful in monitoring our foreign exchange exposures and conducting an effective hedging program, our foreign currency hedging activities may not offset the impact of fluctuations in currency exchange rates on our future results of operations and financial position.
Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays that expire in whole or in part during Fiscal 2011 through Fiscal 2019.from time to time. Many of these holidays may be extended when certain conditions are met, or terminated if certain conditions are not met. If theythe tax holidays are not extended, or if we fail to satisfy the conditions of the reduced tax rate, then our effective tax rate would increase in the
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future. Our effective tax rate could also increase if our geographic sales mix changes. We are under audit in various tax jurisdictions. An unfavorable outcome in certain of these matters could result in a substantial increase to our tax expense. In addition, changes in tax laws (including U.S. taxes on foreign operations) could adversely affect our operations and profitability.
Our profitability could suffer from any impairment of our portfolio investments.
We invest a significant portion of our available funds in a portfolio consisting primarily of debt securities of various types and maturities pending the deployment of these funds in our business. Our earnings performance could suffer from any impairment of our investments. Our portfolio securities generally are classified as available-for-sale and are recorded on our Consolidated Statements of Financial Position at fair value. If any such investments experience market price declines, we may recognize in earnings the decline in the fair market value of such investments below their cost or carrying value when the decline is determined to be other than temporary.
Unfavorable results of legal proceedings could harm our business and result in substantial costs.
We are involved in various claims, suits, investigations, and legal proceedings that arise from time to time in the ordinary course of our business, including those described elsewhere in this report. Additional legal claims or regulatory matters may arise in the future and could involve stockholder, consumer, government regulatory and compliance, intellectual property, antitrust, tax, and other issues on a global basis. Litigation is inherently unpredictable. Regardless of the merits of the claims, litigation may be both time-consuming and disruptive to our business. We could incur judgments or enter into settlements of claims that could adversely affect our operating results or cash flows in a particular period. In addition, our business, operating results, and financial condition could be adversely affected if any infringement or other intellectual property claim made against us by any third-party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions.
Our success depends on our ability to attract, retain, and motivate our key employees.
We rely on key personnel, including our CEO and executive leadership team, to support anticipated continued rapid international growth and increasingly complex product and services offerings. We may not be able to attract, retain, and motivate the key professional, technical, marketing, and staff resources we need.
We face risks relating to any inability to maintain strong internal controls.
If management is not successful in maintaining a strong internal control environment, weinvestors could have weaknesses in our control environment, causing investors to lose confidence in our reported financial information. This could lead to a decline in our stock price, limit our ability to access the
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capital markets in the future, and require us to incur additional costs to improve our internal control systems and procedures.
Current or future environmental and safety laws, or other regulatory laws, may harm our business.
Our operations are subject to environmental and safety regulation in all of the areas in which we conduct business. Our product design and procurement operations must comply with new and future requirements relating to theclimate change laws and regulations, materials composition, sourcing, energy efficiency and collection, recycling, treatment, transportation, and disposal of our electronics products, including restrictions on mercury, lead, cadmium, lithium metal, lithium ion, and other substances. If we fail to comply with applicable rules and regulations regarding the transportation, source, use, and sale of such regulated substances, we could be subject to liability. The costs and timing of costs under environmental and safety laws are difficult to predict, but could have an unfavorable impact on our business.
In addition, we are subject to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act intended to improve transparency and accountability concerning the supply of minerals originating from the conflict zones of the Democratic Republic of Congo or adjoining countries. We will incur costs to comply with the new disclosure requirements of this law and may realize other costs relating to the sourcing and availability of minerals used in our products. Further, since our supply chain is complex, we may face reputational harm if our customers or other stakeholders conclude that we are unable to verify sufficiently the origins of the minerals used in the products we sell.
Armed hostilities, terrorism, natural disasters, or public health issues could harm our business.
Armed hostilities, terrorism, natural disasters, or public health issues, whether in the U.S. or abroad, could cause damage or disruption to us, our suppliers, or our customers, or could create political or economic instability, any of which could harm our business. These events could cause a decrease in demand for our products, could make it difficult or impossible for us to deliver products or for our suppliers to deliver components, and could create delays and inefficiencies in our supply chain.
ITEM 1B — UNRESOLVED STAFF COMMENTS
None.
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ITEM 2 — PROPERTIES
At January 29, 2010,February 3, 2012, we owned or leased a total of approximately 19.718.9 million square feet of office, manufacturing, and warehouse space worldwide, approximately 9.48.5 million square feet of which is located in the U.S. We owned approximately 57%58% of this space and leased the remaining 43%42%. Included in these amounts are approximately 1.81.6 million square feet that areis either vacant or sublet.
Our principal executive offices, including global headquarters, are located at One Dell Way, Round Rock, Texas. Our business centers, which include facilities that contain operations for sales, technical support, administrative, and support functions, occupy 10.312.7 million square feet of space, of which we own 36%46%. We own 42.6 million square feet of manufacturing space. Our designIn addition, our research and development centers are housed in 1.52.0 million square feet of space, of which we own 49%53%.
As discussed in “Part I — Item 1 — Business,” we have four operating segments identified as Large Enterprise, Public, SMB and Consumer. Because of the interrelation of the products and services offered in each of these segments, we do not designate our properties to eachany segment. All four segments use substantially all of the properties at least in part, and we retain the flexibility to make future use of each of the properties available to each of the segments.
ITEM 3 — LEGAL PROCEEDINGS
The information required by this Item 3 is incorporated herein by reference to the information set forth under the captionscaption “Legal Matters” and “Copyright Levies” in Note 910 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” and is incorporated herein by reference.Data.”
ITEM 4 — (REMOVED AND RESERVED)MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
Our common stock is listed on the NASDAQ Global Select Market of The NASDAQ Stock Market LLC under the symbol DELL. Information regarding the high and low sales prices per share of our common stock for Fiscal 20102012 and Fiscal 2009,2011, as reported by the NASDAQ Global Select Market, is set forth in Note 16 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” and is incorporated by reference herein.below:
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| Stock sales price per share for the fiscal year ended February 3, 2012: | ||||||||||||||||
| High | $ | 15.98 | $ | 17.60 | $ | 16.65 | $ | 17.88 | ||||||||
| Low | $ | 12.99 | $ | 15.34 | $ | 13.29 | $ | 14.15 | ||||||||
| Stock sales price per share for the fiscal year ended January 28, 2011: | ||||||||||||||||
| High | $ | 17.52 | $ | 16.46 | $ | 14.89 | $ | 14.70 | ||||||||
| Low | $ | 12.92 | $ | 11.72 | $ | 11.34 | $ | 13.06 | ||||||||
Holders
Dividends
We have never declared or paid any cash dividends on shares of our common stock and currently do not anticipate paying any cash dividends in the immediate future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors.
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Purchases of Common Stock
We have a share repurchase program that authorizes us to purchase shares of common stock in order to increase shareholder value and manage dilution resulting from shares issued under our equity compensation plans. However, we do not currently have a policy that requires the repurchase of common stock in conjunction with share-based payment arrangements. We did not repurchase any sharesThe following table sets forth information regarding our repurchases or acquisitions of common stock during the fourth quarter of Fiscal 2010. At January 29, 2010,2012 and the remaining authorized amount forof future purchases under our share repurchase program:
| Total Number of Shares Purchased | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||
| Period | ||||||||||||||
| (in millions, except average price paid per share) | ||||||||||||||
| Repurchases from October 29, 2011 through November 25, 2011 | 11 | $ | 14.78 | 11 | $ | 6,394 | ||||||||
| Repurchases from November 26, 2011 through December 30, 2011 | 15 | $ | 15.29 | 15 | $ | 6,164 | ||||||||
| Repurchases from December 31, 2011 through February 3, 2012 | 10 | $ | 16.50 | 10 | $ | 6,002 | ||||||||
| Total | 36 | $ | 15.45 | 36 | ||||||||||
_____________________
(a)Between 1996 and 2007, our Board of Directors authorized share repurchase programs to repurchase up to $40 billion of our common stock over an unspecified amount of time. On September 13, 2011, we announced that our Board of Directors had authorized an additional $5 billion for share repurchases under the program, was $4.5 billion.bringing the aggregate amount of common stock we can repurchase to $45 billion over an unspecified amount of time. As of February 3, 2012, $6.0 billion remained available for future share repurchases.
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Stock Performance Graph
The following graph compares the cumulative total return on Dell’sDell's common stock during the last five fiscal years with the S&P 500 Index, and the Dow Jones US Computer Hardware Index, and the S&P Information Technology Index during the same period. During Fiscal 2012, we transitioned from using the Dow Jones US Computer Hardware Index as our published industry index to the S&P Information Technology Index. We believe the S&P information Technology Index is more representative of Dell's peer group of companies and the industry in which Dell operates.
The graph shows the value, at the end of each of the last five fiscal years, of $100 invested in Dell common stock or the indices on January 29, 2005, andon February 2, 2007, and assumes the reinvestment of all dividends. The graph depicts the change in the value of our common stock relative to the indices at the end of each fiscal year and not for any interim period. Historical stock price performance is not necessarily indicative of future stock price performance.
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||||||||||||||||||
| Dell Inc. | $ | 100.00 | $ | 86.52 | $ | 40.39 | $ | 54.85 | $ | 55.91 | $ | 75.09 | |||||||||||
| S&P 500 | $ | 100.00 | $ | 97.69 | $ | 59.95 | $ | 79.82 | $ | 97.53 | $ | 101.64 | |||||||||||
| Dow Jones US Computer Hardware | $ | 100.00 | $ | 104.15 | $ | 67.90 | $ | 116.26 | $ | 164.70 | $ | 188.47 | |||||||||||
| S&P Information Technology | $ | 100.00 | $ | 100.20 | $ | 63.12 | $ | 96.42 | $ | 120.92 | $ | 127.88 | |||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Dell Inc. | $ | 100.00 | $ | 71.26 | $ | 57.28 | $ | 49.56 | $ | 23.14 | $ | 31.42 | ||||||||||||
S&P 500 | $ | 100.00 | $ | 110.38 | $ | 126.40 | $ | 123.48 | $ | 75.78 | $ | 100.89 | ||||||||||||
Dow Jones US Computer Hardware | $ | 100.00 | $ | 114.28 | $ | 130.83 | $ | 136.26 | $ | 88.83 | $ | 152.10 | ||||||||||||
20
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ITEM 6 — SELECTED FINANCIAL DATA
The following selected consolidated financial data for our company should be read in conjunction with “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II — Item 8 — Financial Statements and Supplementary Data” and are derived from our audited consolidated financial statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” or in our previously filed Annual Reports onForm 10-K.
| Fiscal Year Ended | ||||||||||||||||||||
| January 29, | January 30, | February 1, | February 2, | February 3, | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in millions, except per share data) | ||||||||||||||||||||
Results of Operations: | ||||||||||||||||||||
| Net revenue | $ | 52,902 | $ | 61,101 | $ | 61,133 | $ | 57,420 | $ | 55,788 | ||||||||||
| Gross margin | $ | 9,261 | $ | 10,957 | $ | 11,671 | $ | 9,516 | $ | 9,891 | ||||||||||
| Operating income | $ | 2,172 | $ | 3,190 | $ | 3,440 | $ | 3,070 | $ | 4,382 | ||||||||||
| Income before income taxes | $ | 2,024 | $ | 3,324 | $ | 3,827 | $ | 3,345 | $ | 4,608 | ||||||||||
| Net income | $ | 1,433 | $ | 2,478 | $ | 2,947 | $ | 2,583 | $ | 3,602 | ||||||||||
| Earnings per common share: | ||||||||||||||||||||
| Basic | $ | 0.73 | $ | 1.25 | $ | 1.33 | $ | 1.15 | $ | 1.50 | ||||||||||
| Diluted | $ | 0.73 | $ | 1.25 | $ | 1.31 | $ | 1.14 | $ | 1.47 | ||||||||||
| Number of weighted-average shares outstanding: | ||||||||||||||||||||
| Basic | 1,954 | 1,980 | 2,223 | 2,255 | 2,403 | |||||||||||||||
| Diluted | 1,962 | 1,986 | 2,247 | 2,271 | 2,449 | |||||||||||||||
Cash Flow & Balance Sheet Data: | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 3,906 | $ | 1,894 | $ | 3,949 | $ | 3,969 | $ | 4,751 | ||||||||||
| Cash, cash equivalents and investments | $ | 11,789 | $ | 9,546 | $ | 9,532 | $ | 12,445 | $ | 11,756 | ||||||||||
| Total assets | $ | 33,652 | $ | 26,500 | $ | 27,561 | $ | 25,635 | $ | 23,252 | ||||||||||
| Short-term borrowings | $ | 663 | $ | 113 | $ | 225 | $ | 188 | $ | 65 | ||||||||||
| Long-term debt | $ | 3,417 | $ | 1,898 | $ | 362 | $ | 569 | $ | 625 | ||||||||||
| Total stockholders’ equity | $ | 5,641 | $ | 4,271 | $ | 3,735 | $ | 4,328 | $ | 4,047 | ||||||||||
| Fiscal Year Ended | ||||||||||||||||||||
| February 3, 2012 | January 28, 2011 | January 29, 2010 | January 30, 2009 | February 1, 2008 | ||||||||||||||||
| (in millions, except per share data) | ||||||||||||||||||||
| Results of Operations: | ||||||||||||||||||||
| Net revenue | $ | 62,071 | $ | 61,494 | $ | 52,902 | $ | 61,101 | $ | 61,133 | ||||||||||
| Gross margin | $ | 13,811 | $ | 11,396 | $ | 9,261 | $ | 10,957 | $ | 11,671 | ||||||||||
| Operating income | $ | 4,431 | $ | 3,433 | $ | 2,172 | $ | 3,190 | $ | 3,440 | ||||||||||
| Income before income taxes | $ | 4,240 | $ | 3,350 | $ | 2,024 | $ | 3,324 | $ | 3,827 | ||||||||||
| Net income | $ | 3,492 | $ | 2,635 | $ | 1,433 | $ | 2,478 | $ | 2,947 | ||||||||||
| Earnings per share: | ||||||||||||||||||||
| Basic | $ | 1.90 | $ | 1.36 | $ | 0.73 | $ | 1.25 | $ | 1.33 | ||||||||||
| Diluted | $ | 1.88 | $ | 1.35 | $ | 0.73 | $ | 1.25 | $ | 1.31 | ||||||||||
| Number of weighted-average shares outstanding: | ||||||||||||||||||||
| Basic | 1,838 | 1,944 | 1,954 | 1,980 | 2,223 | |||||||||||||||
| Diluted | 1,853 | 1,955 | 1,962 | 1,986 | 2,247 | |||||||||||||||
| Cash Flow & Balance Sheet Data: | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 5,527 | $ | 3,969 | $ | 3,906 | $ | 1,894 | $ | 3,949 | ||||||||||
| Cash, cash equivalents and investments | $ | 18,222 | $ | 15,069 | $ | 11,789 | $ | 9,546 | $ | 9,532 | ||||||||||
| Total assets | $ | 44,533 | $ | 38,599 | $ | 33,652 | $ | 26,500 | $ | 27,561 | ||||||||||
| Short-term borrowings | $ | 2,867 | $ | 851 | $ | 663 | $ | 113 | $ | 225 | ||||||||||
| Long-term debt | $ | 6,387 | $ | 5,146 | $ | 3,417 | $ | 1,898 | $ | 362 | ||||||||||
| Total stockholders’ equity | $ | 8,917 | $ | 7,766 | $ | 5,641 | $ | 4,271 | $ | 3,735 | ||||||||||
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ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with “Part II — Item 8 — Financial Statements and Supplementary Data.”
INTRODUCTION
We are a leading integrated technology solutions provider in the IT industry. We offer a broad range of products, including mobility products, desktop PCs, software and peripherals, servers and networking, and storage products. Our services offerings include infrastructure technology, consulting and applications, and business process services. We also offer various financing alternatives, asset management services, and other customer financial services for business and consumer customers.
A key component of our business strategy is to continue shifting our portfolio to products and services that provide higher-value and recurring revenue streams over time. As part of this strategy, we emphasize expansion of our enterprise solutions and services, which include servers, networking, storage, and services. We maintainbelieve the most attractive areas for profitable growth include data center and information management as well as client and cloud computing. Some of our most attractive growth opportunities for technology expansion are in emerging countries which include a highly efficient global supply chain, which allows low inventory levelsvast majority of the world's population. In recent years, we have focused much of our investment in Growth Countries, with a particular focus on BRIC. Growth Countries now account for a significant portion of our revenue and the efficient use of and return on capital.revenue from BRIC has continued to increase each year.
Our strategic transformation has contributed to significant improvements in our operating margins. We have manufacturing locations arounddirected our client product development efforts towards streamlining our product portfolio and focusing on product leadership by developing next generation capabilities. We employ a collaborative approach to product design and development in which our engineers, with direct customer input, design innovative solutions and work with a global network of technology companies to architect new system designs, influence the worlddirection of future development, and relationships with contract manufacturers. This combined structure allows us to optimizeintegrate new technologies into our global supply chain to best serve our global customer base. To maintain our competitiveness,products. Through this collaborative, customer-focused approach, we continuously strive to improve ourdeliver new and relevant products and services technology, manufacturing,to the market quickly and logistics.
efficiently. We are continuingcontinue to invest in initiatives that will alignthe enhancement of our newsales and existing products and services around customers’ needs in order to drive long-term sustainable growth, profitability, and liquidity. During Fiscal 2010,marketing functions. Over time, we acquired Perot Systems Corporation (“Perot Systems”), which expands our services business and better positions us for immediate and long-term growth through the sale of additional enterprise solutions. Our business model also includes selling throughhave added new distribution channels, such as retail, system integrators, value-added resellers, and distributors, which allows us to reach evenexpand our access to more end-users around the world.
