UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Form 10-K
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x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended: January 30, 2009 ended February 3, 2012 |
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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
Commission filenumber: 0-17017
Dell Inc.
(Exact name of registrant as specified in its charter)
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| 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:(512) 338-44001-800-BUY-DELL
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
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| Common Stock, par value $.01 per share | | The NASDAQ Stock Market LLC (NASDAQ Global Select Market) |
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 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R 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”,filer,” “accelerated filer”,filer,” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check One): |
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Large accelerated filerþR | | Accelerated filero |
Non-accelerated filero (do (Do not check if a smaller reporting company) | | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o No þR
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Approximate aggregate market value of the registrant’s common stock held by non-affiliates as of August 1, 2008,July 29, 2011, based upon the closinglast sale price reported for such date on Thethe NASDAQ StockGlobal Select Market | | | $41.825.3 billion |
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Number of shares of common stock outstanding as of March 13, 2009 7, 2012 | | 1,762,044,563 | 1,951,045,734 |
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the registrant’sregistrant's proxy statement relating to the 2009 annual meeting of stockholders.stockholders in 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report containsincludes “forward-looking statements.” The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim,” “seek” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements thatby us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings and similar matters are based on Dell’s current expectations. Actual results in future periods may differ materially from thoseforward-looking statements. Our expectations expressed or implied by thosein these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of a number ofvarious risks, and uncertainties. For a discussion of risk factors affecting our business and prospects, seeincluding the risks discussed in this report under “Part I —- Item 1A —- Risk Factors.” Any forward-looking statement speaks only as of the date as 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 as of which such statement was made.
PART I
All percentage amounts and ratios were calculated using the underlying data in thousands. Unless otherwise noted, all references to industry share and total industry growth data are for computer systems (including desktops, notebooks, and x86 servers), and are based on information provided by IDC Worldwide Quarterly PC Tracker, February 17, 2009. Industry share data is for the full calendar year and all our growth rates are on a fiscalyear-over-year basis. Unless otherwise noted, all references to time periods refer to our fiscal periods.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.
General
ITEM 1 — BUSINESS
General
Dell listens to customers and delivers innovative technology and services they 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, softwaresolutions and peripherals, serversservices delivered directly by Dell and networking, services,through other distribution channels. We are focused on providing technology solutions that are more efficient, more accessible, and storage. Accordingeasier to IDC, we are the number one supplier of computer systems in the United States and the number two supplier worldwide.manage.
Our companyDell Inc. 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 ourholding company that conducts its business model to include a broader portfolio of products, including services, and we have also added new distribution partners, such as retail, system integrators, value added resellers, and distributors, which allow us to reach even more end-users around the world.worldwide through its subsidiaries. Our global corporate headquarters areis located in Round Rock, Texas, and we conduct operations worldwide through our subsidiaries. To optimize our global supply chain to best serve our global customer base, we have manufacturing locations around the world and are expanding our relationships with third-party original equipment manufacturers.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.
Business Strategy
Dell built its reputation as a leading technology provider through listening to customers and developing solutions that meet customer needs. A few years ago, we initiated a broad transformation of the company to become an end-to-end technology solutions 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 threat intelligence and security consulting. We are also focused on growing our end-user computing business, which includes desktop and mobility offerings. Software is a critical part of enterprise solutions and end-user computing, and we are expanding our capabilities in this business. Since the beginning of Fiscal 2011, we have acquired more than ten companies whose offerings and 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 balance revenue growth with an appropriate level of profitability. In addition, we will continue to manage our businesses to grow operating income and cash flows over the long-term. We believe our strategy will benefit our customers, drive greater efficiency and productivity, and create value for our shareholders.
Operating Business Segments
We operate principally in onethe information technology industry, and we manage our business in four global customer-centric operating segments: Americas Commercial; Europe, Middle Eastsegments that we identify as Large Enterprise, Public, Small and Africa (“EMEA”) Commercial; Asia Pacific-Japan (“APJ”) Commercial;Medium Business, and Global Consumer.
We are committed to managing and operatingbelieve our business insegments allow us to serve our customers with faster innovation and greater responsiveness.
Large Enterprise— Our Large Enterprise customers include large global and national corporate businesses. We believe that a responsible and sustainable manner around the globe. This includessingle large-enterprise unit enhances our commitment to environmental responsibility in all areasknowledge of our business. See “Part Icustomers and improves our advantage in delivering globally consistent solutions and services to many 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 — Item 1— Business — Sustainability.” This also includes our focus on maintaining Our Public customers, which include educational institutions, government, health care, and law enforcement agencies, operate in their own communities. These customers have a strong control environment, high ethical standards,broad range of unique IT needs and financial reporting integrity. See “Part II — Item 9A — Controls and Procedures.”
Business Strategy
Direct relationships with our customers give us an advantage of seeing changing customer requirements and needs earlier than companies who do not have the same breadth of direct relationships. As a result, we are able to develop products with simpler and more productive technology to better serve our customers. As we continuestrive to expand our global presence, we are further diversifying our revenueleadership and profit streams.address their urgent IT challenges through the delivery of technology solutions that help them achieve their mission.
Small and Medium Business ("SMB") — Our strategySMB segment is to focusfocused on higher marginhelping 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
deliver SMB-specific solutions to increase overall profitability as we balance our liquidity, profitability,so customers worldwide can take advantage of these emerging technologies and growth.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 also focused on improvingdesigning new, innovative products and experiences with fast development cycles and competitive features and will continue our competitiveness by reducing overall costs. In May 2008, we announced a $3 billion cost reduction initiative, which includes both cost of goods soldefforts to deliver high quality products and operating expenses. Inservices to Consumer customers around the fourth quarter of Fiscal 2009, we identified additional savings opportunitiesworld.
We refer to our Large Enterprise, Public, and have increased our cost-reduction target to $4 billion bySMB segments as "Commercial." For financial information about the end of Fiscal 2011. Our growth strategy involves reaching more customers worldwide through new distribution partners, such as retail, expanding our relationships with value-added resellers and distributors, and augmenting select areasresults of our business through targeted acquisitions. 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 goal continues to be to optimize the balance of liquidity, profitability,enterprise solutions include servers, networking, and growth with a focus on increasing the mix of our product portfolio to higher margin products and recurring revenue streams.storage products.
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| • | Provide great valueServers 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 partners through direct relationships. We are committed to innovating without legacy, creating efficient solutions,value tower servers for small organizations, networks, and providing price, performance, and feature leadership across all ofremote offices. During Fiscal 2012, we expanded our businesses. In addition, we will deliver the power of cloud computing and connect with our customers through the Internet. We are focused on helping customers identify and remove unnecessary cost and complexity in IT architecture and operations. In addition, we seek to broaden our profit stream to capture complementary opportunities in new solutions for customers that include search, services, and 3G originations. To that end, during Fiscal 2009 we released a broad lineup of dedicated virtualization solutions, including software, servers, services, and storage. |
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• | Optimize the balance of liquidity, profitability, and growthPowerConnect campus networking product offerings with a focus on increasing the mixfull suite of Dell Force10 data center networking solutions. We have also recently introduced our product portfolio12th 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 higher margin products and recurring revenue streams. We will balance our mixhelp companies of products and services to increase profitability over time. We are committed to shifting our solutions portfolio to higher margin solutions and recurring revenue streams in software, servers, services, and storage. Our services business has growth opportunities both in driving attachment of services onto existing product platforms and expanding into new solution offerings. We expect to expand our presence in the enterprise solution arena as we add more capabilities that are attractive to existing and new customers. We are committed to improving our storage and server products and services as evidenced by our new building IT-as-a-Service solution, an integrated service delivery platform that is simple, modular, and flexible, and which provides businesses with remote and lifecycle management,e-mailall sizes simplify their IT environments. backup, and software license management, among other services. In addition to services, system software presents another opportunity for us to further strengthen our portfolio. |
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
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.
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 — 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 4 of the Notes to Consolidated Financial Statements included in “Part II -Item 8 - Financial Statements and Supplementary Data.”
During Fiscal 2012, we acquired Dell Financial Services Canada Limited from CIT Group Inc. and we 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 financing programs with Dell in select countries around the world, including programs in Latin America, after completion of this transaction.
Product Development
We focus on developing standards-basedscalable technologies that incorporate highly desirable features and capabilities at competitive prices. We employ a collaborative approach to product design and development wherein which our engineers, along 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 continuingincreasing our focus on research and development and will continue to expandshift our useinvestment 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 original design manufacturing partnershipsglobal research and manufacturing outsourcing relationshipsdevelopment centers we operate to generate cost efficiencies, deliver products faster, and better serve our customers in certain product categories, customer segments, and geographical areas.12. Our total research, development, and engineering expenses were $665$856 million, $661 million, and $624 million for Fiscal 2009, $693 million for2012, Fiscal 2008,2011, and $498 million for Fiscal 2007, including acquisition related in-process research2010, respectively.
Manufacturing and development of $2 million for Fiscal 2009 and $83 million for Fiscal 2008.Materials
Products and Services
We design, develop,Third parties manufacture market, sell, and support a wide range of products that in many cases are customized to individual customer requirements. Our product categories include mobility products, desktop PCs, software and peripherals, servers and networking, services, and storage. See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Revenue by Product and Service Categories” and Note 11 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
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• | Mobility— The XPStm and Alienwaretm lines of notebook computers are targeted at customers seeking the best experiences and designs available, from sleek, elegant, thin, and light notebooks to the highest performance gaming systems. In Fiscal 2009, we introduced the new stylish Studio line of consumer notebooks with powerful multimedia elements. The Inspirontm line of notebook computers is designed for consumers seeking the latest technology and high performance in a stylish and affordable package. In Fiscal 2009, we added the 3G enabled Mini, a light, highly mobile notebook, to the Inspiron line. The Latitudetm line is designed to help business, government, and institutional customers manage their total cost of ownership through managed product lifecycles and the latest offerings in performance, security, and communications. The Vostrotm line is designed to customize technology, services, and expertise to suit the specific needs of small businesses. The Dell Precisiontm line of mobile workstations is intended for professional users who demand exceptional performance to run sophisticated applications. This year, we also had the largest global product launch in our company’s history with our newE-Series commercial Latitude and Dell Precision notebooks. |
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• | Desktop PCs— The XPStm and Alienwaretm lines of desktop computers are targeted at customers seeking the best experiences and designs available, from multimedia capability to the highest gaming performance. The OptiPlextm line is designed 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 Inspirontm line of desktop computers is designed for mainstream PC users requiring the latest features for their productivity and entertainment needs. The Vostrotm line is designed to provide technology and services to suit the specific needs of small businesses. In July 2008, we introduced the Studio line of compact and stylish consumer desktops, which includes the Hybrid, our most power efficient consumer desktop. |
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.
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• | Software and Peripherals— We offer Dell-branded printers and displays and a multitude of competitively priced third-party peripheral products, including software titles, printers, televisions, notebook accessories, networking and wireless products, digital cameras, power adapters, scanners, and other products. |
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| – | Software. We 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. In Fiscal 2009, we launched the Dell Download Store, an online software store for consumers andsmall-and-medium-sized businesses. |
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| – | Printers. We offer a wide array of Dell-branded printers, ranging fromall-in-one ink jet printers for consumers to large multifunction devices for corporate workgroups. In Fiscal 2009, we further expanded our product portfolio and launched the world’s smallest color laser printer. Dell-branded printers continue to win awards for reliability and value. |
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| – | Displays. We offer a broad line of branded and non-branded display products, including flat panel monitors and projectors. We continue to win awards for quality, performance, and value across our monitors and projector product lines. The M109son-the-go projector was the first pocket projector to ship in the industry at the end of calendar 2008 and won the prestigious CES Innovations 2009 award in January 2009. |
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• | Servers and Networking— Our standards-based PowerEdgetm line of servers is designed to offer customers affordable performance, reliability, and scalability. Options include high performance rack, blade, and tower servers for enterprise customers and value tower servers for small organizations, networks, and remote offices. We also offer customized Dell server solutions for very large data center customers. During the Fiscal 2009, we released a broadline-up of dedicated virtualization solutions, including new servers, tools, and services. We expect to refresh our servers and networking product portfolio in Fiscal 2010. |
Our PowerConnecttm switches connect computers and servers insmall-to-medium-sized networks. PowerConnecttm products offer customers enterprise-class features and reliability at a high value for our customers.
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• | Services— Our global services business offers a broad range of configurable IT services that help commercial customers and channel partners plan, implement, and manage IT operations and consumers install, protect, and maintain their computer systems and accessories. Our service solutions help customers simplify IT, thus maximizing the performance, reliability, and cost-effectiveness of IT operations. |
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| – | Infrastructure Consulting Services. Our consulting services help customers evaluate, design, and implement standards-based IT infrastructures. These customer-oriented consulting services are designed to be focused and efficient, providing customers access to our experience and guidance on how to best architect and operate IT operations. |
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| – | Deployment Services. Our deployment services simplify and accelerate the deployment of enterprise products and computer systems in customers’ environments. Our processes and deployment technologies enable customers to get systems up and running quickly and reliably, with minimal end-user disruption. |
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| – | Asset Recovery and Recycling Services. We offer a variety of flexible services for the secure and environmentally safe recovery and disposal of owned and leased IT equipment. Various options, including resale, recycling, donation, redeployment, employee purchase, and lease return, help customers retain value while facilitating regulatory compliance and minimizing storage costs. |
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| – | Training Services. We help customers develop the skills and knowledge of key technologies and systems needed to increase their productivity. Courses include hardware and software training as well as computer system skills and professional development classes available through instructor-led, virtual, or self-directed online courses. |
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| – | Support Services. Our suite of scalable support services is designed for IT professionals and end-users whose needs range from basic phone support to rapid response and resolution of complex problems. We offer flexible levels of support that span from desktop and notebook PCs to complex servers and storage systems, helping customers maximize uptime and stay productive. Our support services include warranty services and proactive maintenance offerings to help prevent problems as well as rapid response and resolution of problems. These services are supported by our network of Global Command Centers in the U.S., Ireland, China, Japan, and Malaysia, providing rapid,around-the-clock support for critical commercial systems. |
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| – | Managed Services. We offer a full suite of managed service solutions for companies who desire outsourcing of some or all of their IT management. From planning to deployment to ongoing technical support, our managed services are modular in nature so that customers can customize a plan based on their current and future needs. We can manage a portion of their IT tasks or provide anend-to-end solution. |
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• | Storage— We offer a comprehensive portfolio of advanced storage solutions, including storage area networks, network-attached storage, direct-attached storage, disk and tape backup systems, and removable disk backup. With our advanced storage solutions for mainstream buyers, we offer customers functionality and value while reducing complexity in the enterprise. Our storage systems are easy to deploy, manage, and maintain. The flexibility and scalability offered by Dell PowerVaulttm, Dell EqualLogictm, and Dell | EMC storage systems help organizations optimize storage for diverse environments with varied requirements. During the fiscal year, we expanded our storage portfolio by adding increasingly flexible storage choices that allow customers to grow capacity, add performance and protect their data in a more economical manner. |
Financial Services
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 CIT Bank to qualified consumer and small business customers and offers leases and fixed-term financings to business 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 Off-Balance Sheet Arrangements” and Note 6 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
Sales and Marketing
We sell our products and services directly to customers through dedicated sales representatives, telephone-based sales, online atwww.dell.com, and through a variety of indirect sales channels. Our customers include large corporate, government, healthcare, and education accounts, as well as small and medium businesses and individual consumers. Within each of our geographic regions, we have divided our sales and marketing resources among these various customer groups. No single customer accounted for more than 10% of our consolidated net revenue during anymajority of the last three fiscal years.
Our sales and marketing efforts are organized around the evolving needs of our customers. Our direct business model provides direct communication with our customers; thereby allowing us to refine our products and marketing programs for specific customer groups. Customers may offer suggestions for current and future Dell products, services, and operations on an interactive portion of our website called Dell IdeaStorm. This constant flow of communication allows us to rapidly gauge customer satisfaction and target new or existing products.
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, 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, multinational 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 at specific healthcare and educational customers.
We market our products and services to small and medium businesses and consumers primarily by advertising on television and the Internet, advertising in a variety of print media, and mailing or emailing a broad range of direct marketing publications, such as promotional materials, catalogs, and customer newsletters.
Our business strategy also includes indirect sales channels. Outside the U.S., we sell products indirectly through selected partners to benefit from the partner’s existing end-user customer relationships and valuable knowledge of traditional customs and logistics in the country, to mitigate credit and country risk, and because sales in some countries may be too small to warrant a direct sales business unit. In the U.S., we sell products indirectly through third-party solution providers, system integrators, and third-party resellers. PartnerDirect brings our existing partner initiatives under one umbrella globally. PartnerDirect includes partner training and certification, deal registration, dedicated sales and customer care, and a dedicated web portal. We also offer select consumer products in retail stores in several countries in the Americas, EMEA, and APJ. Our goal is to have strategic relationships with a number of major retailers in our larger geographic regions. During Fiscal 2009, we continued to expand our global retail presence, and we now reach over 24,000 retail locations worldwide. Our retailers include Best Buy, Staples, Wal-Mart, GOME, and Carrefour, among others.
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Competition
We operate in an industry in which there are rapid technological advances in hardware, software, and service offerings and face on-going product and price competition in all areas of our business from branded and generic competitors. We compete based on our ability to offer profitable and competitive solutions to our customers that provide the most current and desired product features as well as customer service, quality, and reliability. This is enabled by our direct relationships with customers, which allow us to recognize changing customer needs faster than other companies. This connection with our customers allows us to best serve customer needs and offers us a competitive advantage.
According to IDC, we gained 0.2 points of share during calendar 2008 as our 11.1% growth in units outpaced the industry’s overall worldwide computer systems growth of 9.7%. Our gain in share was driven by a strong overall performance in the first half of Fiscal 2009 followed by a decline in unit shipments in our commercial business in the second half of the year, which was partially offset by strength in our global consumer business. Our commercial business’s slower unit growth in the second half of Fiscal 2009 reflects our decision in an eroding demand environment to selectively pursue unit growth opportunities while protecting profitability. During the second half of Fiscal 2009, the entire industry faced a challenging IT end-user demand environment as current economic conditions influenced global customer spending behavior.
Technology companies grow by expanding product offerings and penetrating new geographies. To achieve this growth, companies innovate and will also lower price. Our ability to maintain or gain share is predicated on our ability to be competitive on product features and functionality, geographic penetration, and pricing. Additionally, our efforts to balance our mix of products and services to optimize profitability, liquidity, and growth may put pressure on our industry unit share position in the short-term. At the end of Fiscal 2009, we remained the number one supplier of computer systems in the U.S. and the number two supplier worldwide.
Manufacturing and Materials
We manufacture many of theclient products we sell under the Dell brand. We use contract manufacturers and have manufacturing locations worldwideoutsourcing relationships to serviceachieve our global customer base.goals of generating cost efficiencies, delivering products faster, better serving our customers, and building a world-class supply chain. Our manufacturing facilities are located in Austin, Texas; Penang, Malaysia; Xiamen, China; Hortolândia, Brazil; Chennai, India; and Lodz, Poland. See “Part I —- Item 2 —- Properties” for information about our manufacturing locations. In addition, we are continuing to expand our use of original design manufacturing partnerships and manufacturing outsourcing relationships to generate cost efficiencies, deliver products faster, and better serve our customers in certain segments and geographical areas.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 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 worldwide by the International Standards Organization to the requirementsISO (International
Organization for Standardization) 9001: 2000.2008 Quality management systems standard. This certification includes most of our global sites that design, manufacture, and service of computer products in all of our locations.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 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 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.
Geographic Operations
Our global corporate headquarters is located in Round Rock, Texas. We have operations and conduct business in many countries located in the Americas, Europe, the Middle East, Asia and other geographic regions. We continue to expand and invest in Growth 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. 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. 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 Discussion and Analysis of Financial Condition and Results of Operations - Results of 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 actively reviewingrapid technological advances in hardware, software, and service offerings and we face ongoing product and price competition in all aspectsareas of our facilities, logistics, supply chain,business including both branded and manufacturing footprints. This reviewgeneric competitors. We compete based on our ability to offer to our customers competitive, scalable, and integrated solutions that provide the most current and desired product and services features. We believe that our strong relationships with our customers and our distribution channels, such as retail, system integrators, value-added resellers, distributors, and other channel partners, allow us to respond to changing customer needs faster than many of our competitors.
Sales and Marketing
We sell our products and services directly to customers and through various other sales distribution channels, such as retailers, third-party solution providers, system integrators, and third-party resellers. Our customers include large global and national corporate businesses, public institutions that include government, education, and healthcare organizations, law enforcement agencies, small and medium business, and consumers. No single customer accounted for more than 10% of our consolidated net revenue during any of the last three fiscal years.
Our sales efforts are organized around the evolving needs of our customers, and our marketing initiatives reflect this focus. Our direct business model emphasizes 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. In order to react quickly to our customers' needs, we track our Net Promoter Score, a customer loyalty metric that is focusedwidely used across various industries. Increasingly, we also engage with customers through our social media communities on identifying efficiencieswww.dell.com and cost reduction opportunities and migrationin external social media channels. In Fiscal 2012, in an effort to create a more variable cost manufacturing model, while maintaining a strong customer experience. Examples of these actions includeresponsive and efficient sales organization, we announced the closureunification of our desktop manufacturing facility in Austin, Texas,global sales and 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 saleworld. Dedicated account teams, which include field-based enterprise solution specialists, form long-term relationships to provide our largest customers with a single source of our call center in El Salvador, the recent announcementassistance, develop tailored solutions for these customers, and provide us with customer feedback. For these customers, we offer several programs designed to provide single points of our migrationcontact and closureaccountability 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.
Patents, Trademarks, and Licenses
As of January 30, 2009,At February 3, 2012, we held a worldwide portfolio of 2,2533,449 patents and had an additional 2,5141,660 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
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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 71107 of our other markstrademarks in the U.S. At January 30, 2009,February 3, 2012, we had pending applications for registration of 4514 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 184183 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.
Employees
At the end of Fiscal 2009, we had approximately 78,900 total employees (consisting of 76,500 regular employees and 2,400 temporary employees), compared to approximately 88,200 total employees (consisting of 82,700 regular employees and 5,500 temporary employees) at the end of Fiscal 2008. Approximately 25,900 of the regular employees at the end of Fiscal 2009 were located in the U.S., and approximately 50,600 regular employees were located in other countries.
We continue to comprehensively review costs across all processes and organizations, from product development and procurement through service and support delivery, with a goal to reduce costs, simplify structure, eliminate redundancies, and better align cost of goods sold and operating expenses with the current business environment and strategic growth opportunities. As part of this overall effort, we expect to further reduce our overall headcount; however, we may add headcount in certain strategic growth areas. We also may realign, sell, or close additional facilities depending on a number of factors, including end-user demand, capabilities, and our migration to a more variable cost manufacturing model. These actions will result in additional business realignment costs in the future, although no plans were finalized at January 30, 2009.
Government Regulation and EnvironmentSustainability
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;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, regulation byemployment and labor, and other regulatory activities of a variety of regulatorygovernmental authorities in each of the areascountries in which we conduct business. We are also subject to regulation in other countries where 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 2009.2012.
Sustainability
OurEnvironmental stewardship and social responsibility are both integral parts of how we manage our business, and complement our focus on business efficiencies and customer satisfaction drivessatisfaction. We use open dialogue with our environmental stewardship program in all areasstockholders, customers, vendors, and other stakeholders as part of our business — reducingsustainability governance process in which we solicit candid feedback and offer honest discussions on the challenges we face globally. Our environmental initiatives take many forms, including maximizing product energy consumption,efficiency, reducing orand eliminating sensitive materials for disposal, prolonging product life spans,from our products, and providing effective andresponsible, convenient equipment recovery solutions. We are committed to becoming the “greenest technology company on the planet” — a long-term initiative we announced in June 2007. This multi-faceted campaign focuses on driving internal business innovations and efficiencies; enhancing customer satisfaction; and partnering with suppliers, stakeholders, and people who care about the environment.computer recycling options for customers.
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In Fiscal 2008, we announced our commitment to becoming carbon neutral in our operations. We were the first company in our industry to offer a free worldwide recycling program for our consumers. We also providedprovide consumers with no-charge recycling of any brand of used 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. This means eliminatingapproach in which we seek to eliminate environmentally sensitive substances (where reasonable alternatives exist) from our products and workingwork 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 achievereduce both the costs of those operations and their own environmental goals.impact on the environment.
Product Backlog
We believe that product backlog is not a meaningful indicator of net revenue that can be expected for any period. There can be no assurance that the backlog at any point in time will translate into net revenue in any subsequent period, as unfilled orders can generally be canceled at any time by the customer. Our 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. Even thoughMoreover, 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 end of Fiscal 2009 was higher than at the end of Fiscal 2008 and Fiscal 2007, it was not material.customer.
Operating Business Segments
We conduct operations worldwide. Effective the first quarter of Fiscal 2009, we combined our consumer businesses of EMEA, APJ, and Americas International (formerly reported through Americas Commercial) with our U.S. Consumer business and re-aligned our management and financial reporting structure. As a result, effective May 2, 2008, our operating segments consisted of the following four segments: Americas Commercial, EMEA Commercial, APJ Commercial, and Global Consumer. Our commercial business includes sales to large corporate, government, healthcare, education, small and medium business customers, and value-added resellers and is managed through the Americas Commercial, EMEA Commercial, and APJ Commercial segments. The Americas Commercial segment, which is based in Round Rock, Texas, encompasses the U.S., Canada, and Latin America. The EMEA Commercial segment, based in Bracknell, England, covers Europe, the Middle East, and Africa; and the APJ Commercial segment, based in Singapore, encompasses the Asian countries of the Pacific Rim as well as Australia, New Zealand, and India. The Global Consumer segment, which is based in Round Rock, Texas, includes global sales and product development for individual consumers and retailers around the world. We revised previously reported operating segment information to conform to our new operating segments in effect during the first quarter of Fiscal 2009.
On December 31, 2008, we announced our intent during Fiscal 2010 to move from geographic commercial segments to global business units reflecting the impact of globalization on our customer base. Customer requirements now share more commonality based on their sector rather than physical location. We expect to combine our current Americas Commercial, EMEA Commercial, and APJ Commercial segments and realign our management structure. After this realignment, our operating structure will consist of the following segments: Global Large Enterprise, Global Public, Global Small and Medium Business (“SMB”), and our existing Global Consumer segment. We believe that these four distinct, global business organizations can capitalize on our competitive advantages and strengthen execution. We will begin reporting these four global businesses once we complete the realignment of our management and financial reporting structure, which is expected to be in the first half of Fiscal 2010.
We have invested in high growth countries such as Brazil, Russia, India, and China (“BRIC”) to design and manufacture products and support our customers, and we expect to continue our global expansion in the years ahead. 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. As a result, we plan to continue to add additional resources to our offices in Singapore to better coordinate certain global activities, including the management of our original design manufacturers and utilization ofnon-U.S. Dell and supplier production capacity where most needed in light of product demand levels that vary by region. The expanded global operations in Singapore also coordinate product design and development efforts with procurement activities and sources of supply. We intend to continue to expand our global capabilities as our international business continues to grow. 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 — Revenues by Segment” and Note 11 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” For information about percentages of revenue outside the U.S. 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.”
Our corporate headquarters are located in Round Rock, Texas. Our manufacturing and distribution facilities are located in Austin, Texas; Winston-Salem, North Carolina; Lebanon and Nashville, Tennessee; Miami, Florida; Limerick and Athlone, Ireland; Penang, Malaysia; Xiamen, China; Hortolândia, Brazil; Chennai, India; and Lodz, Poland. For additional information, see “Part I — Item 2 — Properties.”
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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
The mailing address of our principal executive offices is One Dell Way, Round Rock, Texas 78682. Our telephone number is 1-800-BUY-DELL.
We maintain an Internet website atwww.dell.com.www.dell.com. All of our reports filed with the Securities and Exchange Commission (“SEC”)SEC (including annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, and Section 16 filings)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 electronic filing. The publicwe 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 2012, we had approximately 109,400 total employees (consisting of 106,700 regular employees and 2,700 temporary employees), compared to approximately 103,300 total employees (consisting of 100,300 regular employees and 3,000 temporary employees) at the end of Fiscal 2011. Approximately 39,900 of our regular employees at the end of Fiscal 2012 were located in the U.S., and approximately 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, 2009:9, 2012:
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| Name | | Age | | | | |
Name
| | Age
| | Title |
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| Michael S. Dell | | | 44 | 47 | | Chairman of the Board and Chief Executive Officer |
| Bradley R. Anderson | | | 49 | | | Senior Vice President, Enterprise Product Group |
Paul D. Bell | | | 48 | 52 | | President, Global PublicEnterprise Solutions |
| Jeffrey W. Clarke | | | 46 | 49 | | Vice Chairman Operations and Technology |
Andrew C. Esparza | | | 50 | | | Senior Vice President, Human ResourcesEnd-User Computing Solutions & Operations |
| Stephen J. Felice | | | 51 | 54 | | President, Global Small and Medium Business |
Ronald G. Garriques | | | 45 | | | President, Global ConsumerChief Commercial Officer |
| Brian T. Gladden | | | 44 | 47 | | Senior Vice President and Chief Financial Officer |
Erin NelsonDavid L. Johnson | | | 3958 | | 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 | | | 48 | 51 | | President, Global Large EnterpriseServices |
| John A. Swainson | | 57 | | President, Software |
| Lawrence P. Tu | | | 54 | 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.
Michael S. Dell — Mr. Dell currently serves as Chairman of the Board of Directors and Chief Executive Officer.
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• | Michael S. Dell —Mr. Dell currently serves as Chairman of the Board of Directors and Chief Executive Officer. He has held the title of Chairman of the Board since he founded the Company in 1984. Mr. Dell 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, serves on the executive committee of the International Business Council, and is a member of the U.S. Business Council. He also sits on the governing board of the Indian School of Business in Hyderabad, India. |
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• | Bradley R. Anderson— Mr. Anderson joined us in July 2005 and has served as Senior Vice President, Enterprise Product Group since January 2009. 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 in Petroleum Engineering from Texas A&M University and a Master of Business Administration from Harvard University. He serves on the Texas A&M Look College of Engineering Advisory Council. |
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• | Paul D. Bell —Mr. Bell has been with us since 1996 and currently serves as President, Global Public. In this role he is responsible for leading the teams that help governments, education, healthcare and other public organizations make full use of Information |
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| Technology. From March 2007 until January 2009, Mr. Bell served as Senior Vice President and President, Americas. In this role, Mr. Bell is responsible for all sales and customer support operations across the Americas region other than our consumer business. From February 2000 until March 2007, Mr. Bell served as Senior Vice President and President, Europe, Middle East, and Africa. Prior to this, Mr. Bell served as Senior Vice President, Home and Small Business. Prior to joining Dell in July 1996, Mr. Bell was a management consultant with Bain & Company for six years, including two years as a consultant on our account. Mr. Bell received Bachelor’s degrees in Fine Arts and Business Administration from Pennsylvania State University and a Master of Business Administration degree from the Yale School of Organization and Management. |
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• | Jeffrey W. Clarke— Mr. Clarke currently serves as Vice Chairman, Operations and Technology. In this role 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. Mr. Clarke joined Dell in 1987 as a quality engineer and has served in a variety of engineering and management roles. In 1995 Mr. Clarke became the director of desktop development, and from November 2001 to January 2003 he served as Vice President and General Manager, Relationship Product Group. Mr. Clarke received a Bachelor’s degree in Electrical Engineering from the University of Texas at San Antonio. |
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• | Andrew C. Esparza— Mr. Esparza joined us in 1997 as a director of Human Resources in the Product Group. He was named Senior Vice President, Human Resources in March 2007 and was named an executive officer in September 2007. In this role, he is responsible for driving the strategy and supporting initiatives to attract, motivate, develop, and retain world-class talent in support of our business goals and objectives. He also has responsibility for corporate security and corporate responsibility on a worldwide basis. He currently is an executive sponsor for aDellante, our internal networking group responsible for the development of Hispanic employees within the company. Prior to joining Dell, he held human resource positions with NCR Corporation from 1985 until 1997 and Bechtel Power Corporation from 1981 until 1985. Mr. Esparza earned a Bachelor’s degree in Business Administration with a concentration in Human Resource Management from San Diego State University. |
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• | Stephen J. Felice — Mr. Felice currently serves as President, Global Small and Medium Business. Mr. Felice leads the Dell organization that creates and delivers specific solutions and technology to more than 72 million small and medium-sized businesses globally. From March 2007 until January 2009, Mr. Felice served as Senior Vice President and President, Asia Pacific-Japan, after having served as Vice President, Asia Pacific-Japan since August 2005. Mr. Felice was responsible for our operations throughout the APJ region, including sales and customer service centers in Penang, Malaysia, and Xiamen, China. Mr. Felice joined us in February 1999 and has held various executive roles in our sales and consulting services organizations. From February 2002 until July 2005, Mr. Felice was Vice President, Corporate Business Group, Dell Americas. Prior to joining Dell, Mr. Felice served as Chief Executive Officer and President of DecisionOne Corp. 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. |
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• | Ronald G. Garriques— Mr. Garriques joined us in February 2007 as President, Global Consumer Group. In this role he is responsible for Dell’s portfolio of consumer products, including desktops, notebooks, software and peripherals as well as product design and sales. Before joining Dell, Mr. Garriques served in various leadership roles at Motorola from February 2001 to February 2007, where he was most recently Executive Vice President and President, responsible for the Mobile Devices division. He was also Senior Vice President and General Manager of the Europe, Middle East, and Africa region for the Personal Communications Services division, and Senior Vice President and General Manager of Worldwide Products Line Management for the Personal Communications Services division. Prior to joining Motorola, Mr. Garriques held management positions at AT&T Network Systems, Lucent Technologies, and Philips Consumer Communications. Mr. Garriques holds a Master’s degree in Business Administration from The Wharton School at the University of Pennsylvania, a master’s degree in Mechanical Engineering from Stanford University, and a Bachelor’s degree in Mechanical Engineering from Boston University. |
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• | Brian T. Gladden— Mr. Gladden serves as Senior Vice President and Chief Financial Officer (“CFO”). In this role, he is responsible for all aspects of Dell’s finance function including accounting, financial planning and analysis, tax, treasury, audit, information technology, and investor relations, and is also responsible for our global information systems and technology structure. Prior to joining Dell in June 2008, Mr. Gladden was President and CEO of SABIC Innovative Plastics Holding BV. Prior to joining SABIC Innovative Plastics, Mr. Gladden spent nearly 20 years with General Electric (“GE”) in a variety of financial and management leadership roles. During his career with the company, he served as Vice President and General Manager of GE Plastics’ resin business, CFO of GE Plastics and Vice President and CFO of GE Medical Systems Healthcare IT business. He was named a GE corporate officer in 2002 and |
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| had formerly served on GE’s corporate audit staff for five years. Mr. Gladden earned a Bachelor of Science degree in Business Administration and Finance from Millersville University in Millersville, PA. |
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• | Erin Nelson — Ms. Nelson currently serves as Vice President and Chief Marketing Officer (“CMO”). In this role she is responsible for customer relationship management, communications, brand strategy, core research and analytics, and overall marketing agency management. Before becoming CMO in January 2009, Ms. Nelson spent three years in Europe, most recently as Vice President of Marketing for Dell’s business in Europe, the Middle East and Africa. Since joining Dell in 1999, she has held progressive leadership positions in U.S. consumer marketing, U.S. public sales, EMEA home and small-business marketing, as well as eBusiness. Prior to joining Dell, Ms. Nelson held positions in brand management at Procter & Gamble, corporate strategy at PepsiCo, and as a management consultant with A.T. Kearney. Ms. Nelson earned a Bachelor’s degree in Business Administration with a concentration in International Business and Marketing from the University of Texas at Austin. |
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• | Stephen F. Schuckenbrock — Mr. Schuckenbrock currently serves as President, Global Large Enterprise, leading the delivery of innovative and globally consistent Dell solutions and services to the world’s largest corporate IT users. Mr. Schuckenbrock joined us in January 2007 as Senior Vice President and President, Global Services. In September 2007, he assumed the additional role of Chief Information Officer, and served in those roles until January 2009. In those roles, he was responsible for all aspects of our services business, with worldwide responsibility for Dell enterprise service offerings, and was also responsible for our global information systems and technology structure. Prior to joining us, 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 for PepsiCo from 1998 to 2000. Mr. Schuckenbrock earned a Bachelor’s degree in Business Administration from Elon University. |
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• | Lawrence P. Tu — Mr. Tu joined us as Senior Vice President, General Counsel and Secretary in July 2004, and is responsible for overseeing Dell’s global legal department, governmental affairs and ethics department. 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. |
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.
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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
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
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.
ITEM 1A — RISK FACTORS
Our business, operating results, financial condition, and prospects are many risk factors that affect our business and resultssubject to a variety of operations, somesignificant 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.
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• | Weakening global economic conditions and instability in financial markets could harm our business and result in reduced netWe face intense competition, which may adversely affect our industry unit share position, revenue, and profitability.We are a global company with customers in virtually every business and industry. There has been an erosion of global consumer confidence amidst concerns over declining asset values, fluctuating energy costs, geopolitical issues, the availability and cost of credit, rising unemployment, and the stability and solvency of financial institutions, financial markets, businesses, and sovereign nations. These concerns have slowed global economic growth and have resulted in recessions in many countries, including the U.S. While these global economic issues persist, there are likely to be a number of follow-on effects on our business, including customers or potential customers reducing or delaying their technology investments, insolvency of key suppliers resulting in product delays, counterparty failures negatively impacting our treasury operations, the inability of customers to obtain credit to finance purchases of our products, and customer insolvencies, all of which could reduce demand for our product and services, impact our ability to effectively manage inventory levels and collect customer receivables, lengthen our cash conversion cycle and negatively impact liquidity, and ultimately decrease our net revenue and profitability. |
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• | Weakening economic conditions and instability in financial markets could harm our financial services activities. Our financial services activities are negatively affected in four major ways by the current economic environment — spending softness, increasing loan delinquencies and defaults, increasing funding costs, and reduced availability of funding through securitizations. Decreased customer spending directly reduces the potential sales revenue that we can seek to finance. Loan delinquencies and defaults impact our net credit losses and have been increasing for more than a year. If this trend continues, we may need to increase our reserves in our customer receivables in the future. The debt and securitization markets have been experiencing and may continue to experience |
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| extreme volatility and disruption, resulting in higher credit spreads in the capital markets and higher funding costs for us, as well as reduced availability of funding from securitizing our financing receivables. |
We have continuedoperate 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 utilize securitizationsoffer to fund our financing activities. During Fiscal 2009customers competitive integrated solutions that provide the most current and Fiscal 2008, Dell transferred $1.4 billiondesired product and $1.2 billion, respectively,services features. We expect that competition will continue to be intense, and there is a risk that our competitors' products may be less costly, provide better performance or include additional features when compared to our products. Additionally, 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 fixed-term leasesproducts and loansservices to optimize profitability, liquidity, and revolving loansgrowth may put pressure on our industry position.
In addition to unconsolidated qualified special purpose entitiescompetitive factors we face as a result of the current state of our business and our industry, we confront additional competitive challenges as our business and industry continue to facilitategrow and evolve. As we expand globally, we may see new and increased competition in different geographic regions. Moreover, the funding of financing receivables in the capital markets. Deteriorationgenerally low barriers to entry in our business 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 single-source or limited-source suppliers, could harm our business by adversely affecting product availability, delivery, reliability, and cost.
We 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 a credit rating downgrade, continued volatilitycritical single- or limited-source product or component is delayed or curtailed, we may not be 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 securitization markets,alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could harm our operating results.
We obtain many of our products and all of our components from third-party vendors, many of which are located outside of the U.S. In addition, significant portions of the products we sell are now 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 these contract manufacturers and 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 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 adverse changes in the economyproduct availability could lead to reductions in debt availability for the qualified special purpose entitiesharm our financial performance and could limit our ability to continue asset securitizations or other financingsatisfy customer needs. In addition, defective parts and products from debt or capital sources,these vendors could reduce the amount of financing receivables that we originate, or could adversely affect the costs or terms on which we may be able to obtain capital, which could unfavorably affectproduct reliability and harm our profitability or cash flows.reputation.
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• | We face strong competition, which may adversely affect our market share, revenue, and profitability. We operate in an industry in which there are rapid technological advances in hardware, software and service offerings, and face aggressive product and price competition from both branded and generic competitors. We compete based on our ability to profitably offer competitive solutions with the most current and desired product features, as well as on customer service, quality and reliability. We expect that competition will continue to be intense and that our competitors’ products may be less costly, provide better performance or include additional features. 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 in the short-term. As we continue to expand globally, we may see new and increased competition in different geographic regions. In addition, barriers to entry in our businesses generally are low and products can be distributed broadly and quickly at relatively low cost. |
If we fail to achieve favorable pricing from our increasing reliance on third-party original equipment manufacturers, original design manufacturing partnerships, and manufacturing outsourcing relationships fails to generate cost efficiencies,vendors, our profitability could be adversely impacted. affected.
Our profitability is also affected by our ability to negotiateachieve favorable pricing withfrom our vendors and contract manufacturers, including through negotiations for vendor rebates, marketing funds, and other vendor funding.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 cost variables. Our inability to establish a cost and product advantage, or determine
alternative means to deliver value to our customers, may adversely affect our market share,revenue and profitability.
Adverse global economic conditions and instability in financial markets may harm our business and result in reduced net revenue and profitability.
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• | Our ability to generate substantialnon-U.S. net revenue faces many additional risks and uncertainties. Sales outside the U.S. accounted for approximately 48% of our consolidated net revenue in Fiscal 2009. Our future growth rates and success are dependent on continued growth outside the U.S., including 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 instability, and changes in the regulatory environment, 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. |
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• | Our profitability may be affected by our product, customer, and geographic sales mix and by seasonal sales trends. Our profit margins vary among products, customers, and geographies. 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 will be affected by the mix of products, customers, and geographies reflected in our sales for that period, as well as by seasonal trends. |
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• | Infrastructure failures and breaches in data security could harm our business. We depend on our information technology and manufacturing infrastructure to achieve our business objectives. If a problem, such as a computer virus, intentional disruption by a third party, natural disaster, manufacturing failure, telecommunications system failure, or lost connectivity impairs our infrastructure, we may be unable to book or process orders, manufacture, ship in a timely manner, or otherwise carry on our business. An infrastructure disruption could damage our reputation and cause us to lose customers and revenue, result in the unintentional disclosure of company or customer information, and require us to incur significant expense to eliminate these problems and address related data security concerns. The harm to our business could be even greater if it occurs during a period of disproportionately heavy demand. |
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• | Our inability to effectively manage product and services transitions could reduce the demand for our products and the profitability of our operations. Continuing improvements in technology mean frequent new product introductions, short product life cycles, and improvement in product performance characteristics. In addition, we are increasingly sourcing new products and transitioning existing products through our original design manufacturing partnerships and manufacturing outsourcing relationships in order to generate cost efficiencies, deliver products faster and better serve our customers in certain segments and geographical areas. These product |
As a global 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 credit, 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.
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| 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. |
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.
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• | Our growth strategy depends on our ability to successfully transform our sales capability and to add to the scope of our product and services offerings. 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. 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 and add to the breadth of our higher margin offerings through selective acquisitions. If we are unable to effectively transition our sales capabilities and grow our product and services offerings, our business and results of operations could be unfavorably affected. |
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• | Disruptions in component or product availability could unfavorably affect our performance. Our manufacturing and supply chain efficiencies give us the ability to operate with reduced levels of component and finished goods inventories. Our financial success is partly due to our supply chain management practices, including our ability to achieve rapid inventory turns. 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. |
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• | Our reliance on vendors for products and components creates risks and uncertainties. We require a high volume of quality products and components from third party vendors. In addition, we are continuing to expand our use of original design manufacturing partnerships and manufacturing outsourcing relationships in order to generate cost efficiencies, deliver products faster and better serve our customers in certain segments and geographical areas. Our increasing reliance on these vendors subjects us to a greater risk of shortages, and reduced control over delivery schedules of components and products (which can harm efficiencies), as well as a greater risk of increases in product and component costs (which can harm our profitability). In addition, defective parts and products from these vendors could reduce product reliability and harm our reputation. |
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• | We could experience manufacturing interruptions, delays, or inefficiencies if we are unable to timely and reliably procure components and products from single-source or limited-source suppliers. We maintain several single-source or limited-source supplier relationships, either because multiple sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity, or price considerations. If the supply of a critical single- or limited-source product or component is delayed or curtailed, we may not be able to ship the related product in desired quantities 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 delays and a possible loss of sales, which could harm operating results. |
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• | Our business is increasingly dependent on our ability to access the capital markets. 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 share repurchases, funding customer receivables, and acquisitions. Additionally, we have customer financing relationships with companies whose business models rely on accessing the capital markets. The inability of these companies to access such markets could force us to self-fund transactions or forgo customer financing opportunities, potentially harming our financial performance. The debt and capital markets have been experiencing and may continue to experience extreme volatility and disruption. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk, and the current weak economic conditions have made, and will likely continue to make, it difficult to obtain funding. The cost of accessing debt and capital markets has increased 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. We believe that we will be able to obtain appropriate financing from third parties even in light of the current market conditions; nevertheless, changes in our credit ratings, deterioration in our business performance, or adverse changes in the economy could limit our ability to obtain financing from debt or capital sources or could adversely affect the terms on which we may be able to obtain capital, which could unfavorably affect our net revenue and profitability. See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Commitments — Liquidity.” |
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• | We face risks relating to our internal controls. If management is not successful in maintaining a strong internal control environment, material weaknesses could reoccur, 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 capital markets in the future, and require us to incur additional costs to improve our internal control systems and procedures. |
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We may not successfully execute our growth strategy if we fail to manage effectively the change involved in implementing our strategic initiatives.
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• | 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 and that are not yet resolved, including those that are set forth under Note 10 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” 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, 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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• | The acquisition of other companies may present new risks. We acquire companies as a part of our overall growth strategy. These acquisitions may involve significant new risks and uncertainties, including distraction of management attention away from our current business operations, insufficient new revenue to offset expenses, inadequate return of capital, integration challenges, new regulatory requirements, and issues not discovered in our due diligence process. No assurance can be given that such acquisitions will be successful and will not adversely affect our profitability or operations. |
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• | Failure to properly manage the distribution of our products and services may result in reduced revenue and profitability. We use a variety of distribution methods to sell our products and services, including directly to customers and through select retailers and third-party value-added resellers. 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 inability to properly manage and balance inventory levels and potential conflicts among these various distribution methods could harm our operating results. |
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• | If our cost cutting measures are not successful, we may become less competitive. A variety of factors could prevent us from achieving our goal of better aligning our product and service offerings and cost structure with customer needs in the current business environment through reducing our operating expenses; reducing total costs in procurement, product design, and transformation; simplifying our structure; and eliminating redundancies. 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 them. As a result, we may not achieve our expected cost savings in the time anticipated, or at all. In such case, our results of operations and profitability may be negatively impaired, making us less competitive and potentially causing us to lose market share. |
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• | Failure to effectively hedge our exposure to fluctuations in foreign currency exchange rates and interest rates could unfavorably affect our performance. 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. |
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• | We are subject to counterparty default risks. We enter into numerous financing arrangements, including foreign currency option contracts and forward contracts, with a wide array of bank counterparties. As a result, we are subject to the risk that the counterparty to one or more of these contracts defaults, 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 to eventually 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. As of January 30, 2009, approximately 25% of our cash and cash equivalents were deposited with two large financial institutions rated AA and A. If an institution which is holding our deposits fails, we could lose all uninsured funds in those accounts. |
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• | Our continued business success may depend on obtaining licenses to intellectual property developed by others on commercially reasonable and competitive terms. 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. While our suppliers may 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. For a |
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| description of potential claims related to copyright levies, see Note 10 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data — Legal Matters — Copyright Levies.” |
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• | Our success depends on our ability to attract, retain, and motivate our key employees. We rely on key personnel to support anticipated continued rapid international growth and increasingly complex product and service offerings. There can be no assurance that we will be able to attract, retain, and motivate the key professional, technical, marketing, and staff resources we need. |
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• | Loss of government contracts could harm our business. Government contracts are subject to future funding that may affect the extension or termination of programs and are subject to the right of the government to terminate for convenience or non-appropriation. In addition, if we violate legal or regulatory requirements, the government could suspend or disbar us as a contractor, which would unfavorably affect our net revenue and profitability. |
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• | The expiration of tax holidays or favorable tax rate structures, or unfavorable outcomes in tax compliance and regulatory matters, could result in an increase of our effective tax rate in the future. 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 2010 through Fiscal 2018. Many of these holidays may be extended when certain conditions are met, or terminated if certain conditions are not met. If they 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 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. |
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• | Current environmental laws, or laws enacted in the future, may harm our business. Our operations are subject to environmental 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 the materials composition, energy efficiency and collection, recycling, treatment, and disposal of our electronics products, including restrictions on lead, cadmium, and other substances. If we fail to comply with the rules and regulations regarding the use and sale of such regulated substances, we could be subject to liability. While we do not expect that the impact of these environmental laws and other similar legislation adopted in the U.S. and other countries will have a substantial unfavorable impact on our business, the costs and timing of costs under environmental laws are difficult to predict. |
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• | 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 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. |
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ITEM 1B — | UNRESOLVED STAFF COMMENTS |
Not Applicable.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.
14
We may not successfully implement our acquisition strategy.
We acquire companies as a part of our growth strategy. These acquisitions may involve significant new risks and uncertainties that could adversely affect our profitability or operations, including distraction of management attention 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 liabilities and other exposures not discovered in our due diligence process. Further, our acquisitions may negatively impact our 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 required to record an impairment charge to goodwill or 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 may 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 the 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
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 revenue is subject to additional risks and uncertainties.
Sales outside the U.S. accounted for approximately 51% of our consolidated net revenue for Fiscal 2012. Our future growth rates and success are substantially dependent on the continued growth of our business outside the U.S. Our international operations face many risks and uncertainties, including varied local economic and labor conditions, political instability, changes in the U.S. and international regulatory 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 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. In addition, we have customer financing relationships with some companies that rely on access to the debt and capital markets to meet significant funding needs. Any inability of these companies to access such markets could compel us to self-fund transactions with them or forgo customer financing opportunities, potentially harming our financial performance. The debt and capital markets may experience
extreme volatility and disruption from time to time in the future, which could result in higher credit spreads in such markets and higher funding costs for us. Deterioration in our business performance, a credit rating downgrade, volatility in the securitization markets, changes in financial services regulation, 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. Any of these 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.
Our 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 future. 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 related supporting activities, could unfavorably impact the profitability and cash flows of our consumer financing activities.
We are subject to counterparty default risks.
We have numerous arrangements with financial institutions that include cash and investment deposits, interest rate swap contracts, foreign currency option contracts, and forward contracts. As a result, we are subject to the risk that the counterparty to one or more of these arrangements will default, either voluntarily or involuntarily, on its performance under the terms of the arrangement. 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. If 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 the event of such default, we could incur 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 our failure to perform as we anticipate at the time we enter services contracts, could adversely affect our revenue and profitability.
Many of our services contracts allow the customer to take the following actions that may adversely affect our revenue and profitability:
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
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
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.
The expiration of tax holidays or favorable tax rate structures, or unfavorable outcomes in tax audits and other tax compliance matters, could result in an increase in our current tax expense or our effective income tax rate in the future.
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 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 the 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 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, investors could lose confidence in our reported financial information. This could lead to a decline in our stock price, limit our ability to access the
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 climate 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.
The 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 customers and operations, our business and financial results could suffer.
ITEM 1B — UNRESOLVED STAFF COMMENTS
None.
ITEM 2 — PROPERTIES
At January 30, 2009,February 3, 2012, we owned or leased a total of approximately 16.818.9 million square feet of office, manufacturing, and warehouse space worldwide, approximately 7.48.5 million square feet of which is located in the U.S. Approximately 1.0We owned approximately 58% of this space and leased the remaining 42%. Included in these amounts are approximately 1.6 million square feet primarily in the U.S. and Canada,that is 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 12.7 million square feet of space, of which we own 46%. We own 2.6 million square feet of manufacturing space. In addition, our research and development centers are housed in 2.0 million square feet of space, of which we own 53%.
During Fiscal 2012, we opened a research and development center in Santa Clara, California as well as a data center in Washington. At February 3, 2012, a business center in Coimbatore, India was under construction. 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.
Our principal executive offices, including global headquarters, are located at One Dell Way, Round Rock, Texas, United StatesAs discussed in “Part I — Item 1 — Business,” we have four operating segments identified as Large Enterprise, Public, SMB and Consumer. Because of America.
Americas Properties
| | | | | | | | | | | | |
| Description | | | Principal Locations | | | Owned (square feet) | | | Leased (square feet) |
| | Headquarters | | | | n Round Rock, Texas | | | 2.1 million | | | - |
| | Business
Centers(a) | | | | n Brazil - El Dorado Do Sul
n Oklahoma - Oklahoma City
n Panama - Panama City
n Tennessee - Nashville
n Texas - Austin and Round Rock | | | 1.1 million | | | 1.0 million |
| | Manufacturing
and Distribution | | | | n Brazil - Hortolândia
n Florida - Miami (Alienware)
n North Carolina - Winston-Salem
n Tennessee - Lebanon and Nashville
n Texas - Austin | | | 2.6 million | | | 100,000 |
| | Design Centers | | | | n Texas - Austin and Round Rock
n New Hampshire - Nashua
n California - San Jose | | | 700,000 | | | 100,000 |
| | | | | | | | | | | | |
EMEA Properties
| | | | | | | | | | | |
Description | | | Principal Locations | | | Owned (square feet) | | | Leased (square feet) |
| Business
Centers(a)
| | | | n England - Bracknell
n Germany - Halle
n France - Montpellier
n Ireland - Dublin and Limerick
n Morocco - Casablanca
n Slovakia - Bratislava
| | | 500,000 | | | 1.5 million |
| Manufacturing
and Distribution | | | | n Ireland - Limerick and Athlone (Alienware)
n Poland - Lodz
| | | 1.0 million | | | - |
| | | | | | | | | | | |
15
APJ Properties
| | | | | | | | | | | |
Description | | | Principal Locations | | | Owned (square feet) | | | Leased (square feet) |
| Business Centers(a)
| | | | n China - Dalian and Xiamen
n India - Bangalore, Gurgaon, Hyderabad, and Mohali
n Japan - Kawasaki
n Malaysia - Penang and Kuala Lumpur
n Philippines - Metro Manila
| | |
300,000 | | |
3.2 million |
| Manufacturing
and Distribution | | | | n China - Xiamen
n Malaysia - Penang
n India - Chennai
| | | 1.1 million | | | - |
| Design Centers | | | | n China - Shanghai
n India - Bangalore
n Singapore
n Taiwan - Taipei
| | | - | | | 500,000 |
| | | | | | | | | | | |
| |
(a) | Business center locations include facilities with capacity greater than 1,000 people. Operations within these centers include sales, technical support, administrative, and support functions. Locations of smaller business centers are not listed; however, the smaller centers are includedthe interrelation of the products and services offered in the square footage. |
In general, our Americas, EMEA, and APJ regions use properties within their geographies. However, business centers in the Philippines and India, which house sales, customer care, technical support, and administrative support functions, are used by each of these segments, we do not designate our geographic regions. During Fiscal 2009, we closed a manufacturing plantproperties to any segment. All four segments use substantially all of the properties at least in Austin, Texas and business centers in Ottawa and Edmonton, Canada,part, and we sold our call center in El Salvador and our small package hub operations in West Chester, Ohio. Atretain the endflexibility to make future use of Fiscal 2009, a business center in Casablanca, Morocco was under construction. Additionally, we announced the dispositioneach of the saleproperties available to each of our customer contact center in the Philippines in Fiscal 2010.segments.