We are investing resources in emerging countriessupplement organic growth with an emphasis on Brazil, Russia, India, and China (“BRIC”), where, given stable economic conditions,a disciplined acquisition program targeting businesses that will expand our portfolio of higher-margin enterprise solutions offerings. We emphasize acquisitions of companies with portfolios that we expect significant growth to occur over the next several years. We are also creating customized products and services to meet the preferences and requirements ofcan leverage with our diversified global customer base. We will focusbase and distribution. Since the beginning of Fiscal 2011, we acquired more than ten businesses that extended our investments to grow our business organicallycore capabilities in a variety of enterprise solutions offerings, including storage, networking, systems management appliance, virtualized server and data center solutions, and software-as-a-service application integration, as well as inorganically through alliancesenabled expansion of our customer financing activities. The comparability of our results of operations for Fiscal 2012, as compared to Fiscal 2011, is affected by our Fiscal 2012 acquisitions, though the impact is not material. Our Fiscal 2012 and strategic acquisitions.Fiscal 2011 results of operations, as compared to Fiscal 2010, are impacted by our acquisition of Perot Systems Corporation ("Perot Systems") in November of 2009. See our Services discussion under "Results of Operations — Revenue of Operations — Revenue by Product and Services Categories" for more information about our acquisition of Perot Systems.
The successful execution of our business strategy is subject to a variety of risks and uncertainties, including those discussed in “Part I - Item 1A - Risk Factors.”
Fiscal Year Periods
Our fiscal year is the 52 or 53 week period ending on the Friday nearest January 31. Fiscal 2012 was a 53 week period that ended on February 3, 2012, while Fiscal 2011 and Fiscal 2010 were 52 week periods that ended on January 28, 2011, and January 29, 2010, respectively.
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Presentation of Supplemental Non-GAAP Financial Measures
In this management's discussion and analysis, we use supplemental measures of our performance, which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These financial measures, which are considered “non-GAAP financial measures” under SEC rules, include our non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income and non-GAAP earnings per share. See “Results of Operations — Non-GAAP Financial Measures” below for information about our use of these non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
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RESULTS OF OPERATIONS
Consolidated Operations
The following table summarizes our consolidated results of operations for each of the past three fiscal years:
| Fiscal Year Ended | ||||||||||||||||||||||||||||||||
| January 29, 2010 | January 30, 2009 | February 1, 2008 | ||||||||||||||||||||||||||||||
| % of | % | % of | % | % of | ||||||||||||||||||||||||||||
| Dollars | Revenue | Change | Dollars | Revenue | Change | Dollars | Revenue | |||||||||||||||||||||||||
| (in millions, except per share amounts and percentages) | ||||||||||||||||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||||||||||
| Product | $ | 43,697 | 82.6% | (17% | ) | $ | 52,337 | 85.7% | (3% | ) | $ | 53,728 | 87.9% | |||||||||||||||||||
| Services, including software related | 9,205 | 17.4% | 5% | 8,764 | 14.3% | 18% | 7,405 | 12.1% | ||||||||||||||||||||||||
| Total net revenue | $ | 52,902 | 100.0% | (13% | ) | $ | 61,101 | 100.0% | (0% | ) | $ | 61,133 | 100.0% | |||||||||||||||||||
Gross margin | ||||||||||||||||||||||||||||||||
| Product | $ | 6,163 | 14.1% | (20% | ) | $ | 7,667 | 14.6% | (11% | ) | $ | 8,579 | 16.0% | |||||||||||||||||||
| Services, including software related | 3,098 | 33.7% | (6% | ) | 3,290 | 37.5% | 6% | 3,092 | 41.8% | |||||||||||||||||||||||
| Total Gross margin | $ | 9,261 | 17.5% | (15% | ) | $ | 10,957 | 17.9% | (6% | ) | $ | 11,671 | 19.1% | |||||||||||||||||||
| Operating expenses | $ | 7,089 | 13.4% | (9% | ) | $ | 7,767 | 12.7% | (6% | ) | $ | 8,231 | 13.5% | |||||||||||||||||||
| Operating income | $ | 2,172 | 4.1% | (32% | ) | $ | 3,190 | 5.2% | (7% | ) | $ | 3,440 | 5.6% | |||||||||||||||||||
| Net income | $ | 1,433 | 2.7% | (42% | ) | $ | 2,478 | 4.1% | (16% | ) | $ | 2,947 | 4.8% | |||||||||||||||||||
| Earnings per share — diluted | $ | 0.73 | N/A | (42% | ) | $ | 1.25 | N/A | (5% | ) | $ | 1.31 | N/A | |||||||||||||||||||
| Fiscal Year Ended | |||||||||||||||||||||||||||
| February 3, 2012 | January 28, 2011 | January 29, 2010 | |||||||||||||||||||||||||
| Dollars | % of Revenue | % Change | Dollars | % of Revenue | % Change | Dollars | % of Revenue | ||||||||||||||||||||
| (in millions, except per share amounts and percentages) | |||||||||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||||||
| Product | $ | 49,906 | 80.4 | % | — | % | $ | 50,002 | 81.3 | % | 14 | % | $ | 43,697 | 82.6 | % | |||||||||||
| Services, including software related | 12,165 | 19.6 | % | 6 | % | 11,492 | 18.7 | % | 25 | % | 9,205 | 17.4 | % | ||||||||||||||
| Total net revenue | $ | 62,071 | 100.0 | % | 1 | % | $ | 61,494 | 100.0 | % | 16 | % | $ | 52,902 | 100.0 | % | |||||||||||
| Gross margin: | |||||||||||||||||||||||||||
| Product | $ | 10,217 | 20.5 | % | 29 | % | $ | 7,934 | 15.9 | % | 29 | % | $ | 6,163 | 14.1 | % | |||||||||||
| Services, including software related | 3,594 | 29.5 | % | 4 | % | 3,462 | 30.1 | % | 12 | % | 3,098 | 33.7 | % | ||||||||||||||
| Total gross margin | $ | 13,811 | 22.3 | % | 21 | % | $ | 11,396 | 18.5 | % | 23 | % | $ | 9,261 | 17.5 | % | |||||||||||
| Operating expenses | $ | 9,380 | 15.2 | % | 18 | % | $ | 7,963 | 12.9 | % | 12 | % | $ | 7,089 | 13.4 | % | |||||||||||
| Operating income | $ | 4,431 | 7.1 | % | 29 | % | $ | 3,433 | 5.6 | % | 58 | % | $ | 2,172 | 4.1 | % | |||||||||||
| Net income | $ | 3,492 | 5.6 | % | 33 | % | $ | 2,635 | 4.3 | % | 84 | % | $ | 1,433 | 2.7 | % | |||||||||||
| Earnings per share — diluted | $ | 1.88 | N/A | 39 | % | $ | 1.35 | N/A | 85 | % | $ | 0.73 | N/A | ||||||||||||||
Other Financial Information (a) | |||||||||||||||||||||||||||
| Non-GAAP gross margin | $ | 14,165 | 22.8 | % | 21 | % | $ | 11,731 | 19.1 | % | 22 | % | $ | 9,649 | 18.2 | % | |||||||||||
| Non-GAAP operating expenses | $ | 9,030 | 14.5 | % | 19 | % | $ | 7,582 | 12.3 | % | 14 | % | $ | 6,675 | 12.6 | % | |||||||||||
| Non-GAAP operating income | $ | 5,135 | 8.3 | % | 24 | % | $ | 4,149 | 6.7 | % | 40 | % | $ | 2,974 | 5.6 | % | |||||||||||
| Non-GAAP net income | $ | 3,952 | 6.4 | % | 27 | % | $ | 3,106 | 5.1 | % | 51 | % | $ | 2,054 | 3.9 | % | |||||||||||
| Non-GAAP earnings per share - diluted | $ | 2.13 | N/A | 34 | % | $ | 1.59 | N/A | 51 | % | $ | 1.05 | N/A | ||||||||||||||
_____________________
(a) | Non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share are not measurements of financial performance prepared in accordance with GAAP. See “Non-GAAP Financial Measures” below for information about these non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. |
Overview
Our Fiscal 2010, our overall2012 total net revenue decreasedyear-over-year due primarily toincreased 1% from the global economic slowdown that began during the second half of Fiscal 2009. The weakened economy continued to impact the IT spending of our Commercial customers, which accounted for 77% of our overall revenueprior year. Our fiscal calendar for Fiscal 2010. Our2012 included an extra week of operations. Without the additional week of operations, our total net revenue would have been essentially unchanged from the prior year. Revenue from our SMB and Large Enterprise segments increased over the prior year while our Consumer segmentand Public segments experienced significant unit demand growthyear-over-year, but a mix shift to lower-priced products and competitive pricing pressures resulted in a decrease in revenue from the prior year. Revenue from our Consumer customers decreased 4%, year-over-year, during Fiscal 2012, primarily due to a decline from our U.S. business. In addition, revenue growth in the Consumer business was adversely affected as we focused our product portfolio on higher-value offerings. Revenue from our Public segment decreased 2% year-over-year as our Public customers have been challenged by budgetary constraints on government spending, particularly in Western Europe and the U.S. Revenue from our Commercial segments overall increased 2% year-over-year, and represented approximately 81% of our total net revenue during Fiscal 2012. Revenue from our enterprise solutions and services increased 6%, led by growth in our SMB segment, while revenue from our client products decreased 1%. During Fiscal 2012, revenue from outside the U.S. increased to $31.7 billion, surpassing 50% of our total net revenue. The increase in revenue from outside the U.S. was primarily driven by higher revenue in the Asia Pacific and Japan region ("APJ"), which grew 13% year-over-year.
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During Fiscal 2012, our consolidated operating income as a percentage of net revenue increased 150 basis points to 7.1%. The increase in operating income percentage was primarily driven by improved product gross margins, the effect of which was partially offset by higher selling, general, and administrative expenses, and to a lesser extent, an increase in research, development, and engineering expenditures. Operating income as a percentage of net revenue from our Commercial segments increased 130 basis points to 10.3% year-over-year during Fiscal 2012, while our Consumer operating income percentage increased 220 basis points to 2.7%.
Our improved profitability for Fiscal 2012 was in part due to growth in our enterprise solutions and services business. For Fiscal 2012, enterprise solutions and services revenue grew 6% year-over-year to $18.6 billion, while gross margins generated from this category grew 10% year-over-year. We also substantially improved the profitability of our client product business in Fiscal 2012 by simplifying our product offerings, continuing to optimize our supply chain, and shifting our revenue mix to higher-value products. We will remain focused on growing our revenue and profitability.profitability by continuing our efforts to provide IT solutions to our customers in areas such as enterprise solutions and services. In addition, we will continue to utilize our flexible supply chain to enhance the profitability of our client products.
As of February 3, 2012, we had $18.2 billion of total cash, cash equivalents, and investments, compared to $15.1 billion as of January 28, 2011. During Fiscal 2012, we continued to maintain an efficient cash conversion cycle as well as strong cash and investment positions. Cash flow from operations was $5.5 billion, $ 4.0 billion, and $3.9 billion during Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively. As of February 3, 2012, we had $9.3 billion in total debt, compared to $6.0 billion in total debt as of January 28, 2011.
In the second halfthird quarter of Fiscal 2010,2012, several regions of Thailand experienced severe flooding, causing damage to infrastructure and factories that have significantly impacted the IT industry started to see signs of economic recovery,hard disk drive ("HDD") supply chain. Although we were effective in shaping demand and as a result, our unit shipments duringpricing for hard drive cost increases in the fourth quarter of Fiscal 2010 improvedyear-over-year for all2012, we were impacted by the available mix of our segments. Overall,hard drives, which affected the product configuration mix we have seen indications of strengthening demand in the Commercial segments and continued growth in the Consumer segment, and we believe that, as the global economy continueswere able to recover, our revenue in Fiscal 2011 should improve relative to Fiscal 2010.
We believe that we will continue to profitably grow revenue in the long- term through the expansion of our overall strategyenterprise solutions, services, and product offerings. We will balance revenue growth with the objective of seeking to balance profitabilityenhancing operating income and liquidity withcash flow. We expect that total revenue growth.growth in the first half of Fiscal 2013 will be challenging, given the existing weakness in our Public segment as well as the uncertain macroeconomic environment.
Revenue
Fiscal 20102012 compared to Fiscal 20092011
Product Revenue — Product revenue for Fiscal 2012 was essentially unchanged from the prior year. Product revenue increases in |
23
Services Revenue, including software related— Services revenue, including software related, increased year-over-year by 6% for Fiscal 2012. Our services revenue performance during Fiscal 2012 was attributable to a 8% year-over-year increase in services revenue, excluding software related, and an increase of 1% in software related revenue. All of our Commercial segments remained relatively flatexperienced increases in services revenue while Consumer services revenue decreased.
At a regional level, revenue from Fiscal 2009.
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time. As a result,During Fiscal 2012, we experienced favorable changes in foreign currency exchange rates, though the impact of these currency movements was not significantmaterial to our consolidated results of operations or any related trends.for the period.
Fiscal 20092011 compared to Fiscal 20082010
Product Revenue — Product revenue increased year-over-year by 14% for Fiscal 2011. Our product revenue performance was primarily attributable to improved customer demand as a result of increased global IT spending from our Commercial customers across all product categories as well as a shift in mix to higher priced products. See "Revenue by Product and Services Categories" for further information regarding the average selling prices of our products.
Services Revenue, including software related— Services revenue, including software related, increased year-over-year by 25% for Fiscal 2011. Our services revenue performance was attributable to a 36% year-over-year increase in services revenue, excluding software related, and an increase of 7% in software related services revenue during Fiscal 2011. The increase in services revenue was primarily due to our acquisition of Perot Systems in the fourth quarter of Fiscal 2010, which was integrated into our Public and Large Enterprise segments.
During Fiscal 2011, revenue from the U.S. increased 14% to $31.9 billion and represented 52% of total net revenue. Revenue from outside the U.S. represented approximately 48% of Fiscal 2009 net revenue. Outside the U.S., we produced 4%increased 19% to $29.6 billion. Revenue from BRIC increased 38% year-over-year revenue growth for Fiscal 2009 as compared to2011. As a 3% decline in revenue for the U.S. The decline inresult of our U.S. revenue was mainly attributable tocomprehensive hedging program, our Commercial business in the U.S., which wasresults were not materially impacted by the downturnforeign currency exchange rates in the global economy during the second half of Fiscal 2009. Our U.S. consumer business also was impacted by the economic slowdown; however, this business’s revenue grew during2011 or Fiscal 2009, aided by our expansion into retail through an increased number of worldwide retail locations. BRIC revenue grew 20% during Fiscal 2009 as we tailored solutions to meet specific regional needs, and enhanced relationships to provide customer choice and flexibility. From a worldwide product perspective, the continued decline in desktop unit sales and prices, and decreases in mobility selling prices contributed to our Fiscal 2009 performance.2010.
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Gross Margin
| Fiscal Year Ended | ||||||||||||||||||||||||||||||||
| January 29, 2010 | January 30, 2009 | February 1, 2008 | ||||||||||||||||||||||||||||||
| % of | % | % of | % | % of | ||||||||||||||||||||||||||||
| Dollars | Revenue | Change | Dollars | Revenue | Change | Dollars | Revenue | |||||||||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||||||||||
Gross margin: | ||||||||||||||||||||||||||||||||
| Product | $ | 6,163 | 14.1% | (20% | ) | $ | 7,667 | 14.6% | (11% | ) | $ | 8,579 | 16.0% | |||||||||||||||||||
| Services, including software related | 3,098 | 33.7% | (6% | ) | 3,290 | 37.5% | 6% | 3,092 | 41.8% | |||||||||||||||||||||||
| Total gross margin | $ | 9,261 | 17.5% | (15% | ) | $ | 10,957 | 17.9% | (6% | ) | $ | 11,671 | 19.1% | |||||||||||||||||||
Fiscal 20102012 compared to Fiscal 20092011
Products — | |
During Fiscal 2010,2012, product gross margins increased in absolute dollars year-over-year and in gross margin percentage. Product gross margin percentage increased to 20.5% for Fiscal 2012 from 15.9% for Fiscal 2011. A shift away from lower-value business, better supply chain execution, a disciplined pricing strategy in a competitive environment, and favorable component cost conditions contributed to the year-over-year increase in product gross margin percentage for all of our segments. We have created a flexible supply chain that has improved our supply chain execution, and we have simplified our product offerings.
Services, including software related — During Fiscal 2012, our services gross margin decreasedincreased in absolute dollars compared to the prior fiscal year, with a correspondingalthough our gross margin percentage decreased. The decrease in gross margin percentage. Our solutionpercentage for services, offerings faced competitive pricing pressuresincluding software related, was primarily driven by declines in the current economic environment, resulting in lower gross margin percentages.percentages from our transactional and outsourcing services.
Fiscal 2011 compared to Fiscal 2010
Products — During Fiscal 2011, product gross margins increased in absolute dollars year-over-year and in gross margin percentage. Product gross margin percentage increased to 15.9% for Fiscal 2011 from 14.1% for Fiscal 2010. Reduced component costs, improved pricing discipline, better sales and supply chain execution, and improved quality resulting in favorable warranty experience contributed to the year-over-year increase in product gross margin percentage.
Services, including software related — During Fiscal 2011, our services gross margin increased in absolute dollars compared to the prior fiscal year, although our gross margin percentage decreased. The decrease in gross margin percentage for services, including software related, was primarily due to a higher mix of outsourcing and project-related services.
Total gross margin for Fiscal 2011 increased 23% to $11.4 billion on a GAAP basis and 22% to $11.7 billion on a non-GAAP basis from Fiscal 2010. Gross margin on a GAAP basis for Fiscal 2011 and Fiscal 2010 includes the effects of amortization of intangible assets and of severance and facility action costs and acquisition-related charges. As we continueset forth in the reconciliation
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under "Non-GAAP Financial Measures" below, these items are excluded from the calculation of non-GAAP gross margin for Fiscal 2011 and Fiscal 2010. Amortization of intangible assets included in gross margin increased 84% to evolve$278 million for Fiscal 2011. The increase in amortization of intangibles for Fiscal 2011 was primarily attributable to an increase in intangible assets of $1.2 billion in Fiscal 2010 related to our inventoryacquisition of Perot Systems. Severance and manufacturing business modelfacility action costs and acquisition-related charges included in gross margin decreased 76% to drive$57 million during Fiscal 2011. The overall decrease in severance and facility action costs and acquisition-related charges was due to a decrease in cost efficiencies, we continuously negotiatereduction activities from Fiscal 2010.
Vendor Rebate Programs
Our gross margin is affected by our ability to achieve competitive pricing with our suppliers invendors and contract manufacturers, including through our negotiation of a variety of areas, including availabilityvendor rebate programs to achieve lower net costs for the various components we include in our products. Under these programs, vendors provide us with rebates or other discounts from the list prices for the components, which are generally elements of supply, quality,their pricing strategy. Vendor rebate programs are only one element of the costs we negotiate for our product components. We account for rebates and cost. These real-time continuous supplier negotiations support our business structure, which is able to respond quickly to changing market conditions due to our customer-facing model. Such negotiations are focused on achieving the lowestother discounts as a reduction in cost of net revenue. Our total net cost includes supplier list prices reduced by vendor rebates and other discounts. We manage our costs on a total net cost basis.
The terms and conditions of our various components, independentvendor rebate programs are largely based on product volumes and are generally not long-term in nature, but instead are typically negotiated at the beginning of the pricing strategies used by our supplier base.each quarter. Because of the fluid nature of these ongoing negotiations, which reflect changes in the competitive environment, the timing and amount of supplierrebates and other discounts and rebateswe receive under the programs may vary from
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In addition, we have pursued legal action against certain vendors and are currently involved in negotiations with other vendors regarding their past pricing practices. We have negotiated settlements with some of these vendors and may have additional settlements in future quarters. During Fiscal 2012, negotiated vendor settlements, including settlements related to past pricing practices, resulted in a net increase to our Consolidated Gross Margin of approximately $70 million. These discounts and rebatessettlements are allocated to theour segments based on a varietythe relative amount of factors, including strategic initiatives, to drive certain programs. We monitor our suppliers’ net cost, includingaffected vendor funding programs, and work to mitigate any disruptions or price disadvantages causedproducts used by changes in our supplier programs.each segment.
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Operating Expenses
The following table presents information regarding our operating expenses during each of the past three fiscal years:
| Fiscal Year Ended | ||||||||||||||||||||||||||||||||
| January 29, 2010 | January 30, 2009 | February 1, 2008 | ||||||||||||||||||||||||||||||
| % of | % | % of | % | % of | ||||||||||||||||||||||||||||
| Dollars | Revenue | Change | Dollars | Revenue | Change | Dollars | Revenue | |||||||||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
| Selling, general, and administrative | $ | 6,465 | 12.2% | (9% | ) | $ | 7,102 | 11.6% | (6% | ) | $ | 7,538 | 12.4% | |||||||||||||||||||
| Research, development, and engineering | 624 | 1.2% | (6% | ) | 663 | 1.1% | 9% | 610 | 1.0% | |||||||||||||||||||||||
| In-process research and development | - | 0.0% | (100% | ) | 2 | 0.0% | (98% | ) | 83 | 0.1% | ||||||||||||||||||||||
| Total operating expenses | $ | 7,089 | 13.4% | (9% | ) | $ | 7,767 | 12.7% | (6% | ) | $ | 8,231 | 13.5% | |||||||||||||||||||
| Fiscal Year Ended | |||||||||||||||||||||||||||
| February 3, 2012 | January 28, 2011 | January 29, 2010 | |||||||||||||||||||||||||
| Dollars | % of Revenue | % Change | Dollars | % of Revenue | % Change | Dollars | % of Revenue | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||
| Selling, general, and administrative | $ | 8,524 | 13.7 | % | 17 | % | $ | 7,302 | 11.9 | % | 13 | % | $ | 6,465 | 12.2 | % | |||||||||||
| Research, development, and engineering | 856 | 1.5 | % | 30 | % | 661 | 1.0 | % | 6 | % | 624 | 1.2 | % | ||||||||||||||
| Total operating expenses | $ | 9,380 | 15.2 | % | 18 | % | $ | 7,963 | 12.9 | % | 12 | % | $ | 7,089 | 13.4 | % | |||||||||||
| Other Financial Information | |||||||||||||||||||||||||||
Non-GAAP operating expenses (a) | $ | 9,030 | 14.5 | % | 19 | % | $ | 7,582 | 12.3 | % | 14 | % | $ | 6,675 | 12.6 | % | |||||||||||
(a)For a reconciliation of non-GAAP operating expenses to operating expenses prepared in accordance with GAAP, see “Non-GAAP Financial Measures” below.
Fiscal 20102012 compared to Fiscal 20092011
Selling, General, and benefitsAdministrative — During Fiscal 2012, selling, general, and administrative ("SG&A") expenses increased $1.2 billion year-over-year. The overall higher level of SG&A was largely attributable to the continued execution of our strategic transformation. Our strategic initiatives have entailed organic investments in enterprise solution selling capabilities and other infrastructure spending as well as investments in enterprise and services-focused acquisitions, which generally have higher expense structures. During Fiscal 2012, compensation-related expenses, excluding severance-related expenses, relatedincreased approximately $967 million due to a 6% year-over-year increase in headcount, reductions, decreased approximately $300which was driven by our organic and inorganic investments. We also experienced a year-over-year increase of $175 million in Fiscal 2010 compared to Fiscal 2009. With the increase in retail volumes, which typically incur less advertising, costs, advertising expenses decreased approximately $200 millionyear-over-year from Fiscal 2009. Due to company-wide spending control measures, there were large decreases in mostpromotional, and other categories of expenses, including travel, maintenance, telecom, utilities, training, and recruiting, resulting in savings of over $340 million.
Research, Development, and Engineering — During Fiscal 2012, research, development, and engineering expenses were 1.5% of net revenue, compared to 1.0% during the prior year. We manage our research, development, and engineering spending by targeting those innovations and products that we believe are most valuable to our customers and by relying upon the capabilities of our strategic relationships. We are increasing our focus on research and development and will continue to shift our investment in RD&E activities to support our initiatives that grow our enterprise solutions and services offerings.
Total operating expenses for Fiscal 2012 increased 18% to $9.4 billion on a GAAP basis and 19% to $9.0 billion on a non-GAAP basis over Fiscal 2011. Operating expenses on a GAAP basis for Fiscal 2012 and Fiscal 2011 includes the effects of severance and facility action costs and acquisition-related charges and amortization of intangible assets. These charges increased 45% to $350 million during Fiscal 2012 compared to Fiscal 2011, primarily due to an increase in acquisition-related charges as a result of the larger acquisitions that were completed in Fiscal 2012 compared to Fiscal 2011. For Fiscal 2011, operating expenses on a GAAP basis also included approximately $115$140 million of costsin settlements we incurred related to an SEC investigation and a securities litigation matter. As set forth in the reconciliation under “Non-GAAP Financial Measures” below, non-GAAP operating expenses for Fiscal 2012 and for Fiscal 2011 excludes the effects of severance and facility action costs and acquisition related charges, amortization of Perot Systems.intangible assets, and, for Fiscal 2011, the settlements referred to above.
Fiscal 2011 compared to Fiscal 2010
Selling, General, and Administrative— During Fiscal 2011, SG&A expenses increased year-over-year, while SG&A expenses as a percentage of net revenue decreased. The increase in SG&A expenses was primarily attributable to increases in compensation-related expenses and advertising and promotional expenses. Compensation-related expenses, excluding severance-related expenses, increased approximately $679 million due to an increase in performance-based compensation expense, which is tied to revenue and operating income growth, and cash flow targets, and an increase in headcount. Our
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headcount increased approximately 6% due to our acquisitions and new hires related to our strategic initiatives. We expect integrationalso experienced a year-over-year increase of $111 million in advertising and promotional expenses. These increases were offset in part by decreases in severance and facility action costs and acquisition-related charges, discussed below.
Research, Development, and Engineering— During Fiscal 2011, research, development, and engineering expenses remained at approximately 1.0% of revenue, consistent with the prior fiscal year.
Total operating expenses for Fiscal 2011 increased 12% to $8.0 billion on a GAAP basis and 14% to $7.6 billion on a non-GAAP basis for Fiscal 2011 over Fiscal 2010. Operating expenses on a GAAP basis for Fiscal 2011 and Fiscal 2010 includes the effects of severance and facility action costs and acquisition-related charges as well as amortization of intangible assets. For Fiscal 2011, operating expenses on a GAAP basis also includes $140 million in settlements we incurred related to an SEC investigation and a securities litigation matter. As set forth in the reconciliation under “Non-GAAP Financial Measures” below, non-GAAP operating expenses for Fiscal 2011 and for Fiscal 2010 excludes the effects of severance and facility action costs and acquisition-related charges, amortization of intangible assets, and, for Fiscal 2011, the settlements referred to above. Severance and facility action costs and acquisition-related charges included in operating expenses decreased year-over-year by 53% to $170 million for Fiscal 2011. The decrease in severance and facility action costs and acquisition-related charges was primarily due to a decrease in cost reduction activities from Fiscal 2010. Amortization of intangibles included in operating expenses increased 31% to $71 million over Fiscal 2010, and was primarily related to our acquisition of Perot Systems in Fiscal 2010 as well as our Fiscal 2011 acquisitions.
Operating and Net Income
Fiscal 2012 compared to continueFiscal 2011
Operating Income — During Fiscal 2012, operating income increased 29% to $4.4 billion on a GAAP basis and 24% to $5.1 billion on a non-GAAP basis over Fiscal 2011. The increases were primarily attributable to the next fiscal years.improved gross margins discussed above, the effect of which was partially offset by an increase in selling and marketing costs.
Net Income — During Fiscal 2012, net income increased 33% to $3.5 billion on a GAAP basis and 27% to $4.0 billion on a non-GAAP basis over Fiscal 2011. Net income was positively impacted by increases in operating income and a lower effective tax rate, offset in part by unfavorable changes in Interest and other, net. Interest and other, net for Fiscal 2011 was favorably impacted by our receipt of a $72 million merger termination fee. This fee is excluded from net income on a non-GAAP basis. See “Income and Other Taxes” and “Interest and Other, net” below for a discussion of our effective tax rates and Interest and other, net.
Fiscal 2011 compared to Fiscal 2010
Operating Income — During Fiscal 2011, operating income increased 58% to $3.4 billion on a GAAP basis and 40% to $4.1 billion on a non-GAAP basis over Fiscal 2010. The increases were primarily attributable to increased revenue, improved gross margins, and better operating leverage resulting from the increase in net revenue.
Net Income — During Fiscal 2011, net income increased 84% to $2.6 billion on a GAAP basis and 51% to $3.1 billion on a non-GAAP basis over Fiscal 2010. Net income was positively impacted by increases in operating income and a lower effective income tax rate. In addition, on a GAAP basis, Interest and other, net increased favorably by 44% for Fiscal 2011 due primarily to a $72 million merger termination fee that we will continue to review our costs across all processes and organizations withreceived during the goals of reducing complexity and eliminating redundancies. Since the secondthird quarter of Fiscal 20082011. See “Income and throughOther Taxes” and “Interest and Other, net” below for discussion of our effective tax rates and Interest and other, net.
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Non-GAAP Financial Measures
We use non-GAAP financial measures to supplement the endfinancial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows our management to better understand our consolidated financial performance from period to period and in relationship to the operating results of our segments, as management does not believe that the excluded items are reflective of our underlying operating performance. We also believe that excluding certain items from our GAAP results allows our management to better project our future consolidated financial performance because our forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures will provide investors with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance, and enabling them to make more meaningful period to period comparisons.
The non-GAAP financial measures presented in this report include non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share. These non-GAAP financial measures, as defined by us, represent the comparable GAAP measures adjusted to exclude severance and facility action costs and acquisition-related charges, amortization of purchased intangible assets related to acquisitions, the settlements related to the SEC investigation and a securities litigation matter, which were both incurred during the first quarter of Fiscal 2010,2011, and a merger termination fee, which we received during the third quarter of Fiscal 2011, and for non-GAAP net income and non-GAAP earnings per share, the aggregate adjustment for income taxes related to the exclusion of such items. We provide more detail below regarding each of these items and our reasons for excluding them. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the 23,800exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual.
There are limitations to the use of the non-GAAP financial measures presented in this report. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate the non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. In addition, items such as amortization of purchased intangible assets represent the loss in value of intangible assets over time. The expense associated with this loss in value is not included in the non-GAAP financial measures and such measures, therefore, do not reflect the full economic effect of such loss. Further, items such as severance and facility action costs and acquisition-related charges that are excluded from the non-GAAP financial measures can have a material impact on earnings. Our management compensates for the foregoing limitations by relying primarily on our GAAP results and using non-GAAP financial measures supplementally or for projections when comparable GAAP financial measures are not available. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for gross margin, operating expenses, operating income, net income, and earnings per share prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. We provide below reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure, and encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the past three fiscal years.
The following is a summary of the costs and other items excluded from the most comparable GAAP financial measures to calculate the non-GAAP financial measures presented in this management's discussion and analysis:
Severance and Facility Actions and Acquisition-related Costs —Severance and facility action costs are primarily related to facilities charges including accelerated depreciation and severance and benefits for employees terminated pursuant to cost synergies related to strategic acquisitions and actions taken as part of a comprehensive review of costs. Acquisition-related charges are expensed as incurred and consist primarily of retention payments, integration costs, and other costs. Retention payments include stock-based compensation and cash incentives awarded to employees, which are recognized over the vesting period. Integration costs primarily include IT costs related to the integration of IT systems and processes, costs related to the integration of employees, costs related to full-time employees who are working on the integration, and consulting expenses. Severance and facility actions and acquisition-related charges are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although we added from Perot Systems,may incur these types of expenses in the future, we have reduced headcount by approximately 20,000 and closedbelieve that eliminating these charges for purposes of calculating the non-GAAP financial measures facilitates a numbermore meaningful evaluation of our facilities. While we have made significant progresscurrent operating performance and comparisons to our past operating performance.
Amortization of Intangible Assets — Amortization of purchased intangible assets consists primarily of amortization of customer relationships, acquired technology, non-compete covenants, and trade names purchased in connection with business acquisitions. We incur charges relating to the transformationamortization of these intangibles, and those charges are included in our Consolidated Financial Statements. Amortization charges for our purchased intangible assets are inconsistent in
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amount from period to period and are significantly impacted by the timing and magnitude of our manufacturingacquisitions. Consequently, we exclude these charges for purposes of calculating the non-GAAP financial measures to facilitate a more meaningful evaluation of our current operating performance and logistics areas,comparisons to our past operating performance.
Other Fees and Settlements — We also adjust our GAAP results for certain fees and settlements. During the third quarter of Fiscal 2011, we expect to take further actions to reduce costs while investing in strategic growth areas.
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received a $72 million fee for termination of a merger agreement with us. During the first quarter of Fiscal 2010,2011, we reorganizedrecorded a $100 million settlement amount for the SEC investigation into certain of our geographic commercial segmentsaccounting and financial matters, which was initiated in 2005, and incurred $40 million for a securities litigation class action lawsuit that was filed against us during Fiscal 2007. We are excluding these fees and settlements for the purpose of calculating the non-GAAP financial measures because we believe these fees and settlements, while not unusual, are outside our ordinary course of business and do not contribute to global business units. a meaningful evaluation of our current operating performance or comparisons to our past operating performance.
Aggregate Adjustment for Income Taxes —The aggregate adjustment for income taxes is the estimated combined income tax effect for the items described above. The tax effects are determined based on the jurisdictions where the items were incurred.
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The table below presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for each of the past three fiscal years:
| Fiscal Year Ended | |||||||||||||||||
| February 3, 2012 | % Change | January 28, 2011 | % Change | January 29, 2010 | |||||||||||||
| (in millions, except percentages) | |||||||||||||||||
| GAAP gross margin | $ | 13,811 | 21 | % | $ | 11,396 | 23 | % | $ | 9,261 | |||||||
| Non-GAAP adjustments: | |||||||||||||||||
| Amortization of intangibles | 305 | 278 | 151 | ||||||||||||||
| Severance and facility actions and acquisition-related costs | 49 | 57 | 237 | ||||||||||||||
| Non-GAAP gross margin | $ | 14,165 | 21 | % | $ | 11,731 | 22 | % | $ | 9,649 | |||||||
| GAAP operating expenses | $ | 9,380 | 18 | % | $ | 7,963 | 12 | % | $ | 7,089 | |||||||
| Non-GAAP adjustments: | |||||||||||||||||
| Amortization of intangibles | (86 | ) | (71) | (54) | |||||||||||||
| Severance and facility actions and acquisition-related costs | (264 | ) | (170) | (360) | |||||||||||||
| Other fees and settlements | — | (140) | — | ||||||||||||||
| Non-GAAP operating expenses | $ | 9,030 | 19 | % | $ | 7,582 | 14 | % | $ | 6,675 | |||||||
| GAAP operating income | $ | 4,431 | 29 | % | $ | 3,433 | 58 | % | $ | 2,172 | |||||||
| Non-GAAP adjustments: | |||||||||||||||||
| Amortization of intangibles | 391 | 349 | 205 | ||||||||||||||
| Severance and facility actions and acquisition-related costs | 313 | 227 | 597 | ||||||||||||||
| Other fees and settlements | — | 140 | — | ||||||||||||||
| Non-GAAP operating income | $ | 5,135 | 24 | % | $ | 4,149 | 40 | % | $ | 2,974 | |||||||
| GAAP net income | $ | 3,492 | 33 | % | $ | 2,635 | 84 | % | $ | 1,433 | |||||||
| Non-GAAP adjustments: | |||||||||||||||||
| Amortization of intangibles | 391 | 349 | 205 | ||||||||||||||
| Severance and facility actions and acquisition-related costs | 313 | 227 | 597 | ||||||||||||||
| Other fees and settlements | — | 68 | — | ||||||||||||||
| Aggregate adjustment for income taxes | (244 | ) | (173) | (181) | |||||||||||||
| Non-GAAP net income | $ | 3,952 | 27 | % | $ | 3,106 | 51 | % | $ | 2,054 | |||||||
| GAAP earnings per share - diluted | $ | 1.88 | 39 | % | $ | 1.35 | 85 | % | $ | 0.73 | |||||||
| Non-GAAP adjustments per share - diluted | 0.25 | 0.24 | 0.32 | ||||||||||||||
| Non-GAAP earnings per share - diluted | $ | 2.13 | 34 | % | $ | 1.59 | 51 | % | $ | 1.05 | |||||||
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| Fiscal Year Ended | ||||||||
| February 3, 2012 | January 28, 2011 | January 29, 2010 | ||||||
| Percentage of Total Net Revenue | ||||||||
| GAAP gross margin | 22.3 | % | 18.5 | % | 17.5 | % | ||
| Non-GAAP adjustments | 0.5 | % | 0.6 | % | 0.7 | % | ||
| Non-GAAP gross margin | 22.8 | % | 19.1 | % | 18.2 | % | ||
| GAAP operating expenses | 15.2 | % | 12.9 | % | 13.4 | % | ||
| Non-GAAP adjustments | (0.7 | )% | (0.6 | )% | (0.8 | )% | ||
| Non-GAAP operating expenses | 14.5 | % | 12.3 | % | 12.6 | % | ||
| GAAP operating income | 7.1 | % | 5.6 | % | 4.1 | % | ||
| Non-GAAP adjustments | 1.2 | % | 1.1 | % | 1.5 | % | ||
| Non-GAAP operating income | 8.3 | % | 6.7 | % | 5.6 | % | ||
| GAAP net income | 5.6 | % | 4.3 | % | 2.7 | % | ||
| Non-GAAP adjustments | 0.8 | % | 0.8 | % | 1.2 | % | ||
| Non-GAAP net income | 6.4 | % | 5.1 | % | 3.9 | % | ||
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Segment Discussion
Our four global business segments are Large Enterprise, Public, Small and Medium Business, and Consumer, reflecting the impact of globalization on our customer base.Consumer.