We plan to migrate all production of computer systems for customers in EMEA from our Limerick, Ireland manufacturing facility to our facility in Poland and third-party manufacturing partners over the next year. The manufacturing migration and subsequent closure of our Limerick facility will be completed in a phased transition during calendar 2009. We may realign, sell, or close additional facilities depending on a number of factors, including end-user demand, capabilities, and our migration to a more variable cost manufacturing model. These actions will result in additional business realignment costs in the future, although no plans were finalized at January 30, 2009.
| |
| ITEM 3 — | LEGAL PROCEEDINGS |
The information required by this itemItem 3 is incorporated herein by reference to the information set forth under the caption “Legal Matters” in Note 10 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 — | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matter was submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of Fiscal 2009.
16
PART II
ITEM 4 — MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
Market Information
Our common stock is listed on the NASDAQ Global Select Market of The NASDAQ Stock Market LLC under the symbol DELL. Information regarding the markethigh and low sales prices per share of our common stock may be found in Note 13 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statementsfor Fiscal 2012 and Supplementary Data.”Fiscal 2011, as reported by the NASDAQ Global Select Market, is set forth below:
Holders |
| | | | | | | | | | | | | | | | |
| | | 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
AtAt March 13, 2009,7, 2012, there were 29,542 holders28,041 holders of record of Dell common stock.
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.
Redeemable Common Stock
In prior periods, we inadvertently failed to register with the SEC the issuanceTable of some shares under certain employee benefit plans. These shares were purchased by participants between March 31, 2006, and April 3, 2007. As a result, certain purchasers of securities pursuant to those plans may have had the right to rescind their purchases for an amount equal to the purchase price paid for the securities, plus interest from the date of purchase. On June 5, 2008, we announced a registered rescission offer to eligible plan participants, which became effective as of August 12, 2008 and provided for the repurchase of up to 1,852,486 units in the Dell Inc. Stock Fund through the Dell Inc. 401(k) Plan. At February 1, 2008, and February 2, 2007, approximately 4 million shares ($94 million) and 5 million shares ($111 million), respectively, were classified outside of stockholders’ equity because the redemption features were not within our control. Prior to the effective date of the rescission offer, as participants sold shares in the open market, the shares held outside of stockholder’s equity were reclassified to common stock and capital in excess of $0.01 par value, accordingly. These shares were treated as outstanding for financial reporting purposes. The registered rescission offer expired on September 26, 2008, and payments of $29 million under the offer have been substantially completed during Fiscal 2009. Upon expiration of the rescission offer, all remaining redeemable shares were reclassified to within stockholder’s equity.Contents17
Purchases of Common Stock
Share Repurchase Program
We have a share repurchase program that authorizes us to purchase shares of common stock in order to increase shareholder value and manage dilution resulting from shares issued under our equity compensation plans. However, we do not currently have a policy that requires the repurchase of common stock in conjunction with share-based payment arrangements. The following table sets forth information regarding our repurchases or acquisitions of common stock during the fourth quarter of Fiscal 20092012 and the remaining authorized amount of 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, 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 purchases:share repurchases.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Total
| | | Approximate
| |
| | | | | | | | | Number of
| | | Dollar Value
| |
| | | | | | | | | Shares
| | | of Shares that
| |
| | | | | | | | | Repurchased
| | | May Yet Be
| |
| | | | | | | | | as Part of
| | | Repurchased
| |
| | | Total Number
| | | Average
| | | Publicly
| | | Under the
| |
| | | of Shares
| | | Price Paid
| | | Announced
| | | Announced
| |
Period | | Repurchased | | | per Share | | | Plans | | | Plans | |
| | | | | | | | | | | | (in millions) | |
| |
Repurchases from November 1, 2008
through November 28, 2008 | | | - | | | | N/A | | | | - | | | $ | 4,545 | |
Repurchases from November 29, 2008
through December 26, 2008 | | | - | | | | N/A | | | | - | | | $ | 4,545 | |
Repurchases from December 27, 2008
through January 30, 2009* | | | 78,715 | | | $ | 22.23 | | | | 78,715 | | | $ | 4,543 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 78,715 | | | $ | 22.23 | | | | 78,715 | | | | | |
| | | | | | | | | | | | | | | | | |
| |
* | All shares were repurchased as a part of our registered rescission offer described above under Redeemable Common Stock. |
18
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 31, 2004, 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | |
| |
Dell Inc. | | | 100.00 | | | | 122.79 | | | | 87.50 | | | | 70.33 | | | | 60.86 | | | | 28.41 | |
S&P 500 | | | 100.00 | | | | 106.23 | | | | 117.26 | | | | 134.28 | | | | 131.17 | | | | 80.50 | |
Dow Jones US Computer Hardware | | | 100.00 | | | | 107.65 | | | | 123.03 | | | | 140.85 | | | | 146.69 | | | | 95.63 | |
19
| |
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.”
The following balance sheet data as of January 30, 2009, February 1, 2008, February 2, 2007,Data” and February 3, 2006, results of operations, and cash flows for Fiscal 2009, 2008, 2007, 2006, and 2005 are derived from our audited consolidated financial statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” and fromor in our previously filed Annual Reports onForm 10-K for Fiscal 2008 and Fiscal 2007. The balance sheet data as of January 28, 2005, is derived from our unaudited financial statements for that period.10-K.
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | |
| | | January 30,
| | February 1,
| | February 2,
| | February 3,
| | January 28,
| | | | | | | | | | | | |
| | | 2009(a) | | 2008(a) | | 2007(a) | | 2006(b) | | 2005(c) | | | Fiscal Year Ended |
| | | (in millions, except per share data) | | | 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 | | $ | 61,101 | | | $ | 61,133 | | | $ | 57,420 | | | $ | 55,788 | | | $ | 49,121 | | | $ | 62,071 |
| | $ | 61,494 |
| | $ | 52,902 |
| | $ | 61,101 |
| | $ | 61,133 |
|
| Gross margin | | $ | 10,957 | | | $ | 11,671 | | | $ | 9,516 | | | $ | 9,891 | | | $ | 9,018 | | | $ | 13,811 |
| | $ | 11,396 |
| | $ | 9,261 |
| | $ | 10,957 |
| | $ | 11,671 |
|
| Operating income | | $ | 3,190 | | | $ | 3,440 | | | $ | 3,070 | | | $ | 4,382 | | | $ | 4,206 | | | $ | 4,431 |
| | $ | 3,433 |
| | $ | 2,172 |
| | $ | 3,190 |
| | $ | 3,440 |
|
| Income before income taxes | | $ | 3,324 | | | $ | 3,827 | | | $ | 3,345 | | | $ | 4,608 | | | $ | 4,403 | | | $ | 4,240 |
| | $ | 3,350 |
| | $ | 2,024 |
| | $ | 3,324 |
| | $ | 3,827 |
|
| Net income | | $ | 2,478 | | | $ | 2,947 | | | $ | 2,583 | | | $ | 3,602 | | | $ | 3,018 | | | $ | 3,492 |
| | $ | 2,635 |
| | $ | 1,433 |
| | $ | 2,478 |
| | $ | 2,947 |
|
| Earnings per common share: | | | | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | |
| | |
| | |
| | |
|
| Basic | | $ | 1.25 | | | $ | 1.33 | | | $ | 1.15 | | | $ | 1.50 | | | $ | 1.20 | | | $ | 1.90 |
| | $ | 1.36 |
| | $ | 0.73 |
| | $ | 1.25 |
| | $ | 1.33 |
|
| Diluted | | $ | 1.25 | | | $ | 1.31 | | | $ | 1.14 | | | $ | 1.47 | | | $ | 1.18 | | | $ | 1.88 |
| | $ | 1.35 |
| | $ | 0.73 |
| | $ | 1.25 |
| | $ | 1.31 |
|
| Number of weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
| Basic | | | 1,980 | | | | 2,223 | | | | 2,255 | | | | 2,403 | | | | 2,509 | | | 1,838 |
| | 1,944 |
| | 1,954 |
| | 1,980 |
| | 2,223 |
|
| Diluted | | | 1,986 | | | | 2,247 | | | | 2,271 | | | | 2,449 | | | | 2,568 | | | 1,853 |
| | 1,955 |
| | 1,962 |
| | 1,986 |
| | 2,247 |
|
| | | | | | | | | | | | |
Cash Flow & Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
| Net cash provided by operating activities | | $ | 1,894 | | | $ | 3,949 | | | $ | 3,969 | | | $ | 4,751 | | | $ | 5,821 | | | $ | 5,527 |
| | $ | 3,969 |
| | $ | 3,906 |
| | $ | 1,894 |
| | $ | 3,949 |
|
| Cash, cash equivalents and investments | | $ | 9,546 | | | $ | 9,532 | | | $ | 12,445 | | | $ | 11,756 | | | $ | 14,101 | | | $ | 18,222 |
| | $ | 15,069 |
| | $ | 11,789 |
| | $ | 9,546 |
| | $ | 9,532 |
|
| Total assets | | $ | 26,500 | | | $ | 27,561 | | | $ | 25,635 | | | $ | 23,252 | | | $ | 23,318 | | | $ | 44,533 |
| | $ | 38,599 |
| | $ | 33,652 |
| | $ | 26,500 |
| | $ | 27,561 |
|
| Short-term borrowings | | $ | 113 | | | $ | 225 | | | $ | 188 | | | $ | 65 | | | $ | 74 | | | $ | 2,867 |
| | $ | 851 |
| | $ | 663 |
| | $ | 113 |
| | $ | 225 |
|
| Long-term debt | | $ | 1,898 | | | $ | 362 | | | $ | 569 | | | $ | 625 | | | $ | 662 | | | $ | 6,387 |
| | $ | 5,146 |
| | $ | 3,417 |
| | $ | 1,898 |
| | $ | 362 |
|
| Total stockholders’ equity | | $ | 4,271 | | | $ | 3,735 | | | $ | 4,328 | | | $ | 4,047 | | | $ | 6,412 | | | $ | 8,917 |
| | $ | 7,766 |
| | $ | 5,641 |
| | $ | 4,271 |
| | $ | 3,735 |
|
25
| |
(a) | Results for Fiscal 2009, Fiscal 2008, and Fiscal 2007 include stock-based compensation expense pursuant to Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (“SFAS 123(R)”). See Note 5 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” |
|
(b) | Results for Fiscal 2006 include charges aggregating $421 million ($338 million of other product charges and $83 million in selling, general and administrative expenses) related to the cost of servicing or replacing certain OptiPlextm systems that included a vendor part that failed to perform to our specifications, workforce realignment, product rationalizations, excess facilities, and a write-off of goodwill recognized in the third quarter. The related tax effect of these items was $96 million. Fiscal 2006 also includes an $85 million income tax benefit related to a revised estimate of taxes on the repatriation of earnings under the American Jobs Creation Act of 2004 recognized in the second quarter. |
|
(c) | Results for Fiscal 2005 include an income tax charge of $280 million related to the repatriation of earnings under the American Jobs Creation Act of 2004 recorded in the fourth quarter. |
20
ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE: This section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on our current expectations. Actual results in future periods may differ materially from those expressed or implied by those forward-looking statements because of a number of risks and uncertainties. For a discussion of risk factors affecting our business and prospects, see “Part I — Item 1A — Risk Factors.” This section should be read in conjunction with “Part II — Item 8 — Financial Statements and Supplementary Data.”
INTRODUCTION
All percentage amountsWe are a leading integrated technology solutions provider in the IT industry. We built our reputation through listening to customers and ratios were calculated usingdeveloping solutions that meet customer needs. We are focused on providing long-term value creation through the underlying data in thousands. Unless otherwise noted, all referencesdelivery of customized solutions that make technology more efficient, more accessible, and easier to industry sharemanage. Our four customer-centric, global business segments are Large Enterprise, Public, Small and total industry growth data are for computer systems (including desktops, notebooks,Medium Business, and x86 servers), and are based on information provided by IDC Worldwide Quarterly PC Tracker, February 17, 2009. Industry share data is for the calendar year and all our growth rates are on a fiscalyear-over-year basis. Unless otherwise noted, all references to time periodsConsumer. We also refer to our fiscal periods.Large Enterprise, Public, and SMB segments as “Commercial.”
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 believe 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 vast 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 revenue from BRIC has continued to increase each year.
Overview
Our Company
As a leading technology company, we offer a broad range of product categories, including mobility, desktop PCs, software and peripherals, servers and networking, services, and storage. We are the number one supplier of computer systemsstrategic transformation has contributed to significant improvements in the United States, and the number two supplier worldwide.
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 third-party original equipment manufacturers. This structure allows usintegrate new technologies into our products. Through this collaborative, customer-focused approach, we strive to optimize our global supply chaindeliver new and relevant products and services to best serve our global customer base.the market quickly and efficiently. We continue to expandinvest in the enhancement of our supply chain which allows us to enhance product designsales and features, shorten product development cycles, improve logistics, and lower costs, thus improving our competitiveness.
We were founded on the core principle of a direct customer business model, which included build to order hardware for consumer and commercial customers. The inherent velocity of this model, which included a highly efficient global supply chain, allowed for low inventory levels and the ability to be among the industry leaders in selling the most relevant technology, at the best value, to our customers. Our direct relationships with customers also allowed us to bring to market products that featured customer driven innovation, thereby allowing us to be on the forefront of changing user requirements and needs.marketing functions. Over time, we have expanded our business model to include a broader portfolio of products, including services, and we have also added new distribution partners,channels, such as retail, system integrators, value addedvalue-added resellers, and distributors, which allow us to reach evenexpand our access to more end-users around the world.
We also offer various financing alternatives, assetsupplement organic growth with 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 can leverage with our global customer base and distribution. Since the beginning of Fiscal 2011, we acquired more than ten businesses that extended our core capabilities in a variety of enterprise solutions offerings, including storage, networking, systems management services,appliance, virtualized server and other customer financial services for businessdata center solutions, and consumer customers. As a partsoftware-as-a-service application integration, as well as enabled expansion of our overall growth strategy, we have executed targetedcustomer 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 Fiscal 2011 results of operations, as compared to augment select areasFiscal 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 with more products, services,strategy is subject to a variety of risks and technology.uncertainties, including those discussed in “Part I - Item 1A - Risk Factors.”
Fiscal Year Periods
Our new distribution partnerships includefiscal year is the launch in52 or 53 week period ending on the Friday nearest January 31. Fiscal 20082012 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.
Presentation of Supplemental Non-GAAP Financial Measures
In this management's discussion and analysis, we use supplemental measures of our global retail initiative, offering select productsperformance, which are derived from our consolidated financial information but which are not presented in retail storesour consolidated financial statements prepared in accordance with accounting principles generally accepted in the Americas, Europe, Middle East,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 Africa (“EMEA”), and Asia Pacific-Japan (“APJ”) regions. In Fiscal 2008, we also launched PartnerDirect, a global program that bringsnon-GAAP earnings per share. See “Results of Operations — Non-GAAP Financial Measures” below for information about our existing value-added reseller programs under one umbrellause of these non-GAAP financial measures, including training, certification, deal registration, focused sales and customer care,our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a dedicated web portal.reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
We continue to simplify technology, enhance value, and lower costs for our customers while expanding our business opportunities. Underpinning these goals is our commitment to achieving world-class competitiveness,any-to-any supply chain, services and solutions, and sales effectiveness. We are currently focused on five key growth priorities which, when coupled with our core competencies, we believe will drive an optimal balance
| |
– | Global Consumer — In the first quarter of Fiscal 2009, we realigned our management and financial reporting structure to focus on worldwide sales to individual consumers and retailers as a part of an internal consolidation of our consumer business. Our global consumer business sells to customers through our on-line store atwww.dell.com, over the phone, and through our retail channel. The global consolidation of this business has improved our global sales execution and coverage through better customer alignment, targeted sales force investments in rapidly growing countries, and improved marketing tools. We are also designing new, innovative products with faster development cycles and competitive features including the new Studio line of notebooks, which allow consumers greater personalization and self expression. Finally, we have rapidly expanded our retail business in order to reach more consumers. |
21
| |
– | Enterprise — In the enterprise, our solution mission is to help companies of all sizes simplify their IT environments. The complete solution includes servers, storage, services, and software. At the core of this simplification is the problem with complexity in IT architecture and operations developed over decades and ineffective services models that create unnecessary complexity and cost. We are focused on helping customers identify and remove this unnecessary cost and complexity. This year we have strengthened our storage portfolio with expanded EqualLogic solutions, new PowerVault storage products, and fourth generation Dell ï EMC storage systems. We also invested in power and cooling solutions for our data center platforms, including blade servers, and as a result we have become the industry leader in server virtualization, power, and cooling performance. |
|
– | Notebooks — Our goal is to reclaim notebook leadership by creating the best products while shortening our development cycle and being the most innovative developer of notebooks. To help meet this goal, we have separated our consumer and commercial design functions to drive greater focus on our product development process. According to IDC data, the sale of notebook units globally outpaced that of desktops for the first time during the third quarter of calendar 2008; this trend is expected to continue into the future. In the third quarter of Fiscal 2009, we introduced a new addition to our Dell Inspiron products with our new 3G enabled Inspiron Mini. In the fourth quarter of Fiscal 2009, we launched our new Studio XPS 13, Studio XPS 16, and Inspiron 15 notebooks for consumers, and we introduced our Latitude XT2 convertible tablet for our commercial customers. This year, we also had the largest global product launch in our company’s history with our newE-Series commercial Latitude and Dell Precision notebooks. We expect to continue to launch a number of new notebook products throughout Fiscal 2010, targeting various price and performance bands. |
|
– | Small and Medium Business — We are focused on providing small and medium businesses with the simplest and most complete IT solution, customized for their needs, by extending our channel direct program (PartnerDirect) and expanding our offerings to mid-sized businesses. We are committed to improving our storage products and services as evidenced by our new building IT-as-a-Service solution, which provides businesses with remote and lifecycle management,e-mail backup, and software license management. |
|
– | Emerging countries — We are focused on and investing resources in emerging countries with an emphasis on Brazil, Russia, India, and China (“BRIC”), where we expect significant growth to occur over the next several years. We are also creating customized products and services to meet the preferences and demands of individual countries and various regions, including the new Vostro A notebooks and desktops designed specifically for cost sensitive growing businesses in emerging economies. |
RESULTS OF OPERATIONS
We continue to invest in initiatives that will align our new and existing products around customers’ needs in order to drive long-term, sustainable growth, profitability, and cash flow. We also continue to grow our business organically and through acquisitions. During Fiscal 2009, we acquired three companies, with the largest being MessageOne, Inc. These acquisitions are targeted to further expand our service capabilities. We expect to make more acquisitions in the future.
Result 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 30, 2009 | | February 1, 2008 | | February 2, 2007 | |
| | | | | | % of
| | | | | | | | % of
| | | | | | | | % of
| |
| | | Dollars | | | Revenue | | | % Change | | Dollars | | | Revenue | | | % Change | | Dollars | | | Revenue | |
| | | (in millions, except per share amounts and percentages) | |
| |
| Net revenue | | $ | 61,101 | | | | 100.0% | | | (0%) | | $ | 61,133 | | | | 100.0% | | | 6% | | $ | 57,420 | | | | 100.0% | |
| Gross margin | | $ | 10,957 | | | | 17.9% | | | (6%) | | $ | 11,671 | | | | 19.1% | | | 23% | | $ | 9,516 | | | | 16.6% | |
| Operating expenses | | $ | 7,767 | | | | 12.7% | | | (6%) | | $ | 8,231 | | | | 13.5% | | | 28% | | $ | 6,446 | | | | 11.2% | |
| Operating income | | $ | 3,190 | | | | 5.2% | | | (7%) | | $ | 3,440 | | | | 5.6% | | | 12% | | $ | 3,070 | | | | 5.4% | |
| Income tax provision | | $ | 846 | | | | 1.4% | | | (4%) | | $ | 880 | | | | 1.4% | | | 16% | | $ | 762 | | | | 1.3% | |
| Net income | | $ | 2,478 | | | | 4.1% | | | (16%) | | $ | 2,947 | | | | 4.8% | | | 14% | | $ | 2,583 | | | | 4.5% | |
| Earnings per share — diluted | | $ | 1.25 | | | | N/A | | | (5%) | | $ | 1.31 | | | | N/A | | | 15% | | $ | 1.14 | | | | N/A | |
Share Position — |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 2012 total net revenue increased 1% from the prior year. Our fiscal calendar for Fiscal 2012 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 and Public segments experienced 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.
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 shipped 43 million unitsalso substantially improved the profitability of our client product business in Fiscal 2009. According2012 by simplifying our product offerings, continuing to IDC,optimize our supply chain, and shifting our revenue mix to higher-value products. We will remain focused on growing our revenue and profitability by continuing our efforts to provide IT solutions to our customers in calendar year 2008,areas such as enterprise solutions and services. In addition, we maintainedwill continue to utilize our second place positionflexible 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 third quarter of Fiscal 2012, several regions of Thailand experienced severe flooding, causing damage to infrastructure and factories that have significantly impacted the hard disk drive ("HDD") supply chain. Although we were effective in shaping demand and pricing for hard drive cost increases in the worldwide computer systems marketfourth quarter of Fiscal 2012, we were impacted by the available mix of hard drives, which affected the product configuration mix we were able to sell. We prioritized high end-drives to our strategic customers, which reduced profitability in our Consumer segment. During the fourth quarter of Fiscal 2012, we entered into purchase commitments with a share positioncertain HDD suppliers to ensure continuity of 15.1%.supply for these components. We gained share, bothexpect 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 about our purchase commitments.
We believe that we will continue to profitably grow revenue in the U.S.long- term through the expansion of our enterprise solutions, services, and internationally, as our worldwideproduct offerings. We will balance revenue growth with the objective of 11.1% for calendar 2008 exceeded the overall worldwide computer systemsenhancing operating income and cash flow. We expect that total revenue growth of 9.7%. Our gain in share was driven by a strong overall performance in the first half of Fiscal 2009 followed by a decline in unit shipments2013 will be challenging, given the existing weakness in our commercial business inPublic segment as well as the second half of the year, which was partially offset by strength in our global consumer business. Our commercial business’suncertain macroeconomic environment.
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Revenue
slower unit growth in the second half of Fiscal 2009 reflects our decision in an eroding demand environment to selectively pursue unit growth opportunities while protecting profitability. We will continue to focus on improving the mix of our product portfolio to higher margin products and recurring revenue streams.
Fiscal 20092012 compared to Fiscal 20082011
Product Revenue — Product revenue for Fiscal 20092012 was a year of mixed results for us. Duringessentially unchanged from the first half of the fiscal year we capitalized on growth opportunitiesprior year. Product revenue increases in our Large Enterprise and experienced double digit growthSMB segments were offset by decreases from our Public and Consumer segments. The decline in product revenue from our Public segment was driven by increased industry demand. This growth was followed by a period of challenging economic conditions, with a decline in global IT end-user demand. As a result, duringweakened demand, while the second half of Fiscal 2009, we realigned our balance of liquidity, profitability, and growth, selectively focusing on areas that provided profitable growth opportunities. Throughout the year we took actions to reduce operating expenses and optimize product costs. While no one can predict the severity and duration of the current global economic slowdown, we are planning for a continued challenging end-user demand environment in Fiscal 2010. We will selectively invest in strategic growth opportunities, and we will continue our activity around optimizing and transforming our cost structure.
Net Revenue — Fiscal 2009 revenue remained flatyear-over-year at $61.1 billion even though unit shipments increased 7%year-over-year. Our revenue performance is primarily attributed to a decrease in selling prices, as discussed further below. During Fiscal 2009, our global commercial businessConsumer segment revenue declined 2%year-over-year while unit shipment remained flat as a result of the challenging economic environment that was prevalent in the second half of Fiscal 2009. Our global consumer business offset this decline in revenue by postingyear-over-year revenue growth of 11% on unit growth of 35% for Fiscal 2009.
Our average selling price (total revenue per unit sold) during Fiscal 2009 decreased 7%year-over-year. Average selling prices were impacted by a change in revenue mix between our commercial and consumer business. Selling prices in our commercial business are typically higher than our consumer business selling prices. During the year our global consumer unit shipments grew significantly whereas our commercial unit shipments remained flat year over year. Our increased presence in consumer retail also contributedlargely attributable to our average selling price decline as retail typically has lower average selling prices, thanpartially offset by an increase in sales of higher-value products.
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 on-line and phone direct business. Average selling prices were also impacted byCommercial segments experienced increases in services revenue while Consumer services revenue decreased.
At a competitive pricing environment. Our market strategy has been to concentrate on solution sales to drive a more profitable mix of products and services, while pricing our products to remain competitive in the marketplace. During Fiscal 2009, we continued to see competitive pressure, particularly for lower priced desktops and notebooks, as we targeted a broader range of products and price bands. We expect this competitive pricing environment will continue for the foreseeable future.
Revenueregional level, revenue from outside the U.S. increased 7% to $31.7 billion and represented approximately 48%51% of Fiscal 2009total net revenue. Outsiderevenue while revenue from the U.S., we produced 4%year-over-year decreased 5% to $30.4 billion. Revenue from Growth Countries increased 12% overall year-over-year. In particular, revenue growthfrom BRIC increased 15% year-over-year during Fiscal 2012 and represented 14.2% of our total net revenue for Fiscal 2009 as opposed2012, compared to a 3% decline in revenue12.3% for the U.S. The decline in our U.S. revenue is mainly attributableprior year. We are continuing to our commercial business in the U.S., which was impacted by the downturn in the global economy during the second half of Fiscal 2009. Our U.S. consumer business was also impacted by the economic slowdown; however, its revenue increased 5%year-over-year, aided by our expansion into retail through an increased number of worldwide retail locations. Outside of the U.S. we continue to focus on revenue and unit growth in the BRIC countries. BRIC revenue growth during Fiscal 2009 was 20% as we are tailoring solutions to meet specific regional needs, enhancing relationships to provide customer choice and flexibility, and expandingexpand into these and other emerging countries that represent the vast majority of the world’s population. From a worldwide product perspective, the continuing decline in desktop unit salesworld's population, tailor solutions to meet specific regional needs, and prices,enhance relationships to provide customer choice and decreases in mobility selling prices contributed heavily to our Fiscal 2009 performance.flexibility.
During Fiscal 2009, the U.S. dollar experienced significant volatility relative to the other principal currencies in which we transact business with the exception of the Japanese Yen. We 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
time. During Fiscal 2012, we experienced favorable changes in foreign currency exchange rates, though the impact of these currency movements was not material to our results for the period.
Fiscal 2011 compared to Fiscal 2010
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. increased 19% to $29.6 billion. Revenue from BRIC increased 38% year-over-year for Fiscal 2011. As a result of our comprehensive hedging program, our results were not materially impacted by foreign currency fluctuations did not have a significant impact on our consolidated results of operations.
Operating Income— Operating income decreased 7%year-over-year to $3.2 billionexchange rates in Fiscal 2009. The decrease was partially driven by2011 or Fiscal 2010.
Gross Margin
Fiscal 2012 compared to Fiscal 2011
Products — During Fiscal 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 shiftdisciplined pricing strategy in a competitive environment, and favorable component cost conditions contributed to the year-over-year increase in product mixgross margin percentage for all of our segments. We have created a flexible supply chain that resultedhas improved our supply chain execution, and we have simplified our product offerings.
Services, including software related — During Fiscal 2012, our services gross margin increased in lower average selling prices. Additionally, operating income was impacted by higher cost of sales, which loweredabsolute dollars compared to the prior fiscal year, although our gross margin percentage partially offsetdecreased. The decrease in gross margin percentage for services, including software related, was primarily driven by reduced operating expenses.declines in gross margin percentages from our transactional and outsourcing services.
Net Income — ForTotal gross margin for Fiscal 2009 net income decreased 16%year-over-year to $2.5 billion. Net income2012 increased 21% on both a GAAP and non-GAAP basis. Total gross margin on a GAAP basis for Fiscal 2012 was impacted by a 7%year-over-year decline in operating income, a 65% decline in investment and other income, and an increase in our effective tax rate from 23.0% to 25.4%.
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Fiscal 2008$13.8 billion, compared to $14.2 billion on a non-GAAP basis. Gross margin on a GAAP basis for Fiscal 2007
Net Revenue — 2012 and Fiscal 2008 revenue increased 6%year-over-year to $61.1 billion, with unit shipments up 5%year-over-year. Revenue grew across all segments except for Global Consumer. Revenue outside2011 includes the U.S. represented approximately 47%effects of Fiscal 2008 net revenue, compared to approximately 44%amortization of intangible assets and of severance and facility action costs and acquisition-related charges. As set forth in the prior year. Outsidereconciliation under "Non-GAAP Financial Measures" below, these items are excluded from the U.S., we produced 14%year-over-year revenue growthcalculation of non-GAAP gross margin for Fiscal 2008. Combined BRIC revenue growth2012 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 2008 was 27%. Worldwide, all product categories grew revenue over the prior year other than desktop PCs, which declined 1% as consumers continued to migrate to mobility products.
In Fiscal 2008, our average selling price increased 2%year-over-year, which primarily resulted from our pricing strategy, compared to a 1%year-over-year increase for Fiscal 2007. In Fiscal 2008, we experienced intense competitive pressure, particularly for lower priced desktops2012. The overall decrease in severance and notebooks, as competitors offered aggressively priced products with better product recognitionfacility action costs and more relevant feature sets.
During Fiscal 2008, the U.S. dollar weakened relative to the other principal currencies in which we transact business; however, as a result of our hedging activities, foreign currency fluctuations did not have a significant impact on our consolidated results of operations.
Operating Income— Operating income increased 12%year-over-year to $3.4 billion. The increased profitability was mainly a result of strength in mobility, solid demand for enterprise products, and a favorable component-cost environment. In Fiscal 2007, operating income was $3.1 billion.
Net Income — Net income increased 14%year-over-year to $2.9 billion for Fiscal 2008 from $2.6 billion in Fiscal 2007. Net income was impacted by a $112 millionyear-over-year increase in investment and other income, partially offset by an increase in our effective tax rate from 22.8% to 23.0%.
Revenues by Segment
We conduct operations worldwide. Effective in the first quarter of Fiscal 2009, we combined our consumer businesses of EMEA, APJ, and Americas International (formerly reported through Americas Commercial) with our U.S. Consumer business and re-aligned our management and financial reporting structure. As a result, effective in the first quarter of Fiscal 2009, our operating structure consisted of the following four segments: Americas Commercial, EMEA Commercial, APJ Commercial, and Global Consumer. Our commercial business includes sales to corporate, government, healthcare, education, small and medium business customers, and value-added resellers and is managed through the Americas Commercial, EMEA Commercial, and APJ Commercial segments. The Americas Commercial segment, which is based in Round Rock, Texas, encompasses the U.S., Canada, and Latin America. The EMEA Commercial segment, based in Bracknell, England, covers Europe, the Middle East, and Africa. The APJ Commercial segment, based in Singapore, encompasses the Asian countries of the Pacific Rim as well as Australia, New Zealand, and India. The Global Consumer segment, which is based in Round Rock, Texas, includes global sales and product development for individual consumers and retailers around the world. We revised previously reported operating segment information to conform to our new operating structure in effect during the first quarter of Fiscal 2009.
On December 31, 2008, we announced our intent during Fiscal 2010 to move from geographic commercial segments to global business units reflecting the impact of globalization on our customer base. Customer requirements now share more commonality based on their sector rather than physical location. We expect to combine our current Americas Commercial, EMEA Commercial, and APJ Commercial segments and realign our management structure. After this realignment, our operating structure will consist of the following segments: Global Large Enterprise, Global Public, Global Small and Medium Business (“SMB”), and our existing Global Consumer segment. We believe that these four distinct, global business organizations can capitalize on our competitive advantages and strengthen execution. We expect to begin reporting the four global business segments once we complete the realignment of our management and financial reporting structure, which is expected to be complete in the first half of Fiscal 2010.
During the second half of Fiscal 2008, we began selling desktop and notebook computers, printers, ink, and toner through retail channels in the Americas, EMEA, and APJ in order to expand our customer base. Our goal is to have strategic relationships with a number of major retailers in our larger geographic regions. During Fiscal 2009, we continued to expand our global retail presence, and we now reach over 24,000 retail locations worldwide.
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The following table summarizes our net revenue by reportable segment for each of the past three fiscal years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | January 30, 2009 | | February 1, 2008 | | February 2, 2007 |
| | | | | % of
| | | | | | % of
| | | | | | % of
|
| | | Dollars | | Revenue | | % Change | | Dollars | | Revenue | | % Change | | Dollars | | Revenue |
| | | (in millions, except percentages) |
| |
Net revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Americas Commercial | | $ | 28,614 | | | | 47 | % | | | (5% | ) | | $ | 29,981 | | | | 49 | % | | | 6% | | | $ | 28,289 | | | | 49 | % |
| EMEA Commercial | | | 13,617 | | | | 22 | % | | | 0% | | | | 13,607 | | | | 22 | % | | | 15% | | | | 11,842 | | | | 21 | % |
| APJ Commercial | | | 7,341 | | | | 12 | % | | | 2% | | | | 7,167 | | | | 12 | % | | | 15% | | | | 6,223 | | | | 11 | % |
| Global Consumer | | | 11,529 | | | | 19 | % | | | 11% | | | | 10,378 | | | | 17 | % | | | (6% | ) | | | 11,066 | | | | 19 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenue | | $ | 61,101 | | | | 100 | % | | | (0% | ) | | $ | 61,133 | | | | 100 | % | | | 6% | | | $ | 57,420 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2009 compared to Fiscal 2008
Americas Commercial — Americas Commercial revenue decreased 5% with unit shipments down 7%year-over-year for Fiscal 2009. Revenue declined across all business sectors within Americas Commercial, except for Latin America and sales to the U.S. Federal government, due to the decline in IT end-user demand environment. Growth in Latin America was led by Brazil and Argentina which experienced revenue growth of 18% and 10%, respectively, during Fiscal 2009 as compared to Fiscal 2008.Year-over-year, average selling prices increased 2% as we improved our mix of products and services during the year. From a product perspective, the revenue declineacquisition-related charges was primarily due to a decrease in desktop revenue of 14% on a unit decline of 9%, and a decreasecharges related to facility closures in mobility revenue of 10% on a unit decline of 5%. Average selling prices for desktops and mobility products both decreased 6%year-over-year as a result of competitive pricing pressures due to the slowdown in IT spending. The decline in desktop and mobility salesFiscal 2011, which was partiallyslightly offset by revenue growthan increase in services and software and peripherals, which increased 14% and 6%, respectively,acquisition-related charges during Fiscal 2009. We continue2012.
Fiscal 2011 compared to focus on selling solutions to our customers to provide greater value for each dollar of spend and to bolster our average selling prices.Fiscal 2010
EMEA Commercial— During Fiscal 2009 EMEA Commercial revenue remained flatyear-over-yearProducts at $13.6 billion on unit growth of 6%. This volume growth was mainly the result of a 21%year-over-year increase in mobility shipments. Even though mobility unit shipments increased 21%, revenue only increased 8% as average selling prices for mobility products declined 10%year-over-year. Due to the decline in IT spending, downward pricing pressures negatively impacted selling prices for EMEA Commercial’s mobility products as well as its desktop and servers and networking products as average selling prices for all products declined 6%year-over-year. In addition to mobility revenue growth, storage revenue and software and peripherals revenue grew 20% and 6%, respectively. Offsetting this revenue growth wereyear-over-year revenue declines of 11% and 5% for desktops and servers and networking, respectively. During Fiscal 2009, EMEA Commercial experienced challenging demand in Western Europe; however, there was double digit revenue growth in emerging countries such as the Czech Republic, Poland, and Ukraine. This growth, while consistent with our overall strategy, continued to drive a mix shift in the EMEA Commercial revenue base, towards products in lower price bands, which reduced average selling prices.
APJ Commercial — During Fiscal 2009, APJ Commercial experienced a 2%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 revenue on a unit volume increase of 10% as average revenue per unit declined 6%. Consistent with our other commercial segments, selling prices were strategically reduced to remain competitive in a slow global economy. Revenue grew across all product lines,gross margin percentage.
year-over-year, except for desktop and servers and networking products. Revenue from mobility products grew 8% on a unit growth of 21%, and desktop revenue declined 2% on unit growth of 5% due to the continued shift in customer preference from desktops to notebooks. Storage, services, andServices, including software and peripherals revenue increasedrelatedyear-over-year by 12%, 6%, and 5%, respectively, for Fiscal 2009. From a country perspective, our targeted countries of India, the Philippines, Vietnam, and Indonesia experienced high double digit revenue growth during the year. During Fiscal 2009,year-over-year revenue growth in China, which is APJ Commercial’s largest country by revenue and is also a target country, slowed significantly as revenue grew only 1% due to a weakening global economy.
Global Consumer — Global Consumer revenue increased 11% in Fiscal 2009 from Fiscal 2008 on a unit volume increase of 35%. Average revenue per unit declined 18% due to our participation in a wider distribution of price bands including lower average sales prices realized as we expanded our presence in retail through an increased number of worldwide retail locations. Retail typically has lower average selling prices than our on-line and phone direct business. Mobility revenue grew 32%year-over-year on unit growth of 67%, and desktop revenue decreased 17%year-over-year on a unit decline of 5% as customer preference continued to shift from desktops to notebooks. Also contributing to Global Consumer’s revenue growth was software and peripherals revenue increase of 13% and continued strength in emerging markets. During calendar 2008, we have grown nearly two times the industry rate of growth on a unit basis and
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increased our global share to 8.7%, up from 7.8% in the previous year, driven by continued success in the global retail channel and a more diversified product portfolio. This growth was led by our APJ consumer business with a 45%year-over-year increase in revenue.
Fiscal 2008 compared to Fiscal 2007
Americas Commercial — Americas Commercial grew revenue as well as units by 6% in Fiscal 2008, compared to 3% revenue growth on a slight unit decline in Fiscal 2007. The increase in revenue in Fiscal 2008 resulted from strong sales of mobility products, servers and networking, services, and software and peripherals, which grew 9%, 8%, 9%, and 13%, respectively,year-over-year. The unit volume increases resulted from growth in notebooks. In Fiscal 2007, the slowdown of net revenue growth was due to desktop weakness, lower demand, and a significant decline in our Public business due to weakening sales to federal customers.
EMEA Commercial — For Fiscal 2008, EMEA Commercial represented 22% of our total consolidated net revenue as compared to 21% in Fiscal 2007. EMEA Commercial had 15%year-over-year net revenue growth as a result of unit shipment growth of 12%. Average price per unit increased 2%, which reflects the mix of products sold and a benefit from the strengthening of the Euro and British Pound against the U.S. dollar during Fiscal 2008, which influenced our pricing strategy. The revenue growth was primarily a result of higher demand for mobility products, represented by a unit shipment increase of 30%. Additionally, revenue grewyear-over-year for all product categories within EMEA Commercial, led by growth in mobility, services, and software & peripherals revenue of 23%, 32%, and 18%, respectively.
APJ Commercial — During Fiscal 2008, APJ Commercial’s revenue continued to improve, with 15% revenue growthyear-over-year. Consistent with the EMEA Commercial segment, these increases were mainly a result of strong growth in mobility. Unit sales of mobility products increased 32% in Fiscal 2008 as compared to Fiscal 2007. Sales of mobility products grew due to a shift in customer preference from desktops to notebooks as well as the strong reception of our Vostrotm notebooks. APJ Commercial also reported 21% growth in servers and networking revenue primarily due to our focus on delivering greater value within customer data centers with our rack optimized server platforms, whose average selling prices are higher than our tower servers. These increases were partially offset by a decrease in services revenue of 13%.
Global Consumer — Global Consumer revenue and unit volume decreased 6% and 12%, respectively, in Fiscal 2008, compared to revenue and unit decreases of 5% and 3%, respectively, in Fiscal 2007. Global Consumer revenue declined as compared to Fiscal 2007 primarily due to a 23% decline in desktop unit volumes. In Fiscal 2008, this segment’s average selling price increased 6%year-over-year mainly due to realigning prices and selling a more profitable product mix. In the fourth quarter of Fiscal 2008, the Global Consumer business began to improve and posted revenue growth of 16% over the fourth quarter of Fiscal 2007, which reflected changes we made to the business to reignite growth, including the introduction of four notebook families for consumers.
For additional information regarding our reportable segments, see Note 11 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
Revenue by Product and Services Categories
The following table summarizes our net revenue by product category:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30, 2009 | | | February 1, 2008 | | | February 2, 2007 | |
| | | | | | % of
| | | | | | | | | % of
| | | | | | | | | % of
| |
| | | Dollars | | | Revenue | | | % Change | | | Dollars | | | Revenue | | | % Change | | | Dollars | | | Revenue | |
| | | (in millions, except percentages) | |
| |
Net revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mobility | | $ | 18,638 | | | | 31 | % | | | 7 | % | | $ | 17,423 | | | | 28 | % | | | 13 | % | | $ | 15,480 | | | | 27 | % |
| Desktop PCs | | | 17,244 | | | | 29 | % | | | (12 | %) | | | 19,573 | | | | 32 | % | | | (1 | %) | | | 19,815 | | | | 34 | % |
| Software and peripherals | | | 10,603 | | | | 17 | % | | | 7 | % | | | 9,908 | | | | 16 | % | | | 10 | % | | | 9,001 | | | | 16 | % |
| Servers and networking | | | 6,275 | | | | 10 | % | | | (3 | %) | | | 6,474 | | | | 11 | % | | | 12 | % | | | 5,805 | | | | 10 | % |
| Services | | | 5,715 | | | | 9 | % | | | 7 | % | | | 5,320 | | | | 9 | % | | | 5 | % | | | 5,063 | | | | 9 | % |
| Storage | | | 2,626 | | | | 4 | % | | | 8 | % | | | 2,435 | | | | 4 | % | | | 8 | % | | | 2,256 | | | | 4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenue | | $ | 61,101 | | | | 100 | % | | | (0 | %) | | $ | 61,133 | | | | 100 | % | | | 6 | % | | $ | 57,420 | | | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Fiscal 2009 compared to Fiscal 2008
Mobility — During Fiscal 2009 revenue from mobility products (which includes notebook computers and mobile workstations) grew 7% on unit growth of 24%. According to IDC, our unit growth rate for calendar 2008 was 31%, which was consistent with the industry’s growth rate of 32%. The average selling prices of our mobility products across all of our segments dropped 14%year-over-year due to a soft demand environment and the continued expansion into retail by our Global Consumer segment due to an increased number of worldwide retail locations. Expansion into retail also contributed to our overall revenue growth as mobility revenue in Global Consumer increased 32%year-over-year on unit growth of 67%, as opposed to a decline in mobility revenue of 2% on unit growth of 7% in our global commercial business. APJ Commercial and EMEA Commercial both grew revenue by 8% on unit growth of 21%. However, Americas Commercial mobility revenue declined 10%year-over-year for Fiscal 2009 on a unit decline of 5% as we experienced conservative customer spending across all business sectors within Americas Commercial, including Latin America. The slow revenue growth in our commercial business can also be partially attributed to our transition to the new Latitudetm E-Series and Dell Precision notebook product lines during the second half of Fiscal 2009. Our new product lines range from the lightest ultra-portable in our history to the most powerful mobile workstation. We believe the on-going trend to mobility products will continue, and we are therefore focused on expanding our product platforms to cover broader price bands and functionalities.
In Fiscal 2009, we have launched industry leading mobility products such as the Inspiron 1525, Vostro, and 3G enabled Inspiron Mini. We also launched our ruggedized Latitudetm XFR, which is designed for reliable performance in the harshest environments, and introduced our completely new line of Latitudetm and Dell Precision notebooks. We introduced the Vostrotm A-Series and the Dell 500 during Fiscal 2009, which were specifically designed for emerging countries. All of our commercial products in emerging countries are now cost optimized. We will continue our cost optimization efforts in remaining products in Fiscal 2010.
Desktop PCs — During Fiscal 2009 revenue from desktop PCs (which includes desktop computer systems and workstations) decreasedyear-over-year 12% 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 8%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 Global Consumer, Americas Commercial, EMEA Commercial, and APJ Commercial segments experiencedyear-over-year revenue declines of 17%, 14%, 11% and 2% respectively. 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. During Fiscal 2009, we introduced four new models of our OptiPlextm commercial desktop systems. These systems cut power consumption by up to 43%, speed serviceability time by more than 40% versus our competition, and include a portfolio of services that can be accessed by the user as needed.
Software and Peripherals — Revenue from sales of software and peripherals (“S&P”) consists of Dell-branded printers, monitors (not sold with systems), projectors, and a multitude of competitively priced third-party peripherals including plasma and LCD televisions, software, and other products. This revenue grew 7%year-over-year for Fiscal 2009, driven by strength in software licensing primarily due to our acquisition of ASAP Software (“ASAP”) in the fourth quarter of Fiscal 2008. With ASAP, we now offer products from over 2,000 software publishers. At a segment level, Global Consumer led the revenue growth with a 13%year-over-year growth rate for Fiscal 2009. EMEA Commercial and Americas Commercial both experienced revenue growth of 6% during Fiscal 2009. S&P revenue for APJ Commercial increased 5%year-over-year during Fiscal 2009. We continue to believe that software licensing is a revenue growth opportunity as customers continue to seek out consolidated software sources.
Servers and Networking — During Fiscal 2009 revenue from sales of servers and networking products decreased 3%year-over-year on a unit increase of 4%. The decline in our server and networking revenue is due to demand challenges across all regions. 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 7%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. We expanded our server coverage to 88% of the server space, and we plan to increase our coverage to 95% next year. For calendar 2008, we were again ranked number one in the United States with a 35% share in server units shipped; worldwide, we were second with a 26% share. During the fiscal year, we have released our broadest lineup of dedicated virtualization solutions ever, including more than a dozen new servers, tools, and services, as a part of our mission to help companies of all sizes simplify their IT environments.
Services — Services consists of a wide range of services including assessment, design and implementation, deployment, asset recovery and recycling, training, enterprise support, client support, and managed lifecycle. Services revenue increased 7%year-over-year for Fiscal 2009 to $5.7 billion, as our annuity of deferred services revenue amortization increases in our Americas Commercial segment and a 10%year-over-year increase in consulting services revenue for Fiscal 2009. The increase in services revenue was also aided by our new
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ProSupport offerings, which distilled ten service offerings down to two customizable packages spanning our commercial product and solutions portfolios with flexible options for service level and proactive management. We also expanded2011, our services business with new offeringsgross margin increased in enterprise solutions and remote infrastructure management. For Fiscal 2009, Americas Commercial and APJ Commercial ledyear-over-year revenue growth with increases of 14% and 6%, respectively. EMEA Commercial revenue declined 1% for Fiscal 2009. Our deferred service revenue balance increased 7%year-over-year to $5.6 billion at January 30, 2009, primarily due to strong unit growth in the first half of Fiscal 2009. We continue to view the services as a strategic growth opportunity and will continue to invest in our offerings and resources focused on increasing our solution sales.
Storage — Revenue from sales of storage products increased 8%year-over-year for Fiscal 2009.Year-over-year storage growth was led by strength in our PowerVault line and the strong performance of our EqualLogic iSCSI networked storage solutions, which we acquired in Fiscal 2008. EMEA Commercial, APJ Commercial, and Americas Commercial all contributed to the increase in storage revenue withyear-over-year growth of 20%, 12% and 2%, respectively, for Fiscal 2009. During the fiscal year, we expanded our storage portfolio by adding increasingly flexible storage choices that allow customers to grow capacity, add performance and protect their data in a more economical manner.
Fiscal 2008 compared to Fiscal 2007
Mobility — In Fiscal 2008, revenue from mobility products grew 13%year-over-year on unit growth of 16%. The growth was led by the APJ Commercial and EMEA Commercial segments with 35% and 23% increases in revenueyear-over-year, respectively, while Americas Commercial revenue increased 9%. Unit shipments grewyear-over-year in these three segments by 32%, 30%, and 19%, respectively. Global Consumer mobility units were flat during Fiscal 2008 as compared to Fiscal 2007. Even though we posted mobility unit growth of 16% during Fiscal 2008, according to IDC, our growth was below the industry’s growth of 34% during calendar 2007. To capitalize on the industry growth in mobility, we separated our consumer and commercial design functions — focusing our consumer team on innovation and shorter design cycles. As a result, we launched four consumer notebook families, including Inspirontm color notebooks and XPStm notebooks, for which the demand was better than expected. We also introduced Vostrotm notebooks, specifically designed to meet the needs of small business customers. During the fourth quarter of Fiscal 2008, we launched our first tablet — the Latitudetm XT, the industry’s onlysub-four pound convertible tablet with pen and touch capability.
Desktop PCs — During Fiscal 2008, revenue from desktop PCs decreased slightly from Fiscal 2007 revenue on a unit decline of 2% even though worldwide industry unit sales grew 5% during calendar 2007. The decline was primarily due to us being out of product feature and price position and consumers migrating to mobility products. Our Global Consumer segment continued to perform below expectation in Fiscal 2008 with a 13%year-over-year decrease in desktop revenue. Global Consumer was the primary contributor to our worldwide full year decline in desktop revenue with Americas Commercial also contributing to the weaker performance during Fiscal 2008 as compared to Fiscal 2007. The decline was partially offset by a strong performance in APJ Commercial where desktop revenue and units both increased 13% during Fiscal 2008 over prior year. In Fiscal 2008, we introduced Vostrotm desktops specifically designed to meet the needs of small business customers.
Software and Peripherals — In Fiscal 2008, S&P revenue increased 10%year-over-year. EMEA Commercial lead S&P revenue growth with ayear-over-year increase of 18%, and Americas Commercial and APJ Commercial revenue growth was 13% and 12%, respectively, during Fiscal 2008 as compared to Fiscal 2007. The increase in S&P revenue was primarily attributable to strength in imaging and printing, digital displays, and software licensing. We also acquired ASAP during the year as we believe having stronger software licensing offerings and related customer management tools are areas of strategic opportunity.
Servers and Networking — In Fiscal 2008, servers and networking revenue grew 12% on unit growth of 6%year-over-year as compared to industry unit growth of 8%. Our unit growth was slightly behind the growth in the overall industry, while we improved our product feature sets by transitioning to new platforms, and as we managed through the realignment of certain portions of our sales force to address sales execution deficiencies. A significant portion of the revenue growth was due to higher average selling prices, which increased 5% during Fiscal 2008 asabsolute dollars compared to the prior year. Fourth quarteryear-over-year revenue growth of 2% was below industry growth and our expectations as conservatism in the U.S. commercial sectors affected sales of our server products. All regions experienced strongyear-over-year revenue growth with APJ Commercial leading the way with 21% growth on unit growth of 6%; additionally, server and networking revenue increased 16% and 8% in EMEA Commercial and Americas Commercial, respectively. For Fiscal 2008, we were again ranked number one in the United States with a 34% share in server units shipped; worldwide we were second with a 25% share. Servers and networking remains a strategic focus area. Late in the fourth quarter, we launched our 10G blade servers — the most energy efficient blade server solution on the market. Our PowerEdge servers were ranked number one in server benchmark testing for overall performance, energy efficiency, and price.
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Services — In Fiscal 2008, revenue from services (which includes the sale and servicing of our extended product warranties) increased 5%year-over-year compared to a 20% increase in Fiscal 2007. EMEA Commercial drove services revenue growth with a 32% increase in Fiscal 2008 as compared to Fiscal 2007, and Americas Commercial contributed with 9% revenue growth. This growth was offset by revenue declines in Global Consumer and APJ Commercial of 25% and 13%, respectively. Strong Fiscal 2008 services sales increased our deferred service revenue balance by approximately $1.0 billion in Fiscal 2008, a 25% increase to approximately $5.3 billion. During Fiscal 2008, we acquired a number of service technologies and capabilities through acquisitions of certain companies. These capabilities are being used to build-out our mix of service offerings. We are continuing to make progress in services including ProSupport, remote infrastructure management, and Software as a Service (SaaS), which are aimed at simplifying IT for our customers.
Storage — In Fiscal 2008, storage revenue increased 8% as compared to a 21% increase in Fiscal 2007. The revenue growth was led by EMEA Commercial, which experienced strong growth of 18%; additionally, APJ Commercial and Americas Commercial increased 10% and 5%, respectively. In Fiscal 2008, we expanded both our PowerVault and Dell ï EMC solutions that drove both additional increases in performance and customer value. During the fourth quarter of Fiscal 2008, we completed the acquisition of EqualLogic, Inc., an industry leader in iSCSI SANs. With this acquisition, we now provide much broader product offerings for small and medium business consumers.
Gross Margin
The following table presents information regardingfiscal year, although our gross margin during each of the past three fiscal years:
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| | | Fiscal Year Ended | |
| | | January 30, 2009 | | | February 1, 2008 | | | February 2, 2007 | |
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| | | Dollars | | | Revenue | | | Change | | | Dollars | | | Revenue | | | Change | | | Dollars | | | Revenue | |
| | | (in millions, except percentages) | |
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| Net revenue | | $ | 61,101 | | | | 100.0 | % | | | (0% | ) | | $ | 61,133 | | | | 100.0 | % | | | 6% | | | $ | 57,420 | | | | 100.0 | % |
| Gross margin | | $ | 10,957 | | | | 17.9 | % | | | (6% | ) | | $ | 11,671 | | | | 19.1 | % | | | 23% | | | $ | 9,516 | | | | 16.6 | % |
Fiscal 2009 compared to Fiscal 2008
During Fiscal 2009, our gross margin decreased in absolute dollars by $714 million compared to the prior year with a correspondingpercentage decreased. The decrease in gross margin percentage for services, including software related, was primarily due to 17.9%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 19.1%.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 a resultset forth in the reconciliation
under "Non-GAAP Financial Measures" below, these items are excluded from the calculation of non-GAAP gross margin for Fiscal 2011 and further expansion into retail throughFiscal 2010. Amortization of intangible assets included in gross margin increased 84% to $278 million for Fiscal 2011. The increase in amortization of intangibles for Fiscal 2011 was primarily attributable to an increased numberincrease in intangible assets of worldwide retail locations, there$1.2 billion in Fiscal 2010 related to our acquisition of Perot Systems. Severance and facility action costs and acquisition-related charges included in gross margin decreased 76% to $57 million during Fiscal 2011. The overall decrease in severance and facility action costs and acquisition-related charges was due to a decrease in our average selling prices, which contributed to a decline in gross margin. Theyear-over-yearcost reduction activities from Fiscal 2010.