Severance and facility action expenses,actions and acquisition-related charges, broad based, long-term incentive expenses, in-process research and development, amortization of purchased intangible assets costs, and acquisition-related expenses in relationcharges related to our acquisitionsettlement of Perot Systemsthe SEC investigation as well as a securities litigation class action lawsuit that were incurred during Fiscal 2011, are not allocated to the reporting segments as management does not believe that these items are reflective of the underlying operating performance of the reporting segments. These costs totaled $1.1 billion for each of Fiscal 2012 and Fiscal 2011, and $1.2 billion duringfor Fiscal 2010, $805 million during Fiscal 2009, and $650 million during Fiscal 2008. 2010.
See Note 1415 of the Notes to Consolidated Financial Statements included in “Part II— Item 8— Financial Statements and Supplementary Data” for additional information and reconciliation of segment revenue and operating income to consolidated revenue and operating income.
The following table presents our net revenue and operating income by our reportable global segments:
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OperatingPublic's operating income percentage increased 10declined 60 basis pointsyear-over-year to 8.6% during8.8% for Fiscal 2010. Operating income dollars decreased 18%2011 due to a year-over-year increase in operating expenses as a percentage of revenue, and unit shipments decreased significantly for both periods. Also impacting operating income wasoffset in part by a slight increase in gross margin percentagepercentage. The increase in operating expenses was a result of higher selling and marketing costs.
Consumer’sFor Fiscal 2011, Consumer's operating income percentage declined approximately 1.5decreased 40 basis points year-over-year to 0.5%. The decrease in operating income percentage pointsyear-over-yearwas largely attributable to 0.9%. Consumer’s operating performance was affected by ayear-over-year decline decrease in gross margin during Fiscal 2010 mainlypercentage. Consumer gross margin decreased due to the previously mentioned revenue declines andshift in sales mix from direct sales to component cost pressures. Even thoughsales through other distribution channels, which generally carry a lower gross margin, which was not entirely offset by decreases in operating expenses decreasedyear-over-year, operatingas a percentage of revenue. Operating expenses as a percentage of revenue remained relatively flat duringyear-over-year. In the second half of Fiscal 20102011, Dell Financial Services, which provides financing to our customers, experienced improved delinquency and charge-off rates that partially offset the decrease in Consumer 's operating income percentage. From time to time, we monetize aspects of the Consumer business model with arrangements with vendors and suppliers, such as revenue sharing arrangements, which we believe will continue to contribute to and improve Consumer's operating income over time. The impact of our vendor and supplier arrangements was not material to our Fiscal 2011 results as compared to Fiscal 2009. During the fourth quarter2010.
During Fiscal 2010, Consumer’s revenue and operating income was favorably impacted by a second quarter $53 million transaction, in which a vendor purchased our contractual right to share in future revenues from product renewals sold by the vendor. Excluding this transaction, Consumer’s Fiscal 2010 operating income percentage would have been 0.4% instead of 0.9%. We may from time to time enter into similar agreements as we intend to monetize other elements of the consumer business.We sell desktop and notebook computers, printers, ink, toner, displays, and accessories through retailers. Our goal is to have strategic relationships with a number of major retailers in our larger geographic regions. We expanded our global retail presence over the prior year, and now reach over 56,000 retail locations worldwide, compared to 24,000 at the end of Fiscal 2009.Fiscal 2009 compared to Fiscal 2008
For Fiscal 2009, operating income dollars declined 13%year-over-year, and operating income percentage decreased 70 basis pointsyear-over-year to 6.4% from 7.1%. Operating income deteriorated due to lower demand which drove decreases in both revenue and costs of revenue.
For Fiscal 2009, operating income dollars remained flat on the revenue growth, while operating income dollars and percentage were positively impacted by the growth in unit shipments and a 1% increase in average selling prices, the effects of which were partially offset by a 5% increase in cost of revenue and a 3% increase in operating expenses.
For Fiscal 2009, operating income percentage remained flatyear-over-year at 8.5%. However, operating income dollars decreased 5%year-over-year as revenue decreased mainly due to a 6% decline in average selling prices in a competitive pricing environment, partially offset by a reduction in cost of revenue of 7%year-over-year. As a result, we experienced a slight improvement in our gross margin percentage.
Consumer’s operating income percentage increasedyear-over-year by approximately 100 basis points to 2.4%. Operating income was negatively impacted by a 17% decrease in average selling prices. Additionally, operating expenses declined 19%year-over-year as we began to realize the benefits from our cost-improvement initiatives.
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The dynamics
Mobility — Revenue from mobility products (which include notebook computers, mobile workstations, and smartphones) declined during Fiscal 2010 even though unit shipments increased 7% over Fiscal 2009 due to an industry mix shift to lower priced mobility product offerings. The unit increase was primarily driven by a 32%year-over-year increase in Consumer, while Commercial units declined 12% for the same period. Overall, Consumer mobility revenue increased 4%year-over-year, while Commercial declined 20%. We believe the on-going demand trend towards mobility products will continue, and we plan to address this demand by expanding our product platforms to cover broader feature sets and price bands.Desktop PCs — During Fiscal 2010, revenue from desktop PCs (which include desktop computer systems and workstations) decreased on unit declines of 17%. In the marketplace, we are continuing to see rising end-user demand for mobility products, which contributes to further slowing demand for desktop PCs, as mobility growth is expected to continue to outpace desktop growth. The decline in desktop PC revenue was also due to the on-going competitive pricing pressure for lower priced desktops and the slowdown in global IT end-user demand during Fiscal 2010. Consequently, our average selling price for desktops decreased 11%
year-over-year as we continued to align our prices and product offerings with the marketplace. During Fiscal 2010, desktop revenue decreased across all segments.Fiscal 2009 compared to Fiscal 2008
Servers and Networking — During Fiscal 2009, revenue from sales of servers and networking products remained flatyear-over-year on a unit increase of 4%Storage — The growth in revenue from sales of storage products was led by strength in our PowerVaulttm line and the strong performance of our EqualLogictm iSCSI networked storage solutions, which we acquired in Fiscal 2008. SMB and Public contributed to the increase in storage revenue withyear-over-year growth of 36% and 15%, respectively, for Fiscal 2009.
Mobility — During Fiscal 2009, revenue from mobility products grew 4% on unit growth of 24%. The average selling prices of our mobility products across all of our segments dropped 17%year-over-year due to a soft demand environment and the continued expansion into retail by our Consumer segment. Expansion into retail also contributed to our overall revenue growth as mobility revenue in Consumer increased 29%year-over-year on unit growth of 60%, as compared to a decline in mobility revenue of 8% on unit growth of 6% in our Commercial business. Large Enterprise and SMB experienced declines in mobility revenue of 16% and 3%, respectively, on a unit decline of 2% and unit growth of 10%, respectively.Desktop PCs — During Fiscal 2009, revenue from desktop PCs decreasedyear-over-year on a unit decline of 4%. The decline was primarily due to the on-going competitive pricing pressure for lower priced desktops and a softening in global IT end-user demand. Consequently, our average selling price for desktops decreased 6%year-over-year during Fiscal 2009 as we aligned our prices and product offerings with the marketplace. For Fiscal 2009, desktop revenue decreased across all segments. Our Consumer, Large Enterprise, SMB, and Public segments experiencedyear-over-year desktop revenue declines of 17%, 11%, 10% and 6%, respectively.
Fiscal 20102012 compared to Fiscal 20092011During Fiscal 2010, ourOur investment income declined, even withincreased in Fiscal 2012 over the prior year primarily due to higher average cash and investment balances as well as a shift to longer-duration investments, which have higher investment yields. Overall investment yield in Fiscal 2012 increased from approximately 35 basis points during Fiscal 2011 to approximately 49 basis points.
Fiscal 2009 compared to Fiscal 2008Theyear-over-year decrease in investment income for the fiscal year ended January 30, 2009, was primarily due to decreased interest rates on lower average investment balances. Gain (losses) on investments decreased for Fiscal 2009 as compared to Fiscal 2008, primarily due to a $11 million loss recorded forother-than-temporarily impaired investments during Fiscal 2009. Theyear-over-year increase in interest expense in Fiscal 2009 was attributable to interest on the $1.5 billion debt issued in the first quarter of Fiscal 2009. CIT non-controlling interest was eliminated due to our purchase of CIT Group Inc.’s (“CIT”) 30% interest in Dell Financial Services L.L.C. (“DFS”) during the fourth quarter of Fiscal 2008. Foreign exchange increasedyear-over-year from Fiscal 2008 primarily due to
revaluation gains from unhedged currencies. During Fiscal 2009, we recognized a $35 million decline in the fair market value of our investments related to our deferred compensation plan. These expenses are included in Other in the table above.
The adoption of the accounting guidance for uncertain tax positions resulted in a decrease to stockholders’ equity of approximately $62 million in the first quarter of Fiscal 2008. For a further discussion regarding tax matters, including the status of the impact of uncertainincome tax positions,audits, see Note 1011 of the Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
We are currently under income tax audits in various jurisdictions, including the United States. The tax periods open to examination by the major taxing jurisdictions to which we are subject include fiscal years 1997 through 2010. As a result of these audits, we maintain ongoing discussions and negotiations relating to tax matters with the taxing authorities in these various jurisdictions. Our U.S. federal income tax returns for fiscal years 2007 through 2009 are currently under examination by the Internal Revenue Service (“IRS”). In April 2009, the IRS issued a Revenue Agent’s Report (“RAR,”) for fiscal years 2004 through 2006 proposing certain assessments primarily related to transfer pricing matters. We disagree with certain of the proposed assessments, primarily related to transfer pricing matters, included within the RAR and have protested them in accordance with IRS administrative appeals procedures. The first meeting between Dell and the IRS Appeals Division is scheduled for early 2010. We anticipate the appeals process will involve multiple meetings and could take several years to complete before additional clarity will emerge regarding potential outcomes. We continue to believe that adequate reserves have been provided relating to all matters contained in tax periods open to examination. However, should we experience an unfavorable outcome in the matter before the IRS Appeals Division, such an outcome could have a material impact on our financial statements. Although the timing of income tax audit resolution and negotiations with taxing authorities are highly uncertain, we do not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.We take certain non-income tax positions in the jurisdictions in which we operate and have received certain non-income tax assessments from various jurisdictions. We are also involved in related non-income tax litigation matters in various jurisdictions. These jurisdictions include Brazil, where we are in litigation with a state government over the proper application of transactional taxes to warranties and software related to the sale of computers as well as the appropriate use of state statutory incentives to reduce the transactional taxes. Tax litigation in Brazil has historically taken multiple years to resolve. While we believe we will ultimately prevail in the Brazilian courts, we have also negotiated certain tax incentives with the state that can be used to offset potential tax liabilities should the courts rule against us. The incentives are based upon maintaining a certain number of jobs within the state. We believe our positions are supportable, a liability is not probable, and that we will ultimately prevail. In the normal course of business, our positions and conclusions related to our non-income taxes could be challenged and assessments may be made. To the extent new information is obtained and our views on our positions, probable outcomes of assessments, or litigation change, changes in estimates to our accrued liabilities would be recorded in the period in which the determination is made.
FINANCING RECEIVABLEScustomers internationally, we have aligned with a select number of third-party financial services companies. During Fiscal 2012, we acquired Dell Financial Services Canada Limited ("DFS Canada") from CIT Group Inc. In addition, we announced our entry into a definitive agreement to acquire CIT Vendor Finance's Dell-related financing assets portfolio and sales and servicing functions in Europe for approximately $400 million. Subject to customary closing, regulatory, and other conditions, Dell expects to close substantially all of this acquisition in the fiscal year ending February 1, 2013. CIT Vendor Finance is currently a Dell financing preferred vendor operating in more than 25 countries and will continue to support Dell for the transition period in Europe. CIT Vendor Finance will also continue to provide financing programs with Dell in select countries around the world, including programs in Latin America, after completion of this transaction. During Fiscal 2010,We have securitization programs to fund revolving loans and fixed-term leases and loans through consolidated special purpose entities ("SPEs"), which we continued toaccount for as secured borrowings. We transfer certain U.S. customer financing receivables to these SPEs, in securitization transactions. Thewhose purpose of the SPEs is to facilitate the funding of customer receivables through financing arrangements with multi-seller conduits that issue asset-backed debt securities in the capital markets. TheWe transferred $2.3 billion, $1.9 billion, and $0.8 billion to these SPEs may or may not be consolidated depending on the termsduring Fiscal 2012, Fiscal 2011, and conditions of the arrangements.Upon the sale of the customer receivables to nonconsolidated qualified SPEs, we recognize a gain on the sale and retain a beneficial interest in the pool of assets sold. During Fiscal 2010, and Fiscal 2009, $784 million and $1.4 billion, respectively, of customer receivables were funded via securitization through nonconsolidated qualified SPEs.respectively. Our risk of loss related to these securitized receivables is limited to the amount of our retained interestover-collateralization in the transferred pool of receivables. We expect to consolidate the two remaining nonconsolidated SPEs in the first quarter of FiscalAt February 3, 2012, and January 28, 2011, when we adopt the new accounting guidance for variable interest entities and transfers of financial assets and extinguishment of financial liabilities.In the second quarter of Fiscal 2010, a conduit that funded revolving loans entered scheduled amortization and the SPE was consolidated. The previously securitized finance receivables were recorded at fair value, which was based on the net present value of future cash flows, in the second quarter upon consolidation. At January 29, 2010, the balance of these receivables was $435 million, and there was no associated structured financing debt. The balance of these previously securitized revolving loan receivables will continue to decline as no new receivables will be put into this asset pool.In the fourth quarter of Fiscal 2010, we initiated a new securitization program to fund revolving loans through a consolidated SPE which we account for as a secured borrowing. At January 29, 2010, the structured financing debt related to this programall of our secured borrowing securitization programs was $164 million$1.3 billion and $1.0 billion, respectively, and the balancecarrying amount of the corresponding revolving loanfinancing receivables was $314 million.$1.5 billion and
CIT, formerly a joint venture partner
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 was signed into U.S. law on May 22, 2009, and will affect the consumer financing provided by DFS. This Act will impose new restrictions on credit card companies in the areas of marketing, servicing, and pricing of consumer credit accounts. We do not expect the changes will substantially alter how consumer credit is offered to our customers or how their accounts will be serviced. Commercial credit is unaffected by the change in law. Some provisions of the law are now in effect, with the majority of provisions of the new law effective in February 2010 and August 2010. We are compliant with the legislation that currently is in effect and expect to be compliant with future regulations by the established deadlines. Some of the future regulations, including changes to rules relating to late fees, are subject to additional clarification. We do not expect the impact of these pending changes to be material to our financial results in future periods.SeeWith the “Financing Receivables” section above and Note 4consolidation of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for information about our previously nonconsolidated special purpose entities, we no longer have off-balance sheet financing arrangements.
MARKET RISKWe 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 ActivitiesOur 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 more than 20 currencies in which we transact business. Our exposure to foreign currency movements is comprised primarily of certain principal currencies. During Fiscal 2010, these principal currencies were the Euro, British Pound, Japanese Yen, Canadian Dollar, and Australian 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 continue to substantially offset the impact of fluctuations in currency exchange rates on our results of operations and financial position in the future.Based on our foreign currency cash flow hedge instruments outstanding at January 29, 2010, and January 30, 2009, we estimate a maximum potentialone-day loss in fair value of approximately $86 million and $393 million, respectively, using aValue-at-Risk (“VAR,”) model. By using market implied rates and incorporating volatility and correlation among the currencies of a portfolio, the VAR model simulates 3,000 randomly generated market prices and calculates the difference between the fifth percentile and the average as theValue-at-Risk. In Fiscal 2009, both higher volatility and correlation increased the VAR significantly. 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.
We periodically review our investment portfolio to determine if any investment isother-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. At January 29, 2010, our portfolio included securities with unrealized losses totaling $2 million, which have been recorded in other comprehensive income (loss), as we believe the investments are notother-than-temporarily impaired. While theseavailable-for-sale securities have market values below cost, we believe it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the decline in the market value is primarily due to changes in interest rates and not increased credit risk.The fair value of our portfolio is based on prices provided from national pricing services, which we currently believe are indicative of fair value, as our assessment is that the inputs are market observable. We will continue to evaluate whether the inputs are market observable in accordance with the accounting guidance on fair value measurements. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact our fair value disclosures.LIQUIDITY, CAPITAL COMMITMENTS, AND CONTRACTUAL CASH OBLIGATIONS
LiquidityCash generated from operations is our primary source of operating liquidity. In general, we seek to deploy our capital in a systematically prioritized manner focusing first on requirements for operations, then on growth investments, and finally on returns of cash to stockholders. Our strategy is to deploy capital from any potential source, whether internally generated cash or debt, depending on the adequacy and availability of that source of capital and whether it can be accessed in a cost effective manner. We believe that internally generated cash flows, which consist of operating cash flows, are sufficient to support our day-to-day business operations, both domestically and internationally, for at least the next 12 months. Additionally, while cash generated from operations is our primary source of operating liquidity, we use a variety of capital sources to fund the growth in our financing receivables, share repurchases and our needs for less predictable investing and financing decisions such as acquisitions.
We have an active working capital management team that monitors the efficiency of our balance sheet by evaluating liquidity under various macroeconomic and competitive scenarios. These scenarios quantify risks to the financial statements and provide a basis for actions necessary to ensure adequate liquidity. During Fiscal 2010, we continued to monitor and carefully prioritize capital expenditures and other discretionary spending.The following table summarizes our ending cash, cash equivalents, and investments balances for the respective periods:
We ended Fiscal 2010 and Fiscal 2009 with $11.8 billion and $9.5 billion in cash, cash equivalents, and investments, respectively. Cash generated from operations is our primary source of liquidity and we believe that internally generated cash flows are sufficient to support business operations. Over the past year, we have utilized external capital sources to supplement our domestic liquidity to fund a number of strategic initiatives, including the acquisition of Perot Systems that was completed in the fourth quarter of Fiscal 2010. Outstanding as of January 29, 2010, was $3.3 billion in principal on long-term notes, $496 million in commercial paper, and $164 million in structured financing debt. We expect to continue to grow our business through strategic acquisitions, which will impact our future cash requirements and liquidity. We will continue to utilize external capital sources, such as notes and other term debt, commercial paper, or structured financing arrangements, to supplement our internally generated sources of liquidity as necessary. In November 2008, we filed a shelf registration statement with the SEC for an unspecified amount of debt securities. The amount of debt securities issuable by us under this registration statement from time to time will be established by our Board of Directors.
Financing Activities — Cash provided by financing activities during Fiscal 2010 was $2.0 billion as compared to cash used of $1.4 billion during Fiscal 2009 and $4.1 billion in Fiscal 2008. Perot Systems.
During Fiscal 2010, we issued $1.5senior notes outstanding as of February 3, 2012, compared to $4.8 billion and $3.3 billion principal amount of senior term notes which was comparable to Fiscal 2009. Due to the overall strengthoutstanding as of our financial position, we believe that we will have adequate access to capital markets. We intend to maintain the appropriate debt levels based upon cash flow expectations, the overall cost of capital, cash requirements for operations,January 28, 2011, and discretionary spending, including for acquisitions and share repurchases.
new $1.0 billion senior unsecured revolving credit facility upon expirationoutstanding as of the current $500 million facility, thereby expanding the size of our commercial paper program with supporting credit facilities to $2.0 billion.We issued $164 million in structured financing-related debt to fund our financing receivables as previously discussed in the “Financing Receivables” section above.Standard and Poor’s Rating Services, Moody’s Investors Service, and Fitch Ratings currently rate our senior unsecured long-term debt A-, A2, and A, respectively, and our short-term debtA-1,P-1, and F1, respectively. These rating agencies use proprietary and independent methods of evaluating our credit risk. Factors used in determining our rating include, but are not limited to, publically available information, industry trends and ongoing discussions between the company and the agencies. We are not aware of any planned changes to our corporate credit ratings by the rating agencies. However, any credit rating downgrade will increase our borrowing costs and may limit our ability to issue commercial paper or additional term debt.In Fiscal 2010, the amount of shares repurchased was immaterial to financing activities. During Fiscal 2009, weWe also repurchased approximately 134178 million shares at an aggregate cost of $2.9common stock for $2.7 billion during Fiscal 2012 compared to approximately 17957 million shares atof common stock for $800 million during Fiscal 2011. During the third quarter of Fiscal 2012, our Board of Directors authorized an aggregate costadditional $5 billion for our share repurchase program. As of $4.0February 3, 2012, $6.0 billion in Fiscal 2008. We also paid, in Fiscal 2009, the principal on the senior notes of $200 million that matured in April 2008.remained available for future share repurchases.
receivables. We believe that we can generate cash flow from operations in excess of net income over the long term and can operate our cash conversion cycle at mid negative thirty days or better.terms. The deteriorationincrease in DSI from January 30, 2009,28, 2011,was primarily driven by strategic purchases of inventory, particularly HDDs.Our cash conversion cycle contracted by eleven days at January 30, 2009, from February 1, 2008, driven by a thirteen day decrease in DPO, which was partially offset by a one day decrease in DSO and a one day decrease in DSI. The decrease in DPO from February 1, 2008, was attributable to procurement throughput declines as a result of declining demand, reduction in inventory levels, and a decrease in non-production supplier payables, as we continue to control our operating expense spending, and the timing of purchases from and payments to suppliers during the fourth quarter of Fiscal 2009 as compared to the fourth quarter of Fiscal 2008. The decrease in DSO from February 1, 2008, was attributable to the timing of revenue due to seasonal impact, partially offset by a shift in customers with longer payment terms.
Restricted CashPurchase Obligations— PursuantWe utilize several suppliers to an agreement between DFSmanufacture sub-assemblies for our products. Our efficient supply chain management allows us to enter into flexible and CIT,mutually beneficial purchase arrangements with our suppliers in order to minimize inventory risk. Consistent with industry practice, we are requiredacquire raw materials or other goods and services, including product components, by issuing to maintain escrow cash accounts that are held as recourse reserves for credit losses, performance fee deposits relatedsuppliers authorizations to purchase based on our private label credit card,projected demand and deferred servicing revenue. Restricted cash in the amount of $147 millionmanufacturing needs. See "Liquidity, Capital Commitments, and $213 million is included in other current assets at January 29, 2010, and January 30, 2009, respectively.
PurchaseOur purchase obligations decreased approximately $404 millionincreased from January 30, 2009, to $383 million$0.4 billion at January 30, 2010. The decrease28, 2011, to approximately $2.9 billion at February 3, 2012. This increase was primarily dueattributable to our entry into purchase commitments with selected suppliers of hard disk drives in order to ensure continuity of supply for these components following disruption of the fulfillmentHDD supply chain as a result of commitmentssevere flooding in Thailand during the third quarter of Fiscal 2012. The agreements provide for some variation in the amount of units we are required to purchase keyand allow us to purchase these components at market-competitive rates. The HDD purchase commitments totaled approximately $2.6 billion as of February 3, 2012, and services, partially offset by the renewal of or entry into new purchase contracts.have terms expiring on various dates through December 2012.
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Dell sells itsWe sell our products directly to customers as well as through retailers.other distribution channels, including retailers, distributors, and resellers. Sales tothrough our retail customersdistribution channels are generallyprimarily made under agreements allowing for limited rights of return, price protection, rebates, and marketing development funds. We have generally limited the return rights through contractual caps. Our policycaps or we have an established selling history for sales to retailers is to defer the full amount of revenue relative to sales for which the rights of return apply unlessthese arrangements. Therefore, there is sufficient historical data to establish reasonable and reliable estimates of returns. When contractual caps are included inreturns for the agreement and there is no reasonable and reliable historical data to make an estimate on returns, we defer revenue equal to the amountmajority of the contractual cap. All other sales for which the rights of return do not apply are recognized upon shipment when all applicable revenue recognition criteria have been met.these sales. To the extent price protection andor return rights are not limited and a reliable estimate cannot be made, all of the revenue and related cost are deferred until the product has been sold byto the retailer,end-user or the rights expire, or a reliable estimate of such amounts can be made. Generally, weexpire. We record estimated reductions to revenue or an expense for retail customerdistribution channel programs at the later of the offer or the time revenue is recognized. Our customer programs primarily involve rebates,
The Financial Accounting Standards Board (“FASB”) issued new guidance that amends the current revenue recognition guidance for multiple deliverable arrangements. It allows the use of management’s best estimate of selling price for individual elements of an arrangement when neither vendor specific objective evidence nor third party evidence is available. Additionally, it eliminates the residual method of revenue recognition in accounting for multiple deliverable arrangements. In conjunction with the new guidance on multiple deliverable arrangements, the FASB also issued a new pronouncement that modifies the scope of the software revenue recognition guidance to exclude tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality. This pronouncement does not have a significant impact on us as we do not have a significant number of revenue arrangements with software elements. Both of these pronouncements are effective for fiscal years beginning on or after June 15, 2010 (our Fiscal 2012), but early adoption is permitted. Both pronouncements must be adopted at the same time. We have elected to early adopt these pronouncements in the first quarter of Fiscal 2011 on a prospective basis. Based on a preliminary evaluation, the adoption of this guidance will not have a material impact on our Consolidated Financial Statements.
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Variable Interest EntitiesIntangibles- Goodwill and Transfers of Financial Assets and Extinguishments of LiabilitiesOther — We transfer certain customer financing receivables to special purpose entities. In FiscalSeptember 2011, the Financial Accounting Standards Board issued new FASB guidance on variable interestthat will simplify how entities and transferstest goodwill for impairment. After assessment of financial statements and extinguishmentcertain qualitative factors, if it is determined to be more likely than not that the fair value of liabilities will bea reporting unit is less than its carrying amount, entities must perform a quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test becomes optional. This new guidance is effective for us. Under the prior guidance, special purpose entities were exempt from variable interest entity accounting. Upon adoption of the new guidance inus for the first quarter of Fiscal 2011, wethe fiscal year ending February 1, 2013. Early adoption is permitted. We do not expect that this new guidance will apply variable interest entity accounting to these special purpose entities and consolidate these special purpose entities inimpact our Consolidated Financial Statements. As
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKResponse to this item is included in “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk” and is incorporated herein by reference.
| Fiscal Year Ended | ||||||||||||||||||||||||||
| February 3, 2012 | January 28, 2011 | January 29, 2010 | ||||||||||||||||||||||||
| Dollars | % of Revenue(a) | % Change | Dollars | % of Revenue(a) | % Change | Dollars | % of Revenue(a) | |||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||||
| Large Enterprise | ||||||||||||||||||||||||||
| Net revenue | $ | 18,457 | 30 | % | 4 | % | $ | 17,813 | 29 | % | 25 | % | $ | 14,285 | 27 | % | ||||||||||
| Operating income | $ | 1,854 | 10.0 | % | 26 | % | $ | 1,473 | 8.3 | % | 80 | % | $ | 819 | 5.7 | % | ||||||||||
| Public | ||||||||||||||||||||||||||
| Net revenue | $ | 16,548 | 27 | % | (2 | )% | $ | 16,851 | 27 | % | 16 | % | $ | 14,484 | 27 | % | ||||||||||
| Operating income | $ | 1,644 | 9.9 | % | 11 | % | $ | 1,484 | 8.8 | % | 9 | % | $ | 1,361 | 9.4 | % | ||||||||||
| Small and Medium Business | ||||||||||||||||||||||||||
| Net revenue | $ | 15,166 | 24 | % | 5 | % | $ | 14,473 | 24 | % | 20 | % | $ | 12,079 | 23 | % | ||||||||||
| Operating income | $ | 1,665 | 11.0 | % | 13 | % | $ | 1,477 | 10.2 | % | 42 | % | $ | 1,040 | 8.6 | % | ||||||||||
| Consumer | ||||||||||||||||||||||||||
| Net revenue | $ | 11,900 | 19 | % | (4 | )% | $ | 12,357 | 20 | % | 3 | % | $ | 12,054 | 23 | % | ||||||||||
| Operating income | $ | 324 | 2.7 | % | 398 | % | $ | 65 | 0.5 | % | (39 | )% | $ | 107 | 0.9 | % | ||||||||||
| Fiscal Year Ended | ||||||||||||||||||||||||||||||||
| January 29, 2010 | January 30, 2009 | February 1, 2008 | ||||||||||||||||||||||||||||||
| % of | % | % of | % | % of | ||||||||||||||||||||||||||||
| Dollars | Revenue(a) | Change | Dollars | Revenue(a) | Change | Dollars | Revenue(a) | |||||||||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||||||||||
| Large Enterprise | ||||||||||||||||||||||||||||||||
| Net revenue | $ | 14,285 | 27% | (21% | ) | $ | 18,011 | 30% | (4% | ) | $ | 18,833 | 31% | |||||||||||||||||||
| Operating income | $ | 819 | 6% | (29% | ) | $ | 1,158 | 6% | (13% | ) | $ | 1,331 | 7% | |||||||||||||||||||
| Public | ||||||||||||||||||||||||||||||||
| Net revenue | $ | 14,484 | 27% | (6% | ) | $ | 15,338 | 25% | 4% | $ | 14,708 | 24% | ||||||||||||||||||||
| Operating income | $ | 1,361 | 9% | 8% | $ | 1,258 | 8% | 0% | $ | 1,261 | 9% | |||||||||||||||||||||
| Small and Medium Business | ||||||||||||||||||||||||||||||||
| Net revenue | $ | 12,079 | 23% | (19% | ) | $ | 14,892 | 24% | (6% | ) | $ | 15,807 | 26% | |||||||||||||||||||
| Operating income | $ | 1,040 | 9% | (18% | ) | $ | 1,273 | 9% | (5% | ) | $ | 1,338 | 8% | |||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| Net revenue | $ | 12,054 | 23% | (6% | ) | $ | 12,860 | 21% | 9% | $ | 11,785 | 19% | ||||||||||||||||||||
| Operating income | $ | 107 | 1% | (65% | ) | $ | 306 | 2% | 91% | $ | 160 | 1% | ||||||||||||||||||||
_______________________
(a) | Operating income percentage of revenue is stated in relation to the respective segment. |
Fiscal 20102012 compared to Fiscal 20092011
Large Enterprise — During Fiscal 2012, Large Enterprise experienced a 4% year-over-year increase in revenue that was driven by increases in revenue across all product lines, except for storage revenue and desktop PC revenue, which declined 30% and was essentially unchanged, respectively. The decline in storage revenue was primarily due to a decrease in the sale of third-party storage products as we shifted to sales of Dell-owned storage solutions. Revenue from services and servers and networking increased 13% and 8%, year-over-year, respectively, while mobility revenue increased 6% and software and peripherals revenue increased 2% year-over-year. During Fiscal 2012, Large Enterprise's revenue from outside the U.S increased year-over year, while revenue from the U.S. decreased slightly.
During Fiscal 2010,2012, Large Enterprise's operating income as a percentage of revenue increased 170 basis points year-over-year to 10.0%. The increase was primarily attributable to improvements in gross margin for our products, partially offset by an increase in operating expenses as a percentage of net revenue, resulting primarily from increased selling and marketing costs.
Public — During Fiscal 2012, Public experienced a 2% year-over-year decrease in revenue which was primarily driven by a weakened demand environment. Revenue from desktop PCs, storage products, and mobility products decreased year-over-year by 7%, 16%, and 3%, respectively. Revenue from services, servers and networking, and software and peripherals increased 4%, 3%, and 1% year-over-year, respectively. The decline in Public's revenue was primarily
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attributable to revenue decreases in the U.S. and Western Europe, largely because of budgetary constraints on public spending, the effects of which were partially offset by revenue growth in APJ.
During Fiscal 2012, Public's operating income as a percentage of net revenue increased 110 basis points to 9.9%. The increase was primarily attributable to improvements in gross margin for our products, partially offset by an increase in operating expenses as a percentage of net revenue, which was primarily due to increased selling and marketing costs.
Small and Medium Business — During Fiscal 2012, SMB experienced a 5% year-over-year increase in revenue that was primarily attributable to increases from enterprise solutions and services and software and peripherals, partially offset by a slight decrease in mobility revenue. Revenue from servers and networking, storage, and services increased 17%, 10%, and 21%, year-over-year, respectively. Revenue from software and peripherals and desktop PCs increased 5% and 1%, year-over-year, respectively, while mobility product revenue declined 2% year-over-year. SMB experienced revenue growth across all regions.
During Fiscal 2012, SMB's operating income as a percentage of net revenue increased 80 basis points to 11.0%. The increase was primarily attributable to improvements in gross margin for our products, partially offset by an increase in operating expenses as a percentage of net revenue, resulting principally from increased selling and marketing costs.
Consumer — During Fiscal 2012, Consumer experienced a 4% year-over-year decrease in revenue. Revenue from all product and services categories decreased during Fiscal 2012, except mobility product revenue, which increased slightly. The overall decrease in consumer revenue was driven by a 12% decline in revenue from desktop PCs and a 16% decline in revenue from software and peripherals. During Fiscal 2012, desktop PC unit sales declined 4% and the average selling price of desktop PCs decreased 8%. The decline in software and peripherals revenue was due to the removal of lower-margin products from our portfolio of software and peripheral product offerings. Mobility revenue increased 1% due to an increase in units sold of 6%, which was largely driven by an overall increase in demand for our higher-value product lines. The revenue increase from the increase in units sold was largely offset by a decrease in average selling prices of 4%. Revenue from Consumer services decreased 7%, year-over-year, largely due to decreased sales from our U.S. business as well as lower attach rates on our product sales. Revenue from the U.S. decreased 18% year-over-year, while revenue from outside of the U.S. increased 10%. Revenue from Growth Countries increased 27% over the prior year.
For Fiscal 2012, Consumer's operating income percentage decreased 70as a percentage of net revenue increased 220 basis points,year-over-year, to 5.7%2.7%. OperatingThe increase in operating income deteriorated as revenue decreasedyear-over-yearpercentage was largely attributable to an increase in our product gross margin percentage due to lower demand. Additionally,a more favorable component cost environment. In addition, during Fiscal 2012, we sold more units of higher-value client products, as compared to the prior year. Furthermore, we have experienced year-over-year increases in profitability from our customer financing arrangements, which benefited from improvements in consumer credit loss performance on our owned and purchased portfolios. We believe the impact of this improved profitability from our financing arrangements will moderate in future periods as our loss rates have stabilized and as our overall consumer financing portfolio is declining. The positive effects of these factors have been partially offset by a slight increase in operating expenses as a percentage of revenue year-over-year due to increased selling and marketing costs.
Fiscal 2011 compared to Fiscal 2010
Large Enterprise — The year-over-year even though operating expense dollars decreased 17%. We believe that increase in Large Enterprise's revenue for Fiscal 2011 was mainly attributable to improved demand due to a hardware refresh among our Large Enterprise is well positionedcustomers. Large Enterprise experienced year-over-year increases in revenue across all product lines during Fiscal 2011, except for better operating leverage going forward as demand strengthens, andstorage revenue, which declined 5%. The decrease in storage revenue was primarily due to a decrease in the sale of third-party storage products as we continueshifted more towards Dell-owned storage solutions. Revenue from servers and networking and services increased 33% and 35%, respectively. The increase in services revenue was largely due to shift our enterprise storagethe acquisition of Perot Systems in Fiscal 2010. Sales of client products generated large revenue increases, with mobility and server products to higher margin offerings.desktop PCs revenue increasing 33% and 25%, year-over-year, respectively. During Fiscal 2011, Large Enterprise's revenue increased year-over-year across all regions.