Vendor Rebate Programs
Our gross margin percentage decline can be further attributedis affected by our ability to the fact that Fiscal 2008 witnessed unusually high component costs declines, whereas Fiscal 2009 component cost declines returned to more typical levels. During Fiscal 2009 we made continued progress against our ongoing cost improvement initiatives, which resulted in a number of new cost optimized product launches during the second half of 2009.
We continue to actively review all aspects of our facilities, logistics, supply chain, and manufacturing footprints. This review is focused on identifying efficiencies and cost reduction opportunities while maintaining a strong customer experience. Examples of this include the closure of our desktop manufacturing facility in Austin, Texas, the sale of our call center in El Salvador, and the recent announcement of our migration and closure of manufacturing operations from our Limerick, Ireland facility to our Polish facility and third party manufacturers. The cost of these actions and other severance and business realignment reductions was $282 million in Fiscal 2009, of which approximately $146 million affected gross margin. We expect to continue to reduce headcount, and we may realign or close additional facilities depending on a number of factors, including end-user demand, capabilities, and our migration to a more variable cost manufacturing model. These actions will result in additional business realignment costs in the future, although no plans were finalized at January 30, 2009.
We continue to evaluate and optimize our global manufacturing and distribution network, including our relationships with original design manufacturers, to better meet customer needs and reduce product cycle times. Our goal is to introduce the latest relevant technology and to deliver the best value to our customers worldwide. As we continue to evolve our inventory and manufacturing business model to capitalize on component cost declines, we continuously negotiateachieve 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 continuousother discounts as a reduction in cost of net revenue. Our total net cost includes supplier negotiations supportlist prices reduced by vendor rebates and other discounts. We manage our business model, which is able to respond quickly to changing marketcosts on a total net cost basis.
The terms and conditions due toof our direct customer modelvendor rebate programs are largely based on product volumes and real-time manufacturing.are generally not long-term in nature, but instead are typically negotiated at the beginning of 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 timeperiod 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 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.affected vendor products used by each segment.
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In general, gross margin and margins on individual products will remain under downward pressure due to a variety31
Fiscal 2008 compared to Fiscal 2007
During Fiscal 2008, our gross margin increased in absolute dollars and as a percentage of revenue from Fiscal 2007, driven by greater cost declines. The cost environment was more favorable in the first half of Fiscal 2008 than the second half, which resulted in a decline in our gross margin percentage from 19.6% in the first half to 18.6% in the second half of the year. The fourth quarter of Fiscal 2008 was positively impacted by a $58 million reduction in accrued liabilities for a one-time adjustment related to a favorable ruling by the German Federal Supreme Court on a copyright levy case.
Operating Expenses
The following table presents information regarding our operating expenses during each of the past three fiscal years:
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| | | Fiscal Year Ended | |
| | | January 30, 2009 | | | February 1, 2008 | | | February 2, 2007 | |
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Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general, and administrative | | $ | 7,102 | | | | 11.6 | % | | | (6% | ) | | $ | 7,538 | | | | 12.4 | % | | | 27% | | | $ | 5,948 | | | | 10.3 | % |
| Research, development, and engineering | | | 663 | | | | 1.1 | % | | | 9% | | | | 610 | | | | 1.0 | % | | | 22% | | | | 498 | | | | 0.9 | % |
| In-process research and development | | | 2 | | | | 0.0 | % | | | (98% | ) | | | 83 | | | | 0.1 | % | | | N/A | | | | - | | | | - | |
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| Operating expenses | | $ | 7,767 | | | | 12.7 | % | | | (6% | ) | | $ | 8,231 | | | | 13.5 | % | | | 28% | | | $ | 6,446 | | | | 11.2 | % |
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| | | Fiscal Year Ended |
| | | February 3, 2012 | | | | January 28, 2011 | | | | January 29, 2010 |
| | | Dollars | | % of Revenue | | % Change | | Dollars | | % of Revenue | | % Change | | Dollars | | % of Revenue |
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| Operating expenses: | | |
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| 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 20092012 compared to Fiscal 20082011
Selling, General, and Administrative — During Fiscal 2009,2012, selling, general, and administrative (“("SG&A”&A") expenses decreasedincreased $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, increased approximately $967 million due to a 6% to $7.1 billion from $7.5 billionyear-over-year increase in Fiscal 2008. Compensationheadcount, which was driven by our organic and benefits expense, excluding expenses related to headcount and infrastructure reductions, decreased approximately $250inorganic investments. We also experienced a year-over-year increase of $175 million in advertising, promotional, and other selling-related expenses. In addition, higher SG&A expenses for Fiscal 2009 compared to Fiscal 2008, driven primarily2012 reflected increases in acquisition-related charges, which were offset in part by decreases in bonus-related expenses due to weaker company performance versus bonus plan targetsseverance and lower sales commission expenses. Compensation-related expenses also included $73 million of stock option acceleration in Fiscal 2009, while Fiscal 2008 included $76 million for the cash payments made for expiring stock options. Additionally, with the increase in retail volumes and the associated cooperative advertising programs, as well as other factors, advertising expenses decreased approximately $130 million from Fiscal 2008. Furthermore,facility action costs, associated with the ongoing U.S. Securities and Exchange Commission (“SEC”) investigation and the Audit Committee’s now completed independent investigation decreased by $117 million from $160 million for Fiscal 2008 to $43 million for Fiscal 2009. These decreases were partially offset by an increase in SG&A expenses related to headcount and infrastructure reductions through our on-going cost optimization efforts, which were $136 million for Fiscal 2009 compared to $92 million for Fiscal 2008.discussed below.
Research, Development, and Engineering — Research,During Fiscal 2012, research, development, and engineering (“RD&E”) expenses increased 9% to $663 million for Fiscal 2009were 1.5% of net revenue, compared to $610 million for Fiscal 2008, remaining at approximately 1% of revenue for both fiscal years. The increase in RD&E expense is primarily due to approximately $45 million increase in compensation and benefits expenses as we continue to expand our research and development activities in our EqualLogic and Data Center Solutions offerings.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 partners.relationships. We are increasing our focus on research and development and will continue to investshift 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 $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 2012 and for Fiscal 2011 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.
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
headcount increased approximately 6% due to our acquisitions and new hires related to our strategic initiatives. We also 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 support$71 million over Fiscal 2010, and was primarily related to our growthacquisition of Perot Systems in Fiscal 2010 as well as our Fiscal 2011 acquisitions.
Operating and Net Income
Fiscal 2012 compared to Fiscal 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 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 received during the third quarter of Fiscal 2011. See “Income and Other Taxes” and “Interest and Other, net” below for discussion of our effective tax rates and Interest and other, net.
Non-GAAP Financial Measures
We use non-GAAP financial measures to supplement the financial 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 2011, and a merger termination fee, which we received during the third quarter of Fiscal 2011, and for new, competitive products.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 exclusion 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 obtained 2,253 worldwide patentsa material impact on earnings. Our management compensates for the foregoing limitations by relying primarily on our GAAP results and have appliedusing non-GAAP financial measures supplementally or for 2,514 additional worldwide patentsprojections when comparable GAAP financial measures are not available. The non-GAAP financial measures are not meant to be considered as indicators of January 30, 2009.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 may incur these types of expenses in the future, we believe that eliminating these charges for purposes of calculating the non-GAAP financial measures facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
In-Process ResearchAmortization of Intangible Assets — Amortization of purchased intangible assets consists primarily of amortization of customer relationships, acquired technology, non-compete covenants, and Development — We recognized in-process research and development (“IPR&D”) chargestrade names purchased in connection with acquisitions accountedbusiness acquisitions. We incur charges relating to the amortization of these intangibles, and those charges are included in our Consolidated Financial Statements. Amortization charges for our purchased intangible assets are inconsistent in
amount from period to period and are significantly impacted by the timing and magnitude of our acquisitions. 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 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 received a $72 million fee for termination of a merger agreement with us. During the first quarter of Fiscal 2011, we recorded a $100 million settlement amount for the SEC investigation into certain of our accounting 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 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.
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 |
|
| | | | | | | | | | |
|
| | | | | | | | |
| | 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 | % |
Segment Discussion
Our four global business segments are Large Enterprise, Public, Small and Medium Business, and Consumer.
Severance and facility actions and acquisition-related charges, broad based, long-term incentive expenses, amortization of purchased intangible assets costs, and charges related to our settlement of the SEC investigation as business combinations,well as more fully described ina 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 for Fiscal 2010.
See Note 715 of the Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” We recorded IPR&D chargesData” for additional information and reconciliation of $2 million during 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: |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
| |
(a) | Operating income percentage of revenue is stated in relation to the respective segment. |
Fiscal 2009 and $83 million during Fiscal 2008. Prior to Fiscal 2008, there were no IPR&D charges related to acquisitions.
30
In May 2007, we announced that we had initiated a comprehensive review of costs across all processes and organizations with the goal to simplify structure, eliminate redundancies, and better align operating expenses with the current business environment and strategic growth opportunities. These efforts are continuing. Since the second quarter of Fiscal 2008 and through the end of Fiscal 2009, we have reduced headcount by approximately 13,500 and closed some of our facilities. We expect to take further actions to reduce costs and invest in strategic growth areas while focusing on scaling costs and improving productivity.
Fiscal 20082012 compared to Fiscal 20072011
Selling, General, and AdministrativeLarge Enterprise — During Fiscal 2008, SG&A expenses2012, 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 27%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 2012, Large Enterprise's operating income as a percentage of revenue increased 170 basis points year-over-year to $7.5 billion.10.0%. The increase was primarily dueattributable to higher compensation and benefits expense, increased outside consulting fees, and investigation costs. Compensation-related expenses and expenses related to headcount and infrastructure reductions increased approximately $1.0 billionimprovements in Fiscal 2008 compared to Fiscal 2007. This increase was driven both by bonus-related expenses, which increased substantially compared to Fiscal 2007 when bonuses were paid at a reduced amount, as well as an increased average headcount for Fiscal 2008. The increase in compensation related expenses also includes $76 million (of the total of $107 million) of additional expense for cash payments for expiring stock options. SG&A expenses related to headcount and infrastructure reductions were $92 million for Fiscal 2008, and expenses related to the SEC and Audit Committee investigations were $160 million and $100 million for Fiscal 2008 and Fiscal 2007, respectively.
Research, Development, and Engineering — During Fiscal 2008, RD&E expenses increased 22% to $610 million compared to $498 million in Fiscal 2007. The increase in research, development, and engineering was primarily driven by significantly higher compensation costs. The higher compensation costs are partially attributed to increased focused investments in research and development (“R&D”), which are critical to our future growth and competitive position in the marketplace. During Fiscal 2008, we implemented our “Simplify IT” initiativegross margin for our customers. R&D is the foundation for this initiative, which is aimed at allowing customers to deploy IT faster, run IT at a lower total cost, and grow IT smarter.
Operating Income
Fiscal 2009 compared to Fiscal 2008
Operating income decreased 7%year-over-year to $3.2 billion in Fiscal 2009 from $3.4 billion in Fiscal 2008. The decrease in operating income is primarily attributable to our gross margin decline,products, partially offset by a 6% reduction in operating expensesyear-over-year due to factors discussed in the Operating Expenses section. During Fiscal 2009, we experienced customer and product mix shift as our global consumer business grew significantly in both units and revenue as compared to Fiscal 2008 and as our commercial business revenue declined on flat unit shipments during the same time period. Also impacting operating income was the decline in profitability in our EMEA Commercial segment and higher than historical average declines in component costs in Fiscal 2008, which returned to more typical declines in Fiscal 2009.
Americas Commercial — For Fiscal 2009, operating income percentage increased 40 basis pointsyear-over-year. Operating income improved as a result of ayear-over-year 2% increase in average selling prices due to an improved mix of products and services and lower component costs during the second half of Fiscal 2009. Additionally, operating expenses declined 4%year-over-year as we managed our operating expenses tightly and streamlined our organizational operations.
EMEA Commercial — For Fiscal 2009, operating income percentage decreased approximately 300 basis points from Fiscal 2008, and operating income dollars decreased 44% while revenue remained flat. Operating income dollars and percentage were adversely impacted by a 6% decrease in average selling prices as sales mix shifted toward lower price bands, especially in notebooks. Operating income dollars and percentage were also adversely impacted by weaker western European markets coupled with significant growth in emerging markets where product sales are generally in the lower price and profitability bands. Also impacting operating income was a 2%year-over-year increase in operating expenses as well as increases in severance and business realignment expenses.
APJ Commercial — Operating income percentage increased approximately 30 basis pointsyear-over-year from Fiscal 2008, and operating income dollars increased 8% on a revenue increase of 2% due to lower component costs and an improved mix of products and services. Partially offsetting the operating income improvement was ayear-over-year increase in operating expenses of 7% during Fiscal 2009 mainly due to increased severance and business realignment expenses.
Global Consumer — Global Consumer’s operating income percentage increasedyear-over-year by approximately 120 basis points to 1%, and operating income dollars grew from $2 million in Fiscal 2008 to $143 million in Fiscal 2009 on revenue and unit growth of 11% and 35%, respectively. Operating income was negatively impacted by an 18%year-over-year decrease in average selling prices for Fiscal 2009 as we participated in a broader spectrum of consumer product opportunities and continued our expansion into retail. Additionally,
31
operating expenses declined 19%year-over-year as we began to realize the benefits from our cost-improvement initiatives. In the near-term, we expect the operating income percentage for Global Consumer to be in the 1% - 2% range as we balance profitability, liquidity and growth in our expansion in this strategic market.
Fiscal 2008 compared to Fiscal 2007
Operating income increased 12%year-over-year to $3.4 billion. The increased profitability was mainly a result of strength in mobility, solid demand for enterprise products, and a favorable component-cost environment. In Fiscal 2007, operating income was $3.1 billion.
Americas Commercial — For Fiscal 2008, operating income percentage increased 30 basis pointsyear-over-year, and operating income dollars grew 9%year-over-year mainly due to lower component costs. The operating income improvement was partially offset by ayear-over-year increase in operating expenses of 26%.
EMEA Commercial — For Fiscal 2008, operating income percentage increased approximately 200 basis points from Fiscal 2007, and operating income dollars increased due to significantly stronger gross margins. Partially offsetting this growth was a 170 basis points increase in operating expenses as a percent of revenue.
APJ Commercial — Operating income percentage increased 50 basis pointsyear-over-year from Fiscal 2007, and operating income dollars increased 27% on revenue growth of 15%. Impacting the growth in operating income was lower component costs in Fiscal 2008 as compared to Fiscal 2007 partially offset by ayear-over-year increase in operating expenses as a percentage of revenue.net revenue, resulting primarily from increased selling and marketing costs.
Global ConsumerPublic — Global Consumer’sDuring 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
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 decreasedyear-over-year by approximately 120of net revenue increased 110 basis points and operating income dollars declined from $130 million in Fiscal 2007 to $2 million in Fiscal 2008 on revenue and unit decline of 6% and 12%, respectively. A significant improvement9.9%. The increase was primarily attributable to improvements in gross margins was more thanmargin for our products, partially offset by a 23%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 expansion into retailproducts, 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 as a percentage of net revenue increased 220 basis points, year-over-year, to 2.7%. The increase in operating income percentage was largely attributable to an increase in our product gross margin percentage due to 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 increase in Large Enterprise's revenue for Fiscal 2011 was mainly attributable to improved demand due to a hardware refresh among our Large Enterprise customers. Large Enterprise experienced year-over-year increases in revenue across all product lines during Fiscal 2011, except for storage 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 shifted 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 the acquisition of Perot Systems in Fiscal 2010. Sales of client products generated large revenue increases, with mobility and 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 2011, operating income as a percentage of revenue increased 260 basis points year-over-year to 8.3%. The increase was mostly driven by improvements in gross margin due 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 2011 for client products. Revenue increases and tighter spending controls on operating expenses resulted in a 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
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 2011 across the Americas and the Asia-Pacific region, but declined in Europe due to budgetary constraints on public spending.
Public's operating income percentage declined 60 basis points to 8.8% for Fiscal 2011 due to a year-over-year increase in operating expenses as a percentage of revenue, offset in part by a slight increase in gross margin percentage. The increase in operating expenses was a result of higher selling and marketing costs.
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 2011. SMB revenue from BRIC grew 40% year-over-year.
Operating income percentage increased 160 basis points to 10.2%. 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 as a percentage of revenue due to tighter spending controls.
Consumer — Consumer's revenue increased 3% year-over-year during Fiscal 201l. Revenue from all product and 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.
For Fiscal 2011, Consumer's operating income percentage decreased 40 basis points year-over-year to 0.5%. The decrease in operating income percentage was largely attributable to a decrease in gross margin percentage. Consumer gross margin decreased due to the shift in sales mix from direct sales to sales through other distribution channels, which generally carry a lower gross margin, which was not entirely offset by decreases in operating expenses as a percentage of revenue. Operating expenses as a percentage of revenue remained relatively flat year-over-year. In the second half of Fiscal 2008.2011, 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 2010.
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 are organized between enterprise and client categories. Our enterprise products include servers and networking, and storage products. Client products include mobility and desktop 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 peripheral products.
The following table summarizes our net revenue by product and services categories for each of the past three fiscal years: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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) |
| Net revenue: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Enterprise solutions and services: | | | | | | | | | | | | | | | | |
| Enterprise solutions: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Servers and networking | | $ | 8,336 |
| | 13 | % | | 10 | % | | $ | 7,609 |
| | 12 | % | | 26 | % | | $ | 6,032 |
| | 11 | % |
| Storage | | 1,943 |
| | 3 | % | | (15 | )% | | 2,295 |
| | 4 | % | | 5 | % | | 2,192 |
| | 4 | % |
| Services | | 8,322 |
| | 13 | % | | 8 | % | | 7,673 |
| | 12 | % | | 36 | % | | 5,622 |
| | 11 | % |
| Software and peripherals | | 10,222 |
| | 17 | % | | — | % | | 10,261 |
| | 17 | % | | 8 | % | | 9,499 |
| | 18 | % |
| Client: | | |
| | | | | | |
| | | | | | |
| | |
| Mobility | | 19,104 |
| | 31 | % | | 1 | % | | 18,971 |
| | 31 | % | | 14 | % | | 16,610 |
| | 31 | % |
| Desktop PCs | | 14,144 |
| | 23 | % | | (4 | )% | | 14,685 |
| | 24 | % | | 13 | % | | 12,947 |
| | 25 | % |
| Total net revenue | | $ | 62,071 |
| | 100 | % | | 1 | % | | $ | 61,494 |
| | 100 | % | | 16 | % | | $ | 52,902 |
| | 100 | % |
Fiscal 2012 compared to Fiscal 2011
Enterprise Solutions and Services
▪Enterprise Solutions:
Servers and Networking — The increase in our servers and networking revenue for Fiscal 2012 as compared to Fiscal 2011 was primarily driven by increases in revenue from our PowerEdge lines of servers as well as our virtualized servers and data center solutions. During Fiscal 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 — During Fiscal 2012, storage revenue decreased 15%. The decrease in storage revenue was 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 2012, sales of Dell-owned storage products increased 21% to 82% of our total storage revenue compared to 57% in the prior year. We believe Dell-owned storage offerings, which 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 data center storage offerings.
| |
| ▪ | Services — During Fiscal 2012, services revenue increased 8% to $8.3 billion. The increase was driven by an increase in transactional revenue as well as increases in outsourcing and project-based services revenue. The increase in outsourcing and project-based revenue was partially driven by our recent acquisitions. Our estimated services backlog as of February 3, 2012, and January 28, 2011, was $15.5 billion and $13.9 billion, respectively. We provide information regarding services backlog because we believe it provides useful trend information regarding changes in the size of our services business over time. Services backlog, as defined by us, includes deferred revenue from extended warranties and contracted services backlog. Deferred revenue from extended warranties was $7.0 billion and $6.4 billion as of February 3, 2012, and January 28, 2011, respectively. Estimated contracted services backlog, which is primarily related to our outsourcing services business, was $8.5 billion and |
$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 software and peripherals (“S&P”) is derived from sales of Dell-branded printers, monitors (not sold with systems), projectors, keyboards, mice, docking stations, and a multitude of third-party peripherals, including televisions, cameras, stand-alone software sales and related support services, and 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 reduce our 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 reported in services revenue, including software related, on our Consolidated Statements of Income. Software and related support services revenue represented 32% and 33% of services revenue, including software related, for Fiscal 2012 and Fiscal 2011, respectively.
Client
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| ▪ | 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%. |
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| ▪ | 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%.
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| ▪ | 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
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, for Fiscal 2011 and Fiscal 2010, respectively.
Client
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| ▪ | 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 increase in unit demand was driven by our Large Enterprise and SMB customers, generating increases of 25% and 23%, year-over-year, respectively, for Fiscal 2011. These increases were driven primarily by the stronger demand for our Optiplex desktop PCs and fixed work stations. |
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 $418$362 million for Fiscal 2009,2012, compared to $436$332 million and $368$312 million for Fiscal 20082011 and Fiscal 2007,2010, respectively. Stock-based compensation expense for Fiscal 2009 includes $104 million of expense for accelerated options, and Fiscal 2008 includes cash payments of $107 million made for expiredin-the-money stock options. Both of these items are discussed below.
We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),Share-Based Payment (“SFAS 123(R)”)using the modified prospective transition method under SFAS 123(R) effective the first quarter of Fiscal 2007. Included in stock-based compensation is the fair value of stock-based awards earned during the year, including restricted stock, restricted stock units, and stock options, as well as the discount associated with stock purchased under our employee stock purchase plan (“ESPP”). The ESPP was discontinued effective February 2008 as part of an overall assessment of our benefits strategy. For further discussion on stock-based compensation, see Note 514 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
At January 30, 2009, there was $1 million and $507 million of total unrecognized stock-based compensation expense related to stock options and non-vested restricted stock, respectively, with the unrecognized stock-based compensation expense expected to be recognized over a weighted-average period of 2.3 years and 2.0 years, respectively. At February 1, 2008, there was $93 million and $600 million of total unrecognized stock-based compensation expense related to stock options and non-vested restricted stock, respectively, with the unrecognized stock-based compensation expense expected to be recognized over a weighted-average period of 2.0 years and 1.9 years, respectively. At February 2, 2007, there was $139 million and $356 million of total unrecognized stock-based compensation expense related to stock options and non-vested restricted stock, respectively, with the unrecognized stock-based compensation expense expected to be recognized over a weighted-average period of 1.7 years and 2.4 years, respectively.
On January 23, 2009, our Board of Directors approved the acceleration of the vesting of unvested“out-of-the-money” stock options (options that have an exercise price greater than the current market stock price) with exercise prices equal to or greater than $10.14 per share for approximately 2,800 employees holding options to purchase approximately 21 million shares of common stock. We concluded the modification to the stated vesting provisions was substantive after we considered the volatility of our share price and the exercise price
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of the amended options in relation to recent share values. Because the modification was considered substantive, the remaining unearned compensation expense of $104 million was recorded as an expense in Fiscal 2009. The weighted-average exercise price of the options that were accelerated was $21.90.
Due to our inability to timely file our Annual Report onForm 10-K for Fiscal 2007, we suspended the exercise of employee stock options, the vesting of restricted stock units, and the purchase of shares under the ESPP on April 4, 2007. As a result, we decided to pay cash to current and former employees who heldin-the-money stock options (options that had an exercise price less than the then current market price of the stock) that expired during the period of unexercisability. We made payments of approximately $107 million in Fiscal 2008, which were expensed, relating to expiredin-the-money stock options. We resumed allowing the exercise of employee stock options by employees and the settlement of restricted stock units on October 31, 2007. The purchase of shares under the ESPP was not resumed as the plan was discontinued during the first quarter of Fiscal 2009.
InvestmentInterest and Other, Income, net
The following table below provides a detailed presentation of investmentInterest and other, income, 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 2009, 2008, and 2007.
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
| Investment and other income, net: | | | | | | | | | | | | |
| Investment income, primarily interest | | $ | 180 | | | $ | 496 | | | $ | 368 | |
| (Losses) gains on investments, net | | | (10 | ) | | | 14 | | | | (5 | ) |
| Interest expense | | | (93 | ) | | | (45 | ) | | | (45 | ) |
| CIT minority interest | | | - | | | | (29 | ) | | | (23 | ) |
| Foreign exchange | | | 115 | | | | (30 | ) | | | (37 | ) |
| Gain on sale of building | | | - | | | | - | | | | 36 | |
| Other | | | (58 | ) | | | (19 | ) | | | (19 | ) |
| | | | | | | | | | | | | |
| Investment and other income, net | | $ | 134 | | | $ | 387 | | | $ | 275 | |
| | | | | | | | | | | | | |
Theyear-over-year decrease in investment income for the fiscal year ended January 30, 2009, is primarily due to decreased interest rates on lower average investment balances. Gain (losses) on investments decreased for Fiscal 2009 as2012 compared to Fiscal 2008, primarily due to a $11 million loss recorded forother-than-temporarily impaired investments during Fiscal 2009 based on a review of factors consistent with those disclosed in Note 2 of Notes to Consolidated Financial Statements included “Part II — Item 8 — Financial Statements and Supplementary Data” and due to sales of securities during Fiscal 2008. We continue to monitor our investment portfolio and take steps to mitigate impacts from the current volatility in the capital markets. Theyear-over-year increase in interest expense is attributable to interest on the $1.5 billion debt issued in the first quarter of Fiscal 2009. CIT minority 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 for Fiscal 2009 due to gains realized on our hedge program. 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.2011
In addition to the gains realized from revaluation of our unhedged currencies, theyear-over-year increase in foreign exchange for Fiscal 2009, as compared to the prior year, is due to a $42 million gain in Fiscal 2009 resulting from the correction of errors in the remeasurement of certain local currency balances to the functional currency in prior periods. A deferred revenue liability was incorrectly remeasured over time based on changes in currency exchange rates instead of remaining at historical exchange rates. There was also a tax liability incorrectly held at a historical rate instead of being remeasured over time based on changes in currency exchange rates.
The increase in investment income in Fiscal 2008 from Fiscal 2007 is primarily due to earnings on higher average balances of cash equivalents and investments, partially offset by lower interest rates. In Fiscal 2007,Our investment income increased fromin Fiscal 2012 over the prior year primarily due to risinghigher 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.
The year-over-year increase in interest rates,expense for Fiscal 2012 was due to higher debt levels, which increased to $9.3 billion as
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 $72 million merger termination fee that we received during Fiscal 2011.
Fiscal 2011 compared to Fiscal 2010
During Fiscal 2011 and Fiscal 2010, we maintained a portfolio of instruments with shorter maturities, which typically carry lower market yields. During 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 to approximately 35 basis points.
The year-over-year increase in interest expense for Fiscal 2011 was due to higher debt levels, which increased to $6.0 billion as of January 28, 2011, from $4.1 billion as of January 29, 2010.
The year-over-year change in foreign exchange for Fiscal 2011 was primarily due to gains from revaluation of certain un-hedged foreign currency balances, the effect of which was partially offset by increases in the costs associated with the hedge program.
Other includes a decrease in interest income earned on lower average balances$72 million merger termination fee that we received during Fiscal 2011.
Income and investments. The gains in Fiscal 2008 as compared to losses in Fiscal 2007 are mainly the result of sales of securities. The foreign
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exchange loss in Fiscal 2008 and Fiscal 2007 is mainly due to higher net losses on derivative instruments. The gain on sale of building relates to the sale of a building in EMEA.
IncomeOther Taxes
Our effective tax rate was 25.4%17.6%, 23.0%21.3%, and 22.8%29.2% for Fiscal 2009, 2008,2012, Fiscal 2011, and 2007,Fiscal 2010, 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 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 increaseWe continue to assess our business model and its impact in our effective income tax rate for Fiscal 2009 from Fiscal 2008 is primarily due to an increased mix of profits in higher tax ratevarious taxing jurisdictions. In the fourth quarter of Fiscal 2008, we were able to access $5.3 billion in cash from a subsidiary outside of the U.S. to fund share repurchases, acquisitions, and the continued growth of DFS. Accessing the cash slightly increased our effective tax rate in Fiscal 2008. The taxes related to accessing the foreign cash and nondeductibility of the in-process research and development acquisition charges were offset primarily by the increase of our consolidated profitability in lower tax rate jurisdictions during Fiscal 2008. Our foreign earnings are generally taxed at lower rates than in the United States. We do not expect our Fiscal 2010 effective tax rate to vary significantly from our Fiscal 2009 effective tax rate.
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.
We adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109(“FIN 48”) effective February 3, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income taxes recognized in our financial statements in accordance with SFAS 109,Accounting for Income Taxes(“SFAS 109”). FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 provides that a tax benefit from an uncertain tax position may be recognized in the financial statements only when it is more likely than not that the position 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 widely understood administrative practices and precedents. Once the recognition threshold is met, the portion of the tax benefit that is recorded represents the largest amount of tax benefit that is greater than 50 percent likely to be realized upon settlement with a taxing authority. The adoption of FIN 48 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 FIN 48,income tax audits, see Note 311 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 2009. 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 2004 through 2006 are under examination, and the Internal Revenue Service has proposed certain preliminary assessments primarily related to transfer pricing matters. We anticipate this audit will take several years to resolve and continue to believe that we have provided adequate reserves related to the matters under audit. However, should we experience an unfavorable outcome in this matter, it 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. We believe our positions are supportable, a liability is not probable, and that we will ultimately prevail. However, significant judgment is required in determining the ultimate outcome of these matters. 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 changes, changes in estimates to our accrued liabilities would be recorded in the period in which the determination is made.
Out of Period Adjustments
During Fiscal 2009, adjustments to correct items related to prior periods, in the aggregate, increased income before taxes and net income by approximately $95 million and $33 million, respectively. Because these errors, both individually and in the aggregate, were not
34
material to any of the prior years’ financial statements and the impact of correcting these errors in the current year is not material to the full year Fiscal 2009 Consolidated Financial Statements, we recorded the correction of these errors in the Fiscal 2009 Consolidated Financial Statements.
Accounts Receivable
ACCOUNTS RECEIVABLE
We sell products and services directly to customers and through a variety of sales channels, including retail distribution. AtOur Accounts receivable, net was $6.5 billion as of February 3, 2012, and January 30, 2009, our gross accounts receivable balance was $4.8 billion, a 20% decrease from our balance at February 1, 2008. This decrease in accounts receivable was due to lower sales in the second half of Fiscal 2009 as compared to the prior year.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 generala provision for accounts that are collectively evaluated based on historical bad debt experience. As of February 3, 2012, and January 30, 2009 and February 1, 2008,28, 2011, the allowance for doubtful accounts was $112$63 million and $103$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 2009 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.
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.
At February 3, 2012, and January 30, 2009 and February 1, 2008,28, 2011, our net financing receivables balances were $4.7 billion and $4.4 billion, respectively. Included in the February 3, 2012, balance was $2.2approximately $0.3 billion and $2.1 billion respectively. The increase in financing receivables is primarily attributablerelated to an increase in our investment in retained interest, partially offset by a decrease in gross revolving loan receivables. Retained interest increased $173 million from our balance at February 1, 2008, due to a modification to one of our securitization agreements, resulting in a scheduled amortizationacquisition of the transaction. DuringDFS Canada portfolio. To manage the scheduled amortization period, additional purchases made on existing securitized revolving loans are transferred to the qualified special purpose entity, which increased our retained interest balance. See Off-Balance Sheet Arrangements for additional information.
Gross revolving loan receivables decreased $100 million from our balance at February 1, 2008, due to a reduction in the amount of promotional receivables. From time to time, we offer certain customers with the opportunity to finance their Dell purchases with special programs during which, if the outstanding balance is paid in full, no interest is charged. During Fiscal 2009, we reduced our promotional offerings. Promotional receivables were $352 million and $668 million, at January 30, 2009, and February 1, 2008, respectively.
We expectexpected net growth in financing receivables, throughout Fiscal 2010. To manage this growth, we will continue to balance the use of our own working capital and other sources of liquidity. The key decision factors inliquidity, including securitization programs.
We have securitization programs to fund revolving loans and fixed-term leases and loans through consolidated special purpose entities ("SPEs"), which we account for as secured borrowings. We transfer certain U.S. customer financing receivables to these SPEs, whose purpose is to facilitate the funding decision are the cost of funds, required credit enhancements forcustomer receivables sold to thethrough financing arrangements with multi-seller conduits and the ability to accessthat issue asset-backed debt securities in the capital markets. See Note 6We transferred $2.3 billion, $1.9 billion, and $0.8 billion to these SPEs during Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively. Our risk of Notesloss related to Consolidated Financial Statements includedthese securitized receivables is limited to the amount of our over-collateralization in “Part II— Item 8— Financial Statementsthe transferred pool of receivables. At February 3, 2012, and Supplementary Data” for additional information aboutJanuary 28, 2011, the structured financing debt related to all of our secured borrowing securitization programs was $1.3 billion and $1.0 billion, respectively, and the carrying amount of the corresponding financing receivables.receivables was $1.5 billion and
$1.3 billion, respectively.
We maintain an allowance to cover expected financing receivable credit losses. Consistent with trends in the financial services industry, duringlosses and evaluate credit loss expectations based on our total portfolio. For Fiscal 20092012, Fiscal 2011, and Fiscal 2008, we experiencedyear-over-year increased financing receivable credit losses. Net2010, the principal charge-offscharge-off rate for our total portfolio was 4.6%, 7.5%, and 8.0%, respectively. The charge-off rate for Fiscal 2009 and2011 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 2008 were $86 million and $40 million, respectively. These amounts represent 5.5% and 2.7%2011. The credit quality mix of the average outstanding customerour financing receivable balance (including accrued interest) for the respective years. We have takenreceivables has improved in recent years due to our underwriting actions to limit our exposure to losses, including reducing our credit approval rate. We continue to assessand as the mix of high quality commercial accounts in our portfolio risk and take additional underwriting actions as we deem necessary. Our estimate of subprime customer receivables was approximately 20% of the gross customer receivable balance at January 30, 2009, and February 1, 2008.
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. Substantial changes in the economic environment or any of the factors mentioned above could change the expectation of anticipated credit losses. As ofAt February 3, 2012, and January 30, 2009, and February 1, 2008,28, 2011, the allowance for financing receivable losses was $149$202 million and $96$241 million, respectively. A 10% change inIn general, the loss rates on our financing receivables for Fiscal 2012 have continued to improve over the prior year. However, we do not expect this allowance would not be materialimprovement 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 extensive process to manage our consolidated results.exposure to customer risk, including active management of credit lines and our collection activities. Based on our assessment of the customer financing receivables, and the associated risks, we believe that we are adequately reserved.
See Note 64 of the Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for additional information.
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Current Market Conditionsinformation about our financing receivables and the associated allowance.
OFF-BALANCE SHEET ARRANGEMENTS
In connection withWith the weakened global economic conditions, during Fiscal 2009, we took the following actions to manage our risks:
| | |
| • | Diversified financial partner exposure. |
|
| • | Monitored the financial health of our supplier base. |
|
| • | Tightened requirements for customer credit. |
|
| • | Monitored the risk concentration of our cash and cash equivalents balance. |
|
| • | Continued to monitor our balance sheet exposure, primarily trade accounts receivable and financing receivables, to ensure that we do not have significant concentrations of risk with any single customer or industry group. As of January 30, 2009, no single industry group or specific customer represented more than 10% of our trade accounts or financing receivables balance. |
|
| • | Updated our second quarter analysis of potential triggering events for goodwill and intangible asset impairment in the fourth quarter of Fiscal 2009. Based on this analysis, we concluded that there was no evidence that would indicate an impairment of goodwill or intangible assets. |
|
| • | Changed our investment strategy to hold securities with shorter durations. |
|
| • | Continued to monitor the effectiveness of our foreign currency hedging program. |
We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as reviews and actions taken by rating agencies and changes in credit default swap levels. We perform periodic evaluationsconsolidation of our positions with these counterparties and may limit the amountpreviously nonconsolidated special purpose entities, we no longer have off-balance sheet financing arrangements.
LIQUIDITY, CAPITAL COMMITMENTS, AND CONTRACTUAL CASH OBLIGATIONS
Market Risk
We are exposed to a variety of risks, including foreign currency exchange rate fluctuations and changes in the market value of our investments. In the normal course of business, we employ established policies and procedures to manage these risks.
Foreign Currency Hedging Activities
Our objective in managing our exposures to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations on earnings and cash flows associated with foreign currency exchange rate changes. Accordingly, we utilize foreign currency option contracts and forward contracts to hedge our exposure on forecasted transactions and firm commitments in more than 20 currencies in which we transact business. Our exposure to foreign currency movements is comprised of certain principal currencies. During Fiscal 2009, 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. During Fiscal 2009, the U.S. dollar strengthened relative to the other principal currencies in which we transact business with the exception of the Japanese Yen. However, we manage our business on a U.S. dollar basis, and as a result of our comprehensive hedging program, foreign currency fluctuations did not have a significant impact on our consolidated results of operations.
Based on our foreign currency cash flow hedge instruments outstanding at January 30, 2009, and February 1, 2008, we estimate a maximum potentialone-day loss in fair value of approximately $393 million and $57 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 three thousand 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.
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Cash and Investments
At January 30, 2009,February 3, 2012, we had $9.5$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 $9.5$18.2 billion $8.4of cash, cash equivalents, and investments, $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 30, 2009, ourOur cash equivalents are recorded at carryingfair value.
The remaining $1.1$4.3 billion of cash, cash equivalents, and investments is primarily invested in fixed income securities including government, agency, asset-backed, mortgage-backed and corporate debt securities of varying maturities at the date of acquisition. The fair value of our portfolio is affected primarily by interest rates more so than by the credit and liquidity issues currently facing the capital markets. 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 by investing in short to intermediate term investments whose market value is less sensitive to interest rate changes. As of January 30, 2009, and February 1, 2008, we did not hold any auction rate securities. 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 $54 million and $550 million at January 30, 2009, and February 1, 2008, respectively. Based on our investment portfolio and interest rates at January 30, 2009, a 100 basis point increase or decrease in interest rates would result in a decrease or increase of approximately $5 million in the fair value of the investment portfolio.
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 30, 2009, our portfolio included securities with unrealized losses totaling $10 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.
During Fiscal 2009, we recorded an $11 millionother-than-temporary impairment loss based on a review of factors consistent with those disclosed in Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.” Factors considered in determining whether a loss isother-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, previously recordedother-than-temporary impairment charges, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The investmentsother-than-temporarily impaired during Fiscal 2009 were asset-backed securities and were impaired due to severe price degradation or price degradation over an extended period of time, rise in delinquency rates and general credit enhancement declines.
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 SFAS No. 157,Fair Value Measurements(“SFAS 157”). We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact our SFAS 157 disclosures.
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Debt
The following table summarizes our long-term debt at January 30, 2009, and February 1, 2008:
| | | | | | | | | |
| | | January 30,
| | | February 1,
| |
| | | 2009 | | | 2008 | |
| | | (in millions) | |
| |
| Long-term debt: | | | | | | | | |
| Indenture: | | | | | | | | |
| $600 million issued on April 17, 2008 at 4.70% due April 2013 with interest payable April 15 and October 15 | | $ | 599 | | | $ | - | |
| $500 million issued on April 17, 2008 at 5.65% due April 2018 with interest payable April 15 and October 15 | | | 499 | | | | - | |
| $400 million issued on April 17, 2008 at 6.50% due April 2038 with interest payable April 15 and October 15 | | | 400 | | | | - | |
| Senior Debentures | | | | | | | | |
| $300 million issued on April 1998 at 7.10% due April 2028 with interest payable April 15 and October 15 (includes the impact of interest rate swaps) | | | 400 | | | | 359 | |
| Senior Notes | | | | | | | | |
| $200 million issued on April 1998 at 6.55% due April 2008 with interest payable April 15 and October 15 (includes fair value adjustment related to SFAS 133) | | | - | | | | 201 | |
| | | | | | | | | |
| | | | 1,898 | | | | 560 | |
| Other | | | - | | | | 2 | |
| Less current portion | | | - | | | | (200 | ) |
| | | | | | | | | |
| Total long-term debt | | $ | 1,898 | | | $ | 362 | |
| | | | | | | | | |
During Fiscal 2009, we issued and sold $600 million aggregate principal amount of Notes with a fixed rate of 4.70% due 2013 (“2013 Notes”), $500 million aggregate principal amount of Notes with a fixed interest rate of 5.65% due 2018 (“2018 Notes”), and $400 million aggregate principal amount of Notes with a fixed rate of 6.50% due 2038 (“2038 Notes”), and together with the 2013 Notes and the 2018 Notes (“Notes”). The Notes are unsecured obligations and rank equally with our existing and future unsecured senior indebtedness. The Notes effectively rank junior to all indebtedness and other liabilities, including trade payables, of our subsidiaries. The net proceeds from the offering of the Notes were approximately $1.5 billion after payment of expenses of the offering. The estimated fair value of the long-term debt was approximately $1.5 billion at January 30, 2009, compared to a carrying value of $1.5 billion at that date.
The Notes were issued pursuant to an Indenture dated as of April 17, 2008 (“Indenture”), between us and a trustee. The Indenture contains customary events of default with respect to the Notes, including failure to make required payments, failure to comply with certain agreements or covenants and certain events of bankruptcy and insolvency. The Indenture also contains covenants limiting our ability to create certain liens; enter into sale-and-leaseback transactions; and consolidate or merge with, convey, transfer, or lease all or substantially all of our assets to another person. The Senior Debentures generally contain no restrictive covenants, other than a limitation on liens on our assets and a limitation on sale-and-leaseback transactions involving our property. As of January 30, 2009, there were no events of default for the Indenture and the Senior Debentures.
Interest rate swap agreements were entered into concurrently with the issuance of the Senior Debentures to convert the fixed rate to a floating rate for a notional amount of $300 million and were set to mature April 15, 2028. The floating rates were based on three-month London Interbank Offered Rates plus 0.79%. In January 2009, we terminated our interest rate swap contracts with notional amounts totaling $300 million. We received $103 million in cash proceeds from the swap termination, which included $1 million in accrued interest. These swaps had effectively converted our $300 million, 7.10% fixed rate Senior Debentures due 2028 to variable rate debt. As a result of the swap terminations, the fair value of the terminated swaps are reported as part of the carrying value of the Senior Debentures and are amortized as a reduction of interest expense over the remaining life of the debt. The cash flows from the terminated swap contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
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Our effective interest rate for the Senior Debentures was 4.57% for Fiscal 2009. The principal amount of the debt was $300 million at January 30, 2009. The estimated fair value of the long-term debt was approximately $294 million at January 30, 2009, compared to a carrying value of $400 million at that date as a result of the termination of the interest rate swap agreements.
Prior to the termination of the interest rate swap contracts, the interest rate swaps qualified for hedge accounting treatment pursuant to SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended. We designated the issuance of the Senior Debentures and the related interest rate swap agreements as an integrated transaction. The changes in the fair value of the interest rate swap were reflected in the carrying value of the interest rate swaps on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. The differential to be paid or received on the interest rate swap agreements was accrued and recognized as an adjustment to interest expense as interest rates changed.
On April 15, 2008, we repaid the principal balance of the 1998 $200 million 6.55% fixed rate senior notes (the “Senior Notes”) upon their maturity. Interest rate swap agreements related to the Senior Notes had a notional amount of $200 million and also matured April 15, 2008. Our effective interest rate for the Senior Notes, prior to repayment, was 4.03% for the first quarter of Fiscal 2009.
As of January 30, 2009, we have a $1.5 billion commercial paper program with a supporting $1.5 billion senior unsecured revolving credit facility. This program allows us to obtain favorable short-term borrowing rates. At January 30, 2009, $100 million was outstanding under the program, and the weighted-average interest rate on those outstanding short-term borrowings was 0.19%. There were no outstanding advances under the commercial paper program at February 1, 2008. We use the proceeds of the program and facility for short-term liquidity purposes and believe we will be able to access the capital markets to meet these needs.
The credit facility requires compliance with conditions that must be satisfied prior to any borrowing, as well as ongoing compliance with specified affirmative and negative covenants, including maintenance of a minimum interest coverage ratio. Amounts outstanding under the facility may be accelerated for typical defaults, including failure to pay principal or interest, breaches of covenants, non-payment of judgments or debt obligations in excess of $200 million, occurrence of a change of control, and certain bankruptcy events. There were no events of default as of January 30, 2009. On April 3, 2009, $500 million of the credit facility expires, and the remainder expires June 1, 2011. We intend to have a new $500 million credit facility in place prior to the expiration of the current facility on April 3, 2009.
Standard and Poor’s Rating Services, Moody’s Investors Services and Fitch Ratings currently rate our senior unsecured long-term debt A−, A2, and A, 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 when determining our rating include, but are not limited to, publicly 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, in the event our rating was downgraded, our cost to borrow under the terms of the credit facility would increase. Also, a downgrade in our credit rating could increase our borrowing costs and may limit our ability to issue commercial paper or additional term debt.
Off-Balance Sheet Arrangements
Asset Securitization — During Fiscal 2009, we continued to transfer customer financing receivables to unconsolidated qualifying special purpose entities. The qualifying special purpose entities are bankruptcy remote legal entities with assets and liabilities separate from ours. The purpose of the qualifying special purpose entities is to facilitate the funding of customer receivables in the capital markets. Our unconsolidated qualifying special purpose entities have entered into financing arrangements with three multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. Two of the three conduits fund fixed-term leases and loans, and one conduit funds revolving loans. During Fiscal 2009 and Fiscal 2008, we transferred $1.4 billion and $1.2 billion, respectively, of customer receivables to unconsolidated qualifying special purpose entities. The principal balance of the securitized receivables at January 30, 2009, and February 1, 2008, was $1.4 billion and $1.2 billion, respectively.
Certain transfers are accounted for as a sale in accordance with SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, (“SFAS 140”). Upon the sale of the customer receivables to qualifying special purpose entities, we recognize a gain on the sale and retain an interest in the assets sold. We provide credit enhancement to the securitization in the form of over-collateralization. Receivables transferred to the qualified special purpose entities exceed the level of debt issued. We retain the right to receive collections for assets securitized exceeding the amount required to pay interest, principal, and other fees and expenses (referred to as retained interest). Retained interest is included in Financing Receivables on the balance sheet. At January 30, 2009, and February 1, 2008, our retained interest in securitized receivables was $396 million and $223 million, respectively. Our risk of loss related to securitized receivables is limited to the amount of our retained interest.
39
Our retained interest in the securitizations is determined by calculating the present value of excess cash flows over the expected duration of the transactions. In estimating the value of the retained interest, we make a variety of financial assumptions, including pool credit losses, payment rates, and discount rates. These assumptions are supported by both our historical experience and anticipated trends relative to the particular receivable pool. The weighted average assumptions for valuing retained interest can be affected by the many factors, including the type of assets (revolving versus fixed), repayment terms,interest rate movements, credit, and the credit quality of assets being securitized. We review our investments in retained interest periodically for impairment, based on estimated fair values. All gains and losses are recognized in income immediately. Retained interest balances and assumptions are disclosed in Note 6 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data.”liquidity risks.
Current Market Conditions
We service securitized contractsregularly monitor economic conditions and earn a servicing fee. Our securitization transactions generally do not result in servicing assetsassociated impacts on the financial markets and liabilities, as the contractual fees are adequate compensation in relation to the associated servicing cost.
our business. During Fiscal 2009,2012, the disruption inglobal economic environment continued to experience challenges. We consistently evaluate the debt and capital markets resulted in reduced liquidity and increased costs for funding of financial assets. Due to the proposed increase to the cost structure in our revolving credit conduit, we elected not to extend the terms of the agreement. This resulted in a scheduled amortization of the transaction. During this scheduled amortization period, no new debt will be issued and all principal collections will be used to pay down the outstanding debt amount related to the securitized assets. Our right to receive cash collections is delayed until the debt is fully paid off.
During the scheduled amortization period, no transfers of new revolving loans will occur. Additional purchases made on existing securitized revolving loans (repeat purchases) will continue to be transferred to the qualified special purpose entity, which will increase our retained interest on the balance sheet.
We will be required to consolidate the assets and liabilities relating to the revolving securitization transaction on our balance sheet once the amount of beneficial interest in the revolving credit conduit owned by third parties falls below 10%. We expect the securitization transaction related to revolving receivables to terminate completely in Fiscal 2010. The impact to our balance sheet is anticipated to be immaterial. Our fixed-term lease and loan securitization programs will be up for renewal in Fiscal 2010. We expect to renew these facilities. As we negotiate these annual renewals, management will continue to assess the costs and benefits of using securitization to fund our receivables. We expect to be able to continue to offer or arrange financing for our customers, despite our reduced reliance on securitization as a means of funding receivables.
Allhealth of our securitization programs contain standard structural features related tosupplier base, carefully manage customer credit, diversify counterparty risk, and monitor the performance of the securitized receivables. These structural features include defined credit losses, delinquencies, average credit scores, and excess collections above or below specified levels. In the event one or more of these features are met and we are unable to restructure the program, no further funding of receivables will be permitted, and the timing of expected retained interest cash flows will be delayed, which would impact the valuation of our retained interest. Should these events occur, we do not expect a material adverse affect on the valuation of the retained interest.
Liquidity, Capital Commitments, and Contractual Cash Obligations
Liquidity
Our cash balances are held in numerous locations throughout the world, including substantial amounts held outside of the U.S.; however, the majorityconcentration risk of our cash and cash equivalents balances globally. We routinely monitor our financial exposure to both sovereign and 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.
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
Cash 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 located outsidesufficient 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 the U.S. are denominated in the U.S. dollar. Most of the amounts held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws. We have provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered indefinitely reinvested outside of the U.S. Repatriation could result in additional U.S. federal income tax payments. We utilizeoperating liquidity, we use a variety of tax planningcapital sources to fund the growth in our financing receivables, share repurchases and our needs for less predictable investing and financing strategies with the objective of having our worldwide cash available in the locations in which it is needed.decisions such as acquisitions.
We have an activeOur working capital management team thatactively 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.liquidity, both domestically and internationally, to support our acquisition and investment strategy, share repurchase activity and other corporate needs. We tookutilize external capital sources, such as long-term notes and structured
financing arrangements, and short-term borrowings, consisting primarily of commercial paper, to supplement our internally generated sources of liquidity as necessary. We have a numbercurrently effective shelf registration statement under which we may issue up to $3.5 billion of actionsdebt 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 2009 to improve short- and long-term liquidity. We have reprioritized capital expenditures and other discretionary spending. The movement of some of our manufacturing operations to third party manufacturers and2012 primarily for general corporate purposes. During Fiscal 2012, we increased the associated closure of several of our manufacturing facilities has reduced the amount of capital required for our business. Also, during the second half of Fiscal 2009, we slowed our share repurchases. We remained active in the commercial paper market by issuing short-term borrowings with maturities extending into Fiscal 2010. We also increased themaximum size of our commercial paper program and supporting senior unsecured revolving credit facility by $500 millionfrom $2.0 billion to $1.5 billion in April 2008. On April 3, 2009, $500 million of the credit facility will expire, and the remainder will expire June 1, 2011.$2.5 billion. We intend to have a new $500 million credit
40
facility in place prior to the expiration of the current facility on April 3, 2009. In November 2008, we filed a shelf registration statement with the SEC, which provides us with the ability to issue additional term debt, subject to market conditions. We intend to establish themaintain appropriate debt levels based upon cash flow expectations, the overall cost of capital, cash requirements for operations, and discretionary spending, — including items such asspending for acquisitions and share repurchases, funding customer receivables, and acquisitions. Dependingrepurchases.
Our cash balances are held in numerous locations throughout the world, most 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 requirementsdomestic cash have increased as a result of our strategic initiatives. We fund these initiatives through our existing cash and market conditions,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 capital markets underU.S., we will continue to utilize these funds for local liquidity needs. Under current law, earnings available to be repatriated to the U.S. would be subject to U.S. federal income tax, less applicable foreign tax credits. 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 debt shelf registration statement that became effective in November 2008. We do not believe that the overall credit concernsworldwide cash available in the markets would impede our ability to access the capital markets in the future because of the overall strength of our financial position.
The following table summarizes our ending cash, cash equivalents, and investments balances:
| | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| |
| | | 2009 | | | 2008 | |
| | | (in millions) | |
| |
Cash, cash equivalents, and investments: | | | | | | | | |
| Cash and cash equivalents | | $ | 8,352 | | | $ | 7,764 | |
| Debt securities | | | 1,079 | | | | 1,657 | |
| Equity and other securities | | | 115 | | | | 111 | |
| | | | | | | | | |
| Cash, cash equivalents, and investments | | $ | 9,546 | | | $ | 9,532 | |
| | | | | | | | | |
We ended Fiscal 2009 and Fiscal 2008 with $9.5 billion in cash, cash equivalents, and investments. Since February 1, 2008, we have spent $2.9 billion on share repurchases offset primarily by our $1.5 billion debt issuance and $1.9 billion in cash flow from operations. We use cash generated by operations as our primary source of liquidity and believe that internally generated cash flows are sufficient to support business operations. Over the past year, we have utilized external capital sources to supplement our domestic liquidity to fund a number of strategic initiatives. We ended the fourth quarter of Fiscal 2009 with a negative cash conversion cycle of 25 days, whichlocations where it is a contraction of 11 days from the fourth quarter of Fiscal 2008. The contraction is due to a decrease in our accounts payable balance, which is primarily driven by a reduction in purchases related to declining unit volumes. A negative cash conversion cycle combined with a slowdown in revenue growth could result in cash use in excess of cash generated. Generally, as our growth stabilizes, our cash generation from operating activities will improve. For further discussion of the results of our cash conversion cycle, see “Operating Activities” below.
needed.
The following table contains a summary of our Consolidated Statements of Cash Flows for the past three fiscal years:
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | |
| | | January 30,
| | February 1,
| | February 2,
| | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | | Fiscal Year Ended |
| | | (in millions) | | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | | | (in millions) | | |
Net change in cash from: | | | | | | | | | | | | | | |
| | |
| | |
|
| Operating activities | | $ | 1,894 | | | $ | 3,949 | | | $ | 3,969 | | | $ | 5,527 |
| | $ | 3,969 |
| | $ | 3,906 |
|
| Investing activities | | | 177 | | | | (1,763 | ) | | | 1,003 | | | (6,166 | ) | | (1,165 | ) | | (3,809 | ) |
| Financing activities | | | (1,406 | ) | | | (4,120 | ) | | | (2,551 | ) | | 577 |
| | 477 |
| | 2,012 |
|
| Effect of exchange rate changes on cash and cash equivalents | | | (77 | ) | | | 152 | | | | 71 | | | 1 |
| | (3 | ) | | 174 |
|
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | $ | 588 | | | $ | (1,782 | ) | | $ | 2,492 | | |
| | | | | | | | | |
| Change in cash and cash equivalents | | | $ | (61 | ) | | $ | 3,278 |
| | $ | 2,283 |
|
Operating Activities — CashOperating cash flows from operating activities duringfor Fiscal 2009, 2008, and 2007 resulted primarily from net income, which represents our principal source of cash. Cash flows from operating activities were $1.92012 increased $1.6 billion during Fiscal 2009, compared to $3.9 billion during Fiscal 2008 and $4.0 billion during Fiscal 2007. For Fiscal 2009, the decreaseprior fiscal year. The increase in operating cash flows was primarily leddriven by the deterioration of our cash conversion cycle, slower growth in deferred service revenue, and a decreaseyear-over-year increases in net income. Inincome as well as favorable changes in working capital. For Fiscal 2008,2011 compared to Fiscal 2010, the slight decreaseincrease in operating cash flows was primarily dueattributable to changes in working capital slightly offset by an increase in net income.income and deferred revenue, which was partially offset by less favorable changes in working capital. See “Key Performance Metrics” below for additional discussion of our cash conversion cyclecycle.