During Fiscal 2010,2011, operating income as a percentage of revenue increased 120260 basis pointsyear-over-year to 9.4%8.3%. Operating incomeThe increase was positively impactedmostly driven by ayear-over-year improvementimprovements in gross margin percentage duringdue to a shift in gross margin mix to enterprise solutions and services, improved component costs, better product quality, and improved pricing discipline, particularly in the latter half of Fiscal 2010 as we continued to optimize our pricing2011 for client products. Revenue increases and cost structure and sell higher value solutions to our customers. The addition of Perot Systems contributed 3% to the growthtighter spending controls on operating expenses resulted in operating income. Also favorably impacting operating income was a 5%year-over-year decrease in operating expenses as a percentage of net revenue.
Public — During Fiscal 2011, Public experienced a year-over-year increase in revenue across all product and service categories. Services contributed the largest increase, with a 69% increase in revenue over the prior year. The increase in
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services revenue was primarily a result of our acquisition of Perot Systems in Fiscal 2010. Revenue from servers and networking and storage increased 15% and 8%, year-over-year, respectively. Software and peripherals revenue increased 10% year-over-year. Revenue from mobility and desktop PCs increased 5% and 6%, year-over-year, respectively. Public's revenue grew during Fiscal 2010, driven by cost savings related2011 across the Americas and the Asia-Pacific region, but declined in Europe due to headcount reductions and improved spending controlsbudgetary constraints on SG&A and RD&E expenditures.public spending.
Small and Medium Business — During Fiscal 2011, SMB experienced a year-over-year increase in revenue with increases across all product and services categories. Servers and networking, and storage revenue increased 26% and 21% year-over-year, respectively. Revenue from mobility and desktop PCs increased 20% and 23%, year-over-year, respectively, while software and peripherals revenue increased 16% year-over-year. The improved demand environment was a major contributor to the increase in revenue for all product categories. Services revenue increased 6% year-over-year. SMB revenue experienced year-over-year growth across all regions during Fiscal 2010. We were also able2011. SMB revenue from BRIC grew 40% year-over-year.
Operating income percentage increased 160 basis points to reduce10.2%. The increase in operating income percentage was attributable to improved gross margins as a result of lower component costs and an improved pricing environment, as well as to a decrease in operating expenses during Fiscal 2010, mainlyas a percentage of revenue due to tighter spending controls on SG&Acontrols.
Consumer — Consumer's revenue increased 3% year-over-year during Fiscal 201l. Revenue from all product and RD&E expenses.services categories decreased year-over-year for Fiscal 2011, except mobility. Consumer mobility revenue increased by 8% year-over-year, due to increase of 8% in notebook units sold, while revenue from desktops PCs decreased by 1% due to a decline in desktop PC units of 2%. Average selling prices for Consumer mobility and desktop PCs were relatively flat year-over-year during Fiscal 2011. The increase in mobility revenue was due to improved unit demand for Consumer mobility products. Consumer services decreased 11% year-over-year and software and peripherals revenue decreased 10% for the same period. At a country level, our U.S. Consumer revenue decreased 9% year-over-year due to softer demand, while our non-U.S. regions experienced 16% revenue growth. Revenue from BRIC grew 46% year-over-year for Fiscal 2011.
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Revenue by Product and Services Categories
We design, develop, manufacture, market, sell, and support a wide range of products that in many cases are customized to individual customer requirements. Our products and services are organized between enterprise solutions and client categories. Enterprise solutionsOur enterprise products include servers and networking, and storage products. Client products include mobility and relateddesktop PC products. Our services include a broad range of configurable IT and business services, including infrastructure technology, consulting and applications, and product-related support services. We also offer software and peripherals. Client includes mobility, desktop products, and also related services, software and peripherals.peripheral products.
The following table summarizes our net revenue by product and serviceservices categories for each of the past three fiscal years:
| Fiscal Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| January 29, 2010 | January 30, 2009 | February 1, 2008 | Fiscal Year Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of | % | % of | % | % of | February 3, 2012 | January 28, 2011 | January 29, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | Revenue | Change | Dollars | Revenue | Change | Dollars | Revenue | Dollars | % of Revenue | % Change | Dollars | % of Revenue | % Change | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net revenue: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Enterprise Solutions: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Enterprise solutions and services: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Enterprise solutions: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Servers and networking | $ | 6,032 | 11% | (7% | ) | $ | 6,512 | 11% | 0% | $ | 6,486 | 11% | $ | 8,336 | 13 | % | 10 | % | $ | 7,609 | 12 | % | 26 | % | $ | 6,032 | 11 | % | |||||||||||||||||||||||||||||||
| Storage | 2,192 | 4% | (18% | ) | 2,667 | 4% | 10% | 2,429 | 4% | 1,943 | 3 | % | (15 | )% | 2,295 | 4 | % | 5 | % | 2,192 | 4 | % | |||||||||||||||||||||||||||||||||||||
| Services | 5,622 | 11% | 5% | 5,351 | 9% | 7% | 4,980 | 8% | 8,322 | 13 | % | 8 | % | 7,673 | 12 | % | 36 | % | 5,622 | 11 | % | ||||||||||||||||||||||||||||||||||||||
| Software and peripherals | 9,499 | 18% | (10% | ) | 10,603 | 17% | 7% | 9,927 | 16% | 10,222 | 17 | % | — | % | 10,261 | 17 | % | 8 | % | 9,499 | 18 | % | |||||||||||||||||||||||||||||||||||||
| Client: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mobility | 16,610 | 31% | (11% | ) | 18,604 | 30% | 4% | 17,961 | 29% | 19,104 | 31 | % | 1 | % | 18,971 | 31 | % | 14 | % | 16,610 | 31 | % | |||||||||||||||||||||||||||||||||||||
| Desktop PCs | 12,947 | 25% | (25% | ) | 17,364 | 29% | (10% | ) | 19,350 | 32% | 14,144 | 23 | % | (4 | )% | 14,685 | 24 | % | 13 | % | 12,947 | 25 | % | ||||||||||||||||||||||||||||||||||||
| Total net revenue | $ | 52,902 | 100% | (13% | ) | $ | 61,101 | 100% | (0% | ) | $ | 61,133 | 100% | $ | 62,071 | 100 | % | 1 | % | $ | 61,494 | 100 | % | 16 | % | $ | 52,902 | 100 | % | ||||||||||||||||||||||||||||||
Fiscal 20102012 compared to Fiscal 20092011
Enterprise Solutions and Services
▪Enterprise Solutions:
Servers and Networking — The declineincrease in our serverservers and networking revenue duringfor Fiscal 20102012 as compared to Fiscal 2011 was due to demand challenges across all Commercial segments and regions. Unit shipments decreased 12%year-over-year, though average selling prices increased 6%year-over-yearprimarily driven by improved product mix towardincreases in revenue from our new productPowerEdge lines suchof servers as the introduction ofwell as our 11th generation PowerEdgetmvirtualized servers duringand data center solutions. During Fiscal 2010.2012, we saw an overall increase in demand and selling prices. We are continuing to shift towards more differentiated products and solutions that command higher selling prices.
Storage — All Commercial segments contributed to theyear-over-yearDuring Fiscal 2012, storage revenue decreased 15%. The decrease in storage revenue duringwas primarily attributable to an anticipated decline in sales of third-party storage products, which was partially offset by revenue from sales of Dell-owned storage products, such as our recently added Compellent products. During Fiscal 2010. Dell EqualLogictm performed strongly withyear-over-year2012, sales of Dell-owned storage products increased 21% to 82% of our total storage revenue growth of 45%.compared to 57% in the prior year. We are shifting towards more Dell-branded and co-brandedbelieve Dell-owned storage offerings, which generally can be sold with service solutions will generate higher margins in the long-term. Our acquisition of Compellent during the first quarter of Fiscal 2012 has expanded our enterprise and provide increased margin opportunity. During Fiscal 2010, we introducedeasy-to-managedata center storage products such as the EqualLogictmofferings. PS6 series with fast 10Gb Ethernet. We also introduced our PowerVaulttm NX300 storage server, which is designed to simplify file sharing and collaboration for growing small businesses.
Services — |
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$7.5 billion as of February 3, 2012, and January 28, 2011, respectively. While there are no third-party standards or requirements governing the calculation of contracted services backlog, our estimated contracted services backlog represents signed contracts that are initially $2 million or more in total expected revenue with an initial contract term of at least 18 months. The terms of the signed services contracts included in our calculation of services backlog are subject to change and are affected by terminations, changes in the scope of services, and changes to other factors that could impact the value of the contract. For these and other reasons, it is not reasonably practicable to estimate the portions for these backlog amounts that will ultimately be recognized as revenue when performance on the contracts is completed.
We continue to view services as a strategic growth opportunity and will continue to invest in our offerings and resources to focus on increasing our solutions sales.
Software and Peripherals — Revenue from sales of oursoftware and peripherals (“S&P”) is derived from sales of Dell-branded printers, monitors (not sold with systems), projectors, keyboards, mice, docking stations, and a multitude of third-party peripherals, including televisions, cameras, stand-alone software sales and related support services, business will changeand other products. During Fiscal 2012, S&P revenue was effectively unchanged when compared to the prior year. Revenue growth in S&P has been impacted as we continue to integrate Perot Systems. With Perot Systems, we will extendreduce our services business further into infrastructure business process outsourcing, consulting, and application development. We also anticipate expanding our existing managed and modular services businesses.participation in non-strategic areas.
Software revenue from our S&P line of business, which includes stand-alone sales of software license fees and related post-contract customer support, is includedreported in services revenue, including software related, on theour Consolidated Statements of Income. Software and related support services revenue representsrepresented 32% and 33% of services revenue, including software related, for Fiscal 2012 and Fiscal 2011, respectively.
Client
| ▪ | Mobility — Revenue from mobility products (which include notebooks, mobile workstations, smartphones, and tablets) increased 1% during Fiscal 2012. This increase was primarily attributable to a 3% increase in notebook units sold, largely offset by a 3% decline in average selling price. We have been experiencing declines in revenue from our lower priced consumer notebooks, which have been largely offset by increases in revenue from our higher value XPS line of notebooks. During Fiscal 2012, Commercial mobility revenue was essentially unchanged year-over-year, when compared to Fiscal 2011, while Consumer mobility revenue increased 1%. |
| ▪ | Desktop PCs — During Fiscal 2012, revenue from desktop PCs (which include desktop computer systems and fixed workstations) decreased 4% as the average selling price as well as unit sales for our desktop PCs each decreased 2% when compared to Fiscal 2011. |
Fiscal 2011 compared to Fiscal 2010
Enterprise Solutions and Services
▪Enterprise Solutions:
Servers and Networking — The increase in our servers and networking revenue for Fiscal 2011 as compared to Fiscal 2010 was due to demand improvements across all Commercial segments. During Fiscal 2011, unit shipments increased 13% year-over-year, and average selling prices increased 12%, driven by an improved product mix that includes our new product lines.
Storage — Storage revenue increased 5% for Fiscal 2011. The increase in Storage revenue was primarily driven by our SMB segment with a 21% increase year-over-year. EqualLogic performance was strong, with year-over-year revenue growth of 62%.
| ▪ | Services — Services revenue increased $2.1 billion from $5.6 billion during Fiscal 2010 to $7.7 billion during Fiscal 2011, with revenue from Perot Systems contributing a large proportion of the increase. As Perot Systems was acquired on November 3, 2009, our services results for Fiscal 2010 include contributions from Perot Systems for one fiscal quarter. Perot Systems reported revenue of $1.9 billion for the three quarters ended September 30, 2009. |
During Fiscal 2011, we experienced increases in our outsourcing and project-based revenues, due to our acquisition of Perot Systems, while transactional revenues remained relatively flat. Our estimated services
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backlog as of January 28, 2011, and January 29, 2010, was $13.9 billion and $12.8 billion, respectively. Deferred revenue from extended warranties was $6.4 billion and $5.9 billion as of January 28, 2011, and January 29, 2010, respectively. Estimated contracted services backlog, which is primarily related to our outsourcing services business, was $7.5 billion and $6.9 billion, as of January 28, 2011, and January 29, 2010, respectively.
Software and Peripherals — The 8% increase in S&P revenue for Fiscal 2011 was driven by overall customer unit shipment increases due to sales of displays and electronics and peripherals, which experienced a combined year-over-year revenue increase of 15% for Fiscal 2011, while revenue from imaging products decreased by 6%.
Software and related support services revenue represented 33% and 39% of services revenue, including software related, duringfor Fiscal 2010.2011 and Fiscal 2010, respectively.
Client
Mobility — Revenue from mobility products increased 14% during Fiscal 2011 across all operating segments due to demand improvements. Notebook units increased 14%, while average selling prices remained flat during Fiscal 2011. During Fiscal 2011, overall Commercial mobility revenue increased 19% year-over-year, while revenue from Consumer mobility increased 8%. The increase in Commercial mobility was driven by increases in demand for our Latitude notebooks. |
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Desktop PCs — During Fiscal 2011, revenue from desktop PCs increased as unit demand for desktop PCs increased by 10%. The average selling price for our desktop computers increased by 3% year-over-year due to a slight shift in product mix to higher priced units. The flat revenue growth was mainly due to demand challenges. To address the demand challenges and drive growth, we adjusted our pricing and product strategy to shift our product offerings to lower price bands. Consequently, our average selling price for servers and networking products decreased 3%year-over-year during Fiscal 2009. During Fiscal 2009, we experienced double digit growth in blades, 4-Socket rack servers, and our cloud computing initiatives.
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Stock-Based Compensation
We primarily use theour 2002 Long-Term Incentive Plan, amended in December 2007, for stock-based incentive awards. These awards can be in the form of stock options, stock appreciation rights, stock bonuses, restricted stock, restricted stock units, performance units, or performance shares. Stock-based compensation expense totaled $362 million for Fiscal 2012, compared to $332 million and $312 million for Fiscal 2010, compared to $418 million and $436 million for Fiscal 20092011 and Fiscal 2008,2010, respectively. Stock-based compensation expense for Fiscal 2009 includes $104 million of expense for accelerated options, and for Fiscal 2008 includes cash payments of $107 million made for expiredin-the-money stock options. For further discussion on stock-based compensation, see Note 1314 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
Interest and Other, net
The following table provides a detailed presentation of interestInterest and other, net for each of the past three fiscal years:
| Fiscal Year Ended | ||||||||||||
| February 3, 2012 | January 28, 2011 | January 29, 2010 | ||||||||||
| (in millions) | ||||||||||||
| Interest and other, net: | ||||||||||||
| Investment income, primarily interest | $ | 81 | $ | 47 | $ | 57 | ||||||
| Gains (losses) on investments, net | 8 | 6 | 2 | |||||||||
| Interest expense | (279 | ) | (199 | ) | (160 | ) | ||||||
| Foreign exchange | 5 | 4 | (59 | ) | ||||||||
| Other | (6 | ) | 59 | 12 | ||||||||
| Interest and other, net | $ | (191 | ) | $ | (83 | ) | $ | (148 | ) | |||
Fiscal 2010, 2009, and 2008:
| January 29, | January 30, | February 1, | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in millions) | ||||||||||||
Interest and other, net: | ||||||||||||
| Investment income, primarily interest | $ | 57 | $ | 180 | $ | 496 | ||||||
| Gains (losses) on investments, net | 2 | (10 | ) | 14 | ||||||||
| Interest expense | (160 | ) | (93 | ) | (45 | ) | ||||||
| CIT minority interest | - | - | (29 | ) | ||||||||
| Foreign exchange | (59 | ) | 115 | (30 | ) | |||||||
| Other | 12 | (58 | ) | (19 | ) | |||||||
| Interest and other, net | $ | (148 | ) | $ | 134 | $ | 387 | |||||
The year-over-year increase in interest expense for Fiscal 2012 was due to higher debt levels, which increased to $9.3 billion as
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of February 3, 2012, from $6.0 billion as of January 28, 2011.
The year-over-year decrease in other income was primarily due to a decrease in market yield of over 200 basis points from$72 million merger termination fee that we received during Fiscal 20092011.
Fiscal 2011 compared to an average of approximately 48 basis points. We continued to maintainFiscal 2010
During Fiscal 2011 and Fiscal 2010, we maintained a portfolio of instruments with shorter maturities, which typically carry lower market yields. Increased term and short-term debtDuring Fiscal 2011, our investment income declined slightly, even with higher average balances, primarily due to a continued declined in market yields. Overall investment yield in Fiscal 2011 declined from approximately 48 basis points during Fiscal 2010 resultedto approximately 35 basis points.
The year-over-year increase in interest expense for Fiscal 2011 was due to higher debt levels, which increased interest expense. Other, in the table above, primarily reflects the fair market value adjustments related to our deferred compensation plan investments. We recognized a $24 million increase and a $35 million decline in the fair market values$6.0 billion as of our deferred compensation plan investments during Fiscal 2010 and Fiscal 2009, respectively.January 28, 2011, from $4.1 billion as of January 29, 2010.
Theyear-over-year decrease change in foreign exchange for Fiscal 2010, as compared to Fiscal 2009,2011 was primarily due to increasedgains from revaluation of certain un-hedged foreign currency balances, the effect of which was partially offset by increases in the costs on ourassociated with the hedge program, as well as revaluation on balances in unhedged currencies, as most foreign currencies strengthened relative to the U.S. Dollarprogram.
Other includes a $72 million merger termination fee that we received during Fiscal 2010. In addition, for Fiscal 2009, a $42 million gain resulted from the correction2011.
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Income and Other Taxes
Our effective tax rate was 29.2%17.6%, 25.4%21.3%, and 23.0%29.2% for Fiscal 2012, Fiscal 2011, and Fiscal 2010, 2009,respectively. The decrease in our effective income tax rate for Fiscal 2012 as compared to Fiscal 2011, was primarily due to an increase in the proportion of taxable income attributable to lower tax jurisdictions. Our effective tax rate can fluctuate depending on the geographic distribution of our world-wide earnings, as our foreign earnings are generally taxed at lower rates than in the U.S. In certain jurisdictions, our tax rate is significantly less than the applicable statutory rate as a result of tax holidays. The majority of our foreign income that is subject to these tax holidays and 2008, respectively.lower tax rates is attributable to Singapore, China, and Malaysia. Our significant tax holidays expire in whole or in part during Fiscal 2016 through 2021. The differences between our effective tax rate and the U.S. federal statutory rate of 35% principally resultresulted from ourthe geographical distribution of taxable income discussed above and permanent differences between the book and tax treatment of certain items. The increase in our effective income tax rate for Fiscal 2010 from Fiscal 2009 was primarily due to an increased mix of profits in higher tax rate jurisdictions. Our foreign earnings are generally taxed at lower rates than in the United States. We continue to assess our business model and its impact in various taxtaxing jurisdictions.
Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax and book basis of assets and liabilities, and are recognized based on the enacted statutory tax rates for the year in which we expect the differences to reverse. A valuation allowance is established against a deferred tax asset when it is more likely than not that the asset or any portion thereof will not be realized. Based upon all the available evidence, including expectation of future taxable income, we have determined that we will be able to realize all of our deferred tax assets, net of valuation allowances.
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ACCOUNTS RECEIVABLE
We sell products and services directly to customers and through a variety of sales channels, including retail distribution. At January 29, 2010, our accountsOur Accounts receivable, net was $5.8$6.5 billion a 23% increase from our balance atas of February 3, 2012, and January 30, 2009. This increase in accounts receivable was primarily due to the addition of Perot Systems receivables, a higher mix of retail receivables, and an increase in fourth quarter revenue as compared to Fiscal 2009.28, 2011. We maintain an allowance for doubtful accounts to cover receivables that may be deemed uncollectible. The allowance for losses is based on specific identifiable customer accounts that are deemed at risk and a general provision for accounts that are collectively evaluated based on historical bad debt experience. As of January 29, 2010February 3, 2012, and January 30, 2009,28, 2011, the allowance for doubtful accounts was $115$63 million and $112$96 million, respectively. Based on our assessment, we believe we are adequately reserved for expected credit losses. We monitor the aging of our accounts receivable and have takencontinue to take actions in Fiscal 2010 to reduce our exposure to credit losses,losses.
DELL FINANCIAL SERVICES AND FINANCING RECEIVABLES
DFS offers a wide range of financial services, including tighteningoriginating, collecting, and servicing customer receivables primarily related to the purchase of Dell products. To support the financing needs of our credit granting practices.
At January 29, 2010,February 3, 2012, and January 30, 2009,28, 2011, our net financing receivables balances were $3.0$4.7 billion and $2.2$4.4 billion, respectively. The increaseIncluded in the February 3, 2012, balance was primarily the result ofapproximately $0.3 billion related to our funding a higher percentage of our customer receivable originations on balance sheet and the consolidationacquisition of the special purpose entity (“SPE”) in the second quarter of Fiscal 2010, as discussed below. We expect growth in financing receivables to continue throughout Fiscal 2011 as CIT continues to decrease its proportion of fundings and we consolidate our off-balance sheet securitizations as we adopt changes in accounting guidance that become effective in the first quarter of Fiscal 2011.DFS Canada portfolio. To manage the expected net growth in financing receivables, we will continue to balance the use of our own working capital and other sources of liquidity, including securitization programs.
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$1.3 billion, respectively. We expect CIT to continue to fund a small portion of fixed term leases and loans through the second quarter of Fiscal 2011. At January 29, 2010 our exposure to CIT is immaterial. During Fiscal 2010, revolving loans were offered by DFS under private label credit financing programs facilitated by unrelated, nationally chartered banks.
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We maintain an allowance to cover expected financing receivable credit losses.losses and evaluate credit loss expectations based on our total portfolio. For Fiscal 2012, Fiscal 2011, and Fiscal 2010, the principal charge-off rate for our total portfolio was 4.6%, 7.5%, and 8.0%, respectively. The charge-off rate for Fiscal 2011 is annualized for a portfolio of receivables that consisted of revolving Dell U.S. customer account balances that was purchased during the third quarter of Fiscal 2011. The credit quality mix of our financing receivables has improved in recent years due to our underwriting actions and as the mix of high quality commercial accounts in our portfolio has increased. The allowance for losses is determined based on various factors, including historical and anticipated experience, past due receivables, receivable type, and customer risk profile. At January 29, 2010,February 3, 2012, and January 30, 2009,28, 2011, the allowance for financing receivable losses was $237$202 million and $149$241 million, respectively. The increase inIn general, the allowance is primarily dueloss rates on our financing receivables for Fiscal 2012 have continued to improve over the prior year. However, we do not expect this improvement to continue as loss rates have stabilized. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an increase in revolving loanextensive process to manage our exposure to customer receivables.risk, including active management of credit lines and our collection activities. Based on our assessment of the customer financing receivables, we believe that we are adequately reserved.
See Note 4 of the Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional information about our financing receivables.receivables and the associated allowance.
OFF-BALANCE SHEET ARRANGEMENTS
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LIQUIDITY, CAPITAL COMMITMENTS, AND CONTRACTUAL CASH OBLIGATIONS
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Cash and Investments
At January 29, 2010,February 3, 2012, we had $11.8$18.2 billion of total cash, cash equivalents, and investments. The objective of our investment policy and strategy is to manage our total cash and investments balances to preserve principal and maintain 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.
The following table summarizes our ending cash, cash equivalents, and investments balances for the respective periods:
| February 3, 2012 | January 28, 2011 | |||||||
| (in millions) | ||||||||
| Cash, cash equivalents, and investments: | ||||||||
| Cash and cash equivalents | $ | 13,852 | $ | 13,913 | ||||
| Debt securities | 4,251 | 1,032 | ||||||
| Equity and other securities | 119 | 124 | ||||||
| Cash, cash equivalents, and investments | $ | 18,222 | $ | 15,069 | ||||
Of the $11.8$18.2 billion of cash, cash equivalents, and investments, $10.6$13.9 billion is classified as cash and cash equivalents. Our cash equivalents primarily consist of money market funds.funds and commercial paper. Due to the nature of these investments, we consider it reasonable to expect that they will not be significantly impacted by a change in interest rates, and that these investments can be liquidated for cash at short notice. As of January 29, 2010, ourOur cash equivalents are recorded primarily at cost, which approximates fair value.
The remaining $1.2$4.3 billion of cash, cash equivalents, and investments is primarily invested in fixed income securities, including government, agency, asset-backed, and corporate debt securities of varying maturities at the date of acquisition. The fair value of our portfolio iscan be affected primarily by interest rates more than byrate movements, credit, and liquidity risks. We attempt to mitigate these risks by investing primarily in high credit quality securities with AAA and AA ratings and short-term securities with anA-1 rating, limiting the amount that can be invested in any single issuer, and investing in short– to intermediate-term investments whose market value is less sensitive to interest rate changes. Our exposure to asset and mortgage-backed securities is less than 1% of the value of the portfolio. The total carrying value of investments in asset-backed and mortgage-backed debt securities was approximately $4 million and $54 million at January 29, 2010 and January 30, 2009, respectively. Based on our investment portfolio and interest rates at January 29, 2010, a 100 basis point increase or decrease in interest rates would result in a decrease or increase of approximately $4 million in the fair value of the investment portfolio.
Current Market Conditions
We regularly monitor economic conditions and associated impacts on the financial markets and our business. During the second half of Fiscal 2010, as2012, the global capital markets showed some improvements, weeconomic environment continued to be cautious given the downturn in the macroeconomic environment and the recent instability of the financial markets.experience challenges. We continue toconsistently evaluate the financial health of our supplier base, carefully manage customer credit, diversify counterparty risk, and monitor the concentration risk of our cash and cash equivalents balances globally. Additionally, we maintain a conservative investment portfolio with shorter durationWe routinely monitor our financial exposure to both sovereign and high quality assets.
non-sovereign borrowers and counterparties, particularly in Europe in recent quarters. At February 3, 2012, our gross exposures to our customers and investments in Portugal, Ireland, Italy, Greece, and Spain were individually and collectively immaterial.
We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as credit ratings issued by nationally recognized rating agencies and changes in market credit default swap levels. We perform periodic evaluations of our positions with these counterparties and may limit exposure to any one counterparty in accordance with our policies. We monitor and manage these activities depending on current and expected market developments.
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See “Part I — Item 1A — Risk Factors” for further discussion of risks associated with our use of counterparties. The impact on our Consolidated Financial Statements of any credit adjustments related to these counterparties has been immaterial.
Liquidity
Our working capital management team actively monitors the efficiency of our balance sheet under various macroeconomic and competitive scenarios. These scenarios quantify risks to the financial statements and provide a basis for actions necessary to ensure adequate liquidity, both domestically and internationally, to support our acquisition and investment strategy, share repurchase activity and other corporate needs. We utilize external capital sources, such as long-term notes and structured
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financing arrangements, and short-term borrowings, consisting primarily of commercial paper, to supplement our internally generated sources of liquidity as necessary. We have a currently effective shelf registration statement under which we may issue up to $3.5 billion of debt securities. Although there are uncertainties surrounding the global economic environment, due to the overall strength of our financial position, we believe that we currently have adequate access to capital markets. Any future disruptions or additional uncertainty or volatility in those markets may result in higher funding costs for us and could adversely affect our ability to obtain funds.
During Fiscal 2012, we issued $1.5 billion principal amount of senior notes with terms that are consistent with our prior note issuances. We also issued $1.5 billion of commercial paper during Fiscal 2012 primarily for general corporate purposes. During Fiscal 2012, we increased the maximum size of our commercial paper program from $2.0 billion to $2.5 billion. We intend to maintain appropriate debt levels based upon cash flow expectations, the overall cost of capital, cash requirements for operations, and discretionary spending, including spending for acquisitions and share repurchases.
Our cash balances are held in numerous locations throughout the world, including substantialmost of which are outside of the U.S. While our U.S. cash balances do fluctuate, we typically operate with 10% to 20% of our cash balances held domestically. Demands on our domestic cash have increased as a result of our strategic initiatives. We fund these initiatives through our existing cash and investment balances, which are highly liquid, through internally generated cash and through external sources of capital, which include issuances of long-term debt and utilization of our $2.5 billion commercial paper program. When appropriate, we may access foreign cash in a tax efficient manner. Where local regulations limit an efficient intercompany transfer of amounts held outside of the U.S. The majority of ournon-U.S. domiciled cash and investments are denominated in the U.S. dollar. Most of the amounts held outside of the U.S. could, we will continue to utilize these funds for local liquidity needs. Under current law, earnings available to be repatriated to the U.S., but under current law would be subject to U.S. federal income taxes,tax, less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws. We have provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the U.S. We utilize a variety of tax planning and financing strategies with the objective of having our worldwide cash available in the locations where it is needed.
| Fiscal Year Ended | ||||||||
| January 29, | January 30, | |||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
Cash, cash equivalents, and investments: | ||||||||
| Cash and cash equivalents | $ | 10,635 | $ | 8,352 | ||||
| Debt securities | 1,042 | 1,106 | ||||||
| Equity and other securities | 112 | 88 | ||||||
| Cash, cash equivalents, and investments | $ | 11,789 | $ | 9,546 | ||||
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The following table contains a summary of our Consolidated Statements of Cash Flows for the past three fiscal years:
| Fiscal Year Ended | ||||||||||||
| January 29, | January 30, | February 1, | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in millions) | ||||||||||||
Net change in cash from: | ||||||||||||
| Operating activities | $ | 3,906 | $ | 1,894 | $ | 3,949 | ||||||
| Investing activities | (3,809 | ) | 177 | (1,763 | ) | |||||||
| Financing activities | 2,012 | (1,406 | ) | (4,120 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 174 | (77 | ) | 152 | ||||||||
| Change in cash and cash equivalents | $ | 2,283 | $ | 588 | $ | (1,782 | ) | |||||
| Fiscal Year Ended | ||||||||||||
| February 3, 2012 | January 28, 2011 | January 29, 2010 | ||||||||||
| (in millions) | ||||||||||||
| Net change in cash from: | ||||||||||||
| Operating activities | $ | 5,527 | $ | 3,969 | $ | 3,906 | ||||||
| Investing activities | (6,166 | ) | (1,165 | ) | (3,809 | ) | ||||||
| Financing activities | 577 | 477 | 2,012 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1 | (3 | ) | 174 | ||||||||
| Change in cash and cash equivalents | $ | (61 | ) | $ | 3,278 | $ | 2,283 | |||||
Operating Activities — CashOperating cash flows from operating activities were $3.9for Fiscal 2012 increased $1.6 billion during Fiscal 2010 compared to $1.9 billion duringthe prior fiscal year. The increase in operating cash flows was primarily driven by year-over-year increases in net income as well as favorable changes in working capital. For Fiscal 2009 and $3.9 billion during Fiscal 2008. For2011 compared to Fiscal 2010, the increase in operating cash flows was primarily led by the improvement of our cash conversion cycle, specifically through operational improvements relatedattributable to our vendor programs, the effects of which were partially offset by the decreasean increase in net income and growthdeferred revenue, which was partially offset by less favorable changes in financing receivables. In Fiscal 2009, the decrease in operating cash flows from Fiscal 2008 was primarily led by the deterioration of our cash conversion cycle, slower growth in deferred service revenue, and a decrease in net income. Our negative cash conversion cycle combined with revenue growth typically results in operating cash generation in excess of net income.working capital. See “Key Performance Metrics” below for additional discussion of our cash conversion cycle.
Investing Activities —Cash used in investing activities during Fiscal 2010 was $3.8 billion as compared to cash provided of $177 million during Fiscal 2009, and $1.8 billion cash used by investing activities during Fiscal 2008. Investing activities consist of the net of maturities and sales and purchases of investments; net capital expenditures for property, plant, and equipment; principal cash flows related to purchased financing receivables; and net cash used to fund strategic acquisitions. Cash used in investing activities during Fiscal 2012 was $6.2 billion compared to $1.2 billion and $3.8 billion during Fiscal 2011 and Fiscal 2010, respectively. The year-over-year increase in cash used in investing activities for Fiscal 2012 was primarily due to a net $3.2 billion increase in cash used to purchase investments as we shifted funds to investments with original maturities of greater than 90 days and higher spending on business acquisitions. We have shifted our investments to longer-term securities primarily to diversify our investment portfolio as well as to better align the duration of our financial assets with the duration of our financial liabilities. Our long-term marketable securities typically have stated maturities of up to three years. Cash used to fund strategicbusiness acquisitions, net of cash acquired, was approximately $2.6 billion during Fiscal 2012 compared to $0.4 billion and $3.6 billion during Fiscal 2011 and Fiscal 2010, respectively. Our Fiscal 2012 acquisitions consisted primarily related to theof SecureWorks Inc., Compellent, DFS Canada, and Force10 Networks, Inc., while our Fiscal 2011 acquisitions consisted of Kace Networks, Inc., Ocarina Networks, Inc., Scalent Systems, Inc., Boomi, Inc., and InSite One, Inc. Our principal acquisition of Perot Systems, compared to $176 million during Fiscal 2009 and $2.2 billion during Fiscal 2008. In Fiscal 2009 as compared to Fiscal 2008, lower cash flows from operating activities and lower yields on investments resulted in lower net proceeds from maturities, sales, and purchases. In Fiscal 2008, we re-invested a lower amount of our proceeds from the maturity or sales of investments to build liquidity for share repurchases and for cash payments made in connection with acquisitions.
Financing Activities — Financing activities primarily consist of proceeds and repayments from the issuance of long-term debt, the issuance of common stock under employee stock plans, the issuance of long-term debtborrowings and the repurchase of our common stock. Cash provided by financing activities for Fiscal 2012 was $0.6 billion compared to cash provided by
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financing activities of $0.5 billion and $2.0 billion for Fiscal 2011 and Fiscal 2010, respectively. The slight year-over-year increase in cash provided by financing activities for Fiscal 2012 was mainlyprimarily due to the reductionissuance of $1.5 billion in commercial paper, compared to a net repayment of $0.5 billion of commercial paper in Fiscal 2011. The increase was offset by an additional $1.9 billion in share repurchases during Fiscal 2012 over the prior year.
As of February 3, 2012, we had $9.3 billion of total debt, compared to $6.0 billion and $4.1 billion of total debt as of January 28, 2011, and January 29, 2010, respectively. Of this amount, we had $6.3 billion principal amount of our share repurchase program from Fiscal 2009.
January 29, 2010, respectively.
We have a $1.5$3.0 billion commercial paper program with supporting $1.5 billionof senior unsecured revolving credit facilities enabling usprimarily to obtain favorable short-term borrowing rates. During Fiscal 2010, we issuedsupport our $2.5 billion commercial paper with original maturities both greater thanprogram. Of the credit facilities, $1.0 billion will expire on April 2, 2013, and less than 90 days.$2.0 billion will expire on April 15, 2015. No amounts were outstanding under our revolving credit facilities as of February 3, 2012, January 28, 2011, or January 29, 2010. We continue to be active inhad $1.5 billion of commercial paper outstanding as of February 3, 2012. As of January 28, 2011, we did not have any amounts outstanding under the commercial paper market by issuing short-term borrowingsprogram compared to augment our liquidity as needed. We ended Fiscal 2010 and Fiscal 2009 with $496 million and $100 million in outstanding$0.5 billion of commercial paper respectively. Our $500 million credit facility expires on April 2, 2010, and our $1.0 billion credit facility expires on June 1, 2011. We intend to enter into a
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January 29, 2010. See the debt section in Note 35 of the Notes to Consolidated Financial Statements under “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of our debt.
We issued structured financing-related debt to fund our financing receivables as discussed under “Financing Receivables” above. The total debt capacity of our securitization programs is $1.4 billion. We had $1.3 billion in outstanding structured financing securitization debt as of February 3, 2012. Our securitization programs are structured to operate near their debt capacity. We balance the use of our securitization programs with working capital and other sources of liquidity to fund growth in our financing receivables. In November 2011, we changed counterparties for our existing revolving loan securitization program to a counterparty offering more favorable terms. We expect to renew one of our fixed-term securitization programs as part of our annual renewal process in the first quarter of Fiscal 2013. See Note 4 of the Notes to Consolidated Financial Statements under “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of our structured financing debt.