Investing Activities —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 “Key Performance Metrics” below.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 business 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 of 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 in Fiscal 2010 was Perot Systems.
Financing Activities — Financing activities primarily consist of proceeds and repayments from borrowings 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 primarily due to the issuance 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 senior notes outstanding as of February 3, 2012, compared to $4.8 billion and $3.3 billion principal amount of senior notes outstanding as of January 28, 2011, and January 29, 2010, respectively.
We have $3.0 billion of senior unsecured revolving credit facilities primarily to support our $2.5 billion commercial paper program. Of the credit facilities, $1.0 billion will expire on April 2, 2013, and $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 had $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 program compared to $0.5 billion of commercial paper outstanding as of January 29, 2010. See Note 5 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.
We also repurchased approximately 178 million shares of common stock for $2.7 billion during Fiscal 2012 compared to approximately 57 million shares of common stock for $800 million during Fiscal 2011. During the third quarter of Fiscal 2012, our Board of Directors authorized an additional $5 billion for our share repurchase program. As of February 3, 2012, $6.0 billion remained available for future share repurchases.
Key Performance Metrics — Although ourOur cash conversion cycle deterioratedfor the fiscal quarter ended February 3, 2012, improved from February 1, 2008,the fiscal quarter ended January 28, 2011, and February 2, 2007, our directwas essentially unchanged from the fiscal quarter ended January 29, 2010. Our business model allows us to maintain an efficient cash conversion cycle, which compares favorably with that of others in our industry. As our growth stabilizes, more typical cash generation and a resulting cash conversion cycle are expected to resume.
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 30,
| | February 1,
| | February 2,
|
| | | 2009 | | 2008 | | 2007 |
| |
Days of sales outstanding(a) | | | 35 | | | 36 | | | 31 |
Days of supply in inventory(b) | | | 7 | | | 8 | | | 5 |
Days in accounts payable(c) | | | (67) | | | (80) | | | (78) |
| | | | | | | | | | |
| Cash conversion cycle | | | (25) | | | (36) | | | (42) |
| | | | | | | | | | |
_____________________
| | |
(a) | | Days of sales outstanding (“DSO”) calculates the average collection period of our receivables. DSO is based on the ending net trade receivables and the most recent quarterly revenue for each period. DSO also includes the effect of product costs related to customer shipments not yet recognized as revenue that are classified in other current assets. DSO is calculated by adding accounts receivable, net of allowance for doubtful accounts, and customer shipments in transit and dividing that sum by average net revenue per day for the current quarter (90 days)(97 days for Fiscal 2012; 90 days for Fiscal 2011 and Fiscal 2010). AtFebruary 3, 2012, January 30, 2009, February 1, 2008,28, 2011 and February 2, 2007,January 29, 2010, DSO and days of customer shipments not yet recognized were 3139 and 43 days, 3337 and 3 days, and 2835 and 3 days, respectively. |
| |
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(b) | | Days of supply in inventory (“DSI”) measures the average number of days from procurement to sale of our product. DSI is based on ending inventory and most recent quarterly cost of sales for each period. DSI is calculated by dividing inventory by average cost of goods sold per day for the current quarter (90 days)(97 days for Fiscal 2012; 90 days for Fiscal 2011 and Fiscal 2010). |
| |
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(c) | | Days in accounts payable (“DPO”) calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and most recent quarterly cost of sales for each period. DPO is calculated by dividing accounts payable by average cost of goods sold per day for the current quarter (90 days)(97 days for Fiscal 2012; 90 days for Fiscal 2011 and Fiscal 2010). |
Our cash conversion cycle contractedincreased three days at February 3, 2012, from January 28, 2011, driven by elevena seven day increase in
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 was offset in part by a two day increase in DSO and a two day increase in DSI. The increase in DSO from January 28, 2011, was due to a shift in the mix of receivables towards customers with longer payment terms. The increase in DSI from January 28, 2011,was primarily driven by strategic purchases of inventory, particularly HDDs.
Our cash conversion cycle decreased three days at January 30, 2009,28, 2011, from February 1, 2008,January 29, 2010, driven by a thirteentwo day decrease in DPO offset by a one day decreaseincrease in DSO and a one day decreaseincrease in DSI. DPO was flat year-over-year. The decrease in DPO from February 1, 2008, is 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 decreaseincrease in DSO from February 1, 2008, is attributable to the timing of revenueJanuary 29, 2010, was due to seasonal impact, partially offset by a shift to customers withgrowth in our Commercial business, which typically has longer payment terms.
Our cash conversion cycle contracted by six days at February 1, 2008 compared to February 2, 2007. This deterioration was driven by a five day The slight increase in DSO largely attributed to timing of paymentsDSI from customers, a continued shift in sales mix from domestic to international, and an increased presence in the retail channel. In addition, DSI increased by three days, whichJanuary 29, 2010, was primarily due to strategic materials purchases. The DSO and DSI declines were offset by atwo-day increase in DPO largely attributedattributable to an increase in strategic purchases of materials and finished goods inventory in connection with the amountoptimization of strategic material purchases in inventory at the end of Fiscal 2008 and the number of suppliers with extended payment terms as compared to Fiscal 2007.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 it presentsthis 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 $556$482 million, $519$541 million, and $424$523 million, at February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007,January 29, 2010, respectively.
Investing Activities —Cash provided by investing activities during Fiscal 2009 was $177 million, as compared to $1.8 billion cash used by investing activities during Fiscal 2008 and $1.0 billion provided in Fiscal 2007. Cash generated or used in investing activities principally consists of the net of sales and maturities and purchases of investments; net capital expenditures for property, plant, and equipment; and cash used to fund strategic acquisitions, which was approximately $176 million during Fiscal 2009 compared to $2.2 billion during Fiscal 2008. In light of continued capital market and interest rate volatility,We believe that we decided to increase liquidity and change the overall interest rate profile of the portfolio. As a result, during Fiscal 2009 we began repositioning our investment portfolio to shorter duration securities, thus impacting the volume of our sales and purchases of securities. In Fiscal 2009 as compared to Fiscal 2008, lowercan generate cash flow from operating activitiesoperations in excess of net income over the long term and lower yields on investments resulted in lower net proceeds from maturities, sales, and purchases. In Fiscal 2008 as compared to Fiscal 2007, we re-invested a lower amount ofcan operate 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 — Cash used in financing activities during Fiscal 2009 was $1.4 billion, as compared to $4.1 billion in Fiscal 2008 and $2.6 billion in Fiscal 2007. Financing activities primarily consist of the repurchase of our common stock, partially offset by proceeds
42
from the issuance of common stock under employee stock plans and other items. Theyear-over-year decrease in cash used for financing activities is due primarily to the reduction of our share repurchase program during Fiscal 2009 and by proceeds from the issuance of long-term debt of $1.5 billion. During Fiscal 2009, we repurchased approximately 134 million shares at an aggregate cost of $2.9 billion compared to approximately 179 million shares at an aggregate cost of $4.0 billion in Fiscal 2008. We also paid the principal on the Senior Notes of $200 million that matured in April 2008 as discussed in Note 2 of Notes to Consolidated Financial Statements under “Part II — Item 8 — Financial Statements and Supplementary Data.”
In Fiscal 2008, theyear-over-year increase in cash used in financing activities was due primarily to the repurchase of our common stock as the temporary suspension of our share repurchase program endedconversion cycle in the fourth quarter of Fiscal 2008. In Fiscal 2008, we repurchased approximately 179 million shares at an aggregate cost of $4.0 billion, and during Fiscal 2007, we repurchased approximately 118 million shares at an aggregate cost of $3.0 billion.mid negative 30 day range.
We also have a commercial paper program that allows us to issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion. We use the proceeds for general corporate purposes. At January 30, 2009, there was $100 million outstanding under the commercial paper program and no advances under the supporting credit facility. See Note 2 of Notes to Consolidated Financial Statements under “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion on our long-term debt and commercial paper program.
Capital Commitments
Share Repurchase Program — We 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.
We typically repurchase shares of common stock through a systematic program of open market purchases. During Fiscal 2009, we repurchased approximately 134 million shares of common stock for an aggregate cost of $2.9 billion. During Fiscal 2008 we repurchased approximately 179 million shares at an aggregate cost of $4.0 billion compared to 118 million shares at an aggregate cost of $3.0 billion in Fiscal 2007. 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 20092012 and Fiscal 2008,2011, we spent $440$675 million and $831$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. The significant decrease in capital expenditures from Fiscal 2008 is primarily due to the completion of facilities related projects during Fiscal 2008 and other cost reduction actions. 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 2010,2013, which will be primarily related to our continued expansion worldwide,infrastructure investments and strategic initiatives, are currently expected to reachtotal approximately $400$650 million to $700 million. These expenditures are expected towill be primarily funded from our cash flows from operating activities.
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 $213 millionmanufacturing needs. See "Liquidity, Capital Commitments, and $294 million is included in other current assets at January 30, 2009, and February 1, 2008, respectively.
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Contractual Cash Obligations — Contractual Cash Obligations" for more information about our purchase commitments.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at January 30, 2009:February 3, 2012:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Payments Due by Period | |
| | | | | | Fiscal
| | | Fiscal 2011-
| | | Fiscal 2013-
| | | | |
| | | Total | | | 2010 | | | 2012 | | | 2014 | | | Beyond | |
| | | (in millions) | |
| |
| Contractual cash obligations: | | | | | | | | | | | | | | | | | | | | |
| Debt | | $ | 1,797 | | | $ | 2 | | | $ | - | | | $ | 600 | | | $ | 1,195 | |
| Operating leases | | | 458 | | | | 89 | | | | 140 | | | | 76 | | | | 153 | |
| Commercial paper | | | 100 | | | | 100 | | | | - | | | | - | | | | - | |
| Advances under credit facilities | | | 12 | | | | 12 | | | | - | | | | - | | | | - | |
| Purchase obligations | | | 787 | | | | 590 | | | | 196 | | | | 1 | | | | - | |
| Interest | | | 1,578 | | | | 104 | | | | 208 | | | | 193 | | | | 1,073 | |
Current portion of uncertain tax positions(a) | | | 6 | | | | 6 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Contractual cash obligations | | $ | 4,738 | | | $ | 903 | | | $ | 544 | | | $ | 870 | | | $ | 2421 | |
| | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | |
| | | | | 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 |
|
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(a) | | The current portion of uncertain tax positions does not includeWe had approximately $1.7$2.6 billion in additional liabilities associated with uncertain tax positions that are not expected to be liquidated in Fiscal 2010.2013. We are unable to reliably estimate the expected payment dates for these additional non-current liabilities. |
Principal Payments on Long-Term Debt — At January 30, 2009, we hadOur expected principal cash payments related to long term debt are exclusive of hedge accounting adjustments or discounts and premiums. We have outstanding $300 million in Senior Debentures with the principal balance due April 15, 2028. We also had outstanding $1.5 billion of long-term unsecured notes that were issued on April 17, 2008, in three tranches: $600 million aggregate principal amount due 2013, $500 million aggregate principal amount due 2018, and $400 million aggregate principal amount due 2038. Interest is payable semi-annually on April 15 and October 15 for the Senior Debentures and Notes.with varying maturities. For additional information, regarding these debt issuances, see Note 25 of Notes to Consolidated Financial Statements included inunder “Part II — Item 8 — Financial Statements and Supplementary 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.
Commercial Paper — We have a commercial paper program that allows us to issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion. We use the proceeds for general corporate purposes. At January 30, 2009, there was $100 million outstanding under the commercial paper program and no advances under the supporting credit facility. See Note 2 of Notes to Consolidated Financial Statements under “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of our commercial paper program.
Advances Under Credit Facilities — Dell India Pvt Ltd., our wholly-owned subsidiary, maintains unsecured short-term credit facilities with Citibank N.A. Bangalore Branch India (“Citibank India”) that provide a maximum capacity of $30 million to fund Dell India’s working capital and import buyers’ credit needs. Financing is available in both Indian Rupees and foreign currencies. The borrowings are extended on an unsecured basis based on our guarantee to Citibank N.A. Citibank India can cancel the facilities in whole or in part without prior notice, at which time any amounts owed under the facilities will become immediately due and payable. Interest on the outstanding loans is charged monthly and is calculated based on Citibank India’s internal cost of funds plus 0.25%. At January 30, 2009, and February 1, 2008, outstanding advances from Citibank India totaled $12 million and $23 million, respectively, which are included in short-term borrowings on our Consolidated Statement of Financial Position. There have been no events of default.
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
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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.
PurchaseOur purchase obligations decreasedincreased from $0.4 billion at January 28, 2011, to approximately $787 million at January 30, 2009, from $893 million$2.9 billion at February 1, 2008.3, 2012. This increase was primarily attributable 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 HDD supply chain as a result of severe flooding in Thailand during the third quarter of Fiscal 2012. The decrease is primarily due toagreements provide for some variation in the fulfillmentamount of commitmentsunits 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 entering into new purchase contracts.have terms expiring on various dates through December 2012.
Interest — See Note 25 of the Notes to the Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of our debt and related interest expense.
Risk Factors Affecting Our Business and Prospects
There are numerous risk factorssignificant risks that affect our business, operating results, financial condition, and the results of our operations. Someprospects. Many of these risks are beyond our control. These risk factors include:risks include those relating to:
intense competition;
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• | weakening global economic conditions and instability in financial markets; |
• | strong competition; |
• | our ability to generate substantialnon-U.S. net revenue; |
• | our ability to accurately predict product, customer, and geographic sales mix and seasonal sales trends; |
• | information technology and manufacturing infrastructure failures; |
• | our ability to effectively manage periodic product transitions; |
• | our ability to successfully transform our sales capabilities and add to our product and service offerings; |
• | disruptions in component or product availability; |
• | our reliance on vendors; |
• | our reliance on third-party suppliers for quality product components, including reliance on several single-sourced or limited-sourced suppliers; |
• | our ability to access the capital markets; |
• | risks relating to our internal controls; |
• | unfavorable results of legal proceedings; |
• | our acquisition of other companies; |
• | our ability to properly manage the distribution of our products and services; |
• | our cost cutting measures; |
• | effective hedging of our exposure to fluctuations in foreign currency exchange rates and interest rates; |
• | risks related to counterparty default; |
• | obtaining licenses to intellectual property developed by others on commercially reasonable and competitive terms; |
• | our ability to attract, retain, and motivate key personnel; |
• | loss of government contracts; |
• | expiration of tax holidays or favorable tax rate structures or unfavorable outcomes in tax compliance and regulatory matters; |
• | changing environmental laws; and |
• | the effect of armed hostilities, terrorism, natural disasters, and public health issues. |
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.”
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 StatementStatements 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, stock-based compensation, 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.”
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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 under Emerging Issues Task Force99-19,offered by Dell or its competitors in stand-alone sales to similarly situated customers.“Reporting Revenue Gross as a Principal versus Net as an Agent.”
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.
During Fiscal 2008, we began sellingWe 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 retailersthese arrangements. Therefore, there is to defer the full amount of revenue relative to sales for which the rights of return apply as we do not currently have sufficient historical data to establish reasonable and reliable estimates of returns although we are infor the processmajority of accumulating the data necessary to develop reliable estimates in the future. 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.
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 obligated to perform, is recorded as deferred services revenue and subsequently recognized in accordance withEITF 01-09. Our customer programs primarily involve rebates,on a straight-line basis over the term of the contract or ratably as services are completed. Revenue from sales of third-party extended warranty and service contracts, which we are designednot obligated to serve as sales incentives 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 — We account for business combinations using the purchaseacquisition method of accounting and accordingly, the assets and liabilities of the acquired entitiesbusiness are recorded at their estimated fair values at the acquisition date. Goodwill represents thedate of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. Any changes in the estimated fair values of the net assets includingrecorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount assignedof the purchase price allocable to identifiable intangible assets. Given the time it takes to obtain pertinent information to finalize the acquired company’s balance sheet, it may be several quarters before wegoodwill. All
acquisition costs are able to finalize those initialexpensed as incurred and in-process research and development costs are recorded at fair value estimates. Accordingly, itas an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is not uncommon foramortized over its expected useful life. Any restructuring charges associated with a business combination are expensed subsequent to the initialacquisition date. The application of business combination and impairment accounting requires the use of significant estimates to be subsequently revised. and assumptions.
The results of operations of acquired businesses are included in theour Consolidated Financial Statements from the acquisition date.
Identifiable intangible assets with finite lives are amortized over their estimated useful lives. They are generally amortized on a non-straight-line approach based on the associated projected cash flows in order to match the amortization pattern to the pattern in which the economic benefits of the assets are expected to be consumed. They are reviewed for impairment if indicators of potential impairment exist. Goodwill and indefinite lived intangiblesindefinite-lived intangible assets are tested for impairment on an annual basis in the second fiscal quarter, or sooner if an indicator of impairment occurs. GivenTo determine whether goodwill is impaired, we determine the rapid changes infair values of each of our reportable business units using a discounted cash flow methodology and then compare the market place duringfair values to the second halfcarrying values of Fiscal 2009, we updated our impairment analysis in the fourth quarter andeach reportable business unit. We concluded that there were no impairment triggering events.events during Fiscal 2012. At the end of the second quarter of Fiscal 2012, the annual testing period, our market capitalization, including common stock held by affiliates, was $29.8 billion compared to stockholders’ equity of $8.3 billion. We have determined that a 10% decrease in the fair value of any one of our reporting units as of February 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 2015 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
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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. We provide
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 valuation reserves, where appropriate, in accordance with FIN 48.
Stock-Based Compensation — Effective February 4, 2006, stock-based compensation expense is recordedappeals or litigation processes, based on the grant date fair value estimate in accordance withtechnical merits and a consideration of the provisionsrelevant taxing authority's administrative practices and precedents. The determination of SFAS 123(R). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123(R) and the valuation of share-based payments for public companies. We have applied the provisions of SAB 107 in our adoption of SFAS 123(R). Note 5 of Notesincome tax expense related to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for further discussion of stock-based compensation.
SFAS 123(R)these positions requires the use of a valuation model to calculate the fair value of stock option awards. We have elected to use the Black-Scholes option pricing model, which incorporates various assumptions, including volatility, expected term, and risk-free interest rates. The volatility is based on a blend of implied and historical volatility of our common stock over the most recent period commensurate with the estimated expected term of our stock options. We use this blend of implied and historical volatility,management judgment as well as other economic data, because weuse of estimates. We believe such volatility is more representative of prospective trends. The expected term of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.provided adequate reserves for all uncertain tax positions.
The cost of restricted stock awards is determined using the fair market value of our common stock on the date of grant.
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.
Recently Issued and Adopted
New Accounting Pronouncements
Intangibles- Goodwill and Other — In September 2006,2011, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157,Fair Value Measurements(“SFAS 157”), which definesStandards Board issued new guidance that will simplify how entities test goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value providesof a frameworkreporting 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 measuring fair value, and expands the disclosures requiredus for assets and liabilities measured at fair value. SFAS 157 applies to existing accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. We adopted the effective portions of SFAS 157 beginning the first quarter of the fiscal year ending February 1, 2013. Early adoption is permitted. We do not expect that this new guidance will impact our Consolidated Financial Statements.
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 2009,2012, 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 materialassurance 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 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 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 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 underlying exposure.
Interest Rate Risk
We also are exposed to interest rate risk related to our financial results. In February 2008, FASB issued FASB Staff Position (“FSP”)157-2,Effective Datedebt and investment portfolios and financing receivables. We mitigate the risk related to our structured financing debt through the use of FASB Statement No. 157(“FSP 157-2”), which delaysinterest rate swaps to hedge the effective datevariability in cash flows related to the interest rate payments on such debt. See Note 6 of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of Fiscal 2010. We are currently evaluating the inputs and techniques used in these measurements, including items such as impairment assessments of fixed assets and goodwill impairment testing. See Note 2 of Notes to Consolidated Financial Statements included in “Part II — Item 8 — Financial Statements and Supplementary Data” for more information on our interest rate swaps.
We mitigate the impactrisks 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 the adoption.
On October 10, 2008, the FASB issued FSPNo. FAS 157-3 “Determining the Fair Value ofFebruary 3, 2012, a Financial Asset When the Market for that Asset is Not Active” (“FSPFAS 157-3”), which clarifies the application of SFAS 157100 basis point increase or decrease in interest rates would result in a market that is not active. Additional guidance is provided regarding how the reporting entity’s own assumptions should be considered when relevant observable inputs do not exist, how available observable inputsdecrease or increase of approximately $61 million in a market that is not active should be considered when measuring fair value, and how the use of market quotes should be considered when assessing the relevance of inputs available to measure fair value. FSPFAS 157-3 became effective
47
immediately upon issuance. Dell considered the additional guidance with respect to the valuation of its financial assets and liabilities and their corresponding designation within the fair value hierarchy. Its adoption did notof our investment portfolio. As of January 28, 2011, a 100 basis point increase or decrease in interest rates would have resulted in a material effect on Dell’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”), which provides companies with an option to report selected financial assets and liabilities at fair value with the changesdecrease or increase of approximately $4 million in fair value recognized in earnings at each subsequent reporting date. SFAS 159 provides an opportunity to mitigate potential volatility in earnings caused by measuring related assets and liabilities differently, and it may reduce the need for applying complex hedge accounting provisions. While SFAS 159 became effective for our 2009 fiscal year, we did not elect the fair value measurement option for any of our financial assets or liabilities.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations(“SFAS 141(R)”). SFAS 141(R) requires that the acquisition method of accounting be appliedinvestment portfolio. The overall increase in our interest rate sensitivity from January 28, 2011, to February 3, 2012, was due to a broader setshift to longer-duration investments.
ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51(“SFAS 160”). SFAS 160 requires that the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary, and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and is required to be adopted by us beginning in the first quarter of Fiscal 2010. We do not expect SFAS 160 to have a material impact on our results of operations, financial position, and cash flows.In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(“SFAS 161”),which requires additional disclosures about the objectives of derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(“SFAS 133”), and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on a company’s financial position, financial performance, and cash flows. SFAS 161 does not change the accounting treatment for derivative instruments and is effective for us beginning Fiscal 2010.
|
| |
ITEM 7A — | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Response 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.
48
| |
ITEM 8 — | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | | Page |
|
| Financial Statements: | | |
| | |
| |
| | 50 | |
| |
| | 51 | |
Consolidated Statements of Income for the fiscal years ended February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007January 29, 2010 | |
| | 52 | |
Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007January 29, 2010 | |
| | 53 | |
Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007January 29, 2010 | |
| | 54 | |
| | | 55 | |
| | | | |
| | | 97 | |
All other schedules are omitted because they are not applicable. | | | | |
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Dell Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Dell Inc. and its subsidiaries (“Company”(the "Company") at February 3, 2012 and January 30, 2009 and February 1, 2008,28, 2011, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 2009February 3, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 30, 2009,February 3, 2012, based on criteria established inInternal Control —- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCompany's management is responsible for these financial statements, and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
InAs described in Note 1, in Fiscal 2008,2011 the Company adopted new accounting standards which changed the manner in which it accounts for uncertain tax positions (Note 3)variable interest entities and certain hybridtransfers of financial instruments (Note 1).assets and extinguishments of liabilities.
A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Austin, Texas
March 26, 200913, 2012
50
DELL INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions)
|
| | | | | | | |
| | February 3,
2012 | | January 28,
2011 |
| ASSETS |
| Current assets: | |
| | |
|
| Cash and cash equivalents | $ | 13,852 |
| | $ | 13,913 |
|
| Short-term investments | 966 |
| | 452 |
|
| Accounts receivable, net | 6,476 |
| | 6,493 |
|
| Short-term financing receivables, net | 3,327 |
| | 3,643 |
|
| Inventories, net | 1,404 |
| | 1,301 |
|
| Other current assets | 3,423 |
| | 3,219 |
|
| Total current assets | 29,448 |
| | 29,021 |
|
| Property, plant, and equipment, net | 2,124 |
| | 1,953 |
|
| Long-term investments | 3,404 |
| | 704 |
|
| Long-term financing receivables, net | 1,372 |
| | 799 |
|
| Goodwill | 5,838 |
| | 4,365 |
|
| Purchased intangible assets, net | 1,857 |
| | 1,495 |
|
| Other non-current assets | 490 |
| | 262 |
|
| Total assets | $ | 44,533 |
| | $ | 38,599 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | |
|
| Short-term debt | $ | 2,867 |
| | $ | 851 |
|
| Accounts payable | 11,656 |
| | 11,293 |
|
| Accrued and other | 3,934 |
| | 4,181 |
|
| Short-term deferred services revenue | 3,544 |
| | 3,158 |
|
| Total current liabilities | 22,001 |
| | 19,483 |
|
| Long-term debt | 6,387 |
| | 5,146 |
|
| Long-term deferred services revenue | 3,836 |
| | 3,518 |
|
| Other non-current liabilities | 3,392 |
| | 2,686 |
|
| Total liabilities | 35,616 |
| | 30,833 |
|
| Commitments and contingencies (Note 10) |
|
| |
|
|
| Stockholders’ equity: | | | |
|
| Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 3,390 and 3,369, respectively; shares outstanding: 1,761 and 1,918, respectively | 12,187 |
| | 11,797 |
|
| Treasury stock at cost: 1,154 and 976 shares, respectively | (31,445 | ) | | (28,704 | ) |
| Retained earnings | 28,236 |
| | 24,744 |
|
| Accumulated other comprehensive loss | (61 | ) | | (71 | ) |
| Total stockholders’ equity | 8,917 |
| | 7,766 |
|
| Total liabilities and stockholders’ equity | $ | 44,533 |
| | $ | 38,599 |
|
The accompanying notes are an integral part of these consolidated financial statements.
DELL INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts) |
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| Net revenue: | |
| | |
| | |
|
| Products | $ | 49,906 |
| | $ | 50,002 |
| | $ | 43,697 |
|
| Services, including software related | 12,165 |
| | 11,492 |
| | 9,205 |
|
| Total net revenue | 62,071 |
| | 61,494 |
| | 52,902 |
|
| Cost of net revenue: | | | |
| | |
|
| Products | 39,689 |
| | 42,068 |
| | 37,534 |
|
| Services, including software related | 8,571 |
| | 8,030 |
| | 6,107 |
|
| Total cost of net revenue | 48,260 |
| | 50,098 |
| | 43,641 |
|
| Gross margin | 13,811 |
| | 11,396 |
| | 9,261 |
|
| Operating expenses: | | | |
| | |
|
| Selling, general, and administrative | 8,524 |
| | 7,302 |
| | 6,465 |
|
| Research, development, and engineering | 856 |
| | 661 |
| | 624 |
|
| Total operating expenses | 9,380 |
| | 7,963 |
| | 7,089 |
|
| Operating income | 4,431 |
| | 3,433 |
| | 2,172 |
|
| Interest and other, net | (191 | ) | | (83 | ) | | (148 | ) |
| Income before income taxes | 4,240 |
| | 3,350 |
| | 2,024 |
|
| Income tax provision | 748 |
| | 715 |
| | 591 |
|
| Net income | $ | 3,492 |
| | $ | 2,635 |
| | $ | 1,433 |
|
| Earnings per share: | | | |
| | |
|
| Basic | $ | 1.90 |
| | $ | 1.36 |
| | $ | 0.73 |
|
| Diluted | $ | 1.88 |
| | $ | 1.35 |
| | $ | 0.73 |
|
| Weighted-average shares outstanding: | |
| | |
| | |
|
| Basic | 1,838 |
| | 1,944 |
| | 1,954 |
|
| Diluted | 1,853 |
| | 1,955 |
| | 1,962 |
|
The accompanying notes are an integral part of these consolidated financial statements.
DELL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions) |
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| Cash flows from operating activities: | |
| | |
| | |
|
| Net income | $ | 3,492 |
| | $ | 2,635 |
| | $ | 1,433 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
| |
|
| | |
|
| Depreciation and amortization | 936 |
| | 970 |
| | 852 |
|
| Stock-based compensation expense | 362 |
| | 332 |
| | 312 |
|
| Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | (5 | ) | | (4 | ) | | 59 |
|
| Deferred income taxes | 19 |
| | (45 | ) | | (52 | ) |
| Provision for doubtful accounts — including financing receivables | 234 |
| | 382 |
| | 429 |
|
| Other | 21 |
| | 26 |
| | 102 |
|
| Changes in assets and liabilities, net of effects from acquisitions: |
|
| |
|
| | |
|
| Accounts receivable | (53 | ) | | (707 | ) | | (660 | ) |
| Financing receivables | (372 | ) | | (709 | ) | | (1,085 | ) |
| Inventories | (52 | ) | | (248 | ) | | (183 | ) |
| Other assets | (28 | ) | | 516 |
| | (225 | ) |
| Accounts payable | 327 |
| | (151 | ) | | 2,833 |
|
| Deferred services revenue | 720 |
| | 551 |
| | 135 |
|
| Accrued and other liabilities | (74 | ) | | 421 |
| | (44 | ) |
| Change in cash from operating activities | 5,527 |
| | 3,969 |
| | 3,906 |
|
| Cash flows from investing activities: | |
| | |
| | |
|
| Investments: | |
| | |
| | |
|
| Purchases | (4,656 | ) | | (1,360 | ) | | (1,383 | ) |
| Maturities and sales | 1,435 |
| | 1,358 |
| | 1,538 |
|
| Capital expenditures | (675 | ) | | (444 | ) | | (367 | ) |
| Proceeds from sale of facilities and land | 14 |
| | 18 |
| | 16 |
|
| Purchase of financing receivables | — |
| | (430 | ) | | — |
|
| Collections on purchased financing receivables | 278 |
| | 69 |
| | — |
|
| Acquisitions, net of cash received | (2,562 | ) | | (376 | ) | | (3,613 | ) |
| Change in cash from investing activities | (6,166 | ) | | (1,165 | ) | | (3,809 | ) |
| Cash flows from financing activities: | |
| | |
| | |
|
| Repurchases of common stock | (2,717 | ) | | (800 | ) | | — |
|
| Issuance of common stock under employee plans | 40 |
| | 12 |
| | 2 |
|
| Issuance (repayment) of commercial paper (maturity 90 days or less), net | 635 |
| | (176 | ) | | 76 |
|
| Proceeds from debt | 4,050 |
| | 3,069 |
| | 2,058 |
|
| Repayments of debt | (1,435 | ) | | (1,630 | ) | | (122 | ) |
| Other | 4 |
| | 2 |
| | (2 | ) |
| Change in cash from 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 |
|
| Cash and cash equivalents at beginning of the period | 13,913 |
| | 10,635 |
| | 8,352 |
|
| Cash and cash equivalents at end of the period | $ | 13,852 |
| | $ | 13,913 |
| | $ | 10,635 |
|
| Income tax paid | $ | 408 |
| | $ | 435 |
| | $ | 434 |
|
| Interest paid | $ | 267 |
| | $ | 188 |
| | $ | 151 |
|
DELL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock and Capital in Excess of Par Value | | | | | | | | | | |
| | | Treasury Stock | | | | Accumulated Other Comprehensive Income/(Loss) | | |
| | Issued Shares (a) | | Amount | | Shares | | Amount | | Retained Earnings | | | Total |
| Balances at January 30, 2009 | 3,338 |
| | $ | 11,189 |
| | 919 |
| | $ | (27,904 | ) | | $ | 20,677 |
| | $ | 309 |
| | $ | 4,271 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 1,433 |
| | — |
| | 1,433 |
|
| Change in net unrealized gain or loss on investments, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | 6 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | (29 | ) | | (29 | ) |
| Change in net unrealized gain or loss on derivative instruments, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | (323 | ) | | (323 | ) |
| Total comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,087 |
|
Stock issuances under employee plans and other(b) | 13 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Stock-based compensation related | — |
| | 312 |
| | — |
| | — |
| | — |
| | — |
| | 312 |
|
| Net tax shortfall from employee stock plans | — |
| | (32 | ) | | — |
| | — |
| | — |
| | — |
| | (32 | ) |
| Balances at January 29, 2010 | 3,351 |
| | 11,472 |
| | 919 |
| | (27,904 | ) | | 22,110 |
| | (37 | ) | | 5,641 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 2,635 |
| | — |
| | 2,635 |
|
| Adjustment to consolidate variable interest entities | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Change in net unrealized gain or loss on investments, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | 79 |
| | 79 |
|
| Change in net unrealized gain or loss on derivative instruments, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | (112 | ) | | (112 | ) |
| Total comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,600 |
|
Stock issuances under employee plans and other(b) | 18 |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | 7 |
|
| Repurchases of common stock | — |
| | — |
| | 57 |
| | (800 | ) | | — |
| | — |
| | (800 | ) |
| Stock-based compensation related | — |
| | 332 |
| | — |
| | — |
| | — |
| | — |
| | 332 |
|
| Net tax shortfall from employee stock plans | — |
| | (14 | ) | | — |
| | — |
| | — |
| | — |
| | (14 | ) |
| Balances at January 28, 2011 | 3,369 |
| | 11,797 |
| | 976 |
| | (28,704 | ) | | 24,744 |
| | (71 | ) | | 7,766 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 3,492 |
| | — |
| | 3,492 |
|
| Change in net unrealized gain or loss on investments, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
|
| Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | (74 | ) | | (74 | ) |
| Change in net unrealized gain or loss on derivative instruments, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | 71 |
| | 71 |
|
| Total comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,502 |
|
Stock issuances under employee plans and other(b) | 21 |
| | 33 |
| | — |
| | — |
| | — |
| | — |
| | 33 |
|
| Repurchases of common stock | — |
| | — |
| | 178 |
| | (2,741 | ) | | — |
| | — |
| | (2,741 | ) |
| Stock-based compensation related | — |
| | 365 |
| | — |
| | — |
| | — |
| | — |
| | 365 |
|
| Net tax shortfall from employee stock plans | — |
| | (8 | ) | | — |
| | — |
| | — |
| | — |
| | (8 | ) |
| Balances at February 3, 2012 | 3,390 |
| | $ | 12,187 |
| | 1,154 |
| | $ | (31,445 | ) | | $ | 28,236 |
| | $ | (61 | ) | | $ | 8,917 |
|
| | | | | | | | | |
| | | January 30,
| | | February 1,
| |
| | | 2009 | | | 2008 | |
| |
ASSETS |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 8,352 | | | $ | 7,764 | |
| Short-term investments | | | 740 | | | | 208 | |
| Accounts receivable, net | | | 4,731 | | | | 5,961 | |
| Financing receivables, net | | | 1,712 | | | | 1,732 | |
| Inventories, net | | | 867 | | | | 1,180 | |
| Other current assets | | | 3,749 | | | | 3,035 | |
| | | | | | | | | |
| Total current assets | | | 20,151 | | | | 19,880 | |
| Property, plant, and equipment, net | | | 2,277 | | | | 2,668 | |
| Investments | | | 454 | | | | 1,560 | |
| Long-term financing receivables, net | | | 500 | | | | 407 | |
| Goodwill | | | 1,737 | | | | 1,648 | |
| Purchased intangible assets, net | | | 724 | | | | 780 | |
| Other non-current assets | | | 657 | | | | 618 | |
| | | | | | | | | |
| Total assets | | $ | 26,500 | | | $ | 27,561 | |
| | | | | | | | | |
| |
| LIABILITIES AND EQUITY |
| Current liabilities: | | | | | | | | |
| Short-term debt | | $ | 113 | | | $ | 225 | |
| Accounts payable | | | 8,309 | | | | 11,492 | |
| Accrued and other | | | 3,788 | | | | 4,323 | |
| Short-term deferred service revenue | | | 2,649 | | | | 2,486 | |
| | | | | | | | | |
| Total current liabilities | | | 14,859 | | | | 18,526 | |
| Long-term debt | | | 1,898 | | | | 362 | |
| Long-term deferred service revenue | | | 3,000 | | | | 2,774 | |
| Other non-current liabilities | | | 2,472 | | | | 2,070 | |
| | | | | | | | | |
| Total liabilities | | | 22,229 | | | | 23,732 | |
| | | | | | | | | |
| Commitments and contingencies (Note 10) | | | | | | | | |
Redeemable common stock and capital in excess of $.01 par value; shares issued and outstanding:
0 and 4, respectively (Note 4) | | | - | | | | 94 | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock and capital in excess of $.01 par value; shares authorized: 5,000; shares issued and outstanding: none | | | - | | | | - | |
| Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 3,338 and 3,320, respectively; shares outstanding: 1,944 and 2,060, respectively | | | 11,189 | | | | 10,589 | |
| Treasury stock at cost: 919 and 785 shares, respectively | | | (27,904 | ) | | | (25,037 | ) |
| Retained earnings | | | 20,677 | | | | 18,199 | |
| Accumulated other comprehensive income (loss) | | | 309 | | | | (16 | ) |
| | | | | | | | | |
| Total stockholders’ equity | | | 4,271 | | | | 3,735 | |
| | | | | | | | | |
| Total liabilities and equity | | $ | 26,500 | | | $ | 27,561 | |
| | | | | | | | | |
(a) Issued shares include 475 million shares of common stock that were issued to a wholly-owned subsidiary during Fiscal 2007. As these shares are held by a wholly-owned subsidiary, they are not included in outstanding shares in our Consolidated Financial Statements.
(b) Stock issuance under employee plans is net of shares held for employee taxes.
The accompanying notes are an integral part of these consolidated financial statements.
51
DELL INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Net revenue | | $ | 61,101 | | | $ | 61,133 | | | $ | 57,420 | |
| Cost of net revenue | | | 50,144 | | | | 49,462 | | | | 47,904 | |
| | | | | | | | | | | | | |
| Gross margin | | | 10,957 | | | | 11,671 | | | | 9,516 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Selling, general, and administrative | | | 7,102 | | | | 7,538 | | | | 5,948 | |
| In-process research and development | | | 2 | | | | 83 | | | | - | |
| Research, development, and engineering | | | 663 | | | | 610 | | | | 498 | |
| | | | | | | | | | | | | |
| Total operating expenses | | | 7,767 | | | | 8,231 | | | | 6,446 | |
| | | | | | | | | | | | | |
| Operating income | | | 3,190 | | | | 3,440 | | | | 3,070 | |
| Investment and other income, net | | | 134 | | | | 387 | | | | 275 | |
| | | | | | | | | | | | | |
| Income before income taxes | | | 3,324 | | | | 3,827 | | | | 3,345 | |
| Income tax provision | | | 846 | | | | 880 | | | | 762 | |
| | | | | | | | | | | | | |
| Net income | | $ | 2,478 | | | $ | 2,947 | | | $ | 2,583 | |
| | | | | | | | | | | | | |
| Earnings per common share: | | | | | | | | | | | | |
| Basic | | $ | 1.25 | | | $ | 1.33 | | | $ | 1.15 | |
| | | | | | | | | | | | | |
| Diluted | | $ | 1.25 | | | $ | 1.31 | | | $ | 1.14 | |
| | | | | | | | | | | | | |
| Weighted-average shares outstanding: | | | | | | | | | | | | |
| Basic | | | 1,980 | | | | 2,223 | | | | 2,255 | |
| Diluted | | | 1,986 | | | | 2,247 | | | | 2,271 | |
The accompanying notes are an integral part of these consolidated financial statements.
52
DELL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 2,478 | | | $ | 2,947 | | | $ | 2,583 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 769 | | | | 607 | | | | 471 | |
| Stock-based compensation | | | 418 | | | | 329 | | | | 368 | |
| In-process research and development charges | | | 2 | | | | 83 | | | | - | |
| Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | | | (115 | ) | | | 30 | | | | 37 | |
| Deferred income taxes | | | 86 | | | | (308 | ) | | | (262 | ) |
| Other | | | 231 | | | | 121 | | | | (19 | ) |
| Changes in operating assets and liabilities, net of effects from acquisitions: | | | | | | | | | | | | |
| Accounts receivable | | | 591 | | | | (990 | ) | | | (542 | ) |
| Financing receivables | | | (302 | ) | | | (394 | ) | | | (163 | ) |
| Inventories | | | 309 | | | | (498 | ) | | | (72 | ) |
| Other assets | | | (106 | ) | | | (121 | ) | | | (286 | ) |
| Accounts payable | | | (3,117 | ) | | | 837 | | | | 505 | |
| Deferred service revenue | | | 611 | | | | 1,032 | | | | 516 | |
| Accrued and other liabilities | | | 39 | | | | 274 | | | | 833 | |
| | | | | | | | | | | | | |
| Change in cash from operating activities | | | 1,894 | | | | 3,949 | | | | 3,969 | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | |
| Purchases | | | (1,584 | ) | | | (2,394 | ) | | | (8,343 | ) |
| Maturities and sales | | | 2,333 | | | | 3,679 | | | | 10,320 | |
| Capital expenditures | | | (440 | ) | | | (831 | ) | | | (896 | ) |
| Proceeds from sale of facility and land | | | 44 | | | | - | | | | 40 | |
| Acquisition of business, net of cash received | | | (176 | ) | | | (2,217 | ) | | | (118 | ) |
| | | | | | | | | | | | | |
| Change in cash from investing activities | | | 177 | | | | (1,763 | ) | | | 1,003 | |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Repurchase of common stock | | | (2,867 | ) | | | (4,004 | ) | | | (3,026 | ) |
| Issuance of common stock under employee plans | | | 79 | | | | 136 | | | | 314 | |
| Issuance (payment) of commercial paper, net | | | 100 | | | | (100 | ) | | | 100 | |
| Proceeds from issuance of debt | | | 1,519 | | | | 66 | | | | 52 | |
| Repayments of debt | | | (237 | ) | | | (165 | ) | | | (63 | ) |
| Other | | | - | | | | (53 | ) | | | 72 | |
| | | | | | | | | | | | | |
| Change in cash from financing activities | | | (1,406 | ) | | | (4,120 | ) | | | (2,551 | ) |
| | | | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | (77 | ) | | | 152 | | | | 71 | |
| | | | | | | | | | | | | |
| Change in cash and cash equivalents | | | 588 | | | | (1,782 | ) | | | 2,492 | |
| Cash and cash equivalents at beginning of the year | | | 7,764 | | | | 9,546 | | | | 7,054 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of the year | | $ | 8,352 | | | $ | 7,764 | | | $ | 9,546 | |
| | | | | | | | | | | | | |
| Income tax paid | | $ | 800 | | | $ | 767 | | | $ | 652 | |
| Interest paid | | $ | 74 | | | $ | 54 | | | $ | 57 | |
The accompanying notes are an integral part of these consolidated financial statements.
53
DELL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock
| | | | | | | | | | | | | | | | |
| | | and Capital
| | | | | | | | | | | | | | | | | | | |
| | | in Excess
| | | | | | | | | | | | Accumulated
| | | | | | | |
| | | of Par Value | | | | | | | | | | | | Other
| | | | | | | |
| | | Issued
| | | | | | Treasury Stock | | | Retained
| | | Comprehensive
| | | | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Earnings | | | Income/(Loss) | | | Other | | | Total | |
| |
Balances at February 3, 2006 | | | 2,818 | | | $ | 9,503 | | | | 488 | | | $ | (18,007 | ) | | $ | 12,699 | | | $ | (101 | ) | | $ | (47 | ) | | $ | 4,047 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | 2,583 | | | | - | | | | - | | | | 2,583 | |
| Change in net unrealized gain on investments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | 31 | | | | - | | | | 31 | |
| Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | - | | | | - | | | | (11 | ) | | | - | | | | (11 | ) |
| Change in net unrealized gain on derivative instruments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | 30 | | | | - | | | | 30 | |
| Valuation of retained interests in securitized assets, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | 23 | | | | - | | | | 23 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,656 | |
| Stock issuances under employee plans | | | 14 | | | | 196 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 196 | |
| Repurchases | | | - | | | | - | | | | 118 | | | | (3,026 | ) | | | - | | | | - | | | | - | | | | (3,026 | ) |
| Stock-based compensation expense under SFAS 123(R) | | | - | | | | 368 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 368 | |
| Tax benefit from employee stock plans | | | - | | | | 56 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 56 | |
| Other and shares issued to subsidiaries | | | 475 | | | | (16 | ) | | | - | | | | - | | | | - | | | | - | | | | 47 | | | | 31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at February 2, 2007 | | | 3,307 | | | | 10,107 | | | | 606 | | | | (21,033 | ) | | | 15,282 | | | | (28 | ) | | | - | | | | 4,328 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | 2,947 | | | | - | | | | - | | | | 2,947 | |
| Impact of adoption of SFAS 155 | | | - | | | | - | | | | - | | | | - | | | | 29 | | | | (23 | ) | | | - | | | | 6 | |
| Change in net unrealized gain on investments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | 56 | | | | - | | | | 56 | |
| Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17 | | | | - | | | | 17 | |
| Change in net unrealized loss on derivative instruments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | (38 | ) | | | - | | | | (38 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,988 | |
| Impact of adoption of FIN 48 | | | - | | | | (3 | ) | | | - | | | | - | | | | (59 | ) | | | - | | | | - | | | | (62 | ) |
Stock issuances under employee plans(a) | | | 13 | | | | 153 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 153 | |
| Repurchases | | | - | | | | - | | | | 179 | | | | (4,004 | ) | | | - | | | | - | | | | - | | | | (4,004 | ) |
| Stock-based compensation expense under SFAS 123(R) | | | - | | | | 329 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 329 | |
| Tax benefit from employee stock plans | | | - | | | | 3 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at February 1, 2008 | | | 3,320 | | | | 10,589 | | | | 785 | | | | (25,037 | ) | | | 18,199 | | | | (16 | ) | | | - | | | | 3,735 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | 2,478 | | | | - | | | | - | | | | 2,478 | |
| Change in net unrealized loss on investments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | (29 | ) | | | - | | | | (29 | ) |
| Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5 | | | | - | | | | 5 | |
| Change in net unrealized gain on derivative instruments, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | 349 | | | | - | | | | 349 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,803 | |
| Stock issuances under employee plans | | | 18 | | | | 173 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 173 | |
| Repurchases | | | - | | | | - | | | | 134 | | | | (2,867 | ) | | | - | | | | - | | | | - | | | | (2,867 | ) |
| Stock-based compensation expense under SFAS 123(R) | | | - | | | | 419 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 419 | |
| Tax benefit from employee stock plans | | | - | | | | 8 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at January 30, 2009 | | | 3,338 | | | $ | 11,189 | | | | 919 | | | $ | (27,904 | ) | | $ | 20,677 | | | $ | 309 | | | $ | - | | | $ | 4,271 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) Includes 1 million shares and $17 million related to redeemable common stock.
The accompanying notes are an integral part of these consolidated financial statements.
54
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
NOTE 1 — | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Description of Business — Dell Inc., a Delaware corporation (both individually and together with its consolidated subsidiaries, “Dell”), offers a broad range of technology product categories,solutions, including mobility products, desktop PCs, software and peripherals, servers and networking products, storage products, services, software and storage.peripherals, mobility products, and desktop PCs. Dell sells its products and services directly to customers through dedicated sales representatives, telephone-based sales, and online atwww.dell.com,sales, and through a variety of indirectother sales distribution channels. Dell’s customers include large corporate, government, healthcare,Dell's business segments are Large Enterprise, Public, Small and education accounts, as well as smallMedium Business ("SMB"), and medium businessesConsumer. References to Commercial business refer to Large Enterprise, Public, and individual consumers.SMB.
Fiscal Year — Dell’sDell's fiscal year is the 52-52 or 53-week53 week period ending on the Friday nearest January 31. The fiscal year ended February 3, 2012 included 53 weeks, while the fiscal years ending ended January 30, 2009, February 1, 2008,28, 2011 and February 2, 2007January 29, 2010 included 52 weeks.
Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Dell Inc. and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated.
Dell was formerly a partner in Dell Financial Services L.L.C. (“DFS”), a joint venture with CIT Group Inc. (“CIT”). Dell purchased the remaining 30% interest in DFS from CIT effective December 31, 2007; therefore, DFS is a wholly-owned subsidiary at February 1, 2008. DFS’ financial results have previously been consolidated by Dell in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), as Dell was the primary beneficiary. DFS allows Dell to provide its customers with various financing alternatives. See Note 6 of Notes to Consolidated Financial Statements for additional information.
Use of Estimates — The preparation of financial statements in accordance with GAAP requires the use of management’smanagement's estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year-end, and the reported amounts of revenues and expenses during the fiscal year. Actual results could differ from those estimates.
Cash and Cash Equivalents — All highly liquid investments, including credit card receivables due from banks, with original maturities of three months90 days or less at date of purchase, are carriedreported at costfair value and are considered to be cash equivalents. All other investments not considered to be cash equivalents are separately categorized as investments.
Investments — Dell’sDell's investments are primarily in debt securities, which are classified asavailable-for-sale and are reported at fair value (based primarily on quoted prices and market observable inputs) using the specific identification method. Unrealized gains and losses, net of taxes, are reported as a component of stockholders’ equity. Publicly traded equity securities are classified as trading and are reported at fair value (based on quoted prices and market observable inputs) using the specific identification method. Unrealized gains and losses are reported in investment and other income, net. Realized gains and losses on investments are included in investmentInterest and other, income, net when realized. All other investments are initially recorded at cost. Anynet. An impairment loss towill be recognized and will reduce an investment’sinvestment's carrying amount to its fair market value is recognized in income when a decline in the fair market value of an individual security below its cost or carrying value is determined to be other than temporary.
Financing Receivables — Financing receivables consistDell reviews its investment portfolio quarterly to determine if any investment is other than temporarily impaired. Dell determines an impairment is other than temporary when there is intent to sell the security, it is more likely than not that the security will be required to be sold before recovery in value or it is not expected to recover its entire amortized cost basis (“credit-related loss”). However, if Dell does not expect to sell a debt security, it still evaluates expected cash flows to be received and determines if a credit-related loss exists. In the event of customer receivables, residual interest and retained interesta credit-related loss, only the amount of impairment associated with the credit-related loss is recognized in securitized receivables. Customer receivables include revolving loans and fixed-term leases and loans resulting from the saleearnings. Amounts relating to factors other than credit-related losses are recorded as a component of Dell products and services. Financing receivables are presented netstockholders' equity. See Note 3 of the allowance for losses. See Note 6 of Notes to Consolidated Financial Statements for additional information.
Asset Securitization-— Dell transfers certain financing receivables to unconsolidated qualifying special purpose entities in securitization transactions. These receivables are removed from the Consolidated Statement of Financial Position at the time they are sold in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a Replacement of SFAS No. 125. Receivables are considered sold when the receivables are transferred beyond the reach of Dell’s creditors, the transferee has the right to pledge or exchange the assets, and Dell has surrendered control over the rights and obligations of the receivables. Gains and losses from the sale of revolving loans and fixed-term leases and loans are recognized in the period the sale occurs, based upon the relative fair value of the assets sold and the remaining retained interest. Subsequent to the sale, retained interest estimates are periodically updated based upon current information and events to determine the current fair value, with any changes in fair value recorded in earnings. In estimating the value of retained interest, Dell makes a variety of
55
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
financial assumptions, including pool credit losses, payment rates, and discount rates. These assumptions are supported by both Dell’s historical experience and anticipated trends relative to the particular receivable pool. See Note 6 of Notes to Consolidated Financial Statements for additional information.
Allowance for Doubtful Accounts — Dell recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable future losses.losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as selling,in Selling, general, and administrative expense.expenses.
Financing Receivables —
Financing receivables consist of customer receivables and residual interest. Customer receivables include revolving loans and fixed-term leases and loans resulting primarily from the sale of Dell products and services. Based on how Dell assesses risk and determines the appropriate allowance levels, Dell has two portfolio segments, (1) fixed-term leases and loans and (2) revolving loans. Portfolio segments are further segregated into classes based on operating segment and whether the receivable was owned by Dell since its inception or was purchased subsequent to its inception. Financing receivables are presented net of the allowance for losses.
Dell retains a residual interest in equipment leased under its fixed-term lease programs. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
basis, Dell assesses the carrying amount of its recorded residual values for impairment. Anticipated declines in specific future residual values that are considered to be other-than-temporary are recorded currently in earnings.
Allowance for Financing Receivables Losses —
Dell recognizes an allowance for losses on financing receivables in an amount equal to the probable future losses net of recoveries. The allowance for losses is generally determined at the aggregate portfolio level based on a variety of factors, including historical and anticipated experience, past due receivables, receivable type, and customer risk composition. Financing receivablesprofile. Customer account principal and interest are charged to the allowance at the earlier offor losses when an account is deemed to be uncollectible or generally when the account is 180 days delinquent. While Dell does not generally place financing receivables on non-accrual status during the delinquency period, accrued interest is included in the allowance for loss calculation and Dell is therefore adequately reserved in the event of charge off. Recoveries on receivables previously charged off as uncollectible are recorded to the allowance for losses on financing receivables.receivables losses. The expense associated with the allowance for financing receivables losses is recognized as cost of net revenue. Both fixed and revolving receivable loss rates are affected by macroeconomic conditions, including the level of GDP growth, unemployment rates, the level of commercial capital equipment investment, and the credit quality of the borrower.
Asset Securitization
Dell enters into securitization transactions to transfer certain financing receivables to special purpose entities. During Fiscal 2011, Dell adopted the new accounting guidance that removes the concept of a qualifying special purpose entity and removes the exception from applying variable interest entity accounting. The adoption of the new guidance requires an entity to perform an ongoing analysis to determine whether it has a controlling financial interest in its special purpose entities. As a result of this analysis, Dell has determined that it has a controlling financial interest in its special purpose entities, and therefore, consolidated them into Dell's Consolidated Statements of Financial Position as of February 3, 2012 and January 28, 2011. The asset securitizations in these special purpose entities are being accounted for as secured borrowings. See Note 64 of Notes to Consolidated Financial Statements for additional information.information on the impact of the consolidation.
Inventories — Inventories are stated at the lower of cost or market with cost being determined on afirst-in, first-out basis.
Property, Plant, and Equipment — Property, plant, and equipment are carried at depreciated cost. Depreciation is provided using the straight-line method over the estimated economic lives of the assets, which range from ten to thirty years for buildings and two to five years for all other assets. Leasehold improvements are amortized over the shorter of five years or the lease term. Gains or losses related to retirements or disposition of fixed assets are recognized in the period incurred. Dell capitalizes eligible internal-use software development costs incurred subsequent to the completion of the preliminary project stage. Development costs are amortized over the shorter of the expected useful life of the software or five years. Costs associated with maintenance and minor enhancements to the features and functionality of Dell's website are expensed as incurred.
Impairment of Long-Lived Assets — In accordance with the provisions SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Dell reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market values, discounted cash flows, or external appraisals, as applicable. Dell reviews long-lived assets for impairment at the individual asset or the asset group level for which the lowest level of independent cash flows can be identified.
Business Combinations and Intangible Assets Including Goodwill — Dell accounts for business combinations using the purchaseacquisition method of accounting, and accordingly, the assets and liabilities of the acquired entitiesbusiness are recorded at their estimated fair values at the acquisition date. Goodwill represents thedate of acquisition. The excess of the purchase price over the estimated fair values is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase prices allocable to goodwill. All acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value of net assets, includingas an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the amount assignedasset is amortized over its expected useful life. Any restructuring charges associated with a business combination are expensed subsequent to identifiable intangible assets. Given the time it takes to obtain pertinent information to finalize the fair value of the acquired assets and liabilities, it may be several quarters before Dell is able to finalize those initial fair value estimates. Accordingly, it is common for the initial estimates to be subsequently revised.acquisition date. The results of operations of acquired businesses are included in the Consolidated Financial Statements from the acquisition date.
Intangible Assets Including Goodwill— Identifiable intangible assets with finite lives are amortized over their estimated useful lives. They are generally amortized on a non-straight linenon-straight-line approach based on the associated projected cash flows in order to match the amortization pattern to the pattern in which the economic benefits of the assets are expected to be consumed. TheyIntangible assets are reviewed for impairment if indicators of potential impairment exist. Goodwill and indefinite livedindefinite-lived intangible assets are tested for impairment on an annual basis in the second fiscal quarter, or sooner if an indicator of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
impairment occurs.
Foreign Currency Translation — The majority of Dell’sDell's international sales are made by international subsidiaries, most of which have the U.S. dollar as their functional currency. Dell’sDell's subsidiaries that do not have the U.S. dollar as their functional currency translate assets and liabilities at current rates of exchange in effect at the balance sheet date. Revenue and expenses from these international subsidiaries are translated using the monthly average exchange rates in effect for the period in which the items occur. CumulativeThese translations resulted in cumulative foreign currency translation adjustments totaled an $11gains (losses) of $(35) million loss, $16 , $39 million loss,, and $33$(40) million loss at as of February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and
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January 29, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
February 2, 2007,, respectively, and are included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.
Local currency transactions of international subsidiaries that have the U.S. dollar as the functional currency are remeasured into U.S. dollars using current rates of exchange for monetary assets and liabilities and historical rates of exchange for nonmonetarynon-monetary assets and liabilities. Gains and losses from remeasurement of monetary assets and liabilities are included in investmentInterest and other, income, net. See Note 126 of Notes to Consolidated Financial Statements for additional information.
Hedging Instruments — Dell uses derivative financial instruments, primarily forwards, options, and swaps, to hedge certain foreign currency and interest rate exposures. Dell also uses other derivativeThe relationships between hedging instruments not designatedand hedged items, as hedges suchwell as forwards tothe risk management objectives and strategies for undertaking hedge foreign currency balance sheet exposures.transactions, are formally documented. Dell does not use derivatives for speculative purposes.
Dell applies SFAS No. 133,Accounting for Derivative InstrumentsAll derivative instruments are recognized as either assets or liabilities on the Consolidated Statements of Financial Position and Hedging Activities, (“SFAS 133”) as amended, which establishesare measured at fair value. Hedge accounting and reporting standardsis applied based upon the criteria established by accounting guidance for derivative instruments and hedging activities. SFAS 133 requiresDerivatives are assessed for hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. Any hedge ineffectiveness is recognized currently in earnings as a component of Interest and other, net. Dell's hedge portfolio includes derivatives designated as both cash flow and fair value hedges.
For derivative instruments that are designated as cash flow hedges, hedge ineffectiveness is measured by comparing the cumulative change in the fair value of the hedge contract with the cumulative change in the fair value of the hedged item, both of which are based on forward rates. Dell to recognize allrecords the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income (loss) (“OCI”), as a separate component of stockholders' equity and reclassifies the gain or loss into earnings in the period during which the hedged transaction is recognized in earnings.
For derivatives that are designated as either assetsfair value hedges, hedge ineffectiveness is measured by calculating the periodic change in the fair value of the hedge contract and the periodic change in the fair value of the hedged item. To the extent that these fair value changes do not fully offset each other, the difference is recorded as ineffectiveness in earnings as a component of Interest and other, net.
For derivatives that are not designated as hedges or liabilitiesdo not qualify for hedge accounting treatment, Dell recognizes the change in itsthe instrument's fair value currently in earnings as a component of interest and other, net.
Cash flows from derivative instruments are presented in the same category on the Consolidated Statements of Financial Position and measure those instruments at fair value.Cash Flows as the cash flows from the underlying hedged items. See Note 26 of the Notes to Consolidated Financial Statements for a full description of Dell’sDell's derivative financial instrument activities and related accounting policies.activities.
Treasury Stock — Dell accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity.
Revenue Recognition — Dell’s revenue recognition policy is in accordance with the requirements of Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition,Emerging Issues Task Force (“EITF”)00-21,Accounting for Revenue Arrangements with Multiple Deliverables, AICPA Statement of Position (“SOP”)No. 97-2,Software Revenue Recognition,EITF 01-09,Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)(“EITF 01-09”) and other applicable revenue recognition guidance and interpretations.— Net revenues include sales of hardware, software and peripherals, and services (including extended service contracts and professional services).services. Dell recognizes revenue for these products and services when it is realized or realizable and earned. Revenue is considered realized and earned when:when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; Dell's fee to its customer is fixed and determinable; and collection of the resulting receivable is reasonably assured.
Dell classifies revenue and cost of revenue related to stand-alone software sold with Post Contract Support ("PCS") in the same line item as services on the Consolidated Statements of Income. Services revenue and cost of services revenue captions on the Consolidated Statements of Income include Dell's services and software from Dell's software and peripherals product category. This software revenue and related costs include software license fees and related PCS that is sold separately from computer systems through Dell's software and peripherals product category.
| | |
| • | persuasive evidence of an arrangement exists; |
| • | delivery has occurred or services have been rendered; |
| • | Dell’s fee to its customer is fixed or determinable; and |
| • | collection of the resulting receivable is reasonably assured. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Products
Revenue from the sale of products areis recognized when title and risk of loss passes to the customer. Delivery is considered complete when products have been shipped to Dell’sDell's customer, or services have been rendered, title and risk of loss has transferred to the customer, and customer acceptance has been satisfied. Customer acceptance is satisfied through obtainingif acceptance is obtained from the customer, theif all acceptance provision lapses,provisions lapse, or if Dell has evidence that theall acceptance provisions have been satisfied.
Dell sells its products and services either separately or as part of a multiple-element arrangement. Dell allocates revenue from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative sales price of each element when sold separately. The allocation of fair value for a multiple-element arrangement involving software is based on vendor specific objective evidence (“VSOE”), or in the absence of VSOE for delivered elements, the residual method. Under the residual method, Dell allocates the residual amount of revenue from the arrangement to software licenses at the inception of the license term when VSOE for all undelivered elements, such as Post Contract Customer Support (“PCS”), exists and all other revenue recognition criteria have been satisfied. In the absence of VSOE for undelivered elements, revenue is deferred and subsequently recognized over the term of the arrangement. For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs or services are provided. Product revenue is recognized, net of an allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts or other products or software PCS, for which Dell is not obligated to perform, and for
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
which Dell does not meet the criteria for gross revenue recognition underEITF 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent, is recognized on a net basis. All other revenue is recognized on a gross basis.
Dell records 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 ourDell's 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.
During Fiscal 2008, Dell began sellingsells its products directly to customers as well as through retailers. other distribution channels, such as retailers, distributors, and resellers. Dell recognizes revenue on these sales when the reseller has economic substance apart from Dell; any credit risk has been identified and quantified; title and risk of loss has passed to the sales channel; the fee paid to Dell is not contingent upon resale or payment by the end user; and Dell has no further obligations related to bringing about resale or delivery.
Sales to Dell’s retail customersthrough Dell's distribution channels are generallyprimarily made under agreements allowing for limited rights of return, price protection, rebates, and marketing development funds. Dell has generally limited the return rights through contractual caps. Dell’s policycaps or has an established selling history for sales to retailersthese arrangements. Therefore, there is to defer the full amount of revenue relative to sales for which the rights of return apply as Dell does not currently have sufficient historical data to establish reasonable and reliable estimates of returns although Dell is infor the processmajority of accumulating the data necessary to develop reliable estimates in the future. 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 costcosts 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,expire. Dell records estimated reductions to revenue or an expense for retail customerdistribution channel programs at the later of the offer or the time revenue is recognized in accordance withEITF 01-09. Dell’s customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of Dell products and marketing funds.recognized.
Dell defers the cost of shipped products awaiting revenue recognition until revenue is recognized.
Services
Services include transactional, outsourcing and project-based offerings. Revenue is recognized for services contracts as earned, which is generally on a straight-line basis over the term of the contract or on a proportional performance basis as the services are rendered and Dell's obligations are fulfilled. Revenue from time and materials or cost-plus contracts is recognized as the services are performed. Revenue from fixed price contracts is recognized on a straight line basis, unless revenue is earned and obligations are fulfilled in a different pattern. These service contracts may include provisions for cancellation, termination, refunds, or service level adjustments. These contract provisions would not have a significant impact on recognized revenue as Dell generally recognizes revenue for these contracts as the services are performed.
For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs or services are provided. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract on a straight-line basis.
Revenue from sales of third-party extended warranty and service contracts or software PCS, for which Dell is not obligated to perform, and for which Dell does not meet the criteria for gross revenue recognition under the guidance of the Financial Accounting Standards Board (the "FASB"), is recognized on a net basis. All other revenue is recognized on a gross basis.
Software
Dell recognizes revenue in accordance with industry specific software accounting guidance for all software and PCS that are not essential to the functionality of the hardware. Accounting for software that is essential to the functionality of the hardware is accounted for as specified below under “Multiple Deliverables.” Dell has established vendor specific objective evidence ("VSOE") on a limited basis for certain software offerings. When Dell has not established VSOE to support a separation of the software license and PCS elements, the revenue and related costs totaled $556 millionare generally
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recognized over the term of the agreement.
In September 2009, the FASB issued revised guidance, which excluded sales of tangible products that contain essential software elements from the scope of software revenue recognition guidance. Accordingly, beginning in the first quarter of Fiscal 2011, certain Dell storage products were removed from the scope of software revenue recognition guidance. Prior to the new guidance, Dell established fair value for PCS for these products based on VSOE and $519 millionused the residual method to allocate revenue to the delivered elements. Under the revised guidance, the revenue for what was previously deemed PCS is now considered part of a multiple deliverable arrangement. As such, any discount is allocated to all elements based on the relative selling price of both delivered and undelivered elements. The impact of applying this new guidance was not material to Dell's Consolidated Financial Statements for Fiscal 2011 or 2010.
Multiple Deliverables
Dell's multiple deliverable arrangements generally include hardware products that are sold with essential software or services such as extended warranty, installation, maintenance, and other services contracts. Dell's service contracts may include a combination of services arrangements, including deployment, asset recovery, recycling, IT outsourcing, consulting, applications development, applications maintenance, and business process services. The nature and terms of these multiple deliverable arrangements will vary based on the customized needs of Dell's customers. Each of these deliverables in an arrangement typically represents a separate unit of accounting.
In the first quarter of Fiscal 2011, based on new guidance, Dell began allocating revenue to all deliverables in a multiple-element arrangement based on the relative selling price of that deliverable. The hierarchy to be used to determine the selling price of a deliverable is: (1) VSOE, (2) third-party evidence of selling price (“TPE”), and (3) best estimate of the selling price (“ESP”). A majority of Dell product and service offerings are sold on a stand-alone basis. Because selling price is generally available based on stand-alone sales, Dell has limited application of TPE, as determined by comparison of pricing for products and services to the pricing of similar products and services as offered by Dell or its competitors in stand-alone sales to similarly situated customers. As new products are introduced in future periods, Dell may be required to use TPE or ESP, depending on the specific facts at January 30, 2009,the time.
For Fiscal 2010, pursuant to the previous guidance for Revenue Arrangements with Multiple Deliverables, Dell allocated revenue from multiple element arrangements to the elements based on the relative fair value of each element, which was generally based on the relative sales price of each element when sold separately. The adoption of the new guidance in the first quarter of Fiscal 2011 did not change the manner in which Dell accounts for its multiple deliverable arrangements as Dell did not use the residual method for the majority of its offerings and February 1, 2008, respectively, andits services offerings are included in other current assetsgenerally sold on Dell’s Consolidated Statementa stand-alone basis where evidence of Financial Position.selling price is available.
Other
Dell records revenue from the sale of equipment under sales-type leases as product revenue in an amount equal to the present value of minimum lease payments at the inception of the lease. Sales-type leases also produce financing income, which Dell recognizesis included in net revenue in the Consolidated Statements of Income and is recognized at consistent rates of return over the lease term. CustomerDell also offers qualified customers revolving loan financingcredit lines for the purchase of products and services offered by Dell. Financing income attributable to these revolving loans is recognized when billed to the customer.in net revenue on an accrual basis.
Dell reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions.
Standard Warranty Liabilities — Dell records warranty liabilities for its standard limited warranty at the time of sale for the estimated costs that may be incurred under its 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 Dell does business, but generally includes technical support, parts, and labor over a period ranging from one to three years. FactorsFactors that affect Dell’sDell's 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 Dell’sDell's warranty obligation. The anticipated rate of warranty claims is the primary factor impacting the estimated warranty obligation. The other factors are less significant due to the fact that the average remaining aggregate warranty period of the covered installed base is approximately 2015 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Warranty claims are relatively predictable based on historical experience of failure rates. If actual results differ from the estimates, Dell revises its estimated warranty liability. Each quarter, Dell reevaluates its estimates to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Deferred Services Revenue— Deferred services revenue primarily represents amounts received in advance for extended warranty sales and services contracts. Revenue from the sale of extended warranties and services contracts is recognized over the term of the contract or when the service is completed, and the costs associated with these contracts are recognized as incurred. As of February 3, 2012, and January 28, 2011, the majority of deferred services revenue is related to extended warranties.
Vendor Rebates — Dell may receive consideration from vendors in the normal course of business. Certain of these funds are rebates of purchase price paid and others are related to reimbursement of costs incurred by Dell to sell the vendor’svendor's products. Dell’s policy for accounting for these funds is in accordance withEITF 02-16,Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. The funds are recognized asDell recognizes a reduction of cost of goods sold and inventory if the funds are a reduction of the price of the vendor’svendor's products. If the consideration is a reimbursement of costs incurred by Dell to sell or develop the vendor’svendor's products, then the consideration is classified as a reduction of that cost in the income statement,Consolidated Statements of Income, most often operating expenses. In order to be recognized as a reduction of operating expenses, the reimbursement must be for a specific, incremental, identifiable cost incurred by Dell in selling the vendor’svendor's products or services.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loss Contingencies — Dell is subject to the possibility of various losses arising in the ordinary course of business. Dell considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as Dell’sDell's 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. Dell regularly evaluates current information available to determine whether such accruals should be adjusted and whether new accruals are required. Third parties have in the past 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 Dell.
Shipping Costs — Dell’sDell's shipping and handling costs are included in cost of sales in the accompanying Consolidated Statements of Income for all periods presented.Income.
Selling, General, and Administrative — Selling expenses include items such as sales salaries and commissions, marketing and advertising costs, and contractor services. Advertising costs are expensed as incurred and were $811$860 million $943, $730 million, and $836$619 million, during Fiscal 2009, 2008,2012, Fiscal 2011, and 2007,Fiscal 2010, respectively.Advertising costs are included in Selling, general, and administrative in the Consolidated Statements of Income. General and administrative expenses include items for Dell’sDell's administrative functions, such as Finance, Legal, Human Resources, and Information Technology support. These functions include costs for items such as salaries, maintenance and supplies, insurance, depreciation expense, and allowance for doubtful accounts.
Research, Development, and Engineering Costs — Research, development, and engineering costs are expensed as incurred, in accordance with SFAS No. 2,Accounting for Research and Development Costs.incurred. Research, development, and engineering expenses primarily include payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and development support.
In Process Research and Development(“IPR&D”) — IPR&D represents the fair value of the technology acquired in a business combination where technological feasibility has not been established and no future alternative uses exist. IPR&D is expensed immediately upon completion of the associated acquisition.
Website Development Costs — Dell expenses, as incurred, the costs of maintenance and minor enhancements to the features and functionality of its websites.
Income Taxes — Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Dell calculates a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment and interpretation of statutes isare required. Additionally, Dell uses tax planning strategies as a part of its global tax compliance program. Judgments and interpretation of statutes are inherent in this process.
Comprehensive Income — Dell’s comprehensive income is comprised of net income, unrealized gains and losses on marketable securities classified asavailable-for-sale, unrealized gains and losses related to the change in valuation of retained interest in securitized assets, foreign currency translation adjustments, and unrealized gains and losses on derivative financial instruments related to foreign currency hedging. Upon the adoption of SFAS No. 155,AccountingThe accounting guidance for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140, beginning the first quarter of Fiscal 2008, all gains and losses in valuation of retained interest in securitized assets are recognizeduncertainties in income immediatelytax prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and no longer included asdisclosure of uncertain tax positions taken or expected to be taken in income tax returns. Dell recognizes a componenttax benefit from an uncertain tax position in the financial statements only when it is more likely than not that the position will be sustained upon examination, including resolution of accumulated other comprehensive income (loss).any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority's administrative practices and precedents.
Earnings Per Common Share — Basic earnings per share is based on the weighted-average effect of all common shares issued and outstanding, and is calculated by dividing net income by the weighted-average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. Dell excludes equity instruments from the calculation of diluted earnings per share if the effect of including such instruments is antidilutive. Accordingly, certain stock-based incentive awards have been excluded fromanti-dilutive. See Note 12 of the calculation of dilutedNotes to Consolidated Financial Statements for further information on earnings per share totaling 252 million, 230 million, and 268 million shares during Fiscal 2009, 2008, and 2007, respectively.share.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and diluted earnings per share for each of the past three fiscal years:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions, except per share amounts) | |
| |
| Numerator: | | | | | | | | | | | | |
| Net income | | $ | 2,478 | | | $ | 2,947 | | | $ | 2,583 | |
| | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| Weighted-average shares outstanding: | | | | | | | | | | | | |
| Basic | | | 1,980 | | | | 2,223 | | | | 2,255 | |
| Effect of dilutive options, restricted stock units, restricted stock, and other | | | 6 | | | | 24 | | | | 16 | |
| | | | | | | | | | | | | |
| Diluted | | | 1,986 | | | | 2,247 | | | | 2,271 | |
| | | | | | | | | | | | | |
| Earnings per common share: | | | | | | | | | | | | |
| Basic | | $ | 1.25 | | | $ | 1.33 | | | $ | 1.15 | |
| Diluted | | $ | 1.25 | | | $ | 1.31 | | | $ | 1.14 | |
Stock-Based Compensation — Effective February 4, 2006,Dell measures stock-based compensation expense is recordedfor all share-based awards granted based on the estimated fair value of those awards at grant date. The cost of restricted stock units and performance-based restricted stock units is determined using the fair market value of Dell's common stock on the date of grant. Dell generally estimates the fair value of stock option awards using the Black-Scholes valuation model. The compensation costs of stock options, restricted stock units, and awards with a cliff vesting feature are recognized net of any estimated forfeitures on a straight-line basis over the employee requisite service period. Compensation cost for performance-based awards is recognized on a graded accelerated basis net of estimated forfeitures over the requisite service period when achievement of the performance conditions are considered probable. Forfeiture rates are estimated at grant date fair value estimatebased on historical experience and adjusted in accordance with the provisions of SFAS No. 123 (revised 2004),Share-Based Payment(“SFAS 123(R)”). In March 2005, the SEC issued SAB No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123(R) and the valuation of share-based paymentssubsequent periods for public companies. We have applied the provisions of SAB 107differences in our adoption of SFAS 123(R).actual forfeitures from those estimates. See Note 514 of the Notes to Consolidated Financial Statements included for further discussion of stock-based compensation.
Recently Issued and Adopted Accounting Pronouncements
Credit Quality of Financing Receivables and the Allowance for Credit Losses— In September 2006,July 2010, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”), which defines fair value, provides a frameworknew pronouncement that requires enhanced disclosures regarding the nature of credit risk inherent in an entity's portfolio of financing receivables, how that risk is analyzed, and the changes and reasons for measuring fair value, and expands the disclosures required for assets and liabilities measured at fair value. SFAS 157 applies to existing accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. Dell adopted the effective portions of SFAS 157 beginning the first quarter of Fiscal 2009, and it did not have a material impact to Dell’s consolidated financial statements. In February 2008, FASB issued FASB Staff Position (“FSP”)157-2,Effective Date of FASB Statement No. 157(“FSP 157-2”), which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair valuethose changes in the financial statements on a recurring basis (at least annually), untilallowance for credit losses. These new disclosures require information for both the beginningfinancing receivables and the related allowance for credit losses at more disaggregated levels. Disclosures related to information as of the first quarter of Fiscal 2010. Dell is currently evaluating the inputs and techniques used in these measurements, including items such as impairment assessments of fixed assets and goodwill impairment testing. Management does not expect the adoption ofFSP 157-2 to have a material impact on Dell’s results of operations, financial position, and cash flows. See Note 2 of Notes to Consolidated Financial Statements for the impact of the adoption SFAS 157.
On October 10, 2008, the FASB issued FSPNo. FAS 157-3 “Determining the Fair Valueend of a Financial Asset When the Market for that Asset is Not Active” (“FSPFAS 157-3”), which clarifies the application of SFAS 157 in a market that is not active. Additional guidance is provided regarding how the reporting entity’s own assumptions should be considered when relevant observable inputs do not exist, how available observable inputs in a market that is not active should be considered when measuring fair value, and how the use of market quotes should be considered when assessing the relevance of inputs available to measure fair value. FSPFAS 157-3 became effective immediately upon issuance. Dell considered the additional guidance with respect to the valuation of its financial assets and liabilities and their corresponding designation within the fair value hierarchy. Its adoption did not have a material effect on Dell’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”), which provides companies with an option to report selected financial assets and liabilities at fair value with the changes in fair value recognized in earnings at each subsequent reporting date. SFAS 159 provides an opportunity to mitigate potential volatility in earnings
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DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
caused by measuring related assets and liabilities differently, and it may reduce the need for applying complex hedge accounting provisions. While SFAS 159period became effective for Dell’s 2009 fiscal year, Dell did not elect the fair value measurement optionin Fiscal 2011. Specific disclosures regarding activities that occur during a reporting period were required for any of its financial assets or liabilities.
Recently Issued Accounting Pronouncements —In December 2007, the FASB issued SFAS No. 141(R),Business Combinations(“SFAS 141(R)”). SFAS 141(R) requires that the acquisition method of accounting be applied to a broader set of business combinations and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired. SFAS 141(R) also establishes the disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, and is required to be adopted by Dell beginning in the first quarter of Fiscal 2010. Management believes the adoption of SFAS 141(R) will2012. As these changes relate only to disclosures, they did not have an impact on Dell’s results of operations, financial position, and cash flows for acquisitions completed prior to Fiscal 2010. The impact of SFAS 141 (R) on Dell’s future consolidated results of operations and financial condition will be dependent on the size and nature of future combinations.Dell's Consolidated Financial Statements.
Fair Value Measurements — In December 2007,May 2011, the FASB issued SFAS No. 160,Noncontrolling Interests innew guidance on fair value measurements, which clarifies how a principal market is determined, how and when the valuation premise of highest and best use applies, and how premiums and discounts are applied, as well as requiring new disclosures. This new guidance is effective for Dell for the fiscal year ending February 1, 2013. Early application is not permitted. Other than requiring additional disclosures, Dell does not expect that this new guidance will impact Dell's Consolidated Financial StatementsStatements.
Comprehensive Income — an amendment of ARB No. 51(“SFAS 160”). SFAS 160 requires that In June 2011, the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revisedFASB issued new guidance on presentation of comprehensive income. The new guidance eliminates the treatmentoption to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requires an entity to present either one continuous statement of net income and losses attributableother comprehensive income or two separate, but consecutive statements. This new guidance relates only to the noncontrolling interest and changes in ownership interests inpresentation. Dell will present a subsidiary and requires additional disclosures that identify and distinguish between the interestsseparate statement of the controlling and noncontrolling owners. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and is required to be adopted by Dellcomprehensive income beginning in the first quarter of Fiscal 2010. Management does not expect the adoption of SFAS 160 to have a material impact on Dell’s results of operations, financial position,fiscal year ending February 1, 2013.
Intangibles- Goodwill and cash flows.
Other —In March 2008,September 2011, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendmentnew guidance that will simplify how entities test goodwill for impairment. After assessment of FASB Statement No. 133(“SFAS 161”),which requires additional disclosures aboutcertain qualitative factors, if it is determined to be more likely than not that the objectivesfair value of derivative instruments and hedging activities, the method of accounting for such instruments under SFAS 133 anda reporting unit is less than its related interpretations, andcarrying amount, entities must perform a tabular disclosurequantitative analysis of the effects of such instruments and related hedged items on a company’s financial position, financial performance, and cash flows. SFAS 161 does not changegoodwill impairment test. Otherwise, the accounting treatment for derivative instruments andquantitative test becomes optional. This new guidance is effective for Dell beginning Fiscal 2010.
Reclassifications —To maintain comparability amongfor the periods presented, first quarter of the fiscal year ending February 1, 2013. Early adoption is permitted. Dell has revised the presentation of certain prior period amounts reported within cash flow from operations presented in the Consolidated Statements of Cash Flows. The revision had nodoes not expect that this new guidance will impact to the total change in cash from operating activities. Dell has also revised the classification of certain prior period amounts within the Notes toDell's Consolidated Financial Statements. For further discussion regarding
Disclosures about Offsetting Assets and Liabilities — In December 2011, the reclassificationFASB issued new guidance that will enhance disclosure requirements about the nature of deferred service revenuean entity’s right to offset and warranty liability, see Note 9related arrangements associated with its financial instruments and derivative instruments. This new guidance requires the disclosure of Notesthe gross amounts subject to rights of offset, amounts offset in accordance with the accounting standards followed, and the related net exposure. This new guidance will be effective for Dell for the first quarter of the fiscal year ending January 31, 2014. Early adoption is not permitted. Other than requiring additional disclosures, Dell does not expect that this new guidance will impact Dell's Consolidated Financial Statements.
| |
NOTE 2 —
| FINANCIAL INSTRUMENTS |
Fair Value Measurements
On February 2, 2008, Dell adopted the effective portions of SFAS 157. In February 2008, the FASB issuedFSP 157-2, which provides a one year deferral of the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Therefore, Dell adopted the provisions of SFAS 157 with respect to only financial assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value, and enhances disclosure requirements for fair value measurements. This statement does not require any new fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, Dell uses various methods including market, income, and cost approaches. Dell utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs. The adoption of this statement did not have a material effect on the consolidated financial statements.
As a basis for categorizing these inputs, SFAS 157 establishes the following hierarchy, which prioritizes the inputs used to measure fair value from market based assumptions to entity specific assumptions:
| |
• | Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date. |
61
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 — FAIR VALUE MEASUREMENTS
| |
• | Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
|
• | Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation. |
The following table presents Dell’sDell's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of February 3, 2012, and January 30, 2009:28, 2011:
| | | | | | | | | | | | | | | | | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | Quoted
| | | | | | | | | | |
| | | Prices in
| | | | | | | | | | |
| | | Active
| | | Significant
| | | | | | | |
| | | Markets for
| | | Other
| | | Significant
| | | | |
| | | Identical
| | | Observable
| | | Unobservable
| | | | |
| | | Assets | | | Inputs | | | Inputs | | | | |
| | | (in millions) | |
| |
| Investments — available for sale securities | | $ | - | | | $ | 1,135 | | | $ | 27 | | | $ | 1,162 | |
| Investments — trading securities | | | 1 | | | | 73 | | | | - | | | | 74 | |
| Retained interest | | | - | | | | - | | | | 396 | | | | 396 | |
| Derivative instruments | | | - | | | | 627 | | | | - | | | | 627 | |
| | | | | | | | | | | | | | | | | |
| Total assets measured at fair value on recurring basis | | $ | 1 | | | $ | 1,835 | | | $ | 423 | | | $ | 2,259 | |
| | | | | | | | | | | | | | | | | |
| Derivative instruments | | $ | - | | | $ | 131 | | | $ | - | | | $ | 131 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities measured at fair value on recurring basis | | $ | - | | | $ | 131 | | | $ | - | | | $ | 131 | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | February 3, 2012 | | January 28, 2011 |
| | Level 1(a) | | Level 2 (a) | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| | | | | | | | (in millions) | | | | | | |
| Assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Cash equivalents: | | | | | | | | | | | | | | | |
| Money market funds | $ | 8,370 |
| | $ | — |
| | $ | — |
| | $ | 8,370 |
| | $ | 6,261 |
| | $ | — |
| | $ | — |
| | $ | 6,261 |
|
| Commercial paper | — |
| | 2,011 |
| | — |
| | 2,011 |
| | — |
| | 2,945 |
| | — |
| | 2,945 |
|
| U.S. corporate | — |
| | 5 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
|
| U.S. government and agencies | — |
| | — |
| | — |
| | — |
| | — |
| | 1,699 |
| | — |
| | 1,699 |
|
| Debt securities: | | | | | | | | | | | | | | | |
| U.S. government and agencies | — |
| | — |
| | — |
| | — |
| | — |
| | 79 |
| | — |
| | 79 |
|
| Non- U.S. government and agencies | — |
| | 94 |
| | — |
| | 94 |
| | — |
| | 46 |
| | — |
| | 46 |
|
| Commercial paper | — |
| | 434 |
| | — |
| | 434 |
| | — |
| | — |
| | — |
| | — |
|
| U.S. corporate | — |
| | 2,668 |
| | — |
| | 2,668 |
| | — |
| | 464 |
| | 32 |
| | 496 |
|
| International corporate | — |
| | 1,055 |
| | — |
| | 1,055 |
| | — |
| | 411 |
| | — |
| | 411 |
|
| Equity and other securities | 2 |
| | 105 |
| | — |
| | 107 |
| | — |
| | 109 |
| | — |
| | 109 |
|
| Derivative instruments | — |
| | 140 |
| | — |
| | 140 |
| | — |
| | 27 |
| | — |
| | 27 |
|
| Total assets | $ | 8,372 |
| | $ | 6,512 |
| | $ | — |
| | $ | 14,884 |
| | $ | 6,261 |
| | $ | 5,780 |
| | $ | 32 |
| | $ | 12,073 |
|
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Derivative instruments | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 28 |
| | $ | — |
| | $ | 28 |
|
| Total liabilities | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 28 |
| | $ | — |
| | $ | 28 |
|
____________________
(a) Dell did not transfer any securities between levels during the twelve months ended February 3, 2012.
The following section describes the valuation methodologies Dell uses to measure financial instruments at fair value:
Investments Available for Sale Cash Equivalents—The majority of Dell’s investment portfolioDell's cash equivalents in the above table consists of money market funds, commercial paper, including corporate and asset-backed commercial paper, and U.S. government and agencies, all with original maturities of 90 days or less and valued at fair value. The valuations of these securities are based on quoted prices in active markets for identical assets, when available, or pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. Dell reviews security pricing and assesses liquidity on a quarterly basis.
Debt Securities— The majority of Dell's debt securities consists of various fixed income securities such as U.S. government and agencies, U.S. andcorporate, international corporate, and state and municipal bonds. This portfolio of investments, at January 30, 2009,commercial paper. Valuation is valued based on model driven valuationspricing models whereby all significant inputs, including benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers, and other market related data,are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset. Dell utilizes a pricing service to obtain fair value pricing for the majority of the investment portfolio. Pricing for securities is based on proprietary models and inputsInputs are documented in accordance with the SFAS 157fair value measurements hierarchy. Dell conducts reviews security pricing and assesses liquidity on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the SFAS 157 hierarchy disclosure.
Investments Trading Securities —The majority of Dell’s trading portfolio consists of various mutual funds and a small amount of equity securities.basis. The Level 1 securities are valued using quoted prices for identical assets in active markets.3 position as of January 28, 2011, represented a convertible debt security that Dell was unable to corroborate with observable market data. The Level 2 securities include various mutual funds that are not exchange-traded andinvestment was valued at their net asset value, which cancost plus accrued interest as this was management's best estimate of fair value. Due to events occurring in Fiscal 2012, the investment was determined to be market corroborated.
Retained Interest —The fair value of the retained interest in securitized receivables is determined using a discounted cash flow model. Significant assumptionsfully impaired and its cost basis reduced to the model include pool credit losses, payment rates, and discount rates. These assumptions are supported by both historical experience and anticipated trends relative to the particular receivable pool. Retained interest in securitized receivables is included in financing receivables, current and long-term, on the Consolidated Statement of Financial Position.zero. See Note 63 of the Notes to Consolidated Financial Statements for additional information about retained interest.investments.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity and Other Securities— The majority of Dell's investments in equity and other securities consists of various mutual funds held in Dell's Deferred Compensation Plan. The valuation of these securities is based on pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. The Level 1 position consists of equity investments which began trading during Fiscal 2012. The valuations are based on quoted prices in active markets. These investments were previously accounted for under the cost method.
Derivative Instruments—Dell’s Dell's derivative financial instruments consist primarily of foreign currency forward and purchased option contracts.contracts and interest rate swaps. The fair value of the portfolio is valueddetermined using internalvaluation models based on market observable inputs, including interest rate curves, forward and spot prices for currencies, and implied volatilities. Upon adoption of SFAS 157 in the first quarter of Fiscal 2009, Dell began factoring creditvolatilities. Credit risk is factored into the fair value
62
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
calculation of itsDell's derivative instrument portfolio. CreditFor interest rate derivative instruments, credit risk is quantified throughdetermined at the contract levelwith the use of Credit Default Swapscredit default spreads of either Dell, when in a net liability position, or the relevant counterparty, when in a net asset position. For foreign exchange derivative instruments, credit risk is determined in a similar manner, except that the credit default spread is applied based on a compositethe net position of Dell’s counterparties, which representseachcounterparty with the cost of protection in the event the counterparty or Dell were to default on the obligation.
The following table shows a reconciliationuse of the beginningappropriate credit default spreads.See Note 6 of the Notes to Consolidated Financial Statements for a description of Dell's derivative financial instrument activities.
Assets and ending balances for fair value measurements using significant unobservable inputs (Level 3) for the fiscal year ended January 30, 2009:
| | | | | | | | | | | | | |
| | | | | | Investments
| | | | |
| | | Retained
| | | Available
| | | | |
Fiscal Year Ended January 30, 2009 | | Interest | | | for Sale | | | Total | |
| | | (in millions) | |
| |
| Balance at February 1, 2008 | | $ | 223 | | | $ | - | | | $ | 223 | |
Net unrealized (losses) gains included in earnings(a) | | | (8 | ) | | | 2 | | | | (6 | ) |
| Issuances and settlements, net | | | 181 | | | | - | | | | 181 | |
| Purchases | | | - | | | | 25 | | | | 25 | |
| | | | | | | | | | | | | |
| Balance at January 30, 2009 | | $ | 396 | | | $ | 27 | | | $ | 423 | |
| | | | | | | | | | | | | |
(a) The unrealized gains on investments available for sale represent accrued interest.
Unrealized losses for the fiscal year ended January 30, 2009, related to the Level 3 retained interest asset and convertible debt security asset still held at the reporting date, are reported in income.
ItemsLiabilities Measured at Fair Value on a Nonrecurring Basis—Certain financial assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the recurring fair value table. The balances are not material relative to Dell’s balance sheet, and there were no material non-recurring adjustments to disclosetable above. These assets consist primarily of investments accounted for under the provisionscost method and non-financial assets such as goodwill and intangible assets. Investments accounted for under the cost method included in equity and other securities, approximated $12 million and $15 million, on February 3, 2012, and January 28, 2011, respectively. Goodwill and intangible assets are measured at fair value initially and subsequently when there is an indicator of SFAS 157impairment and the impairment is recognized. See Note 8 of the Notes to Consolidated Financial Statements for the fiscal year ended January 30, 2009.additional information about goodwill and intangible assets.
DELL INC.
Investments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3 — INVESTMENTS
The following table summarizes, by major security type, the fair value and amortized cost of Dell’sDell's investments. All debt security investments with remaining maturities in excess of one year and substantially all equity and other securities are recorded as long-term investments in the Consolidated Statements of Financial Position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | January 30, 2009 | | | February 1, 2008 | |
| | | Fair
| | | | | | Unrealized
| | | Unrealized
| | | Fair
| | | | | | Unrealized
| | | Unrealized
| |
| | | Value | | | Cost | | | Gain | | | (Loss) | | | Value | | | Cost | | | Gain | | | (Loss) | |
| | | (in millions) | |
| |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government and agencies | | $ | 539 | | | $ | 537 | | | $ | 3 | | | $ | (1 | ) | | $ | 1,013 | | | $ | 991 | | | $ | 23 | | | $ | (1 | ) |
| U.S. corporate | | | 457 | | | | 464 | | | | 2 | | | | (9 | ) | | | 571 | | | | 569 | | | | 10 | | | | (8 | ) |
| International corporate | | | 78 | | | | 77 | | | | 1 | | | | (0 | ) | | | 68 | | | | 67 | | | | 1 | | | | - | |
| State and municipal governments | | | 5 | | | | 5 | | | | 0 | | | | - | | | | 5 | | | | 5 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subtotal | | | 1,079 | | | | 1,083 | | | | 6 | | | | (10 | ) | | | 1,657 | | | | 1,632 | | | | 34 | | | | (9 | ) |
| Equity and other securities | | | 115 | | | | 115 | | | | - | | | | - | | | | 111 | | | | 111 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments | | $ | 1,194 | | | $ | 1,198 | | | $ | 6 | | | $ | (10 | ) | | $ | 1,768 | | | $ | 1,743 | | | $ | 34 | | | $ | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Short-term | | $ | 740 | | | $ | 737 | | | $ | 4 | | | $ | (1 | ) | | $ | 208 | | | $ | 206 | | | $ | 2 | | | $ | - | |
| Long-term | | | 454 | | | | 461 | | | | 2 | | | | (9 | ) | | | 1,560 | | | | 1,537 | | | | 32 | | | | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments | | $ | 1,194 | | | $ | 1,198 | | | $ | 6 | | | $ | (10 | ) | | $ | 1,768 | | | $ | 1,743 | | | $ | 34 | | | $ | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | February 3, 2012 | | January 28, 2011 |
| | Fair Value | | Cost | | Unrealized Gain | | Unrealized (Loss) | | Fair Value | | Cost | | Unrealized Gain | | Unrealized (Loss) |
| | (in millions) |
| | | | | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | | | | |
| U.S. government and agencies | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 58 |
| | $ | 58 |
| | $ | — |
| | $ | — |
|
| Non- U.S. government and agencies | 24 |
| | 24 |
| | — |
| | — |
| | 12 |
| | 12 |
| | — |
| | — |
|
| Commercial paper | 434 |
| | 434 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| U.S. corporate | 336 |
| | 335 |
| | 1 |
| | — |
| | 254 |
| | 253 |
| | 1 |
| | — |
|
| International corporate | 172 |
| | 172 |
| | — |
| | — |
| | 128 |
| | 128 |
| | — |
| | — |
|
| Total short-term investments | 966 |
| | 965 |
| | 1 |
| | — |
| | 452 |
| | 451 |
| | 1 |
| | — |
|
| | | | | | | | | | | | | | | | |
| U.S. government and agencies | — |
| | — |
| | — |
| | — |
| | 21 |
| | 20 |
| | 1 |
| | — |
|
| Non- U.S. government and agencies | 70 |
| | 70 |
| | — |
| | — |
| | 34 |
| | 34 |
| | — |
| | — |
|
| U.S. corporate | 2,332 |
| | 2,322 |
| | 12 |
| | (2 | ) | | 242 |
| | 243 |
| | — |
| | (1 | ) |
| International corporate | 883 |
| | 880 |
| | 4 |
| | (1 | ) | | 283 |
| | 283 |
| | — |
| | — |
|
| Equity and other securities | 119 |
| | 119 |
| | — |
| | — |
| | 124 |
| | 124 |
| | — |
| | — |
|
| Total long-term investments | 3,404 |
| | 3,391 |
| | 16 |
| | (3 | ) | | 704 |
| | 704 |
| | 1 |
| | (1 | ) |
| Total investments | $ | 4,370 |
| | $ | 4,356 |
| | $ | 17 |
| | $ | (3 | ) | | $ | 1,156 |
| | $ | 1,155 |
| | $ | 2 |
| | $ | (1 | ) |
63
Dell's investments in debt securities are classified as available-for-sale. Equity and other securities primarily relate to investments held in Dell's Deferred Compensation Plan, which are classified as trading securities. Equity and other securities also include equity investments that began trading during Fiscal 2012 which are classified as available-for-sale securities. The remaining equity and other securities are initially recorded at cost and reduced for any impairment losses. During Fiscal 2012, Dell recognized a $39 million impairment charge associated with one of its investments, which is included in Interest and other, net on the Consolidated Statements of Income. Security classes reported at fair value use the specific identification method. The fair value of Dell's portfolio can be affected by interest rate movements, credit, and liquidity risks. Dell's investments in debt securities have contractual maturities of three years or less.
During Fiscal 2012, Fiscal 2011, and Fiscal 2010, gross realized gains recognized in Interest and other, net were $49 million, $7 million, and $6 million, respectively. Dell recognized gross realized losses of $41 million, $1 million, and $4 million, respectively, during the same periods.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4 — FINANCIAL SERVICES
Dell Financial Services
Dell offers or arranges various financing options and services for its business and consumer customers in the U.S. and Canada through Dell Financial Services (“DFS”). DFS's key activities include the origination, collection, and servicing of customer receivables primarily related to the purchase of Dell products and services. In some cases, Dell may originate financing activities for its Commercial customers related to the purchase of third-party technology products that complement Dell's portfolio of products and services. New financing originations, which represent the amounts of financing provided by DFS to customers for equipment and related software and services, including third-party originations, were approximately $3.8 billion, $4.0 billion, and $3.9 billion for the fiscal years ended February 3, 2012, January 28, 2011, and January 29, 2010, respectively. The fair valueresults of Dell’s portfolioDFS are included in the business segment where the customer receivable was originated.
Dell's financing receivables are aggregated into the following categories:
Revolving loans — Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell. Revolving loans in the U.S. bear interest at a variable annual percentage rate that is affected primarilytied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid within 12 months on average. Revolving loans are included in short-term financing receivables. From time to time, account holders may have the opportunity to finance their Dell purchases with special programs during which, if the outstanding balance is paid in full by a specific date, no interest rates more than the creditis charged. These special programs generally range from 6 to 12 months. At February 3, 2012, and liquidity issues currently facing the capital markets.January 28, 2011, receivables under these special programs were $328 million and $398 million, respectively.
Fixed-term sales-type leases and loans — Dell believes that its investments can be liquidated for cash on short notice. Dell’s exposureenters into sales-type lease arrangements with customers who desire lease financing. Leases with business customers have fixed terms of generally two to asset and mortgage backed securities was less than 1% of the value of the portfolio at January 30, 2009. Dell attempts to mitigate these risks by investing primarily in high credit quality securities with AAA and AA ratings and short-term securities with anA-1four rating, limiting the amount that can be invested in any single issuer, and by investing in short to intermediate term investments whose market value is less sensitive to interest rate changes. As part of its cash and risk management processes, Dell performs periodic evaluations of the credit standing of the institutions in accordance with its investment policy. Dell’s investments in debt securities have effective years. Future maturities of less than fiveminimum lease payments at February 3, 2012, were as follows: Fiscal 2013 - $1,159 million; Fiscal 2014 - $725 million; Fiscal 2015 - $340 million; Fiscal 2016 - $46 million; Fiscal 2017 and beyond - $3 million. Dell also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three to four years. Management believes that no significant concentration of credit risk for investments exists for Dell.
At January 30, 2009, and February 1, 2008, Dell did not hold any auction rate securities. At January 30, 2009, and February 1, 2008, the total carrying value of investments in asset-backed and mortgage-backed debt securities was approximately $54 million and $550 million, respectively.
The following table summarizes Dell’s debt securities that had unrealized losses at the components of Dell's financing receivables segregated by portfolio segment as of February 3, 2012, and January 30, 2009, and their duration:28, 2011: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less Than 12 Months | | | 12 Months or Greater | | | Total | |
| | | | | | Unrealized
| | | | | | Unrealized
| | | | | | Unrealized
| |
| | | Fair Value | | | Loss | | | Fair Value | | | Loss | | | Fair Value | | | Loss | |
| | | (in millions) | |
| |
| U.S. government and agencies | | $ | 158 | | | $ | (0 | ) | | $ | 1 | | | $ | (1 | ) | | $ | 159 | | | $ | (1 | ) |
| U.S. corporate | | | 197 | | | | (6 | ) | | | 13 | | | | (3 | ) | | | 210 | | | | (9 | ) |
| International corporate | | | 51 | | | | (0 | ) | | | - | | | | - | | | | 51 | | | | (0 | ) |
| State and municipal governments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 406 | | | $ | (6 | ) | | $ | 14 | | | $ | (4 | ) | | $ | 420 | | | $ | (10 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | February 3, 2012 | | January 28, 2011 |
| | | Revolving | | Fixed-term | | Total | | Revolving | | Fixed-term | | Total |
| | | (in millions) |
| Financing Receivables, net: | | |
| | |
| | | | | | | | |
| Customer receivables, gross | | $ | 2,096 |
| | $ | 2,443 |
| | $ | 4,539 |
| | $ | 2,396 |
| | $ | 1,992 |
| | $ | 4,388 |
|
| Allowances for losses | | (179 | ) | | (23 | ) | | (202 | ) | | (214 | ) | | (27 | ) | | (241 | ) |
| Customer receivables, net | | 1,917 |
| | 2,420 |
| | 4,337 |
| | 2,182 |
| | 1,965 |
| | 4,147 |
|
| Residual interest | | — |
| | 362 |
| | 362 |
| | — |
| | 295 |
| | 295 |
|
| Financing receivables, net | | $ | 1,917 |
| | $ | 2,782 |
| | $ | 4,699 |
| | $ | 2,182 |
| | $ | 2,260 |
| | $ | 4,442 |
|
| Short-term | | $ | 1,917 |
| | $ | 1,410 |
| | $ | 3,327 |
| | $ | 2,182 |
| | $ | 1,461 |
| | $ | 3,643 |
|
| Long-term | | — |
| | 1,372 |
| | 1,372 |
| | — |
| | 799 |
| | 799 |
|
| Financing receivables, net | | $ | 1,917 |
| | $ | 2,782 |
| | $ | 4,699 |
| | $ | 2,182 |
| | $ | 2,260 |
| | $ | 4,442 |
|
At January 30, 2009, Dell held investments in 160 debt securities that had fair values below their carrying values for a period
Dell periodically reviews its investment portfolio to determine if any investment isother-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. During Fiscal 2009 Dell recorded an $11 millionother-than-temporary impairment loss. Factors considered in determining whether a loss isother-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, previousother-than-temporary impairment, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The investmentsother-than-temporarily impaired during Fiscal 2009 were asset-backed securities and were impaired due to severe price degradation or price degradation over an extended period of time, rise in delinquency rates and general credit enhancement declines.
The following table summarizes Dell’s gains and losses on investments recorded in investment and other income:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
| Gains | | $ | 14 | | | $ | 17 | | | $ | 9 | |
| Losses | | | (24 | ) | | | (3 | ) | | | (14 | ) |
| | | | | | | | | | | | | |
| Net realized (losses) gains | | $ | (10 | ) | | $ | 14 | | | $ | (5 | ) |
| | | | | | | | | | | | | |
64
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the changes in the allowance for financing receivable losses for the respective periods:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | Revolving | | Fixed- term | | Total | | Revolving | | Fixed- term | | Total | | Total |
| | | (in millions) |
| Allowance for financing receivable losses: | | | | | | | | | | | | | | |
| Balance at beginning of period | | $ | 214 |
| | $ | 27 |
| | $ | 241 |
| | $ | 224 |
| | $ | 13 |
| | $ | 237 |
| | $ | 149 |
|
| Incremental allowance due to VIE consolidation | | — |
| | — |
| | — |
| | — |
| | 16 |
| | 16 |
| | — |
|
| Principal charge-offs | | (204 | ) | | (9 | ) | | (213 | ) | | (233 | ) | | (18 | ) | | (251 | ) | | (139 | ) |
| Interest charge-offs | | (38 | ) | | — |
| | (38 | ) | | (46 | ) | | — |
| | (46 | ) | | (27 | ) |
| Recoveries | | 64 |
| | 4 |
| | 68 |
| | 27 |
| | — |
| | 27 |
| | 10 |
|
| Provision charged to income statement | | 143 |
| | 1 |
| | 144 |
| | 242 |
| | 16 |
| | 258 |
| | 244 |
|
| Balance at end of period | | $ | 179 |
| | $ | 23 |
| | $ | 202 |
| | $ | 214 |
| | $ | 27 |
| | $ | 241 |
| | $ | 237 |
|
The following table summarizes the aging of Dell's customer receivables, gross, including accrued interest, as of February 3, 2012, and January 28, 2011, segregated by class:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | February 3, 2012 | | January 28, 2011 |
| | | Current | | Past Due 1 — 90 Days | | Past Due > 90 Days | | Total | | Current | | Past Due 1 — 90 Days | | Past Due > 90 Days | | Total |
| | | (in millions) |
| Revolving — Consumer | | | | | | | | | | | | | | | | |
| Owned since inception | | $ | 1,249 |
| | $ | 148 |
| | $ | 49 |
| | $ | 1,446 |
| | $ | 1,302 |
| | $ | 153 |
| | $ | 48 |
| | $ | 1,503 |
|
| Purchased | | 272 |
| | 47 |
| | 18 |
| | 337 |
| | 447 |
| | 88 |
| | 35 |
| | 570 |
|
| Fixed-term — Consumer | | | | | | | | | | | | | | | | |
| Owned since inception | | 29 |
| | 1 |
| | — |
| | 30 |
| | — |
| | — |
| | — |
| | — |
|
| Purchased | | 61 |
| | 5 |
| | 1 |
| | 67 |
| | — |
| | — |
| | — |
| | — |
|
Revolving — SMB(a) | | 272 |
| | 33 |
| | 8 |
| | 313 |
| | 280 |
| | 35 |
| | 8 |
| | 323 |
|
Fixed-term — SMB(a) | | 534 |
| | 23 |
| | 5 |
| | 562 |
| | 371 |
| | 11 |
| | 3 |
| | 385 |
|
Fixed-term — Large Enterprise(a) | | 1,227 |
| | 95 |
| | 12 |
| | 1,334 |
| | 1,077 |
| | 47 |
| | 7 |
| | 1,131 |
|
Fixed-term — Public(a) | | 419 |
| | 30 |
| | 1 |
| | 450 |
| | 463 |
| | 12 |
| | 1 |
| | 476 |
|
| Total customer receivables, gross | | $ | 4,063 |
| | $ | 382 |
| | $ | 94 |
| | $ | 4,539 |
| | $ | 3,940 |
| | $ | 346 |
| | $ | 102 |
| | $ | 4,388 |
|
____________________
(a) Includes purchased receivables described below that are not significant to any portfolio class.
DFS Acquisitions
During the second quarter of Fiscal 2012, Dell acquired Dell Financial Services Canada Limited ("DFS Canada") from CIT Group Inc., which was accounted for as a business combination. The purchase included a portfolio of $367 million in gross contractual fixed-term leases and loans, Consumer installment loans, and Consumer revolving loans with a fair value at purchase of $309 million. Of the gross contractual amounts, $23 million was expected to be uncollectible at the date of
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
acquisition. Dell also acquired a liquidating portfolio of computer equipment operating leases. The gross amount of the equipment associated with these operating leases at the date of acquisition was $67 million and is included in Property, plant, and equipment in the Consolidated Statements of Financial Position. See Note 7 of Notes to Consolidated Financial Statements for additional information about Dell's acquisitions.
In Fiscal 2012, Dell entered into a definitive agreement to acquire CIT Vendor Finance's Dell-related financing assets portfolio and sales and servicing functions in Europe. The acquisition of these assets will enable global expansion of Dell's direct finance model. 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.
Purchased Credit-Impaired Loans
Foreign Currency InstrumentsDuring the third quarter of Fiscal 2011, Dell purchased a portfolio of revolving loan receivables from CIT Group Inc. Prior to the acquisition, it was evident that Dell would not collect on all contractually required principal and interest payments. As such, these receivables met the definition of Purchased Credit-Impaired (“PCI”) loans. At February 3, 2012, the outstanding balance of these receivables, including principal and accrued interest, was $419 million and the carrying amount was $184 million.
The excess of cash flows expected to be collected over the carrying value of PCI loans is referred to as the accretable yield and is accreted into interest income using the effective yield method based on the expected future cash flows over the estimated lives of the PCI loans. Due to improved expectations of the amount of expected cash flows and higher post charge-off recoveries, Dell increased the accretable yield associated with these PCI loans in Fiscal 2012. The increases in accretable yield will be amortized over the remaining life of the loans.
The following table shows activity for the accretable yield on the PCI loans for the fiscal years ended February 3, 2012, and January 28, 2011. We expect the remaining balance of the accretable yield as of February 3, 2012 to accrete over the next 3 years, using the effective interest method.
|
| | | | | | | |
| | Fiscal Year Ended |
| | February 3, 2012 | | January 28, 2011 |
| | (in millions) |
| Accretable Yield: | | | |
| Balance at beginning of period | $ | 137 |
| | $ | — |
|
| Additions/ Purchases | — |
| | 166 |
|
| Accretion | (88 | ) | | (29 | ) |
| Prospective yield adjustment | 93 |
| | — |
|
| Balance at end of period | $ | 142 |
| | $ | 137 |
|
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Quality
The following tables summarize customer receivables, gross, including accrued interest by credit quality indicator segregated by class, as of February 3, 2012, and January 28, 2011. For revolving loans to consumers, Dell makes credit decisions based on propriety scorecards, which include the customer's credit history, payment history, credit usage, and other credit agency-related elements. For Commercial customers, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. These credit level scores range from one to sixteen for Public and Large Enterprise customers, and generally from one to six for SMB customers. The categories shown in the tables below segregate customer receivables based on the relative degrees of credit risk within each segment and product group. As loss experience varies substantially between financial products and customer segments, the credit quality categories cannot be compared between the different classes. The credit quality indicators for Consumer revolving accounts are primarily as of each quarter-end date, and all others are generally updated on a periodic basis.
For the Consumer receivables shown in the below table, the higher quality category includes prime accounts which are generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720+. The mid-category represents the mid-tier accounts that are comparable to U.S. FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to FICO scores below 660.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | February 3, 2012 | | January 28, 2011 |
| | | Higher | | Mid | | Lower | | Total | | Higher | | Mid | | Lower | | Total |
| | | (in millions) |
| Revolving — Consumer | | | | |
| | | | | | | | |
| | | | |
| Owned since inception | | $ | 220 |
| | $ | 412 |
| | $ | 814 |
| | $ | 1,446 |
| | $ | 251 |
| | $ | 415 |
| | $ | 837 |
| | $ | 1,503 |
|
| Purchased | | $ | 28 |
| | $ | 80 |
| | $ | 229 |
| | $ | 337 |
| | $ | 50 |
| | $ | 127 |
| | $ | 393 |
| | $ | 570 |
|
| Fixed-term — Consumer | | | | | | | | | | | | | | | | |
| Owned since inception | | $ | 2 |
| | $ | 14 |
| | $ | 14 |
| | $ | 30 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Purchased | | $ | 4 |
| | $ | 32 |
| | $ | 31 |
| | $ | 67 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
For the SMB receivables shown in the table below, the higher quality category includes receivables that are generally within Dell's top two internal credit quality levels, which typically have the lowest loss experience. The middle category generally falls within credit levels three and four, and the lower category generally falls within Dell's bottom two credit levels, which experience higher loss rates. The revolving product is sold primarily to small business customers and the fixed-term products are more weighted toward medium-sized businesses. Although both fixed-term and revolving products generally rely on a six-level internal rating system, the grading criteria and classifications are different as the loss performance varies between these product and customer sets. Therefore, the credit levels are not comparable between the SMB fixed-term and revolving classes.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | February 3, 2012 | | January 28, 2011(a) |
| | | Higher | | Mid | | Lower | | Total | | Higher | | Mid | | Lower | | Total |
| | | (in millions) |
| Revolving — SMB | | $ | 111 |
| | $ | 98 |
| | $ | 104 |
| | $ | 313 |
| | $ | 124 |
| | $ | 109 |
| | $ | 90 |
| | $ | 323 |
|
| Fixed-term — SMB | | $ | 43 |
| | $ | 208 |
| | $ | 311 |
| | $ | 562 |
| | $ | 55 |
| | $ | 122 |
| | $ | 208 |
| | $ | 385 |
|
____________________
(a) Amounts as of January 28, 2011 have been reclassified for Fixed-term — SMB due to adjustments between credit quality categories.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Large Enterprise and Public receivables shown in the below table, Dell's internal credit level scoring has been aggregated to their most comparable external commercial rating agency equivalents. Investment grade generally represents the highest credit quality accounts, non-investment grade represents middle quality accounts, and sub-standard represents the lowest quality accounts.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | February 3, 2012 | | January 28, 2011 |
| | Investment | | Non-Investment | | Sub-Standard | | Total | | Investment | | Non-Investment | | Sub-Standard | | Total |
| | (in millions) |
Fixed-term — Large Enterprise | $ | 1,000 |
| | $ | 199 |
| | $ | 135 |
| | $ | 1,334 |
| | $ | 806 |
| | $ | 166 |
| | $ | 159 |
| | $ | 1,131 |
|
| Fixed-term — Public | $ | 400 |
| | $ | 40 |
| | $ | 10 |
| | $ | 450 |
| | $ | 438 |
| | $ | 30 |
| | $ | 8 |
| | $ | 476 |
|
Asset Securitizations
Dell transfers certain U.S. customer financing receivables to Special Purpose Entities (“SPEs”) which meet the definition of a Variable Interest Entity ("VIE") and are consolidated into Dell's Consolidated Financial Statements. The SPEs are bankruptcy remote legal entities with separate assets and liabilities. The purpose of the SPEs is to facilitate the funding of customer receivables in the capital markets. These SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. Dell's risk of loss related to securitized receivables is limited to the amount of Dell's right to receive collections for assets securitized exceeding the amount required to pay interest, principal, and other fees and expenses related to the asset-backed securities. Dell provides credit enhancement to the securitization in the form of over-collateralization. Customer receivables funded via securitization through SPEs were $2.3 billion, $1.9 billion, and $0.8 billion, during Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively.
The following table shows financing receivables held by the consolidated VIEs:
|
| | | | | | | | |
| | | February 3,
2012 | | January 28,
2011 |
| | | (in millions) |
| Financing receivables held by consolidated VIEs, net: | | |
| | |
|
| Short-term, net | | $ | 1,096 |
| | $ | 1,087 |
|
| Long-term, net | | 429 |
| | 262 |
|
| Financing receivables held by consolidated VIEs, net | | $ | 1,525 |
| | $ | 1,349 |
|
Dell's securitization programs are generally effective for 12 months and are subject to an annual renewal process. These programs contain standard structural features related to the performance of the securitized receivables. The structural features include defined credit losses, delinquencies, average credit scores, and excess collections above or below specified levels. In the event one or more of these criteria are not met and Dell is unable to restructure the program, no further funding of receivables will be permitted and the timing of Dell's expected cash flows from over-collateralization will be delayed. At February 3, 2012, these criteria were met.
Structured Financing Debt
The structured financing debt related to the fixed-term lease and loan, and revolving loan securitization programs was $1.3 billion and $1.0 billion as of February 3, 2012, and January 28, 2011, respectively. The debt is collateralized solely by the financing receivables in the programs. The debt has a variable interest rate and an average duration of 12 to 36 months based on the terms of the underlying financing receivables. The total debt capacity related to the securitization programs is $1.4 billion. See Note 5 of the Notes to Consolidated Financial Statements for additional information regarding the structured financing debt.
Dell enters into interest rate swap agreements to effectively convert a portion of the structured financing debt from a floating rate to a fixed rate. The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. See Note 6 of the Notes to Consolidated Financial Statements for additional information about interest rate swaps.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5 — BORROWINGS
The following table summarizes Dell's outstanding debt as of the dates indicated: |
| | | | | | | | |
| | | February 3,
2012 | | January 28,
2011 |
| | | (in millions) |
| Long-Term Debt | | |
| | |
|
| Notes | | |
| | |
|
$400 million issued on June 10, 2009, at 3.375% due June 2012 (“2012 Notes”)(a) | | $ | 400 |
| | $ | 400 |
|
$600 million issued on April 17, 2008, at 4.70% due April 2013 (“2013A Notes”)(a)(b) | | 605 |
| | 609 |
|
| $500 million issued on September 7, 2010, at 1.40% due September 2013 (“2013B Notes”) | | 499 |
| | 499 |
|
$500 million issued on April 1, 2009, at 5.625% due April 2014 (“2014A Notes”)(b) | | 500 |
| | 500 |
|
| $300 million issued on March 28, 2011, with a floating rate due April 2014 (“2014B Notes”) | | 300 |
| | — |
|
| $400 million issued on March 28, 2011, at 2.10% due April 2014 (“2014C Notes”) | | 400 |
| | — |
|
$700 million issued on September 7, 2010, at 2.30% due September 2015 (“2015 Notes”)(b) | | 701 |
| | 700 |
|
$400 million issued on March 28, 2011, at 3.10% due April 2016 (“2016 Notes”)(b) | | 401 |
| | — |
|
$500 million issued on April 17, 2008, at 5.65% due April 2018 (“2018 Notes”)(b) | | 501 |
| | 499 |
|
$600 million issued on June 10, 2009, at 5.875% due June 2019 (“2019 Notes”)(b) | | 602 |
| | 600 |
|
| $400 million issued on March 28, 2011, at 4.625% due April 2021 (“2021 Notes”) | | 398 |
| | — |
|
| $400 million issued on April 17, 2008, at 6.50% due April 2038 (“2038 Notes”) | | 400 |
| | 400 |
|
| $300 million issued on September 7, 2010, at 5.40% due September 2040 (“2040 Notes”) | | 300 |
| | 300 |
|
| Senior Debentures | | |
| | |
|
$300 million issued on April 3, 1998, at 7.10% due April 2028 ("Senior Debentures")(a) | | 384 |
| | 389 |
|
| Other | | |
| | |
|
| Long-term structured financing debt | | 920 |
| | 828 |
|
| Less: current portion of long-term debt | | (924 | ) | | (578 | ) |
| Total long-term debt | | 6,387 |
| | 5,146 |
|
| Short-Term Debt | | |
| | |
|
| Commercial paper | | 1,500 |
| | — |
|
| Short-term structured financing debt | | 440 |
| | 272 |
|
| Current portion of long-term debt | | 924 |
| | 578 |
|
| Other | | 3 |
| | 1 |
|
| Total short-term debt | | 2,867 |
| | 851 |
|
| Total debt | | $ | 9,254 |
| | $ | 5,997 |
|
____________________
(a) Includes the impact of interest rate swap terminations.
(b) Includes hedge accounting adjustments.
During Fiscal 2012, Dell issued the 2014B Notes, the 2014C Notes, the 2016 Notes and the 2021 Notes (collectively, the “Issued Notes”) under a shelf registration statement that was originally filed in November 2008 and amended in March 2011. The net proceeds from the Issued Notes, after payment of expenses, were approximately $1.5 billion. The Issued Notes are unsecured obligations and rank equally in right of payment with Dell's existing and future unsecured senior indebtedness. The Issued Notes effectively rank junior in right of payment to all indebtedness and other liabilities, including trade payables, of Dell's subsidiaries. The Issued Notes were issued pursuant to a Supplemental Indenture dated March 31, 2011, between Dell and a trustee, with terms and conditions substantially the same as those governing the Notes outstanding as of January 28, 2011 (such outstanding Notes, together with the Issued Notes, the "Notes").
The estimated fair value of total debt at February 3, 2012, was approximately $9.8 billion. The fair values of the structured financing debt and other short-term debt approximate their carrying values as their interest rates vary with the market. The carrying value of the Senior Debentures, the 2012 Notes and the 2013A Notes includes an unamortized amount related to the
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
termination of interest rate swap agreements, which were previously designated as hedges of the debt. See Note 6 of the Notes to Consolidated Financial Statements for additional information about interest rate swaps. The weighted average interest rate for the short-term structured financing debt and other as of February 3, 2012, and January 28, 2011, was 0.28% and 0.29%, respectively.
Aggregate future maturities of long-term debt at face value were as follows as of February 3, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturities by Fiscal Year | | |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | Thereafter | | Total |
| | | | | | | | (in millions) | | | | |
| Aggregate future maturities of long-term debt outstanding | $ | 924 |
| | $ | 1,404 |
| | $ | 1,291 |
| | $ | 701 |
| | $ | 400 |
| | $ | 2,500 |
| | $ | 7,220 |
|
Structured Financing Debt — As of February 3, 2012, Dell had $1.4 billion outstanding in structured financing related debt, of which $1.3 billion was through the fixed-term lease and loan, and revolving loan securitization programs. Of the $1.4 billion outstanding in structured financing related debt, $964 million was current as of February 3, 2012. See Note 4 and Note 6 of the Notes to Consolidated Financial Statements for further discussion of the structured financing debt and the interest rate swap agreements that hedge a portion of that debt.
Commercial Paper — As of February 3, 2012, there was $1.5 billion outstanding under the commercial paper program. At January 28, 2011, Dell had no outstanding commercial paper. The weighted average interest rate on outstanding commercial paper as of February 3, 2012, was 0.23%. Dell has $3.0 billion in senior unsecured revolving credit facilities, primarily to support its $2.5 billion commercial paper program. Dell replaced the five-year $1.0 billion credit facility expiring on June 1, 2011, with a four-year $2.0 billion credit facility that will expire on April 15, 2015. Dell's remaining credit facility for $1.0 billion will expire on April 2, 2013. There were no outstanding advances under the revolving credit facilities as of February 3, 2012.
The indentures governing the Notes, the Senior Debentures, and the structured financing debt contain customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, and certain events of bankruptcy and insolvency. The indentures also contain covenants limiting Dell's ability to create certain liens; enter into sale-and-lease back transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of its assets to, another person. The senior unsecured revolving credit facilities require compliance with conditions that must be satisfied prior to any borrowing, as well as ongoing compliance with specified affirmative and negative covenants, including maintenance of a minimum interest coverage ratio. Dell was in compliance with all financial covenants as of February 3, 2012.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative Instruments
As part of its risk management strategy, Dell uses derivative instruments, primarily forward contracts and purchased options, to hedge certain foreign currency exposures. Dell’sexposures and interest rate swaps to manage the exposure of its debt portfolio to interest rate risk. Dell's objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge them,the exposures, thereby reducing volatility of earnings and protecting fair values of assets and liabilities. Dell appliesassesses hedge accounting based uponeffectiveness both at the criteria established by SFAS 133, whereby Dell designates its derivativesonset of the hedge and at regular intervals throughout the life of the derivative and recognizes any ineffective portion of the hedge, as fair value hedges or cash flow hedges. Dell estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates and records all derivativeswell as amounts not included in the Consolidated Statementsassessment of Financial Position at fair value.effectiveness, in earnings as a component of Interest and other, net.
Foreign Exchange Risk
Cash Flow Hedges
Dell uses a combination of forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. TheseThe majority of these contracts typically expire in 12 months or less. For derivative instruments that are designated and qualify as cash flow hedges,
Dell records the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity and reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. Dell reports the effective portion of cash flow hedges in the same financial statement line item, within earnings, as the changes in value of the hedged item.
Forassessed hedge ineffectiveness for foreign currency option and forwardexchange contracts designated as cash flow hedges Dell assesses hedge effectiveness both atfor the onset of the hedge as well as at the end of each fiscal quarter throughout the life of the derivative. Dell measures hedgeyear ended February 3, 2012, and determined that such ineffectiveness by comparing the cumulative change in the fair value of the hedge contract with the cumulative change in the fair value of the hedged item, both of which are based on forward rates. Dell recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness, currently in earnings as a component of investment and other income, net. Hedge ineffectiveness for cash flow hedges was not material for Fiscal 2009, 2008, and 2007.material. During Fiscal 2009, 2008, and 2007,the fiscal year ended February 3, 2012, Dell did not discontinue any cash flow hedges related to foreign exchange contracts that had a material impact on Dell’sDell's results of operations, as substantially all forecasted foreign currency transactions were realized in Dell’sDell's actual results.
Changes in the aggregate unrealized net gain (loss) of Dell’s cash flow hedges that are recorded as a component of comprehensive income (loss), net of tax, are presented in the table below. Dell expects to reclassify substantially all of the unrealized net gain recorded in accumulated other comprehensive income (loss) at January 30, 2009, into earnings during the next fiscal year, providing an offsetting economic impact against the settlement of the underlying transactions.
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
| Aggregate unrealized net (losses) gains at beginning of year | | $ | (25 | ) | | $ | 13 | | | $ | (17 | ) |
| Net gains (losses) reclassified to earnings | | | 603 | | | | (392 | ) | | | (260 | ) |
| Change in fair value of cash flow hedges | | | (254 | ) | | | 354 | | | | 290 | |
| | | | | | | | | | | | | |
| Aggregate unrealized net gains (losses) at end of year | | $ | 324 | | | $ | (25 | ) | | $ | 13 | |
| | | | | | | | | | | | | |
Other Foreign Currency Derivative Instruments
In addition, Dell uses forward contracts to hedge monetary assets and liabilities, primarily receivables and payables, denominated in a foreign currency. These contracts generally expire in three months or less, are considered economic hedges and are not designated. The change in the fair value of these instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates. TheseDell recognized gains (losses) for the change in fair value of these foreign currency forward contracts generallyof $17 million, $59 million and $(85) million during Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively.
Interest Rate Risk
65
Dell uses interest rate swaps to hedge the variability in cash flows related to the interest rate payments on structured financing debt. The interest rate swaps economically convert the variable rate on the structured financing debt to a fixed interest rate to match the underlying fixed rate being received on fixed term customer leases and loans. The duration of these contracts typically ranges from 30 to 42 months. Certain of these swaps are designated as cash flow hedges. Hedge ineffectiveness for interest rate swaps designated as cash flow hedges was not material for the fiscal years ended February 3, 2012, and January 28, 2011.
Periodically, Dell also uses interest rate swaps designated as fair value hedges to modify the market risk exposures in connection with long-term debt to achieve primarily LIBOR-based floating interest expense. During the fiscal year ended February 3, 2012, Dell entered into interest rate swaps to economically hedge a portion of its interest rate exposure on certain tranches of its long-term debt. Hedge ineffectiveness for interest rate swaps designated as fair value hedges was not material for the fiscal years ended February 3, 2012, and January 28, 2011.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Notional Amounts of Outstanding Derivative Instruments
expire in three months or less. TheseThe notional amounts of Dell's outstanding derivative instruments are as follows as of the dates indicated:
|
| | | | | | | | |
| | | February 3, 2012 | | January 28, 2011 |
| | | (in millions) |
| Foreign Exchange Contracts | | |
| | |
|
| Designated as cash flow hedging instruments | | $ | 4,549 |
| | $ | 5,364 |
|
| Non-designated as hedging instruments | | 168 |
| | 250 |
|
| Total | | $ | 4,717 |
| | $ | 5,614 |
|
| | | | | |
| Interest Rate Contracts | | | | |
| Designated as fair value hedging instruments | | $ | 650 |
| | $ | — |
|
| Designated as cash flow hedging instruments | | 751 |
| | 625 |
|
| Non-designated as hedging instruments | | 132 |
| | 145 |
|
| Total | | $ | 1,533 |
| | $ | 770 |
|
Derivative Instruments Additional Information
The aggregate unrealized net loss for interest rate swaps and foreign currency exchange contracts, are not designated as hedges under SFAS 133, and therefore, the change in the instrument’s fair value is recognized currently in earningsrecorded as a component of investmentcomprehensive income, for the fiscal years ended February 3, 2012, and other income, net.January 28, 2011, was $40 million and $111 million, respectively.
The gross notional value of foreign currency derivative financial instruments and the related net asset or liability was as follows:
| | | | | | | | | | | | | | | | | |
| | | January 30, 2009 | | | February 1, 2008 | |
| | | Gross
| | | Net Asset
| | | Gross
| | | Net Asset
| |
| | | Notional | | | (Liability) | | | Notional | | | (Liability) | |
| | | (in millions) | |
| |
| Cash flow hedges | | $ | 6,581 | | | $ | 542 | | | $ | 7,772 | | | $ | (9 | ) |
| Other derivatives | | | 581 | | | | (46 | ) | | | (1,338 | ) | | | 8 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 7,162 | | | $ | 496 | | | $ | 6,434 | | | $ | (1 | ) |
| | | | | | | | | | | | | | | | | |
Commercial Paper
Dell has a commercial paper programreviewed the existence and nature of credit-risk-related contingent features in derivative trading agreements with a supporting senior unsecured revolvingits counterparties. Certain agreements contain clauses under which, if Dell's credit facility that allows Dellratings were to obtain favorable short-term borrowing rates. The commercial paper program and related revolving credit facility were increased from $1.0 billion to $1.5 billion on April 4, 2008. Dell pays facility commitment fees at rates basedfall below investment grade upon Dell’s credit rating. Unless extended, $500 million expires on April 3, 2009, and $1.0 billion expires on June 1, 2011. The credit facility requires compliance with conditions that must be satisfied prior to any borrowing, as well as ongoing compliance with specified affirmative and negative covenants, including maintenance of a minimum interest coverage ratio. Amounts outstanding under the facility may be accelerated for typical defaults, including failure to pay principal or interest, breaches of covenants, non-payment of judgments or debt obligations in excess of $200 million, occurrence of a change of control and certain bankruptcyof Dell, counterparties would have the right to terminate those derivative contracts where Dell is in a net liability position. As of February 3, 2012, there had been no such triggering events. There were no events
Effect of default as of January 30, 2009.
At January 30, 2009, there was $100 million outstanding under the commercial paper program and no outstanding advances under the related revolving credit facilities. The weighted-average interest rate on these outstanding short-term borrowings was 0.19%. At February 1, 2008, there were no outstanding advances under the commercial paper program or the related credit facility. Dell uses the proceeds of the program for short-term liquidity needs.
India Credit Facilities
Dell India Pvt Ltd. (“Dell India”), Dell’s wholly-owned subsidiary, maintains unsecured short-term credit facilities with Citibank N.A. Bangalore Branch India (“Citibank India”) that provide a maximum capacity of $30 million to fund Dell India’s working capital and import buyers’ credit needs. The capacity increased from $30 million to $55 million on August 6, 2008. The incremental $25 million line of credit expired on December 31, 2008, and was not renewed. Financing is available in both Indian Rupees and foreign currencies. The borrowings are extended on an unsecured basis based on Dell’s guarantee to Citibank N.A. Citibank India can cancel the facilities in whole or in part without prior notice, at which time any amounts owed under the facilities will become immediately due and payable. InterestDerivative Instruments on the outstanding loans is charged monthly and is calculated based on Citibank India’s internal cost of funds plus 0.25%. At January 30, 2009, and February 1, 2008, outstanding advances from Citibank India totaled $12 million and $23 million, respectively, and are included in short-term debt on Dell’s Consolidated StatementStatements of Financial Position. There have been no eventsPosition and the Consolidated Statements of default.Income
66
|
| | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Gain (Loss) Recognized in Accumulated OCI, Net of Tax, on Derivatives (Effective Portion) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion) | | Gain (Loss) Recognized in Income on Derivative (Ineffective Portion) |
| (in millions) |
| For the fiscal year ended February 3, 2012 | | |
| | | | |
|
| | | |
| | Total net revenue | | $ | (186 | ) | | | | |
| Foreign exchange contracts | | $ | (126 | ) | | Total cost of net revenue | | (7 | ) | | | | |
| Interest rate contracts | | 3 |
| | Interest and other, net | | — |
| | Interest and other, net | | $ | 2 |
|
| Total | | $ | (123 | ) | | | | $ | (193 | ) | | | | $ | 2 |
|
| | | | | | | | | | | |
| For the fiscal year ended January 28, 2011 | | |
| | | | |
|
| | | |
| | Total net revenue | | $ | (105 | ) | | | | |
| Foreign exchange contracts | | $ | (265 | ) | | Total cost of net revenue | | (49 | ) | | | | |
| Interest rate contracts | | (1 | ) | | Interest and other, net | | — |
| | Interest and other, net | | $ | 2 |
|
| Total | | $ | (266 | ) | | | | $ | (154 | ) | | | | $ | 2 |
|
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Derivative Instruments in the Consolidated Statements of Financial Position
Long-Term Debt and Interest Rate Risk Management
The following table summarizes our long-term debt at:
| | | | | | | | | |
| | | January 30,
| | | February 1,
| |
| | | 2009 | | | 2008 | |
| | | (in millions) | |
| |
| Long-term debt: | | | | | | | | |
| Indenture: | | | | | | | | |
| $600 million issued on April 17, 2008 at 4.70% due April 2013 with interest payable April 15 and October 15 | | $ | 599 | | | $ | - | |
| $500 million issued on April 17, 2008 at 5.65% due April 2018 with interest payable April 15 and October 15 | | | 499 | | | | - | |
| $400 million issued on April 17, 2008 at 6.50% due April 2038 with interest payable April 15 and October 15 | | | 400 | | | | - | |
| Senior Debentures | | | | | | | | |
| $300 million issued on April 1998 at 7.10% due April 2028 with interest payable April 15 and October 15 (includes the impact of interest rate swaps) | | | 400 | | | | 359 | |
| Senior Notes | | | | | | | | |
| $200 million issued on April 1998 at 6.55% due April 2008 with interest payable April 15 and October 15 (includes fair value adjustment related to SFAS 133) | | | - | | | | 201 | |
| | | | | | | | | |
| | | | 1,898 | | | | 560 | |
| Other | | | - | | | | 2 | |
| Less current portion | | | - | | | | (200 | ) |
| | | | | | | | | |
| Total long-term debt | | $ | 1,898 | | | $ | 362 | |
| | | | | | | | | |
During Fiscal 2009, Dell Inc. issued and sold debt comprising $600 million aggregate principal amountpresents its foreign exchange derivative instruments on a net basis in the Consolidated Statements of Financial Position due 2013 with a fixed interest rateto the right of 4.70% (“2013 Notes”), $500 million aggregate principal amount due 2018 with a fixed interest rate of 5.65% (“2018 Notes”), and $400 million aggregate principal amount due 2038 with a fixed interest rate of 6.50% Notes (“2038 Notes”), and together with the 2013 Notes and the 2018 Notes, (“Notes”).offset by its counterparties under master netting arrangements. The Notes are unsecured obligations and rank equally with Dell’s existing and future unsecured senior indebtedness. The Notes effectively rank junior to all indebtedness and other liabilities, including trade payables, of Dell’s subsidiaries. The net proceeds from the offering of the Notes were approximately $1.5 billion after payment of expenses of the offering. The estimated fair value of the long-term debt was approximately $1.5 billion at January 30, 2009, compared tothose derivative instruments presented on a carrying value of $1.5 billion at that date.
The Notes were issued pursuant to an Indenture datedgross basis as of April 17, 2008 (“Indenture”), between Dell and a trustee. The Indenture contains customary eventseach date indicated below is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | February��3, 2012 |
| | | Other Current Assets | | Other Non- Current Assets | | Other Current Liabilities | | Other Non-Current Liabilities | | Total Fair Value |
| | | | | (in millions) | | |
| Derivatives Designated as Hedging Instruments |
| Foreign exchange contracts in an asset position | | $ | 266 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 268 |
|
| Foreign exchange contracts in a liability position | | (140 | ) | | — |
| | (7 | ) | | — |
| | (147 | ) |
| Interest rate contracts in an asset position | | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
| Interest rate contracts in a liability position | | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
| Net asset (liability) | | 126 |
| | 8 |
| | (5 | ) | | (3 | ) | | 126 |
|
| Derivatives not Designated as Hedging Instruments |
| Foreign exchange contracts in an asset position | | 67 |
| | — |
| | 1 |
| | — |
| | 68 |
|
| Foreign exchange contracts in a liability position | | (61 | ) | | — |
| | (10 | ) | | — |
| | (71 | ) |
| Net asset (liability) | | 6 |
| | — |
| | (9 | ) | | — |
| | (3 | ) |
| Total derivatives at fair value | | $ | 132 |
| | $ | 8 |
| | $ | (14 | ) | | $ | (3 | ) | | $ | 123 |
|
| | | | | | | | | | | |
| | | January 28, 2011 |
| | | Other Current Assets | | Other Non- Current Assets | | Other Current Liabilities | | Other Non-Current Liabilities | | Total Fair Value |
| | | | | (in millions) | | |
| Derivatives Designated as Hedging Instruments |
| Foreign exchange contracts in an asset position | | $ | 81 |
| | $ | 1 |
| | $ | 34 |
| | $ | — |
| | $ | 116 |
|
| Foreign exchange contracts in a liability position | | (86 | ) | | — |
| | (59 | ) | | — |
| | (145 | ) |
| Interest rate contracts in a liability position | | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Net asset (liability) | | (5 | ) | | 1 |
| | (25 | ) | | (2 | ) | | (31 | ) |
| Derivatives not Designated as Hedging Instruments |
| Foreign exchange contracts in an asset position | | 52 |
| | — |
| | 15 |
| | — |
| | 67 |
|
| Foreign exchange contracts in a liability position | | (21 | ) | | — |
| | (15 | ) | | — |
| | (36 | ) |
| Interest rate contracts in a liability position | | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Net asset (liability) | | 31 |
| | — |
| | — |
| | (1 | ) | | 30 |
|
| Total derivatives at fair value | | $ | 26 |
| | $ | 1 |
| | $ | (25 | ) | | $ | (3 | ) | | $ | (1 | ) |
Table of default with respect to the Notes, including failure to make required payments, failure to comply with certain agreements or covenants and certain events of bankruptcy and insolvency. The Indenture also contains covenants limiting Dell’s ability to create certain liens, enter into sale-and-leaseback transactions and consolidate or merge with, or convey, transfer or lease all or substantially all of Dell’s assets to, another person. The Notes will be redeemable, in whole or in part at any time, at Dell’s option, at a “make-whole premium” redemption price calculated by Dell equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming aContents360-day
year consisting of twelve30-day months) at the Treasury Rate (as defined in the Indenture) plus 35 basis points, plus accrued interest thereon to the date of redemption. The Senior Debentures generally contain no restrictive covenants, other than a limitation on liens on Dell’s assets and a limitation on sale-and-leaseback transactions involving Dell property. Interest rate swap agreements were entered into concurrently with the issuance of the Senior Debentures to convert the fixed rate to a floating rate for a notional amount of $300 million and were set to mature April 15, 2028.
67
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 — ACQUISITIONS
Fiscal 2012 Acquisitions
During Fiscal 2012, Dell completed several acquisitions, including acquisitions of Compellent Technologies, Inc. ("Compellent"), SecureWorks Inc. ("SecureWorks"), DFS Canada, and Force10 Networks, Inc. ("Force10"). The total purchase consideration was approximately $2.7 billion in cash for all of the outstanding shares for all acquisitions completed during the period. Compellent is a provider of virtual storage solutions for enterprise and cloud computing environments, and SecureWorks is a global provider of information security services. Force10 is a global technology company that provides datacenter networking solutions. Compellent, SecureWorks, and Force10 will be integrated into Dell's Commercial segments. DFS Canada enables expansion of Dell's direct finance model into Canada for all of Dell's segments. See Note 4 of the Notes to Consolidated Financial Statements for further discussion on Dell's acquisition of DFS Canada.
Dell has recorded these acquisitions using the acquisition method of accounting and recorded their respective assets and liabilities at fair value at the date of acquisition. The excess of the purchase prices over the estimated fair values was recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for these acquisitions prior to the finalization of more detailed analyses, but not to exceed one year from the date of acquisition, will change the amount of the purchase prices allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to Dell's consolidated financial results will be adjusted retroactively.
Dell recorded $1.5 billion in goodwill related to acquisitions during the fiscal year ended February 3, 2012. This amount primarily represents synergies associated with combining these companies with Dell to provide Dell's customers with a broader range of IT solutions or, in the case of DFS Canada, to extend Dell's financial services capabilities. This goodwill is not deductible for tax purposes. Dell also recorded $753 million in intangible assets related to these acquisitions, which consist primarily of purchased technology and customer relationships. The intangible assets have weighted-average useful lives ranging from 3 to 11 years. In conjunction with these acquisitions, Dell will incur approximately $150 million in compensation-related expenses that will be expensed over a period of up to four years. There was no contingent consideration related to these acquisitions.
Dell has not presented pro forma results of operations for Fiscal 2012 acquisitions because these acquisitions are not material to Dell's consolidated results of operations, financial position, or cash flows on either an individual or an aggregate basis.
Fiscal 2011 Acquisitions
Dell completed five acquisitions during Fiscal 2011, Kace Networks, Inc. (“KACE”), Ocarina Networks Inc. (“Ocarina”), Scalent Systems Inc. (“Scalent”), Boomi, Inc. (“Boomi”), and InSite One, Inc. (“InSite”), for a total purchase consideration of approximately $413 million in cash. KACE is a systems management appliance company with solutions tailored to the requirements of mid-sized businesses. KACE is being integrated primarily into Dell's SMB and Public segments. Ocarina is a provider of de-duplication solutions and content-aware compression across storage product lines. Scalent is a provider of scalable and efficient data center infrastructure software. Boomi is a provider of on-demand integration technology. Ocarina, Scalent, and Boomi will be integrated into all of Dell's Commercial segments. InSite provides cloud-based medical data archiving, storage, and disaster-recovery solutions to the health care industry. InSite will be integrated into Dell's Public segment.
Dell has recorded these acquisitions using the acquisition method of accounting and recorded their respective assets and liabilities at fair value at the date of acquisition. The excess of the purchase prices over the estimated fair values were recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for these acquisitions prior to the finalization of more detailed analyses, but not to exceed one year from the date of acquisition, will change the amount of the purchase prices allocable to goodwill. Any subsequent changes to the purchase price allocations that are material to Dell's consolidated financial results will be adjusted retroactively. Dell recorded approximately $284 million in goodwill and $141 million in intangible assets related to these acquisitions. The goodwill related to these acquisitions is not deductible for tax purposes. In conjunction with these acquisitions, Dell will incur $56 million in compensation-related expenses that will be expensed over a period of one to three years. There was no contingent consideration related to these acquisitions.
Dell has not presented pro forma results of operations for the Fiscal 2011 acquisitions because these acquisitions are not material to Dell's consolidated results of operations, financial position, or cash flows on either an individual or an aggregate
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
basis.
The floating rates were based on three-month London Interbank Offered Rates plus 0.79%. In JanuaryFiscal 2010 Acquisitions
On November 3, 2009, Dell terminatedcompleted its interest rate swap contractsacquisition of all the outstanding shares of the Class A common stock of Perot Systems, a worldwide provider of information technology and business solutions, for a purchase consideration of $3.9 billion in cash. This acquisition is expected to provide customers a broader range of IT services and solutions and better position Dell for its own immediate and long-term growth and efficiency. Perot Systems was primarily integrated into the Large Enterprise and Public segments for reporting purposes. Perot Systems’ results of operations were included in Dell's results beginning November 3, 2009.
The following table summarizes the consideration paid for Perot Systems and the amounts of assets acquired and liabilities assumed recognized at the acquisition date:
|
| | | |
| | Total |
| | (in millions) |
| Cash and cash equivalents | $ | 266 |
|
| Accounts receivable, net | 410 |
|
| Other assets | 58 |
|
| Property, plant, and equipment | 323 |
|
| Customer relationships and other intangible assets | 1,174 |
|
Deferred tax liability, net(a) | (424 | ) |
| Other liabilities | (256 | ) |
| Total identifiable net assets | 1,551 |
|
| Goodwill | 2,327 |
|
| Total purchase price | $ | 3,878 |
|
_____________________
| |
(a) | The deferred tax liability, net primarily relates to purchased identifiable intangible assets and property, plant, and equipment and is shown net of associated deferred tax assets. |
The goodwill of $2.3 billion represents the value from combining Perot Systems with notional amounts totaling $300 million. Dell received $103to provide customers with a broader range of IT services and solutions as well as optimizing how these solutions are delivered. The acquisition has enabled Dell to supply even more Perot Systems customers with Dell products and extended the reach of Perot Systems' capabilities to Dell customers around the world. Goodwill of $679 million, $1,613 million, and $35 million was assigned to the Large Enterprise, Public, and SMB segments, respectively.
In conjunction with the acquisition, Dell incurred $93 million in cash proceeds fromcompensation payments made to former Perot Systems employees who accepted positions with Dell related to the swap terminations, which included $1 million in accrued interest.acceleration of Perot Systems unvested stock options and other cash compensation payments. These swaps had effectively converted its $300 million, 7.10% fixed rate Senior Debentures due 2028 to variable rate debt. As a result of the swap terminations, the fair value of the terminated swaps are reportedcash compensation payments were expensed as part of the carrying value of the Senior Debenturesincurred and are amortized as a reduction of interest expense over the remaining life of the debt. The cash flows from the terminated swap contracts are reported as operating activitiesrecorded in Selling, general, and administrative expenses in the Consolidated StatementStatements of Cash Flows.Income for Fiscal 2010. During Fiscal 2010, Dell incurred $116 million in acquisition-related costs for Perot Systems, including the payments above, and an additional $23 million in other acquisition-related costs such as bankers' fees, consulting fees, other employee-related charges, and integration costs.
There was no contingent consideration related to the acquisition.
Unaudited pro-forma results for the fiscal year ended January 29, 2010 were pro-forma net sales of $54.7 billion, pro-forma net income of $1.4 billion, and pro-forma diluted earnings per share of $0.72. The pro forma results were adjusted for intercompany charges, but did not include any anticipated cost synergies or other effects of the planned integration of Perot Systems. Accordingly, the pro forma results presented are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor are they indicative of the future operating results of the combined company.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill allocated to Dell's business segments as of February 3, 2012, and January 28, 2011, and changes in the carrying amount of goodwill for the respective periods, were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3, 2012 |
| | | Large Enterprise | | Public | | Small and Medium Business | | Consumer | | Total |
| | | (in millions) |
| Balance at beginning of period | | $ | 1,424 |
| | $ | 2,164 |
| | $ | 476 |
| | $ | 301 |
| | $ | 4,365 |
|
| Goodwill acquired during the period | | 800 |
| | 386 |
| | 287 |
| | 6 |
| | 1,479 |
|
| Adjustments | | (2 | ) | | (3 | ) | | (4 | ) | | 3 |
| | (6 | ) |
| Balance at end of period | | $ | 2,222 |
| | $ | 2,547 |
| | $ | 759 |
| | $ | 310 |
| | $ | 5,838 |
|
| | | | | | | | | | | |
| | | January 28, 2011 |
| | | Large Enterprise | | Public | | Small and Medium Business | | Consumer | | Total |
| | | (in millions) |
| Balance at beginning of period | | $ | 1,361 |
| | $ | 2,026 |
| | $ | 389 |
| | $ | 298 |
| | $ | 4,074 |
|
| Goodwill acquired during the period | | 62 |
| | 135 |
| | 87 |
| | — |
| | 284 |
|
| Adjustments | | 1 |
| | 3 |
| | — |
| | 3 |
| | 7 |
|
| Balance at end of period | | $ | 1,424 |
| | $ | 2,164 |
| | $ | 476 |
| | $ | 301 |
| | $ | 4,365 |
|
Goodwill is tested annually during the second fiscal quarter and whenever events or circumstances indicate an impairment may have occurred. If the carrying amount of goodwill exceeds its fair value, estimated based on discounted cash flow analyses, an impairment charge would be recorded. Based on the results of the annual impairment tests, no impairment of goodwill existed at July 30, 2011. Further, no triggering events have transpired since July 30, 2011, that would indicate a potential impairment of goodwill as of February 3, 2012. Dell did not have any accumulated goodwill impairment charges as of February 3, 2012.
Intangible Assets
Dell's intangible assets associated with completed acquisitions at February 3, 2012, and January 28, 2011, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | February 3, 2012 | | January 28, 2011 |
| | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| | | (in millions) |
| Customer relationships | | $ | 1,569 |
| | $ | (506 | ) | | $ | 1,063 |
| | $ | 1,363 |
| | $ | (309 | ) | | $ | 1,054 |
|
| Technology | | 1,156 |
| | (490 | ) | | 666 |
| | 647 |
| | (322 | ) | | 325 |
|
| Non-compete agreements | | 70 |
| | (42 | ) | | 28 |
| | 68 |
| | (26 | ) | | 42 |
|
| Tradenames | | 81 |
| | (41 | ) | | 40 |
| | 54 |
| | (31 | ) | | 23 |
|
| Amortizable intangible assets | | 2,876 |
| | (1,079 | ) | | 1,797 |
| | 2,132 |
| | (688 | ) | | 1,444 |
|
| In-process research and development | | 34 |
| | — |
| | 34 |
| | 26 |
| | — |
| | 26 |
|
| Indefinite lived intangible assets | | 26 |
| | — |
| | 26 |
| | 25 |
| | — |
| | 25 |
|
| Total intangible assets | | $ | 2,936 |
| | $ | (1,079 | ) | | $ | 1,857 |
| | $ | 2,183 |
| | $ | (688 | ) | | $ | 1,495 |
|
During Fiscal 2012 and Fiscal 2011, Dell recorded additions to intangible assets of $715 million and $126 million, respectively, and additions to in-process research and development of $38 million and $26 million, respectively. These additions were
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
primarily related to Dell's Fiscal 2012 and Fiscal 2011 business acquisitions.
Amortization expense related to finite-lived intangible assets was approximately $391 million and $350 million in Fiscal 2012 and Fiscal 2011, respectively. There were no material impairment charges related to intangible assets for the fiscal years ended February 3, 2012, and January 28, 2011.
Estimated future annual pre-tax amortization expense of finite-lived intangible assets as of February 3, 2012, over the next five fiscal years and thereafter is as follows:
|
| | | |
| Fiscal Years | (in millions) |
| 2013 | $ | 388 |
|
| 2014 | 370 |
|
| 2015 | 275 |
|
| 2016 | 227 |
|
| 2017 | 189 |
|
| Thereafter | 348 |
|
| Total | $ | 1,797 |
|
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9 — WARRANTY AND DEFERRED EXTENDED WARRANTY REVENUE
Dell records liabilities for its standard limited warranties at the time of sale for the estimated costs that may be incurred. The liability for standard warranties is included in Accrued and other current liabilities and Other non-current liabilities on the Consolidated Statements of Financial Position. Revenue from the sale of extended warranties is recognized over the term of the contract or when the service is completed, and the costs associated with these contracts are recognized as incurred. Deferred extended warranty revenue is included in deferred services revenue on the Consolidated Statements of Financial Position. Changes in Dell's liabilities for standard limited warranties and deferred services revenue related to extended warranties are presented in the following tables for the periods indicated:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions) |
| Warranty liability: | | |
| | |
| | |
|
| Warranty liability at beginning of period | | $ | 895 |
| | $ | 912 |
| | $ | 1,035 |
|
Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties(a)(b) | | 1,025 |
| | 1,046 |
| | 987 |
|
| Service obligations honored | | (1,032 | ) | | (1,063 | ) | | (1,110 | ) |
| Warranty liability at end of period | | $ | 888 |
| | $ | 895 |
| | $ | 912 |
|
| Current portion | | $ | 572 |
| | $ | 575 |
| | $ | 593 |
|
| Non-current portion | | 316 |
| | 320 |
| | 319 |
|
| Warranty liability at end of period | | $ | 888 |
| | $ | 895 |
| | $ | 912 |
|
| | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions) |
| Deferred extended warranty revenue: | | |
| | |
| | |
|
| Deferred extended warranty revenue at beginning of period | | $ | 6,416 |
| | $ | 5,910 |
| | $ | 5,587 |
|
Revenue deferred for new extended warranties(b) | | 4,301 |
| | 3,877 |
| | 3,481 |
|
| Revenue recognized | | (3,715 | ) | | (3,371 | ) | | (3,158 | ) |
| Deferred extended warranty revenue at end of period | | $ | 7,002 |
| | $ | 6,416 |
| | $ | 5,910 |
|
| Current portion | | $ | 3,265 |
| | $ | 2,959 |
| | $ | 2,906 |
|
| Non-current portion | | 3,737 |
| | 3,457 |
| | 3,004 |
|
| Deferred extended warranty revenue at end of period | | $ | 7,002 |
| | $ | 6,416 |
| | $ | 5,910 |
|
____________________
| |
(a) | Changes in cost estimates related to pre-existing warranties are aggregated with accruals for new standard warranty contracts. Dell's warranty liability process does not differentiate between estimates made for pre-existing warranties and new warranty obligations. |
| |
(b) | Includes the impact of foreign currency exchange rate fluctuations. |
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10 — COMMITMENTS AND CONTINGENCIES
Lease Commitments — Dell leases property and equipment, manufacturing facilities, and office space under non-cancelable leases. Certain of these leases obligate Dell to pay taxes, maintenance, and repair costs. At February 3, 2012, future minimum lease payments under these non-cancelable leases are as follows: $107 million in Fiscal 2013; $86 million in Fiscal 2014; $79 million in Fiscal 2015; $58 million in Fiscal 2016; $50 million in Fiscal 2017; and $85 million thereafter.
Rent expense under all leases totaled $107 million, $87 million, and $93 million for Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively.
Purchase Obligations — Dell has contractual obligations to purchase goods or services, which specify significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. As of January 30, 2009, there were no events of default for the IndentureFebruary 3, 2012, Dell had $2,865 million, $15 million, and the Senior Debentures.
Dell’s effective interest rate for the Senior Debentures was 4.57%$16 million in purchase obligations for Fiscal 2009. The principal2013, Fiscal 2014, and Fiscal 2015, and thereafter, respectively.
Legal Matters— Dell is involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business, including those identified below, consisting of matters involving consumer, antitrust, tax, intellectual property, and other issues on a global basis. Dell accrues a liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the debtloss. Dell reviews these accruals at least quarterly and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and Dell's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in Dell's accrued liabilities would be recorded in the period in which such determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made. The following is a discussion of Dell's significant legal matters and other proceedings pending at February 3, 2012:
Securities Litigation — Four putative securities class actions filed between September 13, 2006, and January 31, 2007, in the U.S. District Court for the Western District of Texas, Austin Division, against Dell and certain of its current and former directors and officers were consolidated as In re Dell Securities Litigation, and a lead plaintiff was $300appointed by the court. The lead plaintiff asserted claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 based on alleged false and misleading disclosures or omissions regarding Dell's financial statements, governmental investigations, internal controls, known battery problems and business model, and based on insiders' sales of Dell securities. This action also included Dell's independent registered public accounting firm, PricewaterhouseCoopers LLP, as a defendant. On October 6, 2008, the court dismissed all of the plaintiff's claims with prejudice and without leave to amend. On November 3, 2008, the plaintiff appealed the dismissal of Dell and the officer defendants to the Fifth Circuit Court of Appeals. The appeal was fully briefed, and oral argument on the appeal was heard by the Fifth Circuit Court of Appeals on September 1, 2009. On November 20, 2009, the parties to the appeal entered into a written settlement agreement whereby Dell would pay $40 million at January 30, to the proposed class and the plaintiff would dismiss the pending litigation. The settlement was preliminarily approved by the District Court on December 21, 2009. The estimated fair value ofsettlement was subject to certain conditions, including opt-outs from the long-term debt was approximately $294 million at January 30, 2009, compared toproposed class not exceeding a carrying value of $400 million at that date as a result ofspecified percentage and final approval by the termination of the interest rate swap agreements.
Prior to the termination of the interest rate swap contracts, the interest rate swaps qualified for hedge accounting treatment pursuant to SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended. Dell designated the issuance of the Senior Debentures and the related interest rate swap agreements as an integrated transaction. The changes in the fair value of the interest rate swaps were reflected in the carrying value of the interest rate swaps on the balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal and offsetting amount. The differential to be paid or received on the interest rate swap agreements was accrued and recognized as an adjustment to interest expense as interest rates changed.
On April 15, 2008, Dell repaid the principal balance of the 1998 $200 million 6.55% fixed rate senior notes (the “Senior Notes”) upon their maturity. Interest rate swap agreement related to the Senior Notes had a notional amount of $200 million and also matured April 15, 2008. Dell’s effective interest rate for the Senior Notes, prior to repayment, was 4.03% forDistrict Court. During the first quarter of Fiscal 2009.2011, the original opt-out period in the notice approved by the District Court expired without the specified percentage being exceeded. The District Court subsequently granted final approval for the settlement and entered a final judgment on July 20, 2010. Dell paid $40 million into an escrow account to satisfy this settlement and discharged the liability during the second quarter of Fiscal 2011. Certain objectors to the settlement filed notices of appeal to the Fifth Circuit Court of Appeals with regard to approval of the settlement. On February 7, 2012, the Fifth Circuit Court of Appeals affirmed the District Court's approval of the settlement.
Copyright Levies — Dell's obligation to collect and remit copyright levies in certain European Union (“EU”) countries may be affected by the resolution of legal proceedings pending in Germany against various companies, including Dell's German subsidiary, and elsewhere in the EU against other companies in Dell's industry. The plaintiffs in those proceedings, some of which are described below, generally seek to impose or modify the levies with respect to sales of such equipment as multifunction devices, phones, personal computers, and printers, alleging that such products enable the copying of copyrighted materials. Some of the proceedings also challenge whether the levy schemes in those countries comply with EU law. Certain EU member countries that do not yet impose levies on digital devices are expected to implement legislation to enable them to extend existing levy schemes, while some other
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EU member countries are expected to limit the scope of levy schemes and their applicability in the digital hardware environment. Dell, other companies, and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders. Dell continues to collect levies in certain EU countries where it has determined that based on local laws it is probable that Dell has a payment obligation. The amount of levies is generally based on the number of products sold and the per-product amounts of the levies, which vary. In all other matters, Dell does not believe there is a probable and estimable claim. As such, Dell has not accrued any liability nor collected any levies.
On December 29, 2005, Zentralstelle Für private Überspielungrechte (“ZPÜ”), a joint association of various German collecting societies, instituted arbitration proceedings against Dell's German subsidiary before the Board of Arbitration at the German Patent and Trademark Office in Munich, and subsequently filed a lawsuit in the German Regional Court in Munich on February 21, 2008, seeking levies to be paid on each personal computer sold by Dell in Germany through the end of calendar year 2007. On December 23, 2009, ZPÜ and the German industry association, BCH, reached a settlement regarding audio-video copyright levy litigation (with levies ranging from €3.15 to €13.65 per unit). Dell joined this settlement on February 23, 2010 and has paid the amounts due under the settlement. However, because the settlement agreement expired on December 31, 2010, the amount of levies payable after calendar year 2010, as well as Dell's ability to recover such amounts through increased prices, remains uncertain.
German courts are also considering a lawsuit originally filed in July 2004 by VG Wort, a German collecting society representing certain copyright holders, against Hewlett-Packard Company in the Stuttgart Civil Court seeking levies on printers, and a lawsuit originally filed in September 2003 by the same plaintiff against Fujitsu Siemens Computer GmbH in Munich Civil Court in Munich, Germany seeking levies on personal computers. In each case, the civil and appellate courts held that the subject classes of equipment were subject to levies. In July 2011, the German Federal Supreme Court, to which the lower court holdings have been appealed, referred each case to the Court of Justice of the European Union, submitting a number of legal questions on the interpretation of the European Copyright Directive which the German Federal Supreme Court deems necessary for its decision. Dell has not accrued any liability in either matter, as Dell does not believe there is a probable and estimable claim.
Proceedings seeking to impose or modify copyright levies for sales of digital devices also have been instituted in courts in Spain and in other EU member states. Even in countries where Dell is not a party to such proceedings, decisions in those cases could impact Dell's business and the amount of copyright levies Dell may be required to collect.
The ultimate resolution of these proceedings and the associated financial impact to Dell, if any, including the number of units potentially affected, the amount of levies imposed, and the ability of Dell to recover such amounts remains uncertain at this time. Should the courts determine there is liability for previous units shipped beyond the amount of levies Dell has collected or accrued, Dell would be liable for such incremental amounts. Recovery of any such amounts from others by Dell would be possible only on future collections related to future shipments.
Chad Brazil and Steven Seick v Dell Inc. — Chad Brazil and Steven Seick filed a class action suit against Dell in March 2007 in the U.S. District Court for the Northern District of California. The plaintiffs allege that Dell advertised discounts on its products from false “regular” prices, in violation of California law. The plaintiffs seek compensatory damages, disgorgement of profits from the alleged false advertising, injunctive relief, punitive damages and attorneys' fees. In December 2010, the District Court certified a class consisting of all California residents who had purchased certain products advertised with a former sales price on the consumer segment of Dell's website during an approximately four year period between March 2003 and June 2007. During the first quarter of Fiscal 2012, the plaintiffs and Dell reached a class-wide settlement in principle regarding the dispute on terms that are not material to Dell, and on October 28, 2011 the District Court granted final approval of the settlement. Since the final approval, an objector to the settlement has filed a notice of appeal to the Ninth Circuit Court of Appeals with regard to approval of the settlement. While there can be no assurances with respect to litigation, Dell believes it is unlikely that the settlement will be overturned on appeal.
Convolve Inc. v Dell Inc. — Convolve, Inc. sued Dell, Western Digital Corporation (“Western Digital”), Hitachi Global Storage Technologies, Inc., and Hitachi Ltd. (collectively “Hitachi”) on June 18, 2008 in the Eastern District of Texas, Marshall Division, alleging that the defendants infringe United States Patent No. 4,916,635 (entitled “Shaping Command Inputs to Minimize Unwanted Dynamics”) and United States Patent No. 6,314,473 (entitled “System for
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Removing Selected Unwanted Frequencies in Accordance with Altered Settings in a User Interface of a Data Storage Device”). Western Digital and Hitachi are hard drive suppliers of Dell. The plaintiff sought damages for each product with an allegedly infringing hard drive sold by Dell, plus exemplary damages for allegedly willful infringement. On July 26, 2011, a jury found that the patents had been infringed and awarded the plaintiff an amount that is not material to Dell. The jury decision is subject to final approval and entry by the judge.
Other Litigation — The various legal proceedings in which Dell is involved include commercial litigation and a variety of patent suits. In some of these cases, Dell is the sole defendant. More often, particularly in the patent suits, Dell is one of a number of defendants in the electronics and technology industries. Dell is actively defending a number of patent infringement suits, and several pending claims are in various stages of evaluation. While the number of patent cases has grown over time, Dell does not currently anticipate that any of these matters will have a material adverse effect on Dell's business, financial condition, results of operations, or cash flows.
As of February 3, 2012, Dell does not believe there is a reasonable possibility that a material loss exceeding the amounts already accrued for these or other proceedings or matters may have been incurred. However, since the ultimate resolution of any such proceedings and matters is inherently unpredictable, Dell's business, financial condition, results of operations, or cash flows could be materially affected in any particular period by unfavorable outcomes in one or more of these proceedings or matters. Whether the outcome of any claim, suit, assessment, investigation, or legal proceeding, individually or collectively, could have a material adverse effect on Dell's business, financial condition, results of operations, or cash flows will depend on a number of variables, including the nature, timing, and amount of any associated expenses, amounts paid in settlement, damages or other remedies or consequences.
Certain Concentrations — Dell's counterparties to its financial instruments consist of a number of major financial institutions with credit ratings of AA and A by major credit rating agencies. In addition to limiting the amount of agreements and contracts it enters into with any one party, Dell monitors its positions with, and the credit quality of the counterparties to, these financial instruments. Dell does not anticipate nonperformance by any of the counterparties.
Dell's investments in debt securities are in high quality financial institutions and companies. As part of its cash and risk management processes, Dell performs periodic evaluations of the credit standing of the institutions in accordance with its investment policy. Dell's investments in debt securities have stated maturities of up to three years. Management believes that no significant concentration of credit risk for investments exists for Dell.
As of February 3, 2012, Dell did not have significant concentrations of cash and cash equivalent deposits with its financial institutions.
Dell markets and sells its products and services to large corporate clients, governments, and health care and education accounts, as well as to small and medium-sized businesses and individuals. No single customer accounted for more than 10% of Dell's consolidated net revenue during Fiscal 2012, Fiscal 2011, or Fiscal 2010.
Dell purchases a number of components from single or limited sources. In some cases, alternative sources of supply are not available. In other cases, Dell may establish a working relationship with a single source or a limited number of sources if Dell believes it is advantageous to do so based on performance, quality, support, delivery, capacity, or price considerations.
Dell also sells components to certain contract manufacturers who assemble final products for Dell. Dell does not recognize the sale of these components in net sales and does not recognize the related profits until the final products are sold by Dell to end users. Profits from the sale of these parts are recognized as a reduction of cost of sales at the time of sale. Dell has net settlement agreements with the majority of these contract manufacturers that allow Dell to offset the accounts payable to the contract manufacturers from the amounts receivable from them. Gross non-trade receivables as of February 3, 2012, and January 28, 2011 were $3.0 billion and $2.7 billion, respectively, and four contract manufacturers account for the majority of these receivables. Dell has net settlement agreements with these four contract manufacturers and as of February 3, 2012, and January 28, 2011, the payables to these four contract manufacturers exceeded the receivables due from them; therefore, the non-trade receivable amounts due from these manufacturers are offset against the corresponding accounts payable to those manufacturers in the accompanying Consolidated Statements of Financial Position.
In November 2008, Dell filed a shelf registration statement with the SEC, which provides Dell with the ability to issue additional term debt up to $1.5 billion, subject to market conditions.90
DELL INC.
Income before income taxes included approximately $2.6 billion, $3.2 billion, and $2.6 billion related to foreign operations in Fiscal 2009, 2008 and 2007 respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11 — INCOME AND OTHER TAXES
The provision for income taxes consistedconsists of the following:
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | |
| | | January 30,
| | February 1,
| | February 2,
| | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | | Fiscal Year Ended |
| | | (in millions) | | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions) |
| Current: | | | | | | | | | | | | | | |
| | |
| | |
|
| Domestic | | $ | 465 | | | $ | 901 | | | $ | 846 | | |
| Federal | | | $ | 375 |
| | $ | 597 |
| | $ | 491 |
|
| State/Local | | | 81 |
| | 66 |
| | 36 |
|
| Foreign | | | 273 |
| | 97 |
| | 116 |
|
| Current | | | 729 |
| | 760 |
| | 643 |
|
| Deferred: | | | |
| | |
| | |
|
| Federal | | | 62 |
| | (95 | ) | | (21 | ) |
| State/Local | | | (12 | ) | | 9 |
| | 9 |
|
| Foreign | | | 295 | | | | 287 | | | | 178 | | | (31 | ) | | 41 |
| | (40 | ) |
| Deferred | | | 86 | | | | (308 | ) | | | (262 | ) | | 19 |
| | (45 | ) | | (52 | ) |
| | | | | | | | | |
| Provision for income taxes | | $ | 846 | | | $ | 880 | | | $ | 762 | | | $ | 748 |
| | $ | 715 |
| | $ | 591 |
|
| | | | | | | | | |
Income before provision for income taxes consists of the following:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | (in millions) |
| Domestic | $ | 365 |
| | $ | 532 |
| | $ | 182 |
|
| Foreign | 3,875 |
| | 2,818 |
| | 1,842 |
|
| Income before income taxes | $ | 4,240 |
| | $ | 3,350 |
| | $ | 2,024 |
|
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 Dell expects 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, Dell has provided a valuation allowance of $31$44 million and $48 million for Fiscal 2012 and Fiscal 2011, respectively, related to state income tax credit carryforwards, butcarryforwards. Dell has provided a valuation allowance of$29 million and $20 million related to net operating losses for Fiscal 2012 and Fiscal 2011, respectively. No valuation allowance has been provided against other deferred tax assets for Fiscal 2012, compared to a $4 million valuation allowance provided against other deferred tax assets for Fiscal 2011. Dell has determined that it will be able to realize the remainder of its deferred tax assets.
68
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of Dell’sDell's net deferred tax assetassets are as follows:
| | | | | | | | | | |
| | | January 30,
| | February 1,
| | |
| | | 2009 | | 2008 | | | | | | |
| | | (in millions) | | | February 3,
2012 | | January 28,
2011 |
| | | (in millions) |
Deferred tax assets: | | | | | | | | | | |
| | |
|
| Deferred revenue | | $ | 633 | | | $ | 597 | | | $ | 486 |
| | $ | 369 |
|
| Inventory and warranty provisions | | | 36 | | | | 46 | | |
| Investment impairments and unrealized losses | | | 5 | | | | 10 | | |
| Warranty provisions | | | 226 |
| | 214 |
|
| Provisions for product returns and doubtful accounts | | | 53 | | | | 61 | | | 85 |
| | 77 |
|
| Capital loss | | | 1 | | | | 7 | | |
| Leasing and financing | | | 242 | | | | 302 | | |
| Credit carryforwards | | | 47 | | | | 3 | | | 61 |
| | 54 |
|
| Loss carryforwards | | | 88 | | | | 16 | | | 271 |
| | 268 |
|
| Stock-based and deferred compensation | | | 233 | | | | 188 | | | 183 |
| | 203 |
|
| Operating accruals | | | 33 | | | | 58 | | |
| Compensation related accruals | | | 48 | | | | 40 | | |
| Operating and compensation related accruals | | | 140 |
| | 135 |
|
| Capitalized intangible assets | | | 51 |
| | 55 |
|
| Other | | | 116 | | | | 78 | | | 97 |
| | 98 |
|
| | | | | | | |
| Deferred tax assets | | | 1,535 | | | | 1,406 | | | 1,600 |
| | 1,473 |
|
| | | | | | | |
| Valuation allowance | | | (73 | ) | | (72 | ) |
| Deferred tax assets, net of valuation allowance | | | 1,527 |
| | 1,401 |
|
Deferred tax liabilities: | | | | | | | | | | |
| | |
|
| Leasing and financing | | | (220 | ) | | (49 | ) |
| Property and equipment | | | (160 | ) | | | (105 | ) | | (136 | ) | | (144 | ) |
| Acquired intangibles | | | (204 | ) | | | (199 | ) | | (667 | ) | | (511 | ) |
| Unrealized gains | | | (14 | ) | | | - | | |
| Other | | | (59 | ) | | | (21 | ) | | (59 | ) | | (64 | ) |
| | | | | | | |
| Deferred tax liabilities | | | (437 | ) | | | (325 | ) | | (1,082 | ) | | (768 | ) |
| | | | | | | |
| Valuation allowance | | | (31 | ) | | | - | | |
| | | | | | | |
| Net deferred tax asset | | $ | 1,067 | | | $ | 1,081 | | |
| | | | | | | |
| Current portion (included in other current assets) | | $ | 499 | | | $ | 596 | | |
| Non-current portion (included in other non-current assets) | | | 568 | | | | 485 | | |
| | | | | | | |
| Net deferred tax asset | | $ | 1,067 | | | $ | 1,081 | | |
| | | | | | | |
| Net deferred tax assets | | | $ | 445 |
| | $ | 633 |
|
| Current portion | | | $ | 682 |
| | $ | 558 |
|
| Non-current portion | | | (237 | ) | | 75 |
|
| Net deferred tax assets | | | $ | 445 |
| | $ | 633 |
|
The current portion of net deferred tax assets is included in Other current assets in the Consolidated Statements of Financial Position as of February 3, 2012, and January 28, 2011. The non-current portion of net deferred tax assets is included in Other non-current liabilities and Other non-current assets in the Consolidated Statements of Financial Position as of February 3, 2012, and January 28, 2011, respectively.
As of January 30, 2009,During Fiscal 2012 and Fiscal 2011, Dell has recorded $76$124 million and $41 million, respectively, of deferred tax assets related to acquired net operating loss and credit carryforwards. The offset for recording the acquired net operating loss and credit carryforwards acquired during the year, all of which was $56offset against goodwill. During Fiscal 2012 and Fiscal 2011, $10 million and $21 million, respectively, were recorded to goodwilladditional paid in capital related to the utilization of acquired net operating losses as a result of employee stock option activity, and $20 million to additional-paid-in-capital.is included in net tax shortfall from employee stock plans on the Consolidated Statements of Stockholders' Equity. Utilization of the acquired carryforwards is subject to limitations due to ownership changes whichthat may delay the utilization of a portion of the acquired carryforwards. No additional valuation allowances have been placed on the acquired net operating loss and credit carryforwards. The carryforwards for significant taxing jurisdictions expire beginning in Fiscal 2017.2015.
Deferred taxes have not been recorded on the excess book basis in the shares of certain foreign subsidiaries because these basis differences are not expected to reverse in the foreseeable future and are expected to be permanent in duration. TheseThe basis differences in the amount of approximately $9.9$15.9 billion arose primarily from the undistributed book earnings, of substantially all of the subsidiaries in which Dell intends to reinvest indefinitely. The basis differences could reverse through a sale of the subsidiaries or the receipt of dividends from the subsidiaries, as well as various other events. Net of available foreign tax credits, residual income tax of approximately $3.2$5.2 billion would be due upon reversal of this excess book basis as of January 30, 2009.
69
February 3, 2012.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A portion of Dell’sDell's operations is subject to a reduced tax rate or is free of tax under various tax holidays. Dell's significant tax holidays that expire in whole or in part during Fiscal 20102016 through 2018.Fiscal 2021. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The income tax
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
benefits attributable to the tax status of these subsidiaries were estimated to be approximately $338$474 million ($0.17 ($.26 per share) in Fiscal 2009, $5022012, $321 million ($0.23 ($.17 per share) in Fiscal 2008,2011, and $282$149 million ($0.13 ($.08 per share) in Fiscal 2007.
In March 2007, China announced a broad program to reform tax rates and incentives, effective January 1, 2008, including the introduction of phased-in transition rules that could significantly alter the Chinese tax structure for U.S. companies operating in China. Clarification of the rules, which phase in higher statutory tax rates over a five year period, was issued in late Fiscal 2008. As a result, Dell increased the relevant deferred tax assets to reflect the enacted statutory rates for the year in which it expects the differences to reverse, which resulted in an additional tax benefit of $27 million in Fiscal 2008.
2010.
The effective tax rate differed from the statutory U.S. federal income tax rate as follows:
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | |
| | | January 30,
| | February 1,
| | February 2,
| | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| U.S. federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Foreign income taxed at different rates | | | (11.2 | ) | | | (13.6 | ) | | | (14.9 | ) | | (19.2 | ) | | (14.7 | ) | | (7.6 | ) |
| Imputed intercompany charges | | | - | | | | - | | | | 2.0 | | |
| In-process research and development | | | - | | | | 0.8 | | | | - | | |
| State income taxes, net of federal tax benefit | | | 0.8 |
| | 1.4 |
| | 1.4 |
|
| Regulatory settlement | | | — |
| | 1.0 |
| | — |
|
| Other | | | 1.6 | | | | 0.8 | | | | 0.7 | | | 1.0 |
| | (1.4 | ) | | 0.4 |
|
| | | | | | | | | |
| Total | | | 25.4 | % | | | 23.0 | % | | | 22.8 | % | | 17.6 | % | | 21.3 | % | | 29.2 | % |
| | | | | | | | | |
The increase in Dell’s Fiscal 2009 effective tax rate, compared to Fiscal 2008, is due primarily to an increased profitability mix in higher tax jurisdictions during Fiscal 2009 as compared to Fiscal 2008. The increase in Dell’s Fiscal 2008 effective tax rate, compared to Fiscal 2007, is due to the tax related to accessing foreign cash and the nondeductibility of acquisition-related IPR&D charges offset primarily by the increase of consolidated profitability in lower foreign tax jurisdictions during Fiscal 2008 as compared to Fiscal 2007.
Dell adopted FIN No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”) effective February 3, 2007. FIN 48 provides that a tax benefit from an uncertain tax position may be recognized in the financial statements only when it is more likely than not that the position 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 widely understood administrative practices and precedents. Once the recognition threshold is met, the portion of the tax benefit that is recorded represents the largest amount of tax benefit that is greater than 50 percent likely to be realized upon settlement with a taxing authority. The cumulative effect of adopting FIN 48 was a $62 million increase in tax liabilities and a corresponding decrease to the February 2, 2007 stockholders’ equity balance of which $59 million related to retained earnings and $3 million related to additional-paid-in-capital. In addition, consistent with the provisions of FIN 48, Dell changed the classification of $1.1 billion of income tax liabilities from current to non-current because payment of cash is not anticipated within one year of the balance sheet date. These non-current income tax liabilities are recorded in other
70
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
non-current liabilities in the Consolidated Statements of Financial Position. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | |
| | | Total | | | | |
| | | (in millions) | | Total |
| | (in millions) |
| Balance at February 3, 2007 (adoption) | | $ | 1,096 | | |
| Balance at January 30, 2009 | | $ | 1,538 |
|
| Increases related to tax positions of the current year | | | 390 | | 298 |
|
| Increases related to tax positions of prior years | | | 34 | | 32 |
|
| Reductions for tax positions of prior years | | | (13 | ) | (69 | ) |
| Lapse of statute of limitations | | | (6 | ) | (3 | ) |
| Settlements | | | (18 | ) | |
| | | | | |
| Balance at February 1, 2008 | | $ | 1,483 | | |
| Audit settlements | | (3 | ) |
| Balance at January 29, 2010 | | 1,793 |
|
| Increases related to tax positions of the current year | | | 298 | | 262 |
|
| Increases related to tax positions of prior years | | | 19 | | 22 |
|
| Reductions for tax positions of prior years | | | (217 | ) | (41 | ) |
| Lapse of statute of limitations | | | (7 | ) | (32 | ) |
| Settlements | | | (38 | ) | |
| | | | | |
| Balance at January 30, 2009 | | $ | 1,538 | | |
| | | | | |
| Audit settlements | | (21 | ) |
| Balance at January 28, 2011 | | 1,983 |
|
| Increases related to tax positions of the current year | | 260 |
|
| Increases related to tax positions of prior years | | 30 |
|
| Reductions for tax positions of prior years | | (43 | ) |
| Lapse of statute of limitations | | (32 | ) |
| Audit settlements | | (4 | ) |
| Balance at February 3, 2012 | | $ | 2,194 |
|
Fiscal 2009 reductions forDell recorded net unrecognized tax positionsbenefits of prior years$2.6 billion and $2.3 billion, which are included in Other non-current liabilities in its Consolidated Statements of Financial Position, as of February 3, 2012, and January 28, 2011, respectively. The unrecognized tax benefits in the table above do not include $163 million of items that did not impact Dell’s effective tax rate for Fiscal 2009. These items include foreign currency translation, withdrawal of positions expected to be taken for prior year tax filings,accrued interest and a reduction that is included in the deferred tax asset valuation allowance at January 30, 2009.
Associated with the unrecognized tax benefits of $1.5 billion at January 30, 2009, arepenalties. Dell had accrued interest and penalties of $664 million, $552 million, and $507 millionas well as $166 million of offsettingFebruary 3, 2012, January 28, 2011, and January 29, 2010, respectively. These interest and penalties are offset by tax benefits associated with estimatedfrom transfer pricing, the benefit of interest deductions, and state income tax, benefits. The net amountwhich are also not included in the table above. These benefits were $295 million, $242 million, and $209 million as of $1.8 billion,February 3, 2012, January 28, 2011, and January 29, 2010, respectively. Net unrecognized tax benefits, if recognized, would favorably affect Dell’sDell's effective tax rate.
Interest and penalties related to income tax liabilities are included in income tax expense. The balance of gross accrued interestDell recorded $112 million, $45 million, and penalties recorded in the Consolidated Statements of Financial Position at January 30, 2009 and February 1, 2008, was $400$107 million and $288 million, respectively. During Fiscal 2009 and Fiscal 2008, $112 million and $88 million, respectively, related to interest and penalties, which were included in income tax expense.expense for Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dell is currently under income tax audits in various jurisdictions, including the U.S.United States. The tax periods open to examination by the major taxing jurisdictions to which Dell is subject include fiscal years 19971999 through 2009. 2011. As a result of these audits, Dell maintains ongoing discussions and negotiations relating to tax matters with the taxing authorities in these various jurisdictions. Dell’sDell believes that it has provided adequate reserves related to all matters contained in tax periods open to examination.
Dell's U.S. Federalfederal income tax returns for fiscal years 20042007 through 20062009 are currently under examination andby the Internal Revenue Service has proposed(“IRS”). The IRS issued a Revenue Agent's Report (“RAR”) for fiscal years 2004 through 2006 proposing certain preliminary assessments primarily related to transfer pricing matters. Dell anticipates thisdisagrees with certain of the proposed assessments and has contested them through the IRS administrative appeals procedures. The IRS has remanded the audit will take severalfor tax years 2004 through 2006 back to resolve and continues to believe that it has provided adequate reserves related to the matters under audit. However, shouldexamination for further review. Should Dell experience an unfavorable outcome in thisthe IRS matter, itsuch an outcome could have a material impact on its results of operations, financial position, orand cash flows. Although the timing of income tax audit resolutionresolutions and negotiations with taxing authorities areis highly uncertain, Dell does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.
Dell takes certain non-income tax positions in the jurisdictions in which it operates and has received certain non-income tax assessments infrom various jurisdictions. Dell is also involvedhas recently reached agreement with a state government in Brazil regarding the proper application of transactional taxes to warranties related to the sale of computers. Under the consensus, Dell has agreed to apply certain tax incentives in order to offset potential tax liabilities. Reaching this agreement did not have a material impact to its Consolidated Financial Statements.
Dell believes its positions in these non-income tax litigation matters in various jurisdictions. Dell believes its positions are supportable, that a liability is not probable, and that it will ultimately prevail. However, significant judgment is required in determining the ultimate outcome of these matters. In the normal course of business, Dell’sDell's positions and conclusions related to its non-income taxes could be challenged and assessments may be made. To the extent new information is obtained and Dell’sDell's views on its positions, probable outcomes of assessments, or litigation changes,change, changes in estimates to Dell’sDell's accrued liabilities would be recorded in the period in which thesuch determination is made.
71
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12 — EARNINGS PER SHARE
Basic earnings per share is based on the weighted-average effect of all common shares issued and outstanding and is calculated by dividing net income by the weighted-average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. Dell excludes equity instruments from the calculation of diluted earnings per share if the effect of including such instruments is anti-dilutive. Accordingly, certain stock-based incentive awards have been excluded from the calculation of diluted earnings per share totaling 142 million, 179 million, and 220 million shares for Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively.
The following table sets forth the computation of basic and diluted earnings per share for each of the past three fiscal years:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions, except per share amounts) |
| Numerator: | | |
| | |
| | |
|
| Net income | | $ | 3,492 |
| | $ | 2,635 |
| | $ | 1,433 |
|
| Denominator: | | |
| | |
| | |
|
| Weighted-average shares outstanding: | | |
| | |
| | |
|
| Basic | | 1,838 |
| | 1,944 |
| | 1,954 |
|
| Effect of dilutive options, restricted stock units, restricted stock, and other | | 15 |
| | 11 |
| | 8 |
|
| Diluted | | 1,853 |
| | 1,955 |
| | 1,962 |
|
| Earnings per share: | | |
| | |
| | |
|
| Basic | | $ | 1.90 |
| | $ | 1.36 |
| | $ | 0.73 |
|
| Diluted | | $ | 1.88 |
| | $ | 1.35 |
| | $ | 0.73 |
|
NOTE 13 — CAPITALIZATION
Preferred Stock
Authorized Shares — Dell has the authority to issue fiveissue 5 million shares shares of preferred stock, par value $.01$.01 per share. At February 3, 2012, and January 30, 2009, and February 1, 2008, 28, 2011, no shares of preferred stock were issued or outstanding.outstanding.
Redeemable Common Stock
In prior years, Dell inadvertently failed to register with the SEC the issuance of some shares under certain employee benefit plans. These shares were purchased by participants between March 31, 2006, and April 3, 2007. As a result, certain purchasers of securities pursuant to those plans may have had the right to rescind their purchases for an amount equal to the purchase price paid for the securities, plus interest from the date of purchase. Dell made a registered rescission offer to eligible plan participants effective as of August 12, 2008. At February 1, 2008, and February 2, 2007, approximately 4 million shares ($94 million) and 5 million shares ($111 million), respectively, were classified outside stockholders’ equity because the redemption features were not within Dell’s control. Prior to the effective date of the rescission offer, as participants sold shares in the open market, the shares held outside of stockholders’ equity were reclassified to common stock and capital in excess of $0.01 par value, accordingly. These shares were treated as outstanding for financial reporting purposes. The registered rescission offer expired on September 26, 2008, and payments of $29 million under the offer have been substantially completed. Upon expiration of the rescission offer, all remaining redeemable shares were reclassified to within stockholders’ equity.
Common Stock
Authorized Shares — At January 30, 2009,February 3, 2012, Dell iswas authorized to issue 7.0issue 7 billion shares shares of common stock, par value $.01$.01 per share.
Share Repurchase Program — Dell has a share repurchase program that authorizes it to purchase shares of common stock in order to increase shareholder value and manage dilution resulting from shares issued under Dell’sDell's equity compensation plans. However, Dell does not currently have a policy that requires the repurchase of common stock in conjunction with stock-based payment arrangements. During Fiscal 2009,2012, Dell repurchased approximately 134 million shares for an aggregate cost of approximately $2.9 billion.$2.7 billion in common stock. At January 30, 2009, Dell’sFebruary 3, 2012, Dell's remaining authorized amount for share repurchases was $4.5 billion.$6.0 billion.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 514 — STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based Compensation
Description of the Plans
Employee Stock Plans — Dell is currently issuing stock grants under the Dell Amended and Restated 2002 Long-Term Incentive Plan (“the 2002(the “2002 Incentive Plan”), which was approved by shareholders on December 4, 2007. There are previous plans that have been terminated, except for options previously granted under those plans that are stillwhich remain outstanding. TheseIn Fiscal 2012, in connection with a business acquisition, Dell assumed the stock incentive plan of one of its acquired companies. No future grants will be made under the assumed plan. The 2002 Incentive Plan, all previous plans, and the assumed plan are all collectively referred to as the “Stock Plans”.Plans.”
The 2002 Incentive Plan provides for the grantinggrant of stock-based incentive awards to Dell’sDell's employees and non-employee directors. Awards may be incentive stock options within the meaning of Section 422 of the Internal Revenue Code, nonqualifiednon-qualified stock options, restricted stock, restricted stock units, or performance-based restricted stock units. There were approximately 313342 million 292, 344 million, and 271320 million shares of Dell’sDell's common stock available for future grants under the Stock Plans2002 Incentive Plan at February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007,January 29, 2010, respectively. To satisfy stock option exercises and vested restricted stock awards, Dell has a policy of issuing new shares as opposed torather than repurchasing shares on the open market.
Stock Option Agreements — The right to purchase shares pursuant to existing stock option agreementsStock options granted under the 2002 Incentive Plan typically vestsvest pro-rata at each option anniversary date over athree- to five-yearfive-year period. TheThese options, which are granted with option exercise prices equal to the fair market value of Dell’sDell's common stock on the date of grant, generally expire within ten to twelve years from the date of grant.In connection with business acquisitions, during Fiscal 2012, Dell converted or assumed a small number of stock options granted under the stock incentive plans of acquired companies, which are collectively referred to as the "assumed options." These assumed options vest over a period of up to four years and generally expire within ten years from the date of assumption. Compensation expense for all stock options is recognized on a straight-line basis over the requisite service period.
Restricted Stock Awards — Awards of restricted stock may be either grants of restricted stock, restricted stock units, or performance-based stock units that are issued at no cost to the recipient. For restricted stock grants, at the date of grant, the recipient has all rights of a stockholder, subject to certain restrictions on transferability and a risk of forfeiture. Restricted stock grants typically vest over a three- to seven-yearseven-year period beginning on the date of the grant. For restricted stock units, legal ownership of the shares is not transferred to the
72
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
employee until the unit vests,units vest, which is generally over athree- to five-yearfive-year period. The cost of these awards is determined using the fair market value of Dell's common stock on the date of the grant. Dell also grants performance-based restricted stock units as a long-term incentive in which an award recipient receives shares contingent upon Dell achieving performance objectives and the employees’employee's continuing employment through the vesting period, which is generally over a three- to five-yearfive-year period. Compensation expensecosts recorded in connection with these performance-based restricted stock units isare based on Dell’sDell's best estimate of the number of shares that will eventually be issued upon achievement of the specified performance criteriaobjectives and when it becomes probable that certainsuch performance goalsobjectives will be achieved. The cost of these awards is determined using the fair market value of Dell’s common stock on the date of the grant.
Compensation expensecosts for restricted stock awards with a service condition is recognized on a straight-line basis over the vesting term.requisite service period. Compensation expensecosts for performance-based restricted stock awards is recognized on an accelerated multiple-award approach based on the most probable outcome of the performance condition.
Acceleration of Vesting of Options — On January 23, 2009, Dell’s Board of Directors approved the acceleration of the vesting of unvested“out-of-the-money” stock options (options that have an exercise price greater than the current market stock price) with exercise prices equal to or greater than $10.14 per share for approximately 2,800 employees holding options to purchase approximately 21 million shares of common stock. Dell concluded the modification to the stated vesting provisions was substantive after Dell considered the volatility of its share price and the exercise price of the amended options in relation to recent share values. Because the modification was considered substantive, the remaining unearned compensation expense of $104 million was recorded as an expense in Fiscal 2009. The weighted-average exercise price of the options that were accelerated was $21.90.DELL INC.
Temporary Suspension of Option Exercises, Vesting of Restricted Stock Units, and Employee Stock Purchase Plan (“ESPP”) Purchases— As a result of Dell’s inability to timely file its Annual Report onForm 10-K for Fiscal 2007, Dell suspended the exercise of employee stock options, the settlement of restricted stock units, and the purchase of shares under the ESPP on April 4, 2007. Dell resumed allowing the exercise of employee stock options by employees and the settlement of restricted stock units on October 31, 2007. The purchase of shares under the ESPP was not resumed as the plan was discontinued during the first quarter of Fiscal 2009.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dell decided to pay cash to current and former employees who held“in-the-money” stock options (options that have an exercise price less than the current market stock price) that expired during the period of unexercisability due to Dell’s inability to timely file its Annual Report onForm 10-K for Fiscal 2007. During Fiscal 2008, Dell made payments of approximately $107 million, which were expensed, relating toin-the-money stock options that expired in the second and third quarters of Fiscal 2008.
General Information
Stock Option Activity —
The following table summarizes stock option activity for the Stock Plans during Fiscal 2009:2010, Fiscal 2011, and Fiscal 2012:
| | | | | | | | | | | | | | | | | |
|
| | | | | | | Weighted-
| | | | | | | | | | | | |
| | | | | Weighted-
| | Average
| | | | | Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | Number
| | Average
| | Remaining
| | Aggregate
| | | (in millions) | | (per share) | | (in years) | | (in millions) |
| | | of
| | Exercise
| | Contractual
| | Intrinsic
| | |
| | | Options | | Price | | Term | | Value | | |
| | | (in millions) | | (per share) | | (in years) | | (in millions) | | |
| | |
| Options outstanding — February 1, 2008 | | | 264 | | | $ | 32.30 | | | | | | | | | | |
| Granted | | | 13 | | | | 19.71 | | | | | | | | | | |
| Options outstanding — January 30, 2009 | | | 230 |
| | $ | 31.85 |
| | | | |
Granted (a) | | | 11 |
| | 9.83 |
| | | | |
| Exercised | | | (4 | ) | | | 19.08 | | | | | | | | | | | — |
| | 12.05 |
| | | | |
| Forfeited | | | (4 | ) | | | 23.97 | | | | | | | | | | | — |
| | 14.73 |
| | | | |
| Cancelled/expired | | | (39 | ) | | | 33.14 | | | | | | | | | | | (36 | ) | | 35.59 |
| | | | |
| | | | | |
| Options outstanding — January 30, 2009 | | | 230 | | | $ | 31.85 | | | | | | | | | | |
| | | | | |
Vested and expected to vest (net of estimated forfeitures) — January 30, 2009(a)(b) | | | 230 | | | $ | 31.86 | | | | 3.9 | | | $ | - | | |
Exercisable — January 30, 2009(a)(b) | | | 230 | | | $ | 31.86 | | | | 3.9 | | | $ | - | | |
| Options outstanding — January 29, 2010 | | | 205 |
| | 30.00 |
| | | | |
Granted (a) | | | 17 |
| | 14.82 |
| | | | |
| Exercised | | | (1 | ) | | 9.18 |
| | | | |
| Forfeited | | | (2 | ) | | 13.85 |
| | | | |
| Cancelled/expired | | | (58 | ) | | 36.44 |
| | | | |
| Options outstanding — January 28, 2011 | | | 161 |
| | 26.49 |
| | | | |
|
| Granted and assumed through acquisitions | | | 28 |
| | 13.79 |
| | | | |
|
| Exercised | | | (4 | ) | | 9.38 |
| | | | |
|
| Forfeited | | | (5 | ) | | 13.35 |
| | | | |
|
| Cancelled/expired | | | (37 | ) | | 24.85 |
| | | | |
|
Options outstanding — February 3, 2012 (b) | | | 143 |
| | 25.37 |
| | 4.2 |
| | $ | 177 |
|
Vested and expected to vest (net of estimated forfeitures) — February 3, 2012(b) | | | 138 |
| | $ | 25.72 |
| | 4.1 |
| | $ | 163 |
|
Exercisable — February 3, 2012(b) | | | 108 |
| | $ | 29.02 |
| | 2.8 |
| | $ | 54 |
|
____________________
| |
(a) | In Fiscal 2011 and Fiscal 2010, Dell did not convert or assume any options in connection with business acquisitions. |
| |
(b) | For options vested and expected to vest, options exercisable, and options exercisable,outstanding, the aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Dell’sDell's closing stock price on January 30, 2009,February 3, 2012 and the exercise price multiplied by the number ofin-the-money options) that would have been received by the option holders had the holders exercised their options on January 30, 2009.February 3, 2012. The intrinsic value changes based on changes in the fair market value of Dell’sDell's common stock. |
|
(b) | No options werein-the-money at January 30, 2009. |
73
In connection with Fiscal 2012 acquisitions, Dell assumed approximately 6 million stock options with a weighted-average exercise price per share of $7.38.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information about options outstanding and exercisable at February 3, 2012 is as follows:
|
| | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Range of Exercise Prices | | Number Outstanding | | Weighted-Average Exercise Price per Share | | Weighted-Average Remaining Contractual Life | | Number Exercisable | | Weighted-Average Exercise Price Per Share |
| | | (in millions) | | | | (in years) | | (in millions) | | |
| $ 0 - $9.99 | | 8 |
| | $ | 7.38 |
| | 3.9 |
| | 3 |
| | $ | 7.42 |
|
| $10.00 - $19.99 | | 42 |
| | $ | 15.57 |
| | 8.1 |
| | 12 |
| | $ | 16.72 |
|
| $20.00 - $29.99 | | 45 |
| | $ | 25.86 |
| | 1.8 |
| | 45 |
| | $ | 25.86 |
|
| $30.00 - $39.99 | | 31 |
| | $ | 34.31 |
| | 2.2 |
| | 31 |
| | $ | 34.31 |
|
| $40 and over | | 17 |
| | $ | 40.23 |
| | 3.1 |
| | 17 |
| | $ | 40.23 |
|
| Total | | 143 |
| | $ | 25.37 |
| | 4.2 |
| | 108 |
| | $ | 29.02 |
|
The following table summarizes stock option activity for the Stock Plans during Fiscal 2008:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted-
| | | | |
| | | | | | Weighted-
| | | Average
| | | | |
| | | Number
| | | Average
| | | Remaining
| | | Aggregate
| |
| | | of
| | | Exercise
| | | Contractual
| | | Intrinsic
| |
| | | Options | | | Price | | | Term | | | Value | |
| | | (in millions) | | | (per share) | | | (in years) | | | (in millions) | |
| |
| Options outstanding — February 2, 2007 | | | 314 | | | $ | 32.16 | | | | | | | | | |
| Granted | | | 12 | | | | 24.45 | | | | | | | | | |
| Exercised | | | (7 | ) | | | 18.99 | | | | | | | | | |
| Forfeited | | | (5 | ) | | | 26.80 | | | | | | | | | |
| Cancelled/expired | | | (50 | ) | | | 32.01 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding — February 1, 2008 | | | 264 | | | $ | 32.30 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Vested and expected to vest (net of estimated forfeitures) — February 1, 2008(a) | | | 259 | | | $ | 32.43 | | | | 4.5 | | | $ | 13 | |
Exercisable — February 1, 2008(a) | | | 242 | | | $ | 32.89 | | | | 4.2 | | | $ | 12 | |
The following table summarizes stock option activity for the Stock Plans during Fiscal 2007:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted-
| | | | |
| | | | | | Weighted-
| | | Average
| | | | |
| | | Number
| | | Average
| | | Remaining
| | | Aggregate
| |
| | | of
| | | Exercise
| | | Contractual
| | | Intrinsic
| |
| | | Options | | | Price | | | Term | | | Value | |
| | | (in millions) | | | (per share) | | | (in years) | | | (in millions) | |
| |
| Options outstanding — February 3, 2006 | | | 343 | | | $ | 31.86 | | | | | | | | | |
| Granted | | | 10 | | | | 25.97 | | | | | | | | | |
| Exercised | | | (13 | ) | | | 14.09 | | | | | | | | | |
| Forfeited | | | (4 | ) | | | 25.84 | | | | | | | | | |
| Cancelled/expired | | | (22 | ) | | | 36.43 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Options outstanding — February 2, 2007 | | | 314 | | | $ | 32.16 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Vested and expected to vest (net of estimated forfeitures) — February 2, 2007(a) | | | 309 | | | $ | 32.26 | | | | 5.2 | | | $ | 148 | |
Exercisable — February 2, 2007(a) | | | 284 | | | $ | 32.74 | | | | 5.1 | | | $ | 145 | |
| | |
(a) | | For options vested and expected to vest and options exercisable, the aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Dell’s closing stock price on February 1, 2008, and February 2, 2007, respectively, and the exercise price multiplied by the number ofin-the-money options) that would have been received by the option holders had the holders exercised their options on February 1, 2008, and February 2, 2007, respectively. The intrinsic value changes based on changes in the fair market value of Dell’s common stock. |
74
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other information pertaining to stock options for the Stock Plans is as follows:
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions, except per option data) | |
| |
| Weighted-average grant date fair value of stock options granted per option | | $ | 5.87 | | | $ | 6.29 | | | $ | 6.90 | |
Total fair value of options vested(a) | | $ | 187 | | | $ | 208 | | | $ | 415 | |
Total intrinsic value of options exercised(b) | | $ | 15 | | | $ | 64 | | | $ | 171 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions, except per option data) |
| Total fair value of options vested | | $ | 56 |
| | $ | 13 |
| | $ | — |
|
Total intrinsic value of options exercised(a) | | $ | 27 |
| | $ | 7 |
| | $ | — |
|
____________________
| | |
(a) | | Includes the $104 million charge for the Fiscal 2009 acceleration of vesting of certain unvested and“out-of-the-money” stock options with exercise prices equal to or greater than $10.14 per share previously awarded under equity compensation plans. |
|
(b) | | The total intrinsic value of options exercised represents the total pre-tax intrinsic value (the difference between the stock price at exercise and the exercise price multiplied by the number of options exercised) that was received by the option holders who exercised their options during the fiscal year. |
At February 3, 2012, January 30, 2009, approximately $128, 2011, and January 29, 2010, there was $114 million, $65 million, and $28 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock options is expected to be recognized over a weighted-average period of approximately 2.3 years.1.9 years, 2.0 years, and 2.2 years, respectively.
Valuation of Awards
Non-vested Restricted Stock Activity — Non-vested restricted stock awards and activities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal 2009 | | | Fiscal 2008 | | | Fiscal 2007 | |
| | | | | | Weighted-
| | | | | | Weighted-
| | | | | | Weighted-
| |
| | | Number
| | | Average
| | | Number
| | | Average
| | | Number
| | | Average
| |
| | | of
| | | Grant Date
| | | of
| | | Grant Date
| | | of
| | | Grant Date
| |
| | | Shares | | | Fair Value | | | Shares | | | Fair Value | | | Shares | | | Fair Value | |
| | | (in millions) | | | (per share) | | | (in millions) | | | (per share) | | | (in millions) | | | (per share) | |
| |
| Non-vested restricted stock beginning balance | | | 36 | | | $ | 24.90 | | | | 17 | | | $ | 28.76 | | | | 2 | | | $ | 34.66 | |
| Granted | | | 18 | | | | 19.11 | | | | 26 | | | | 22.85 | | | | 21 | | | | 28.36 | |
| Vested | | | (10 | ) | | | 24.64 | | | | (3 | ) | | | 28.79 | | | | (1 | ) | | | 28.84 | |
| Forfeited | | | (8 | ) | | | 23.15 | | | | (4 | ) | | | 24.71 | | | | (5 | ) | | | 29.29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-vested restricted stock ending balance | | | 36 | | | $ | 22.45 | | | | 36 | | | $ | 24.90 | | | | 17 | | | $ | 28.76 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions, except per option data) | |
| |
| Weighted-average grant date fair value of restricted stock awards granted | | $ | 19.11 | | | $ | 22.85 | | | $ | 28.36 | |
| Total estimated grant date fair value of restricted stock awards vested | | $ | 252 | | | $ | 103 | | | $ | 16 | |
At January 30, 2009, $507 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards is expected to be recognized over a weighted-average period of approximately 2.0 years.
75
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expense Information under SFAS 123(R)
Stock-based compensation expense was allocated as follows:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
| Cost of net revenue | | $ | 62 | | | $ | 62 | | | $ | 59 | |
| Operating expenses | | | 356 | | | | 374 | | | | 309 | |
| | | | | | | | | | | | | |
| Stock-based compensation expense before taxes | | | 418 | | | | 436 | | | | 368 | |
| Income tax benefit | | | (131 | ) | | | (127 | ) | | | (110 | ) |
| | | | | | | | | | | | | |
| Stock-based compensation expense, net of income taxes | | $ | 287 | | | $ | 309 | | | $ | 258 | |
| | | | | | | | | | | | | |
Stock-based compensation in the table above includes $104 million of expense for accelerated options and a reduction of $1 million for the release of the accrual for expiredFor stock options in Fiscal 2009 and $107 million of cash expense in Fiscal 2008 for expired stock options, as previously discussed.
Stock-based compensation expense is based on awards expected to vest, reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated atgranted under the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Valuation Information
SFAS 123(R) requires2002 Incentive Plan, Dell uses the use of a valuationBlack-Scholes option pricing model to calculateestimate the fair value of stock option awards.options at grant date. For stock options assumed through business acquisitions, Dell has electeduses the lattice binomial valuation model to useestimate fair value. For a limited number of performance-based units that include a market-based condition, Dell uses the Black-Scholes option pricingMonte Carlo simulation valuation model which incorporatesto estimate fair value. Stock-based compensation expense recognized for awards assumed through acquisitions as well as awards that include a market-based condition was not material for Fiscal 2012, Fiscal 2011, or Fiscal 2010.
For stock options granted under the 2002 Incentive Plan, the estimated fair values incorporate various assumptions, including volatility, expected term, and risk-free interest rates. TheExpected volatility is based on a blend of implied and historical volatility of Dell’sDell's common stock over the most recent period commensurate with the estimated expected term of Dell’sDell's stock options. Dell uses this blend of implied and historical volatility, as well as other economic data, because management believes such volatility is more representative of prospective trends. The expected term of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The dividend yield of zero is based on the fact that Dell has never paid cash dividends and has no present intention to pay cash dividends.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average fair value of stock options and purchase rightsgranted under the employee stock purchase plan2002 Incentive Plan was determined based on the Black-Scholes option pricing model. The assumptions utilized in this model weighted for all grants utilizingas well as the assumptions in the following table:weighted-average grant date fair value of stock options granted during Fiscal 2012, Fiscal 2011, and Fiscal 2010 are presented below:
| | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | | | | | |
| | | January 30,
| | February 1,
| | February 2,
| | | Fiscal Year Ended |
| | | 2009 | | 2008 | | 2007 | | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | |
| Expected term: | | | | | | | | | | | | | |
| Stock options | | | 3.6 years | | | | 3.5 years | | | | 3.6 years | | |
| Employee stock purchase plan | | | N/A(a) | | | | N/A(a) | | | | 3 months | | |
| Weighted-average grant date fair value of stock options granted per option | | | $ | 5.13 |
| | $ | 5.01 |
| | $ | 3.71 |
|
| Expected term (in years) | | | 4.6 |
| | 4.5 |
| | 4.5 |
|
| Risk-free interest rate (U.S. Government Treasury Note) | | | 2.3% | | | | 4.4% | | | | 4.8% | | | 1.9 | % | | 2.2 | % | | 1.8 | % |
| Volatility | | | 37% | | | | 27% | | | | 26% | | | 36 | % | | 37 | % | | 44 | % |
| Dividends | | | 0% | | | | 0% | | | | 0% | | | — | % | | — | % | | — | % |
Restricted Stock Awards
Non-vested restricted stock awards and activities For Fiscal 2010, Fiscal 2011, and Fiscal 2012 were as follows:
|
| | | | | | | |
| | | Number of Shares | | Weighted- Average Grant Date Fair Value |
| | | (in millions) | | (per share) |
| Non-vested restricted stock: | | |
| | |
|
| Non-vested restricted stock balance as of January 30, 2009 | | 36 |
| | $ | 22.45 |
|
| Granted | | 22 |
| | 11.39 |
|
Vested(a) | | (13 | ) | | 22.78 |
|
| Forfeited | | (5 | ) | | 18.23 |
|
| Non-vested restricted stock balance as of January 29, 2010 | | 40 |
| | 16.84 |
|
| Granted | | 26 |
| | 14.53 |
|
Vested(a) | | (17 | ) | | 19.10 |
|
| Forfeited | | (7 | ) | | 15.21 |
|
| Non-vested restricted stock balance as of January 28, 2011 | | 42 |
| | 14.71 |
|
| Granted | | 22 |
| | 15.19 |
|
Vested(a) | | (18 | ) | | 16.47 |
|
| Forfeited | | (4 | ) | | 14.05 |
|
| Non-vested restricted stock balance as of February 3, 2012 | | 42 |
| | $ | 14.29 |
|
____________________
| | |
(a) | | No purchase rightsUpon vesting of restricted stock units, some of the underlying shares are generally sold to cover the required withholding taxes. However, select participants may choose the net shares settlement method to cover withholding tax requirements. Total shares withheld were granted underapproximately 426,000, 354,000, and 157,000 for Fiscal 2012, Fiscal 2011, and Fiscal 2010, respectively. Total payments for the ESPPemployee's tax obligations to the taxing authorities were $6 million, $5 million, and $2 million in Fiscal 20092012, 2011, and Fiscal 2008 due to Dell suspending the ESPP on April 4, 2007,2010, respectively, and subsequently discontinuing the plan effective the first quarter of Fiscal 2009are reflected as a partfinancing activity within the Consolidated Statements of an overall assessment of its benefits strategy.Cash Flows. |
For Fiscal 2012, Fiscal 2011, and Fiscal 2010, the total estimated vest date fair value of restricted stock awards was $273 million, $250 million, and $134 million, respectively.
At February 3, 2012, January 28, 2011, and January 29, 2010, there was $348 million, $341 million, and $393 million, respectively, of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards. These awards are expected to be recognized over a weighted-average period of approximately 1.8, 1.9, and 1.8 years, respectively.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-based Compensation Expense
Stock-based compensation expense was allocated as follows:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions) |
| Stock-based compensation expense: | | |
| | |
| | |
|
| Cost of net revenue | | $ | 59 |
| | $ | 57 |
| | $ | 47 |
|
| Operating expenses | | 303 |
| | 275 |
| | 265 |
|
| Stock-based compensation expense before taxes | | 362 |
| | 332 |
| | 312 |
|
| Income tax benefit | | (108 | ) | | (97 | ) | | (91 | ) |
| Stock-based compensation expense, net of income taxes | | $ | 254 |
| | $ | 235 |
| | $ | 221 |
|
Employee Benefit Plans
401(k) Plan — Dell has a defined contribution retirement plan (the “401(k) Plan”) that complies with Section 401(k) of the Internal Revenue Code. Substantially all employees in the U.S. are eligible to participate in the 401(k) Plan. Effective January 1, 2008, Dell
76
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
matches 100% of each participant’sparticipant's voluntary contributions, subject to a maximum contribution of 5% of the participant’sparticipant's compensation, and participants vest immediately in all Dell contributions to the 401(k) Plan. From January 1, 2005, to December 31, 2007, Dell matched 100% of each participant’s voluntary contributions, subject to a maximum contribution of 4% of the participant’s compensation. Prior to January 1, 2005, Dell matched 100% of each participant’s voluntary contributions, subject to a maximum contribution of 3% of the participant’s compensation. Dell’sDell's contributions during Fiscal 2009, 2008,2012, Fiscal 2011, and 2007Fiscal 2010 were $93$153 million $76, $132 million, and $70$91 million, respectively. Dell’sDell's contributions are invested according to each participant’sparticipant's elections in the investment options provided under the Plan. Investment options include Dell common stock, but neither participant nor Dell contributions are required to be invested in Dell common stock. During Fiscal 2010, Dell also contributed $4 million to Perot Systems' 401(k) Plan (the "Perot Plan") after the acquisition of the company on November 3, 2009. The Perot Plan was merged into the 401(k) Plan during Fiscal 2011.
Deferred Compensation Plan — Dell has a nonqualifiednon-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees and non-employee directors. The Deferred Compensation Plan permits the deferral of base salary and annual incentive bonus. The deferrals are held in a separate trust, which has been established by Dell to administer the Plan. The assets of the trust are subject to the claims of Dell’sDell's creditors in the event that Dell becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e.(known as a “Rabbi Trust”). In accordance with the accounting provisions of EITFNo. 97-14,Accounting for Deferred Compensation Arrangements Where Amounts Earneddeferred compensation arrangements where amounts earned are Heldheld in a Rabbi Trust and Invested,invested, the assets and liabilities of the Deferred Compensation Plan are presented in long-termLong-term investments and accruedAccrued and other liabilities, respectively, in the Consolidated Statements of Financial Position, respectively.Position. The assets held by the trust are classified as trading securities with changes recorded to investmentInterest and other, income, net. These assets arewere valued at $73$105 million at February 3, 2012, and are disclosed in Note 23 of the Notes to Consolidated Financial Statements. Changes in the deferred compensation liability are recorded to compensation expense.
Employee Stock Purchase Plan — Dell discontinued its shareholder approved employee stock purchase plan during the first quarter of Fiscal 2009. Prior to discontinuance, the ESPP allowed participating employees to purchase common stock through payroll deductions at the end of each three-month participation period at a purchase price equal to 85% of the fair market value of the common stock at the end of the participation period. Upon adoption of SFAS 123(R) in Fiscal 2007, Dell began recognizing compensation expense for the 15% discount received by the participating employees. No common stock was issued under this plan in Fiscal 2009 or Fiscal 2008 due to Dell suspending the ESPP on April 4, 2007, and subsequently discontinuing the ESPP as part of an overall assessment of its benefits strategy. Common stock issued under ESPP totaled 6 million shares in Fiscal 2007, and the weighted-average fair value of the purchase rights under the ESPP during Fiscal 2007 was $3.89.
| |
NOTE 6 — | FINANCIAL SERVICES |
Dell Financial Services L.L.C.
Dell offers or arranges various financing options and services for its business and consumer customers in the U.S. through DFS. a wholly-owned subsidiary of Dell. DFS’s key activities include the origination, collection, and servicing of customer receivables related to the purchase of Dell products.
Dell utilizes DFS to facilitate financing for customers who elect to finance products sold by Dell. New financing originations, which represent the amounts of financing provided to customers for equipment and related software and services through DFS, were $4.5 billion, $5.7 billion, and $6.1 billion, during the fiscal years ended January 30, 2009, February 1, 2008, and February 2, 2007, respectively.
CIT, formerly a joint venture partner of DFS, continues to have the right to purchase a percentage of new customer receivables facilitated by DFS until January 29, 2010 (“Fiscal 2010”). CIT’s contractual funding right is up to 35% in Fiscal 2009 and up to 25% in Fiscal 2010. During Fiscal 2009 CIT’s funding percentage was approximately 34%. DFS services the receivables purchased by CIT. However, Dell’s obligation related to the performance of the DFS originated receivables purchased by CIT is limited to the cash funded credit reserves established at the time of funding.
77
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15 — SEGMENT INFORMATION
Financing Receivables
The following table summarizes the components of Dell’s financing receivables, net of the allowance for financing receivables losses:
| | | | | | | | | |
| | | January 30,
| | | February 1,
| |
| | | 2009 | | | 2008 | |
| | | (in millions) | |
| |
| Customer receivables: | | | | | | | | |
| Revolving loans, gross | | $ | 963 | | | $ | 1,063 | |
| Fixed-term leases and loans, gross | | | 723 | | | | 654 | |
| | | | | | | | | |
| Customer receivables, gross | | | 1,686 | | | | 1,717 | |
| Customer receivables allowance | | | (149 | ) | | | (96 | ) |
| | | | | | | | | |
| Customer receivables, net | | | 1,537 | | | | 1,621 | |
| Residual interest | | | 279 | | | | 295 | |
| Retained interest | | | 396 | | | | 223 | |
| | | | | | | | | |
| Financing receivables, net | | $ | 2,212 | | | $ | 2,139 | |
| | | | | | | | | |
| Short-term | | $ | 1,712 | | | $ | 1,732 | |
| Long-term | | | 500 | | | | 407 | |
| | | | | | | | | |
| Financing receivables, net | | $ | 2,212 | | | $ | 2,139 | |
| | | | | | | | | |
Of the gross customer receivable balance at January 30, 2009,Dell's four global business segments are Large Enterprise, Public, Small and February 1, 2008, $45 million and $444 million, respectively, represent balances which are due from CIT in connection with specified promotional programs.
Customer Receivables — The composition and credit quality of customer receivables vary from investment grade commercial customers to subprime consumers. Dell’s estimate of subprime customer receivables was approximately 20% of the gross customer receivable balance at January 30, 2009, and February 1, 2008.
As of January 30, 2009, and February 1, 2008, customer financing receivables 60 days or more delinquent was $58 million and $34 million, respectively. These amounts represent 3.7% and 2.1% of the ending customer financing receivables balances for the respective years.
Net principal charge-offs for Fiscal 2009 and Fiscal 2008 were $86 million and $40 million, respectively. These amounts represent 5.5% and 2.7% of the average outstanding customer financing receivable balance (including accrued interest) for the respective years.
The following is a description of the components of customer receivables.
| | |
| – | Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell. Revolving loans bear interest at a variable annual percentage rate that is tied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid on average within 12 months. Revolving loans are included in short-term financing receivables in the table above. From time to time, account holders may have the opportunity to finance their Dell purchases with special programs during which, if the outstanding balance is paid in full, no interest is charged. These special programs generally range from 3 to 12 months. At January 30, 2009, and February 1, 2008, $352 million and $668 million, respectively, were receivable under these special programs. |
|
| – | Dell enters into sales-type lease arrangements with customers who desire lease financing. Leases with business customers have fixed terms of two to five years. Future maturities of minimum lease payments at January 30, 2009 for future fiscal years are as follows: 2010: $219 million; 2011: $144 million; 2012: $67 million; 2013: $7 million and 2014: $0.1 million. Fixed-term loans are also offered to qualified small businesses, large commercial accounts, governmental organizations and educational entities. |
78
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Residual Interest — Dell retains a residual interest in the leased equipment. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and futurevalue-at-risk demand valuation methods. On a quarterly basis, Dell assesses the carrying amount of its recorded residual values for impairment. Anticipated declines in specific future residual values that are considered to beother-than-temporary are recorded in current earnings.
Retained Interest — Retained interest represents the residual beneficial interest Dell retains in certain pools of securitized financing receivables. Retained interest is stated at the present value of the estimated net beneficial cash flows after payment of all senior interests. Dell values the retained interest at the time of each receivable transfer and at the end of each reporting period. The fair value of the retained interest is determined using a discounted cash flow model with various key assumptions, including payment rates, credit losses, discount rates, and remaining life of the receivables sold. These assumptions are supported by both Dell’s historical experience and anticipated trends relative to the particular receivable pool. The weighted average assumptions for retained interest can be affected by the many factors, including asset type (revolving versus fixed), repayment terms, and the credit quality of assets being securitized.
The implementation of SFAS 157 did not result in material changes to the models or processes used to value retained interest. See Note 2 of Notes to Consolidated Financial Statements for the impact of the implementation of SFAS 157.
The following table summarizes the activity in retained interest balances and related cash flows:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
Retained interest: | | | | | | | | | | | | |
| Retained interest at beginning of year | | $ | 223 | | | $ | 159 | | | $ | 90 | |
| Issuances | | | 427 | | | | 173 | | | | 167 | |
| Distributions from conduits | | | (246 | ) | | | (132 | ) | | | (142 | ) |
| Net accretion | | | 16 | | | | 31 | | | | 17 | |
| Change in fair value for the period | | | (24 | ) | | | (8 | ) | | | 27 | |
| | | | | | | | | | | | | |
| Retained interest at end of year | | $ | 396 | | | $ | 223 | | | $ | 159 | |
| | | | | | | | | | | | | |
Cash flows during the periods: | | | | | | | | | | | | |
| Proceeds from new securitizations | | $ | 350 | | | $ | 538 | | | $ | 607 | |
| Distributions from conduits | | | 246 | | | | 132 | | | | 142 | |
| Servicing and administration fees received | | | 19 | | | | 15 | | | | 9 | |
| Repurchases of ineligible contracts | | | (5 | ) | | | (11 | ) | | | (7 | ) |
| | | | | | | | | | | | | |
| Cash flows during the period | | $ | 610 | | | $ | 674 | | | $ | 751 | |
| | | | | | | | | | | | | |
The table below summarizes the key assumptions used to measure the fair value of the retained interest as of January 30, 2009.
| | | | | | | | | | | | | | | | | |
| | | Weighted Average Key Assumptions | |
| | | Monthly
| | | | | | | | | | |
| | | Payment
| | | Credit
| | | Discount
| | | | |
| | | Rates | | | Losses | | | Rates | | | Life | |
| | | | | | (lifetime) | | | (annualized) | | | (months) | |
| |
| Time of sale valuation of retained interest | | | 12 | % | | | 8 | % | | | 14 | % | | | 14 | |
| Valuation of retained interest | | | 8 | % | | | 12 | % | | | 11 | % | | | 11 | |
79
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The impact of adverse changes to the key valuation assumptions to the fair value of retained interest at January 30, 2009 is shown in the following table (in millions):
| | | | | |
| Expected prepayment speed: 10% | | $ | (9 | ) |
| Expected prepayment speed: 20% | | $ | (17 | ) |
| Expected credit losses: 10% | | $ | (13 | ) |
| Expected credit losses: 20% | | $ | (21 | ) |
| Discount rate: 10% | | $ | (5 | ) |
| Discount rate: 20% | | $ | (10 | ) |
The analyses above utilized 10% and 20% adverse variation in assumptions to assess the sensitivities in fair value of the retained interest. However, these changes generally cannot be extrapolated because the relationship between a change in one assumption to the resulting change in fair value may not be linear. For the above sensitivity analyses, each key assumption was isolated and evaluated separately. Each assumption was adjusted by 10% and 20% while holding the other key assumptions constant. Assumptions may be interrelated, and changes to one assumption may impact others and the resulting fair value of the retained interest. For example, increases in market interest rates may result in lower prepayments and increased credit losses. The effect of multiple assumption changes were not considered in the analyses.
Asset Securitization
During Fiscal 2009 and Fiscal 2008, Dell transferred $1.4 billion and $1.2 billion respectively, of fixed-term leases and loans and revolving loans to unconsolidated qualifying special purpose entities. The qualifying special purpose entities are bankruptcy remote legal entities with assets and liabilities separate from those of Dell. The purpose of the qualifying special purpose entities is to facilitate the funding of financing receivables in the capital markets. The qualifying special purpose entities have entered into financing arrangements with three multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. Two of the three conduits fund fixed-term leases and loans, and one conduit funds revolving loans. The principal balance of the securitized receivables at the end of Fiscal 2009 and Fiscal 2008 was $1.4 billion and $1.2 billion, respectively.
Dell services securitized contracts and earns a servicing fee. Dell’s securitization transactions generally do not result in servicing assets and liabilities as the contractual fees are adequate compensation in relation to the associated servicing cost.
During Fiscal 2009, the disruption in the debt and capital markets resulted in reduced liquidity and increased costs for funding of financial assets. Due to a proposed increase to the cost structure in Dell’s revolving securitization arrangement, Dell elected not to extend the terms of the agreement. This resulted in a scheduled amortization of the transaction. During this scheduled amortization period, all principal collections will be used to pay down the outstanding debt amount related to the securitized assets. The right to receive cash collections is delayed until the debt is fully paid.
During the scheduled amortization, no transfers of new revolving loans will occur. Additional purchases made on existing securitized revolving loans (repeat purchases) will continue to be transferred to the qualified special purpose entity and will increase the retained interest in securitized assets on the balance sheet.
Dell’s securitization programs contain standard structural features related to the performance of the securitized receivables. These structural features include defined credit losses, delinquencies, average credit scores, and excess collections above or below specified levels. In the event one or more of these features are met and Dell is unable to restructure the program, no further funding of receivables will be permitted and the timing of expected retained interest cash flows will be delayed, which would impact the valuation of the retained interest. For the revolving transaction currently under scheduled amortization, performance features have been suspended.
As of January 30, 2009, and February 1, 2008, securitized financing receivables 60 days or more delinquent were $63 million and $54 million, respectively. These amounts represent 4.6% and 4.4% of the ending securitized financing receivables balances for the respective years.
Net principal charge-offs for Fiscal 2009 and Fiscal 2008, were $114 million and $81 million, respectively. These amounts represent 8.2% and 7.0% of the average outstanding securitized financing receivable balance for the respective years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dell has recorded all of its acquisitions using the purchase method of accounting in accordance with SFAS No. 141,Medium Business Combinations. Accordingly, the results of operations of the acquired companies have been included in Dell’s consolidated results since the date of each acquisition. Dell allocates the purchase price of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, which include IPR&D charges, based on their estimated fair values. The excess of the purchase price over the fair value of the identified assets and liabilities has been recorded as goodwill. The fair value assigned to the assets acquired is based on valuations using management’s estimates and assumptions. Dell does not expect the majority of goodwill related to these acquisitions to be deductible for tax purposes. In compliance with SFAS No. 142,Goodwill and Other Intangible Assets, Dell defines its reporting units as its reportable business segments. Dell has not presented pro forma results of operations because these acquisitions are not material to Dell’s consolidated results of operations, financial position or cash flows on either an individual or an aggregate basis. Dell has included the results of operations of these transactions prospectively from the respective date of the transaction.
The purchase price allocations for these acquisitions are preliminary and subject to revision as more detailed analyses are completed and additional information about the fair value of assets and liabilities becomes available. Any change in the estimated fair value of the net assets, within one year of acquisition of the acquired companies, will change the amount of the purchase price allocable to goodwill.
Fiscal 2009 Acquisitions
Dell completed three acquisitions, The Networked Storage Company, MessageOne, Inc. (“MessageOne”SMB”), and Allin Corporation (“Allin”) during Fiscal 2009 for approximately $197 million in cash. Dell recorded approximately $136 millionConsumer. Large Enterprise includes sales of goodwill and approximately $64 million of purchased intangible assets related to these acquisitions. Dell also expensed approximately $2 million of IPR&D related to these acquisitions in Fiscal 2009. The larger of these transactions was the purchase of MessageOne for approximately $164 million in cash plus an additional $10 million to be used for management retention. MessageOne and Allin have been integrated into Dell’s Global Services organization, which supports Dell’s Americas Commercial; Europe, Middle East, and Africa (“EMEA”) Commercial; and Asia Pacific-Japan (“APJ”) Commercial segments, and The Networked Storage Company has been integrated into Dell’s EMEA Commercial segment.
The acquisition of MessageOne was identified and acknowledged by Dell’s Board of Directors as a related party transaction because Michael Dell and his family held indirect ownership interests in MessageOne. Consequently, Dell’s Board directed management to implement a series of measures designed to ensure that the transaction was considered, analyzed, negotiated, and approved objectively and independent of any control or influence from the related parties.
Fiscal 2008 Acquisitions
EqualLogic Acquisition
On January 25, 2008, Dell completed its acquisition of EqualLogic Inc. (“EqualLogic”), a provider of high performance Internet Protocol (IP) iSCSI storage area network (SAN) solutions uniquely designed for virtualization andease-of-use. Dell acquired 100% of the common shares of EqualLogic for approximately $1.4 billion in cash. Dell originally recorded approximately $969 million of goodwill and $486 million of amortizable intangible assets. This acquisition will strengthen Dell’s product and channel position and assist Dell in its strategic efforts to simplify and virtualize IT for its customers globally. Dell also expensed IPR&D of $75 million resulting from the EqualLogic acquisition. Dell has included EqualLogic in its storage line of business for product revenue reporting purposes. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired, is not deductible for tax purposes.
ASAP Software Acquisition
On November 9, 2007, Dell completed its acquisition of ASAP Software Express, Inc., (“ASAP”), a provider of software solutions and licensing services for approximately $353 million in cash. This acquisition will help Dell to simplify information technology by combining Dell’s reach as a leading supplier of commercial technology and services and ASAP’s expertise in software licensing and license management. In connection with the acquisition, Dell originally recorded approximately $130 million of goodwill and $171 million of amortizable intangible assets. Dell did not record any IPR&D in connection with the ASAP acquisition. Dell has
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
included ASAP in its software and peripherals line of business for product revenue reporting purposes. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired, is expected to be deductible for tax purposes.
Other Acquisitions in Fiscal 2008
Dell acquired three other companies in Fiscal 2008, Everdream Corporation, Silverback Technologies Inc., and Zing Systems Inc. Dell also purchased CIT Group Inc.’s remaining 30% interest in DFS during Fiscal 2008. Total consideration for these purchases was approximately $553 million, which included direct transaction costs and certain liabilities recorded in connection with these acquisitions. The largest of these transactions was the purchase of CIT’s 30% minority interest in DFS for approximately $306 million, which resulted in recognition of $245 million of goodwill and gave Dell 100% ownership of DFS. With these acquisitions Dell expects to be able to broaden its services and financing offerings to customers while simplifying IT. Dell originally recorded approximately $438 million of goodwill and $78 million of amortizable intangible assets in connection with these other acquisitions. Dell also expensed approximately $8 million of IPR&D related to these acquisitions in Fiscal 2008.
The following table summarizes the purchase price allocations of all Fiscal 2008 acquisitions, including original estimates and adjusted allocations:
| | | | | | | | | |
| | | Original
| | | Adjusted
| |
| | | Allocations | | | Allocations | |
| | | (in millions) | |
| |
| Cash, cash equivalents, and short- term investments | | $ | 31 | | | $ | 31 | |
| Other tangible assets | | | 239 | | | | 358 | |
| Liabilities | | | (382 | ) | | | (455 | ) |
| | | | | | | | | |
| Total net liabilities assumed | | | (112 | ) | | | (66 | ) |
| Amortizable intangible assets | | | 735 | | | | 725 | |
| Indefinite lived intangible assets | | | 27 | | | | 25 | |
| | | | | | | | | |
| Total purchased intangibles | | | 762 | | | | 750 | |
| Goodwill | | | 1,538 | | | | 1,510 | |
| IPR&D | | | 83 | | | | 83 | |
| | | | | | | | | |
| Total purchase price | | $ | 2,271 | | | $ | 2,277 | |
| | | | | | | | | |
The amortizable intangible assets are being amortized over their estimated useful lives based upon their expected future cash flows. The following table summarizes the original and adjusted cost of amortizable intangible assets related to Fiscal 2008 acquisitions and their weighted-average useful lives:
| | | | | | | | | | | | | | | | | |
| | | Original
| | | Original
| | | | | | Adjusted
| |
| | | Estimated
| | | Weighted-Average
| | | Adjusted
| | | Weighted-Average
| |
| | | Cost | | | Useful Life | | | Cost | | | Useful Life | |
| | | (in millions) | | | (years) | | | (in millions) | | | (years) | |
| |
| Technology | | $ | 484 | | | | 5.8 | | | $ | 480 | | | | 5.7 | |
| Customer relationships | | | 220 | | | | 9.4 | | | | 212 | | | | 9.0 | |
Covenantsnot-to-compete | | | 22 | | | | 3.9 | | | | 22 | | | | 4.9 | |
| Tradenames | | | 8 | | | | 5.3 | | | | 10 | | | | 5.3 | |
| Other | | | 1 | | | | 3.4 | | | | 1 | | | | 3.4 | |
| | | | | | | | | | | | | | | | | |
| Total amortizable intangible assets | | $ | 735 | | | | 6.8 | | | $ | 725 | | | | 6.6 | |
| | | | | | | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
NOTE 8 — | GOODWILL AND INTANGIBLE ASSETS |
Goodwill
Goodwill allocated to Dell’s business segments as of January 30, 2009, and February 1, 2008, and changes in the carrying amount of goodwill for the fiscal year ended January 30, 2009, were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Americas
| | | EMEA
| | | APJ
| | | Global
| | | | |
| | | Commercial | | | Commercial | | | Commercial | | | Consumer | | | Total | |
| | | (in millions) | |
| |
| Balance at February 1, 2008 | | $ | 822 | | | $ | 412 | | | $ | 127 | | | $ | 287 | | | $ | 1,648 | |
| Goodwill acquired | | | 78 | | | | 37 | | | | 21 | | | | - | | | | 136 | |
| Adjustments to goodwill | | | (31 | ) | | | (14 | ) | | | (10 | ) | | | 8 | | | | (47 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at January 30, 2009 | | $ | 869 | | | $ | 435 | | | $ | 138 | | | $ | 295 | | | $ | 1,737 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | January 30,
| | | February 1,
| | | | | | | | | | |
| | | 2009 | | | 2008 | | | | | | | | | | |
| | | (in millions) | | | | | | | | | | |
| |
| Balance at beginning of the year | | $ | 1,648 | | | $ | 110 | | | | | | | | | | | | | |
| Goodwill acquired during the year | | | 136 | | | | 1,538 | | | | | | | | | | | | | |
| Adjustments to goodwill | | | (47 | ) | | | - | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at end of the year | | $ | 1,737 | | | $ | 1,648 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Goodwill is tested annually during the second fiscal quarter and whenever events or circumstances indicate an impairment may have occurred. If the carrying amount of goodwill exceeds its fair value, estimated based on discounted cash flow analyses, an impairment charge would be recorded. Based on the results of its annual impairment tests, Dell determined that no impairment of goodwill existed at August 1, 2008, and for the fiscal years ended January 30, 2009, and February 1, 2008. The goodwill adjustments are primarily the result of purchase price allocation adjustments related to the finalization of deferred tax calculations and the effects of foreign currency adjustments where the purchase price was recorded in entities where the local currency is the functional currency. In the fourth quarter of Fiscal 2009, Dell updated its annual analysis of potential triggering events for goodwill and indefinite lived intangible asset impairments. Based on this analysis, Dell concluded that there was no evidence that would indicate an impairment of goodwill or indefinite lived intangible assets.
Intangible Assets
Dell’s intangible assets associated with completed acquisitions at January 30, 2009, and February 1, 2008, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | January 30, 2009 | | | February 1, 2008 | |
| | | | | | Accumulated
| | | | | | | | | Accumulated
| | | | |
| | | Gross | | | Amortization | | | Net | | | Gross | | | Amortization | | | Net | |
| | | (in millions) | |
| |
| Technology | | $ | 524 | | | $ | (82 | ) | | $ | 442 | | | $ | 492 | | | $ | (16 | ) | | $ | 476 | |
| Customer relationships | | | 243 | | | | (38 | ) | | | 205 | | | | 231 | | | | (9 | ) | | | 222 | |
| Tradenames | | | 41 | | | | (9 | ) | | | 32 | | | | 39 | | | | (6 | ) | | | 33 | |
Covenantsnot-to-compete | | | 26 | | | | (6 | ) | | | 20 | | | | 23 | | | | (1 | ) | | | 22 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortizable intangible assets | | $ | 834 | | | $ | (135 | ) | | $ | 699 | | | $ | 785 | | | $ | (32 | ) | | $ | 753 | |
| Indefinite lived intangible assets | | | 25 | | | | - | | | | 25 | | | | 27 | | | | - | | | | 27 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets | | $ | 859 | | | $ | (135 | ) | | $ | 724 | | | $ | 812 | | | $ | (32 | ) | | $ | 780 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During Fiscal 2009 and Fiscal 2008, Dell recorded additions to intangible assets of $64 million and $762 million, respectively. Amortization expense related to finite-lived intangible assets was approximately $103 million and $27 million in Fiscal 2009 and in Fiscal 2008. During the year ended January 30, 2009, Dell did not record any impairment charges as a result of its analysis of its intangible assets.
Estimated future annual pre-tax amortization expense of finite-lived intangible assets as of January 30, 2009, over the next five fiscal years and thereafter is as follows:
| | | | | |
Fiscal Years | | (in millions) | |
| |
| 2010 | | $ | 159 | |
| 2011 | | | 144 | |
| 2012 | | | 124 | |
| 2013 | | | 100 | |
| 2014 | | | 69 | |
| Thereafter | | | 103 | |
| | | | | |
| Total | | $ | 699 | |
| | | | | |
| |
NOTE 9 — | WARRANTY LIABILITY AND RELATED DEFERRED SERVICE REVENUE |
Revenue from extended warrantyinfrastructure and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Dell records warranty liabilities at the time of sale for the estimated costs that may be incurred under its standard warranty. Changes in Dell’s deferred revenue for extended warranties, and warranty liability for standard warranties which are included in other current and non-current liabilities on Dell’s Consolidated Statements of Financial Position, are presented in the following tables:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
Deferred service revenue: | | | | | | | | | | | | |
| Deferred service revenue at beginning of year | | $ | 5,260 | | | $ | 4,221 | | | $ | 3,707 | |
Revenue deferred for new extended warranty and service contracts sold(b) | | | 3,545 | | | | 3,806 | | | | 3,188 | |
Revenue recognized(c) | | | (3,156 | ) | | | (2,767 | ) | | | (2,674 | ) |
| | | | | | | | | | | | | |
| Deferred service revenue at end of year | | $ | 5,649 | | | $ | 5,260 | | | $ | 4,221 | |
| | | | | | | | | | | | | |
| Current portion | | $ | 2,649 | | | $ | 2,486 | | | $ | 2,032 | |
| Non-current portion | | | 3,000 | | | | 2,774 | | | | 2,189 | |
| | | | | | | | | | | | | |
| Deferred service revenue at end of year | | $ | 5,649 | | | $ | 5,260 | | | $ | 4,221 | |
| | | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
Warranty liability: | | | | | | | | | | | | |
| Warranty liability at beginning of year | | $ | 929 | | | $ | 958 | | | $ | 951 | |
Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties(a)(b) | | | 1,180 | | | | 1,176 | | | | 1,255 | |
Service obligations honored(c) | | | (1,074 | ) | | | (1,205 | ) | | | (1,248 | ) |
| | | | | | | | | | | | | |
| Warranty liability at end of year | | $ | 1,035 | | | $ | 929 | | | $ | 958 | |
| | | | | | | | | | | | | |
| Current portion | | $ | 721 | | | $ | 690 | | | $ | 768 | |
| Non-current portion | | | 314 | | | | 239 | | | | 190 | |
| | | | | | | | | | | | | |
| Warranty liability at end of year | | $ | 1,035 | | | $ | 929 | | | $ | 958 | |
| | | | | | | | | | | | | |
| | |
(a) | | Changes in cost estimates related to pre-existing warranties are aggregated with accruals for new standard warranty contracts. Dell’s warranty liability process does not differentiate between estimates made for pre-existing warranties and new warranty obligations. |
|
(b) | | Includes the impact of foreign currency exchange rate fluctuations. |
|
(c) | | Fiscal 2008 and Fiscal 2007 amounts have been revised to include foreign currency exchange rate fluctuations in revenue deferred for new extended warranty and service contracts sold and costs accrued for new warranty contracts and changes in estimates for pre-existing warranties to conform to the current period presentation. |
| |
NOTE 10 — | COMMITMENTS AND CONTINGENCIES |
Severance Costs and Facility Closures — In Fiscal 2008, Dell announced a comprehensive review of costs that is currently ongoing. Since this announcement and through the end of Fiscal 2009, Dell reduced headcount and closed certain Dell facilities. Results of operations for Fiscal 2009 include net pre-tax charges of $282 million for these actions, which is comprised of $235 million related to headcount and a net $47 million related to facilities actions, including accelerated depreciation. Additionally, the sales of three facilities were finalized during Fiscal 2009 resulting in $44 million of proceeds reflected in cash from investing activities in the Consolidated Statements of Cash Flows. As of January 30, 2009, and February 1, 2008, the accrual related to these cost reductions and efficiency actions was $98 million and $35 million, respectively, which is included in accrued and other liabilities in the Consolidated Statements of Financial Position.
Lease Commitments — Dell leases property and equipment, manufacturing facilities, and office space under non-cancelable leases. Certain of these leases obligate Dell to pay taxes, maintenance, and repair costs. At January 30, 2009, future minimum lease payments under these non-cancelable leases are as follows: $89 million in Fiscal 2010; $77 million in Fiscal 2011; $63 million in Fiscal 2012; $42 million in Fiscal 2013; $34 million in Fiscal 2014; and $153 million thereafter.
Rent expense under all leases totaled $116 million, $118 million, and $78 million for Fiscal 2009, 2008, and 2007 respectively.
Restricted Cash — Pursuant to an agreement between DFS and CIT, Dell is required to maintain escrow cash accounts that are held as recourse reserves for credit losses, performance fee deposits related to Dell’s private label credit card, and deferred servicing revenue. Restricted cash in the amount of $213 million and $294 million is included in other current assets on Dell’s Consolidated Statements of Financial Position at January 30, 2009, and February 1, 2008, respectively.
Legal Matters — Dell is involved in various claims, suits, investigations, and legal proceedings. As required by SFAS No. 5,Accounting for Contingencies, Dell accrues a liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. Dell reviews these accruals at least quarterly and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. However, litigation is inherently unpredictable. Therefore, Dell could incur judgments or enter into settlements of claims that could adversely affect its operating results or cash flows in a particular period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a discussion of Dell’s significant legal matters.
| |
• | Investigations and Related Litigation— In August 2005, the SEC initiated an inquiry into certain of Dell’s accounting and financial reporting matters and requested that Dell provide certain documents. The SEC expanded that inquiry in June 2006 and entered a formal order of investigation in October 2006. The SEC’s requests for information were joined by a similar request from the United States Attorney for the Southern District of New York (“SDNY”), who subpoenaed documents related to Dell’s financial reporting from and after Fiscal 2002. In August 2006, because of potential issues identified in the course of responding to the SEC’s requests for information, Dell’s Audit Committee, on the recommendation of management and in consultation with PricewaterhouseCoopers LLP, Dell’s independent registered public accounting firm, initiated an independent investigation, which was completed in the third quarter of Fiscal 2008. Although the Audit Committee investigation has been completed, the investigations being conducted by the SEC and the SDNY are ongoing. Dell continues to cooperate with the SEC and the SDNY. |
|
| Dell and several of its current and former directors and officers were named as parties to securities, Employee Retirement Income Security Act of 1974 (“ERISA”), and shareholder derivative lawsuits all arising out of the same events and facts. |
|
| Four putative securities class actions filed between September 13, 2006 and January 31, 2007, in the Western District of Texas, Austin Division, against Dell and certain of its current and former officers were consolidated asIn re Dell Securities Litigation, and a lead plaintiff was appointed by the court. The lead plaintiff asserted claims under sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 based on alleged false and misleading disclosures or omissions regarding Dell’s financial statements, governmental investigations, internal controls, known battery problems and business model, and based on insiders’ sales of Dell securities. This action also included Dell’s independent registered public accounting firm, PricewaterhouseCoopers LLP, as a defendant. On October 6, 2008, the court dismissed all of the plaintiff’s claims with prejudice and without leave to amend. On November 3, 2008, the plaintiff filed a notice of appeal to the Fifth Circuit Court of Appeals with respect to the dismissal of Dell and the officer defendants. |
|
| Four other putative class actions filed between September 25, 2006 and October 5, 2006, in the Western District, Austin Division, by purported participants in the Dell 401(k) Plan were consolidated asIn re Dell ERISA Litigation, and lead plaintiffs were appointed by the court. The lead plaintiffs asserted claims under ERISA based on allegations that Dell and certain current and former directors and officers imprudently invested and managed participants’ funds and failed to disclose information regarding its stock held in the 401(k) Plan. On June 23, 2008, the court granted the defendants’ motion to dismiss as to the plaintiffs’ claims under ERISA based on allegations of imprudence, but the court denied the motion to dismiss as to the claims under ERISA based on allegations of a failure to accurately disclose information. On October 29, 2008, the court dismissed all of the individual plaintiffs’ claims with prejudice. |
|
| In addition, seven shareholder derivative lawsuits filed between September 29, 2006 and January 22, 2007, in three separate jurisdictions were consolidated asIn re Dell Derivative Litigationinto three actions. One of those consolidated actions was pending in the Western District of Texas, Austin Division, but was dismissed without prejudice by an order filed October 9, 2007. The second consolidated shareholder derivative action was pending in Delaware Chancery Court. On October 16, 2008, the Delaware court granted the parties’ stipulation to dismiss all of the plaintiffs’ claims in the Delaware lawsuit without prejudice. The third consolidated shareholder derivative action is pending in state district court in Williamson County, Texas. These shareholder derivative lawsuits named various current and former officers and directors as defendants and Dell as a nominal defendant, and asserted various claims derivatively on behalf of Dell under state law, including breaches of fiduciary duties. |
|
| The Board of Directors received a shareholder demand letter, dated November 12, 2008, asserting allegations similar to those made in the securities and derivative lawsuits against various current and former officers and directors and PricewaterhouseCoopers LLP, and requesting that the Board of Directors investigate and assert claims relating to those allegations on behalf of Dell. The Board of Directors will consider and address the demand. |
|
• | Copyright Levies— Proceedings against the IT industry in Germany seek to impose levies on equipment such as personal computers and multifunction devices that facilitate making private copies of copyrighted materials. The total levies due, if imposed, would be based on the number of products sold and the per-product amounts of the levies, which vary. Dell, along with other companies and various industry associations, are opposing these levies and instead are advocating compensation to rights holders through digital rights management systems. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
| On December 29, 2005, Zentralstelle Für private Überspielungrechte (“ZPÜ”), a joint association of various German collection societies, instituted arbitration proceedings against Dell’s German subsidiary before the Arbitration Body in Munich. ZPÜ claims a levy of €18.4 per PC that Dell sold in Germany from January 1, 2002, through December 31, 2005. On July 31, 2007, the Arbitration Body recommended a levy of €15 on each PC sold during that period for audio and visual copying capabilities. Dell and ZPÜ rejected the recommendation, and on February 21, 2008, ZPÜ filed a lawsuit in the German Regional Court in Munich. Dell plans to continue to defend this claim vigorously and does not expect the outcome to have a material adverse effect on its financial condition or results of operations. |
Dell is involved in various other claims, suits, investigations, and legal proceedings that arise from time to time in the ordinary course of its business. Dell does not expect that the outcome in any of these other legal proceedings, individually or collectively, will have a material adverse effect on its financial condition or results of operations.
Certain Concentrations — All of Dell’s foreign currency exchange and interest rate derivative instruments could involve elements of market and credit risk in excess of the amounts recognized in the consolidated financial statements. The counterparties to the financial instruments consist of a number of major financial institutions rated AA and A. In addition to limiting the amount of agreements and contracts it enters into with any one party, Dell monitors its positions with, and the credit quality of the counterparties to, these financial instruments. Dell does not anticipate nonperformance by any of the counterparties.
Dell’s investments in debt securities are in high quality financial institutions and companies. As part of its cash and risk management processes, Dell performs periodic evaluations of the credit standing of the institutions in accordance with its investment policy. Dell’s investments in debt securities have effective maturities of less than five years. Management believes that no significant concentration of credit risk for investments exists for Dell.
As of January 30, 2009, approximately 25% of Dell’s cash and cash equivalents were deposited with two large financial institutions.
Dell markets and sells its products and servicessolutions to large global and national corporate clients, governments, healthcare and education accounts, as well as small and medium businesses and individuals. No single customer accounted for more than 10% of Dell’s consolidated net revenue during Fiscal 2009, 2008, and 2007.
Dell purchases a number of components from single or limited sources. In some cases, alternative sources of supply are not available. In other cases, Dell may establish a working relationship with a single source or a limited number of sources if Dell believes it is advantageous due to performance, quality, support, delivery, capacity, or price considerations.
| |
NOTE 11 — | SEGMENT INFORMATION |
Dell conducts operations worldwide. Effective the first quarter of Fiscal 2009, Dell combined the consumer business of EMEA, APJ, and Americas International (formerly reported through Americas Commercial) with the U.S. Consumer business and re-aligned its management and financial reporting structure. As a result, effective May 2, 2008, Dell’s operating segments consisted of the following four segments: Americas Commercial, EMEA Commercial, APJ Commercial, and Global Consumer. Dell’s commercial businesscustomers. Public includes sales to corporate, government, healthcare, education,educational institutions, governments, health care organizations, and law enforcement agencies, among others. SMB includes sales of complete IT solutions to small and medium business customers, and value-added resellers and is managed through the Americas Commercial, EMEA Commercial, and APJ Commercial segments. The Americas Commercial segment, which is based in Round Rock, Texas, encompasses the U.S., Canada, and Latin America. The EMEA Commercial segment, based in Bracknell, England, covers Europe, the Middle East, and Africa; and the APJ Commercial segment, based in Singapore, encompasses the Asian countries of the Pacific Rim as well as Australia, New Zealand, and India. The Globalmedium-sized businesses. Consumer segment, which is based in Round Rock, Texas, includes global sales and product development forto individual consumers and retailers around the world. Dell revised previously reported operating segment information to conform to its new operating
The business segments disclosed in effect as of May 2, 2008.
On December 31, 2008, Dell announced its intent during Fiscal 2010 to move from geographic commercial segments to global business units reflecting the impact of globalization on its customer base. Customer requirements now share more commonalityaccompanying Consolidated Financial Statements are based on their sector rather than physical location. Dell expectsthis organizational structure and information reviewed by Dell's management to combine its current Americas Commercial, EMEA Commercial, and APJ Commercial segments and realign its management structure. After this realignment, Dell’s operating structure will consist ofevaluate the following segments: Global Large Enterprise, Global Public, Global Small and Medium Business, and its existing Global Consumer
87
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
segment. Dell will begin reporting these four global businesses once it completes the realignment of its management and financial reporting structure which is expected to be in the first half of Fiscal 2010.
Corporate expenses are included in Dell’sbusiness segment results. Dell's measure of segment operating income for management reporting purposes; however, with the adoption of SFAS 123(R), stock-based compensation expense is not allocated to Dell’s operating segments. Beginning in the fourth quarter of Fiscal 2008,purposes excludes severance and facility closure expenses, broad based long-term incentives, acquisition-related charges, such as in-process research and development and amortization of intangibles are not allocated to Dell’s operating segments. The asset totals disclosed by geography are directly managed by those regions and include accounts receivable, inventory, certain fixed assets, and certain other assets. Corporate assets primarily include cash and cash equivalents, investments, deferred tax assets, goodwill, intangible assets, and other assets.
intangibles.
The following tables presenttable presents net revenue by Dell’sDell's reportable global segments as well as a reconciliation of consolidated segment operating income to Dell’sDell's consolidated operating income:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
Net revenue | | | | | | | | | | | | |
| Americas Commercial | | $ | 28,614 | | | $ | 29,981 | | | $ | 28,289 | |
| EMEA Commercial | | | 13,617 | | | | 13,607 | | | | 11,842 | |
| APJ Commercial | | | 7,341 | | | | 7,167 | | | | 6,223 | |
| Global Consumer | | | 11,529 | | | | 10,378 | | | | 11,066 | |
| | | | | | | | | | | | | |
| Net revenue | | $ | 61,101 | | | $ | 61,133 | | | $ | 57,420 | |
| | | | | | | | | | | | | |
Consolidated operating income | | | | | | | | | | | | |
| Americas Commercial | | $ | 2,568 | | | $ | 2,566 | | | $ | 2,351 | |
| EMEA Commercial | | | 544 | | | | 978 | | | | 622 | |
| APJ Commercial | | | 458 | | | | 424 | | | | 335 | |
| Global Consumer | | | 143 | | | | 2 | | | | 130 | |
| | | | | | | | | | | | | |
| Consolidated segment operating income | | $ | 3,713 | | | $ | 3,970 | | | $ | 3,438 | |
| | | | | | | | | | | | | |
Stock-based compensation expense(a) | | | (418 | ) | | | (436 | ) | | | (368 | ) |
In-process research and development(b) | | | (2 | ) | | | (83 | ) | | | - | |
Amortization of intangible assets(b) | | | (103 | ) | | | (11 | ) | | | - | |
| | | | | | | | | | | | | |
| Consolidated operating income | | $ | 3,190 | | | $ | 3,440 | | | $ | 3,070 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions) |
| Net revenue: | | |
| | |
| | |
|
| Large Enterprise | | $ | 18,457 |
| | $ | 17,813 |
| | $ | 14,285 |
|
| Public | | 16,548 |
| | 16,851 |
| | 14,484 |
|
| Small and Medium Business | | 15,166 |
| | 14,473 |
| | 12,079 |
|
| Consumer | | 11,900 |
| | 12,357 |
| | 12,054 |
|
| Total | | $ | 62,071 |
| | $ | 61,494 |
| | $ | 52,902 |
|
| Consolidated operating income: | | |
| | |
| | |
|
| Large Enterprise | | $ | 1,854 |
| | $ | 1,473 |
| | $ | 819 |
|
| Public | | 1,644 |
| | 1,484 |
| | 1,361 |
|
| Small and Medium Business | | 1,665 |
| | 1,477 |
| | 1,040 |
|
| Consumer | | 324 |
| | 65 |
| | 107 |
|
| Consolidated segment operating income | | 5,487 |
| | 4,499 |
| | 3,327 |
|
Severance and facility actions and acquisition-related costs (a)(b) | | (313 | ) | | (227 | ) | | (597 | ) |
Broad based long-term incentives(a) | | (352 | ) | | (350 | ) | | (353 | ) |
| Amortization of intangible assets | | (391 | ) | | (349 | ) | | (205 | ) |
Other(c) | | — |
| | (140 | ) | | — |
|
| Total | | $ | 4,431 |
| | $ | 3,433 |
| | $ | 2,172 |
|
____________________
| | |
(a) | | Stock-basedBroad based long-term incentives includes stock-based compensation expense includes $104 million of expense for accelerated optionsand other long-term incentive awards, but excludes stock-based compensation related to acquisitions, which are included in Fiscal 2009 and $107 million of cash expense for expired stock options in Fiscal 2008.acquisition-related costs. See Note 514 of Notes to Consolidated Financial Statements for additional information. |
| |
(b) | Acquisition-related costs consist primarily of retention payments, integration costs, and consulting fees. |
| |
Prior to(c) | Other includes the fourth$100 million settlement for the SEC investigation and a $40 million settlement for a securities litigation lawsuit that were both incurred in the first quarter of Fiscal 2008, amortization of intangibles and IPR&D expenses of $16 million and $5 million are included in total consolidated segment operating income in Fiscal 2008 and 2007, respectively.2011. |
88
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents assets by Dell's reportable global segments. Segment assets primarily consist of accounts receivable and inventories.
|
| | | | | | | | |
| | | February 3,
2012 | | January 28,
2011 |
| | | (in millions) |
| Total assets: | | |
| | |
|
| Corporate | | $ | 36,171 |
| | $ | 30,264 |
|
| Large Enterprise | | 3,108 |
| | 2,934 |
|
| Public | | 2,330 |
| | 2,545 |
|
| Small and Medium Business | | 1,421 |
| | 1,398 |
|
| Consumer | | 1,503 |
| | 1,458 |
|
| Total | | $ | 44,533 |
| | $ | 38,599 |
|
The following tables presenttable presents depreciation expense and capital expenditures by Dell’sDell's reportable segments and assets by region:business segments:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions) |
| Depreciation expense: | | |
| | |
| | |
|
| Large Enterprise | | $ | 162 |
| | $ | 180 |
| | $ | 175 |
|
| Public | | 145 |
| | 170 |
| | 177 |
|
| Small and Medium Business | | 133 |
| | 146 |
| | 148 |
|
| Consumer | | 105 |
| | 125 |
| | 147 |
|
| Total | | $ | 545 |
| | $ | 621 |
| | $ | 647 |
|
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
Depreciation expense: | | | | | | | | | | | | |
| Americas Commercial | | $ | 355 | | | $ | 286 | | | $ | 214 | |
| EMEA Commercial | | | 101 | | | | 124 | | | | 95 | |
| APJ Commercial | | | 80 | | | | 86 | | | | 71 | |
| Global Consumer | | | 130 | | | | 103 | | | | 91 | |
| | | | | | | | | | | | | |
| Total | | $ | 666 | | | $ | 599 | | | $ | 471 | |
| | | | | | | | | | | | | |
Capital expenditures: | | | | | | | | | | | | |
| Americas Commercial | | $ | 242 | | | $ | 387 | | | $ | 490 | |
| EMEA Commercial | | | 54 | | | | 179 | | | | 125 | |
| APJ Commercial | | | 56 | | | | 125 | | | | 103 | |
| Global Consumer | | | 88 | | | | 140 | | | | 178 | |
| | | | | | | | | | | | | |
| Total | | $ | 440 | | | $ | 831 | | | $ | 896 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | January 30,
| | | February 1,
| | | | |
| | | 2009 | | | 2008 | | | | |
| | | (in millions) | | | | |
| |
Assets: | | | | | | | | | | | | |
| Corporate | | $ | 12,664 | | | $ | 15,336 | | | | | |
| Americas | | | 8,781 | | | | 6,524 | | | | | |
| EMEA | | | 3,026 | | | | 3,597 | | | | | |
| APJ | | | 2,029 | | | | 2,104 | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | 26,500 | | | $ | 27,561 | | | | | |
| | | | | | | | | | | | | |
The following tables present net revenue and long-lived asset information allocated between the U.S. and foreign countries:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
Net revenue: | | | | | | | | | | | | |
| United States | | $ | 31,569 | | | $ | 32,687 | | | $ | 32,361 | |
| Foreign countries | | | 29,532 | | | | 28,446 | | | | 25,059 | |
| | | | | | | | | | | | | |
| Net revenue | | $ | 61,101 | | | $ | 61,133 | | | $ | 57,420 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions) |
| Net revenue: | | |
| | |
| | |
|
| United States | | $ | 30,404 |
| | $ | 31,912 |
| | $ | 28,053 |
|
| Foreign countries | | 31,667 |
| | 29,582 |
| | 24,849 |
|
| Total | | $ | 62,071 |
| | $ | 61,494 |
| | $ | 52,902 |
|
DELL INC.
|
| | | | | | | | |
| | | February 3,
2012 | | January 28,
2011 |
| | | (in millions) |
| Long-lived assets: | | | | |
| United States | | $ | 1,577 |
| | $ | 1,419 |
|
| Foreign countries | | 547 |
| | 534 |
|
| Total | | $ | 2,124 |
| | $ | 1,953 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in millions) | |
| |
Long-lived assets: | | | | | | | | | | | | |
| United States | | $ | 1,495 | | | $ | 1,622 | | | $ | 1,538 | |
| Foreign countries | | | 782 | | | | 1,046 | | | | 871 | |
| | | | | | | | | | | | | |
| Long-lived assets | | $ | 2,277 | | | $ | 2,668 | | | $ | 2,409 | |
| | | | | | | | | | | | | |
The allocation between domestic and foreign net revenue is based on the location of the customers. Net revenue and long-lived assets from any single foreign country did not compriseconstitute more than 10% of Dell’sDell's consolidated net revenues or long-lived assets during Fiscal 2009, 2008, and 2007. No single customer accounted for more than 10%2012, Fiscal 2011, or Fiscal 2010.
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents net revenue by product groups:and services categories:
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended | | |
| | | January 30,
| | February 1,
| | February 2,
| | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | | Fiscal Year Ended |
| | | (in millions) | | | February 3,
2012 | | January 28,
2011 | | January 29,
2010 |
| | | (in millions) |
Net revenue: | | | | | | | | | | | | | | |
| | |
| | |
|
| Enterprise Solutions and Services: | | | | | | | |
| Enterprise Solutions: | | | |
| | |
| | |
|
| Servers and networking | | | $ | 8,336 |
| | $ | 7,609 |
| | $ | 6,032 |
|
| Storage | | | 1,943 |
| | 2,295 |
| | 2,192 |
|
| Services | | | 8,322 |
| | 7,673 |
| | 5,622 |
|
| Software and peripherals | | | 10,222 |
| | 10,261 |
| | 9,499 |
|
| Client: | | | |
| | |
| | |
|
| Mobility | | $ | 18,638 | | | $ | 17,423 | | | $ | 15,480 | | | 19,104 |
| | 18,971 |
| | 16,610 |
|
| Desktop PCs | | | 17,244 | | | | 19,573 | | | | 19,815 | | | 14,144 |
| | 14,685 |
| | 12,947 |
|
| Software and peripherals | | | 10,603 | | | | 9,908 | | | | 9,001 | | |
| Servers and networking | | | 6,275 | | | | 6,474 | | | | 5,805 | | |
| Enhanced services | | | 5,715 | | | | 5,320 | | | | 5,063 | | |
| Storage | | | 2,626 | | | | 2,435 | | | | 2,256 | | |
| | | | | | | | | |
| Net revenue | | $ | 61,101 | | | $ | 61,133 | | | $ | 57,420 | | | $ | 62,071 |
| | $ | 61,494 |
| | $ | 52,902 |
|
| | | | | | | | | |
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16 — SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
Supplemental Consolidated Statements of Financial Position Information
The following table provides information on amounts included in Accounts receivable, net, Inventories, net, Property, plant, and equipment, net, Accrued and other liabilities, and Other non-current liabilities, as well as prepaid expenses as of February 3, 2012, and January 28, 2011.
|
| | | | | | | | |
| | | February 3,
2012 | | January 28,
2011 |
| | | (in millions) |
| Accounts receivable, net: | | |
| | |
|
| Gross accounts receivable | | $ | 6,539 |
| | $ | 6,589 |
|
| Allowance for doubtful accounts | | (63 | ) | | (96 | ) |
| Total | | $ | 6,476 |
| | $ | 6,493 |
|
| Inventories, net: | | |
| | |
|
| Production materials | | $ | 753 |
| | $ | 593 |
|
| Work-in-process | | 239 |
| | 232 |
|
| Finished goods | | 412 |
| | 476 |
|
| Total | | $ | 1,404 |
| | $ | 1,301 |
|
Prepaid expenses(a) | | $ | 362 |
| | $ | 374 |
|
| Property, plant, and equipment, net: | | |
| | |
|
| Computer equipment | | $ | 2,309 |
| | $ | 2,275 |
|
| Land and buildings | | 1,843 |
| | 1,674 |
|
| Machinery and other equipment | | 782 |
| | 780 |
|
| Total property, plant, and equipment | | 4,934 |
| | 4,729 |
|
| Accumulated depreciation and amortization | | (2,810 | ) | | (2,776 | ) |
| Total | | $ | 2,124 |
| | $ | 1,953 |
|
_____________________
| |
NOTE 12 —(a)
| SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION |
| | | | | | | | | |
Supplemental Consolidated Statements of
| | January 30,
| | | February 1,
| |
| Financial Position Information: | | 2009 | | | 2008 | |
| | | (in millions) | |
| |
| Accounts receivable, net: | | | | | | | | |
| Gross accounts receivable | | $ | 4,843 | | | $ | 6,064 | |
| Allowance for doubtful accounts | | | (112 | ) | | | (103 | ) |
| | | | | | | | | |
| Total | | $ | 4,731 | | | $ | 5,961 | |
| | | | | | | | | |
| Inventories, net: | | | | | | | | |
Production materials(a) | | $ | 454 | | | $ | 714 | |
Work-in-process(a) | | | 150 | | | | 144 | |
Finished goods(a) | | | 263 | | | | 322 | |
| | | | | | | | | |
| Total | | $ | 867 | | | $ | 1,180 | |
| | | | | | | | | |
Prepaid expenses(b) | | $ | 447 | | | $ | 370 | |
| | | | | | | | | |
| Property, plant, and equipment, net: | | | | | | | | |
| Computer equipment | | $ | 1,967 | | | $ | 1,968 | |
| Land and buildings | | | 1,544 | | | | 1,635 | |
| Machinery and other equipment | | | 999 | | | | 1,011 | |
| | | | | | | | | |
| Total property, plant, and equipment | | | 4,510 | | | | 4,614 | |
| Accumulated depreciation and amortization | | | (2,233 | ) | | | (1,946 | ) |
| | | | | | | | | |
| Total | | $ | 2,277 | | | $ | 2,668 | |
| | | | | | | | | |
| Accrued and other current liabilities: | | | | | | | | |
| Warranty liability | | $ | 721 | | | $ | 690 | |
| Income taxes | | | 6 | | | | 99 | |
| Compensation | | | 817 | | | | 1,131 | |
| Other | | | 2,244 | | | | 2,403 | |
| | | | | | | | | |
| Total | | $ | 3,788 | | | $ | 4,323 | |
| | | | | | | | | |
| Other non-current liabilities: | | | | | | | | |
| Warranty liability | | $ | 314 | | | $ | 239 | |
| Income taxes | | | 1,738 | | | | 1,463 | |
| Other | | | 420 | | | | 368 | |
| | | | | | | | | |
| Total | | $ | 2,472 | | | $ | 2,070 | |
| | | | | | | | | |
| | |
(a) | | Certain prior period amounts have been changed to conform to the current year presentation. There is no impact to the consolidated financial statements as a result of this change. |
| | |
(b) | | Prepaid expenses are included in other current assets onin the Consolidated StatementStatements of Financial Position. |
91
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental Consolidated Statements of Financial Position Information (cont.)
|
| | | | | | | | |
| | | February 3,
2012 | | January 28,
2011 |
| | | (in millions) |
| Accrued and other current liabilities: | | |
| | |
|
| Compensation | | $ | 1,604 |
| | $ | 1,550 |
|
| Warranty liability | | 572 |
| | 575 |
|
| Income and other taxes | | 432 |
| | 529 |
|
| Other | | 1,326 |
| | 1,527 |
|
| Total | | $ | 3,934 |
| | $ | 4,181 |
|
| Other non-current liabilities: | | |
| | |
|
| Warranty liability | | $ | 316 |
| | $ | 320 |
|
| Unrecognized tax benefits, net | | 2,563 |
| | 2,293 |
|
| Deferred tax liabilities | | 405 |
| | — |
|
| Other | | 108 |
| | 73 |
|
| Total | | $ | 3,392 |
| | $ | 2,686 |
|
Supplemental Consolidated Statements of Income
The table below provides a detailed presentationdetails of investmentinterest and other, income, net for Fiscal 2009,2012, Fiscal 2008,2011, and Fiscal 2007:2010:
| | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | January 30,
| | | February 1,
| | | February 2,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | (in millions) | | | | |
| |
| Investment and other income, net: | | | | | | | | | | | | |
| Investment income, primarily interest | | $ | 180 | | | $ | 496 | | | $ | 368 | |
| (Losses) gains on investments, net | | | (10 | ) | | | 14 | | | | (5 | ) |
| Interest expense | | | (93 | ) | | | (45 | ) | | | (45 | ) |
| CIT minority interest | | | - | | | | (29 | ) | | | (23 | ) |
| Foreign exchange | | | 115 | | | | (30 | ) | | | (37 | ) |
| Gain on sale of building | | | - | | | | - | | | | 36 | |
| Other | | | (58 | ) | | | (19 | ) | | | (19 | ) |
| | | | | | | | | | | | | |
| Investment and other income, net | | $ | 134 | | | $ | 387 | | | $ | 275 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | 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 | ) |
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Valuation and Qualifying Accounts
|
| | | | | | | | | | | | | | | | | | |
Fiscal Year | | Description | | Balance at Beginning of Period | | Charged to Income Statement | | Charged to Allowance | | Balance at End of Period |
| Trade Receivables: |
| 2012 | | Allowance for doubtful accounts | | $ | 96 |
| | $ | 90 |
| | $ | 123 |
| | $ | 63 |
|
| 2011 | | Allowance for doubtful accounts | | $ | 115 |
| | $ | 124 |
| | $ | 143 |
| | $ | 96 |
|
| 2010 | | Allowance for doubtful accounts | | $ | 112 |
| | $ | 185 |
| | $ | 182 |
| | $ | 115 |
|
Customer Financing Receivables(a): |
| 2012 | | Allowance for doubtful accounts | | $ | 241 |
| | $ | 144 |
| | $ | 183 |
| | $ | 202 |
|
| 2011 | | Allowance for doubtful accounts | | $ | 237 |
| | $ | 258 |
| | $ | 254 |
| | $ | 241 |
|
| 2010 | | Allowance for doubtful accounts | | $ | 149 |
| | $ | 244 |
| | $ | 156 |
| | $ | 237 |
|
| Trade Receivables: |
| 2012 | | Allowance for customer returns | | $ | 102 |
| | $ | 607 |
| | $ | 623 |
| | $ | 86 |
|
| 2011 | | Allowance for customer returns | | $ | 79 |
| | $ | 581 |
| | $ | 558 |
| | $ | 102 |
|
| 2010 | | Allowance for customer returns | | $ | 69 |
| | $ | 541 |
| | $ | 531 |
| | $ | 79 |
|
| |
NOTE 13 —(a)
| UNAUDITED QUARTERLY RESULTS AND STOCK PRICESCharge-offs to the allowance for financing receivable losses for customer financing receivables includes principal and interest. |
Unaudited Quarterly ResultsDELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17 — UNAUDITED QUARTERLY RESULTS
The following tables present selected unaudited Consolidated Statements of Income and stock sales price data for each quarter of Fiscal 20092012 and Fiscal 2008:2011:
| | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2009 | | | | | | | | | | |
| | | First
| | Second
| | Third
| | Fourth
| | | Fiscal Year 2012 |
| | | Quarter | | Quarter | | Quarter | | Quarter | | | First | | Second | | Third | | Fourth |
| | | (in millions, except per share data) | | | Quarter | | Quarter | | Quarter | | Quarter |
| | | (in millions, except per share data) |
| Net revenue | | $ | 16,077 | | | $ | 16,434 | | | $ | 15,162 | | | $ | 13,428 | | | $ | 15,017 |
| | $ | 15,658 |
| | $ | 15,365 |
| | $ | 16,031 |
|
| Gross margin | | $ | 2,965 | | | $ | 2,827 | | | $ | 2,853 | | | $ | 2,312 | | | $ | 3,432 |
| | $ | 3,525 |
| | $ | 3,469 |
| | $ | 3,385 |
|
| Net income | | $ | 784 | | | $ | 616 | | | $ | 727 | | | $ | 351 | | | $ | 945 |
| | $ | 890 |
| | $ | 893 |
| | $ | 764 |
|
| Earnings per common share: | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | |
| Basic | | $ | 0.39 | | | $ | 0.31 | | | $ | 0.37 | | | $ | 0.18 | | | $ | 0.50 |
| | $ | 0.48 |
| | $ | 0.49 |
| | $ | 0.43 |
|
| Diluted | | $ | 0.38 | | | $ | 0.31 | | | $ | 0.37 | | | $ | 0.18 | | | $ | 0.49 |
| | $ | 0.48 |
| | $ | 0.49 |
| | $ | 0.43 |
|
| Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 2,036 | | | | 1,991 | | | | 1,953 | | | | 1,944 | | | 1,908 |
| | 1,858 |
| | 1,813 |
| | 1,778 |
|
| Diluted | | | 2,040 | | | | 1,999 | | | | 1,957 | | | | 1,948 | | | 1,923 |
| | 1,871 |
| | 1,828 |
| | 1,796 |
|
| Stock sales price per share: | | | | | | | | | | | | | | | | | |
| High | | $ | 21.18 | | | $ | 25.26 | | | $ | 26.04 | | | $ | 13.32 | | |
| Low | | $ | 18.13 | | | $ | 18.66 | | | $ | 10.59 | | | $ | 8.72 | | |
| | | | | | | | | | |
| | | | Fiscal Year 2011 |
| | | | First | | Second | | Third | | Fourth |
| | | | Quarter | | Quarter | | Quarter | | Quarter |
| | | | (in millions, except per share data) |
| Net revenue | | | $ | 14,874 |
| | $ | 15,534 |
| | $ | 15,394 |
| | $ | 15,692 |
|
| Gross margin | | | $ | 2,516 |
| | $ | 2,586 |
| | $ | 3,003 |
| | $ | 3,291 |
|
| Net income | | | $ | 341 |
| | $ | 545 |
| | $ | 822 |
| | $ | 927 |
|
| Earnings per share: | | | |
| | |
| | |
| | |
|
| Basic | | | $ | 0.17 |
| | $ | 0.28 |
| | $ | 0.42 |
| | $ | 0.48 |
|
| Diluted | | | $ | 0.17 |
| | $ | 0.28 |
| | $ | 0.42 |
| | $ | 0.48 |
|
| Weighted-average shares outstanding: | | | |
| | |
| | |
| | |
|
| Basic | | | 1,961 |
| | 1,952 |
| | 1,939 |
| | 1,924 |
|
| Diluted | | | 1,973 |
| | 1,960 |
| | 1,949 |
| | 1,938 |
|
92
107
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2008 | |
| | | First
| | | Second
| | | Third
| | | Fourth
| |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| | | (in millions, except per share data) | |
| |
| Net revenue | | $ | 14,722 | | | $ | 14,776 | | | $ | 15,646 | | | $ | 15,989 | |
| Gross margin | | $ | 2,838 | | | $ | 2,951 | | | $ | 2,888 | | | $ | 2,994 | |
| Net income | | $ | 756 | | | $ | 746 | | | $ | 766 | | | $ | 679 | |
| Earnings per common share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.34 | | | $ | 0.33 | | | $ | 0.34 | | | $ | 0.31 | |
| Diluted | | $ | 0.34 | | | $ | 0.33 | | | $ | 0.34 | | | $ | 0.31 | |
| Weighted-average shares outstanding: | | | | | | | | | | | | | | | | |
| Basic | | | 2,234 | | | | 2,237 | | | | 2,236 | | | | 2,184 | |
| Diluted | | | 2,254 | | | | 2,264 | | | | 2,266 | | | | 2,201 | |
| Stock sales price per share: | | | | | | | | | | | | | | | | |
| High | | $ | 25.95 | | | $ | 29.61 | | | $ | 30.77 | | | $ | 30.37 | |
| Low | | $ | 21.61 | | | $ | 24.64 | | | $ | 24.96 | | | $ | 18.87 | |
93
ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Not applicable.
ITEM 9A — CONTROLS AND PROCEDURES
| |
ITEM 9A — | CONTROLS AND PROCEDURES |
This Report includesExhibits 31.1 and 31.2 to this report include the certifications of our Chief Executive Officer and Chief Financial Officer required byRule 13a-14 of under the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 9A includes information concerning the controls and control evaluations referred to in those certifications.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this Report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of January 30, 2009. Based on that evaluation, our management has concluded that our disclosure controls and procedures were effective as of January 30, 2009.
Management’sManagement's Report on Internal Control over Financial Reporting
Management, under the supervision of the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined inRules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (“GAAP”).GAAP. Internal control over financial reporting includes those policies and procedures which (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.
In connection with the preparation of this Report,report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 30, 2009February 3, 2012, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of that evaluation, management has concluded that our internal control over financial reporting was effective as of January 30, 2009.February 3, 2012. The effectiveness of our internal control over financial reporting as of January 30, 2009February 3, 2012, has also been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included in “Part II — Item 8 — Financial Statements and Supplementary Data.”
Changes in Internal Control over Financial Reporting
Dell’sDell's management, with the participation of Dell’sDell's Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in Dell’sDell's internal control over financial reporting occurred during the fourth quarter of Fiscal 2009.2012. Based on thattheir evaluation, management concluded that there has been no change in Dell’sDell's internal control over financial reporting during the fourth quarter of Fiscal 20092012 that has materially affected, or is reasonably likely to materially affect, Dell’sDell's internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of February 3, 2012. Based on that evaluation, our management has concluded that our disclosure controls and procedures were effective as of February 3, 2012.
Inherent Limitations overin Internal Controls
Our system of controls is designed to provide reasonable, not absolute, assurance regarding the reliability and integrity of accounting and financial reporting. Management does not expect that our disclosure controls and procedures or our internal control over financial
94
reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. These inherent limitations include the following:
Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or
| |
• | Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes. |
|
• | Controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override. |
|
• | The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. |
|
• | Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. |
|
• | The design of a control system must reflect the fact that resources are constrained, and the benefits of controls must be considered relative to their costs. |
mistakes.
Controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override.
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures.
The design of a control system must reflect the fact that resources are constrained, and the benefits of controls must be considered relative to their costs.
BecauseITEM 9B — OTHER INFORMATION
None.
PART III
ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a code of ethics applicable to our principal executive officer and other senior financial officers, who include our principal financial officer, principal accounting officer or controller, and persons performing similar functions. The code of ethics, which we refer to as our Code of Conduct, is available on our Internet website at www.dell.com. To the extent required by SEC rules, we intend to disclose any amendments to this code and any waiver of a provision of the inherent limitations in all control systems, no evaluationcode for the benefit of controls can provide absolute assuranceour principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our website within any period that all control issues and instances of fraud, if any, have been detected.may be required under SEC rules from time to time.
| |
ITEM 9B — | OTHER INFORMATION |
None.
95
PART III
The information called for by Part III ofForm 10-K (Item 10See “Part I — Directors, Executive Officers and Corporate Governance, Item 11 — Executive Compensation, Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, Item 13 — Certain Relationships and Related Transactions, and Director Independence, and Item 14 — Principal Accountant Fees and Services), to the extent not set forth herein under “Item 1 — Business — Executive Officers of Dell,”Dell” for information about our executive officers, which is incorporated by reference from Dell’sin this Item 10. Other information required by this Item 10 is incorporated herein by reference to our definitive proxy statement relating to the 2009for our 2012 annual meeting of stockholders. Suchstockholders, referred to as the “2012 proxy statement,” which we will be filedfile with the Securities and Exchange Commission withinSEC on or before 120 days after our