Key Performance Metrics — Our cash conversion cycle for the fiscal quarter ended January 30, 2010February 3, 2012, improved from the fiscal quarter ended January 30, 2009,28, 2011, and was consistent withessentially unchanged from the fiscal quarter ended February 1, 2008, as our directJanuary 29, 2010. Our business model allows us to maintain an efficient cash conversion cycle, which compares favorably with that of others in our industry.
The following table presents the components of our cash conversion cycle for the fourth quarter of each of the past three fiscal years:
| Fiscal Quarter Ended | |||||||||
| February 3, 2012 | January 28, 2011 | January 29, 2010 | |||||||
Days of sales outstanding(a) | 42 | 40 | 38 | ||||||
Days of supply in inventory(b) | 11 | 9 | 8 | ||||||
Days in accounts payable(c) | (89 | ) | (82 | ) | (82 | ) | |||
| Cash conversion cycle | (36 | ) | (33 | ) | (36 | ) | |||
| January 29, | January 30, | February 1, | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Days of sales outstanding(a) | 38 | 35 | 36 | |||||||||
Days of supply in inventory(b) | 8 | 7 | 8 | |||||||||
Days in accounts payable(c) | (82 | ) | (67 | ) | (80 | ) | ||||||
| Cash conversion cycle | (36 | ) | (25 | ) | (36 | ) | ||||||
_____________________
(a) | Days of sales outstanding (“DSO”) calculates the average collection period of our receivables. DSO is based on the ending net trade receivables and the most recent quarterly revenue for each period. DSO also includes the effect of product costs related to customer shipments not yet recognized as revenue that are classified in other current assets. DSO is calculated by adding accounts receivable, net of allowance for doubtful accounts, and customer shipments in transit and dividing that sum by average net revenue per day for the current quarter |
(b) | Days of supply in inventory (“DSI”) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and most recent quarterly cost of sales for each period. DSI is calculated by dividing inventory by average cost of goods sold per day for the current quarter |
(c) | Days in accounts payable (“DPO”) calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and most recent quarterly cost of sales for each period. DPO is calculated by dividing accounts payable by average cost of goods sold per day for the current quarter |
Our cash conversion cycle improved by elevenincreased three days at January 29, 2010,February 3, 2012, from January 30, 2009,28, 2011, driven by a fifteenseven day improvementincrease in
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DPO, which was largely attributable to the timing of payments to vendors at the end of the period as compared to the prior year due to an additional week of operations in Fiscal 2012. The increase in DPO the effect of which was partially offset in part by a threetwo day increase in DSO and onea two day increase in DSI. The improvement in DPO from January 30, 2009, was attributable to our ongoing transition to contract manufacturing, further standardization of vendor agreements, and the timing of supplier purchases and payments during Fiscal 2010 as compared to Fiscal 2009. The increase in DSO from January 30, 2009,28, 2011, was primarily attributabledue to our growtha shift in consumer retail, whosethe mix of receivables towards customers typically havewith longer payment terms, and to foreign currency movements due to the U.S. Dollar weakening slightly, offset by a reduction in past-due
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Our cash conversion cycle decreased three days at January 28, 2011, from January 29, 2010, driven by a two day increase in DSO and a one day increase in DSI. DPO was flat year-over-year. The increase in DSO from January 29, 2010, was due to growth in our Commercial business, which typically has longer payment terms. The slight increase in DSI from January 29, 2010, was primarily attributable to an increase in strategic purchases of materials and finished goods inventory and strategic materials purchases.in connection with the optimization of our supply chain.
We defer the cost of revenue associated with customer shipments not yet recognized as revenue until theythese shipments are delivered. These deferred costs are included in our reported DSO because we believe this reporting results in a more accurate presentation of our DSO and cash conversion cycle. These deferred costs are recorded in otherOther current assets in our Consolidated Statements of Financial Position and totaled $482 million, $541 million, and $523 million, $556 million,at February 3, 2012, January 28, 2011, and $519 million, at January 29, 2010, Januaryrespectively.
We believe that we can generate cash flow from operations in excess of net income over the long term and can operate our cash conversion cycle in the mid negative 30 2009, and February 1, 2008, respectively.day range.
Capital Commitments
Share Repurchase Program — Our Board of Directors has approvedWe have a share repurchase program that authorizes us to purchase shares of our common stock through a systematic program of open market purchases in order to increase shareholder value and manage dilution resulting from shares issued under our equity compensation plans. However, we do not currently have a policy that requires the repurchase of common stock to offset share-based compensation arrangements. For more information regarding our share repurchases, see “Part II — Item 5 — Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
Capital Expenditures — During Fiscal 20102012 and Fiscal 2009,2011, we spent $367$675 million and $440$444 million, respectively, on property, plant, and equipment primarily onin connection with our global expansion efforts and infrastructure investments in ordermade to support future growth. Product demand, product mix, and the increased use of contract manufacturers, as well as ongoing investments in operating and information technology infrastructure, influence the level and prioritization of our capital expenditures. CapitalAggregate capital expenditures for Fiscal 2011,2013, which will be primarily related to infrastructure refreshmentinvestments and strategic initiatives, are currently expected to reachtotal approximately $500$650 million to $700 million. These expenditures are expected towill be primarily funded from our cash flows from operating activities.
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Contractual Cash Obligations — Contractual Cash Obligations" for more information about our purchase commitments.
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Contractual Cash Obligations
The following table summarizes our contractual cash obligations at January 29, 2010:February 3, 2012:
| Payments Due by Period | ||||||||||||||||||||
| Fiscal | Fiscal | Fiscal | ||||||||||||||||||
| Total | 2011 | 2012-2013 | 2014-2015 | Thereafter | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Contractual cash obligations: | ||||||||||||||||||||
| Principal payments on long term debt | $ | 3,324 | $ | - | $ | 424 | $ | 1,100 | $ | 1,800 | ||||||||||
| Operating leases | 441 | 112 | 156 | 83 | 90 | |||||||||||||||
| Purchase obligations | 383 | 313 | 70 | - | - | |||||||||||||||
| Interest | 1,969 | 181 | 354 | 278 | 1,156 | |||||||||||||||
Current portion of uncertain tax positions(a) | - | - | - | - | - | |||||||||||||||
| Contractual cash obligations | $ | 6,117 | $ | 606 | $ | 1,004 | $ | 1,461 | $ | 3,046 | ||||||||||
| Payments Due by Period | ||||||||||||||||||||
| Fiscal | Fiscal | Fiscal | ||||||||||||||||||
| Total | 2013 | 2014-2015 | 2016-2017 | Thereafter | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Contractual cash obligations: | ||||||||||||||||||||
Principal payments on long-term debt | $ | 7,220 | $ | 924 | $ | 2,695 | $ | 1,101 | $ | 2,500 | ||||||||||
| Operating leases | 465 | 107 | 165 | 108 | 85 | |||||||||||||||
| Purchase obligations | 2,896 | 2,865 | 25 | 6 | — | |||||||||||||||
| Interest | 2,417 | 255 | 429 | 326 | 1,407 | |||||||||||||||
Uncertain tax positions(a) | — | — | — | — | — | |||||||||||||||
| Contractual cash obligations | $ | 12,998 | $ | 4,151 | $ | 3,314 | $ | 1,541 | $ | 3,992 | ||||||||||
_____________________
(a) | We had approximately |
Principal Payments on Long TermLong-Term Debt— Our expected principal cash payments related to long term debt are exclusive of hedge accounting adjustments or discounts and premiums. We have several outstanding long-term unsecured notes with varying maturities depending on the agreement.maturities. For additional information, see Note 35 of Notes to Consolidated Financial Statements under “Part II — Item 8 — Financial Statements and Supplementary Data”.Data."
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.
Purchase Obligations — Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and legally binding on us. These obligations specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be cancelledcanceled without penalty.
We utilize several suppliers to manufacturesub-assemblies for our products. Our 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 to 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.
Interest — See Note 35 of the Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of our debt and related interest expense.
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Risk Factors Affecting Our Business and Prospects
There are numerous significant risks that affect our business, operating results, financial condition, and prospects. Many of these risks are beyond our control. These risks include those relating to:
intense competition;
our reliance on vendors for products and components, including reliance on several single-source or limited-source suppliers;
our ability to achieve favorable pricing from our vendors;
adverse global economic conditions and instability in financial markets;
our ability to manage effectively the change involved in implementing our strategic initiatives;
successful implementation of our acquisition strategy;
our cost efficiency measures;
our ability to manage solutions, product, and services transitions in an effective manner;
our ability to deliver quality products and services;
our ability to generate substantial non-U.S. net revenue;
our product, customer, and geographic sales mix, or seasonal sales trends;
the performance of our sales channel participants;
access to the capital markets by us and some of our customers;
weak economic conditions and additional regulation affecting our financial services activities;
counterparty default;
customer terminations of, or pricing changes in, services contracts, or our failure to perform as we anticipate at the time we enter into services contracts;
loss of government contracts;
our ability to develop, obtain or protect licenses to intellectual property developed by us or by others on commercially reasonable and competitive terms;
infrastructure disruptions;
cyber attacks or other data security breaches;
our ability to hedge effectively our exposure to fluctuations in foreign currency exchange rates and interest rates;
expiration of tax holidays or favorable tax rate structures, or unfavorable outcomes in tax audits and other tax compliance matters;
impairment of our portfolio investments;
unfavorable results of legal proceedings;
our ability to attract, retain, and motivate key personnel;
our ability to maintain strong and effective internal controls;
our compliance with current and changing environmental and safety laws or other regulatory laws; and
the effect of armed hostilities, terrorism, natural disasters, and public health issues.
For a discussion of these risk factors affecting our business, operating results, financial conditions, and prospects, see “Part I — Item 1A — Risk Factors.”
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Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).GAAP. The preparation of financial statements in accordance with GAAP requires certain estimates, assumptions, and judgments to be made that may affect our Consolidated Statements of Financial Position and Consolidated StatementStatements of Income. We believe that our most critical accounting policies relate to revenue recognition, business combinations, warranty accruals,liabilities, income taxes, and loss contingencies. We have discussed the development, selection, and disclosure of our critical accounting policies with the Audit Committee of our Board of Directors. These critical accounting policies and our other accounting policies are also described in Note 1 of the Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
Revenue Recognition and Related Allowances— We enter into contracts to sell our products, software and services and frequently enter into sales arrangements with customers that contain multiple elements or deliverables such as hardware, software, peripherals, and services. We use general revenue recognition accounting guidance for hardware, software bundled with hardware that is essential to the functionality of the hardware, peripherals, and certain services. We recognize revenue for these products when it is realized or realizable and earned. Revenue is considered realized and earned when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; our fee is fixed and determinable; and collection of the resulting receivable is reasonably assured. We recognize revenue in accordance with industry specific software accounting guidance for all software that is not essential to the functionality of the hardware. Judgments and estimates are necessary to ensure compliance with GAAP. These judgments relate toinclude 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 the appropriate timing of revenue recognition. Most of our products and services qualify as separate units of accounting. We offer extended warrantyallocate revenue to all deliverables based on their relative selling prices. GAAP requires the following hierarchy to be used to determine the selling price for allocating revenue to deliverables; (i) vendor-specific objective evidence (“VSOE”); (ii) third-party evidence of selling price (“TPE”); or (iii) best estimate of the selling price (“ESP”). A majority of our product and service contracts to customers that extendand/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 weofferings are 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 we are not obligated to perform, is recognizedsold on a net basis atstand-alone basis. Because selling price is generally available based on stand-alone sales, we have limited application of TPE, as determined by comparison of pricing for products and services to the timepricing of sale,similar products and services as we do not meet the criteria for gross recognition.offered by Dell or its competitors in stand-alone sales to similarly situated customers.
We record reductions to revenue for estimated customer sales returns, rebates, and certain other customer incentive programs. These reductions to revenue are made based upon reasonable and reliable estimates that are determined by historical experience, contractual terms, and current conditions. The primary factors affecting our accrual for estimated customer returns include estimated return rates as well as the number of units shipped that have a right of return that has not expired as of the balance sheet date. If returns cannot be reliably estimated, revenue is not recognized until a reliable estimate can be made or the return right lapses. Each quarter, we reevaluate our estimates to assess the adequacy of our recorded accruals for customer returns and allowance for doubtful accounts, and adjust the amounts as necessary.
We offer 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 we are designedobligated to serveperform, is recorded as deferred services revenue and subsequently recognized on a straight-line basis over the term of the contract or ratably as services are completed. Revenue from sales incentivesof third-party extended warranty and service contracts, which we are not obligated to resellersperform, is recognized on a net basis at the time of our products and marketing funds.sale. All other revenue is recognized on a gross basis.
We report revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions.
Business Combinations and Intangible Assets Including Goodwill — During Fiscal 2010, Dell adopted the new FASB guidance onWe account for business combinations using the acquisition method of accounting and non-controlling interests. The new guidance on business combinations retains the underlying concepts of the previously issued standard in that the acquirer of a business is required to account for the business combination at fair value. As under previous guidance,accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair valuesvalue is recorded as goodwill. The new pronouncement resultsAny changes in some changesthe estimated fair values of the net assets recorded for acquisitions prior to the methodfinalization of applyingmore detailed analysis, but not to exceed one year from the date of acquisition, methodwill change the amount of accounting for business combinations in a numberthe purchase price allocable to goodwill. All
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acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset. Prior toasset and assessed for impairment thereafter until completion, at which point the adoption of the new guidance, in-process research and development costs were immediately expensed and acquisition costs were capitalized. Further, the new guidance generally requiresasset is amortized over its expected useful life. Any restructuring charges associated with a business combination to beare expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.
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The results of operations of acquired businesses are included in our Consolidated Financial Statements from the acquisition date.
Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis in the second fiscal quarter, or sooner if an indicator of impairment occurs. To determine whether goodwill is impaired, we determine the fair values of each of our reportable business unitunits using a discounted cash flow methodology and then compare the fair values to the carrying values of each reportable business unit. We concluded that there were no impairment triggering events during Fiscal 2010. As2012. At the end of July 31, 2009, the second quarter of Fiscal 20102012, the annual testing date, Dell’speriod, our market capitalization, including common stock held by affiliates, was $26.2$29.8 billion compared to stockholders’ equity of $5.6$8.3 billion. We have determined that a 10% decrease in the fair value of any one of our reporting units as of January 29, 2010February 3, 2012, would have no impact on the carrying value of our goodwill. Though we believe our estimates are reasonable, these fair values require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.
Standard Warranty Liabilities — We record warranty liabilities at the time of sale for the estimated costs that may be incurred under the terms of the limited warranty. The liability for standard warranties is included in accrued and other current and other non-current liabilities on the Consolidated Statements of Financial Position. The specific warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include technical support, parts, and labor over a period ranging from one 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 15 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 reasonably predictable based on historical experience of failure rates. If actual results differ from our estimates, we revise 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. We provide related valuation allowances for deferred tax assets, where appropriate. 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. Additionally, we use tax planning strategies as a part of our global tax compliance program. Judgments and interpretation of statutes are inherent in this process.
While we believe our tax return positions are sustainable, we recognize tax benefits from uncertain tax positions in the financial statements only when it is more likely than not that the positions will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority's administrative practices and precedents. The determination of income tax expense related to these positions requires management judgment as well as use of estimates. We provide related valuationbelieve we have provided adequate reserves where appropriate.for all uncertain tax positions.
Loss Contingencies — We are subject to the possibility of various losses arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. Third parties have in the past asserted, and may in the future assert claims, or initiate litigation related to exclusive patent, copyright, and other intellectual property rights to technologies and related standards that are relevant to us. If any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.
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New Accounting Pronouncements
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ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 Risk
During Fiscal 2012, the principal foreign currencies in which we transacted business were the Euro, Chinese Renminbi,Japanese Yen, British Pound, Canadian Dollar, and Australian Dollar. Our objective in managing our exposures to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations associated with foreign currency exchange rate changes on our earnings and cash flows. Accordingly, we utilize foreign currency option contracts and forward contracts to hedge our exposure on forecasted transactions and firm commitments for certain currencies. During Fiscal 2012, we hedged our exposures on more than 20 currencies. 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 continue to substantially offset the impact of fluctuations in currency exchange rates on our results of operations and financial position in the future.
Based on our foreign currency cash flow hedge instruments outstanding at February 3, 2012, and January 29, 2010,28, 2011, we estimate a maximum potential one-day loss in fair value of approximately $57 million and $65 million, respectively, using a Value-at-Risk (“VAR”) model. By using market implied rates and incorporating volatility and correlation among the unpaid principal balancecurrencies of a portfolio, the VAR model simulates 3,000 randomly generated market prices and calculates the difference between the fifth percentile and the average as the Value-at-Risk. The VAR model is a risk estimation tool and 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 securitized receivablesunderlying exposure.
Interest Rate Risk
We also are exposed to interest rate risk related to our debt and associatedinvestment portfolios and financing receivables. We mitigate the risk related to our structured financing debt heldthrough the use of interest rate swaps to hedge the variability in cash flows related to the unconsolidated special purposes entities were $774 million and $624 million, respectively. Upon consolidation,interest rate payments on such debt. See Note 6 of the retained interest of $151 million will be eliminated. The new FASB guidance will require us to perform an ongoing analysis to determine whether our variable interests give us a controlling financial interest in the special purpose entities. See Note 4 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additionalmore information abouton our financing receivables.interest rate swaps.
We mitigate the risks related to our investment portfolio by investing primarily in high credit quality securities, limiting the amount that can be invested in any single issuer, and investing in short -to- intermediate-term investments. Based on our investment portfolio and interest rates as of February 3, 2012, a 100 basis point increase or decrease in interest rates would result in a decrease or increase of approximately $61 million in the fair value of our investment portfolio. As of January 28, 2011, a 100 basis point increase or decrease in interest rates would have resulted in a decrease or increase of approximately $4 million in the fair value of our investment portfolio. The overall increase in our interest rate sensitivity from January 28, 2011, to February 3, 2012, was due to a shift to longer-duration investments.
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ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA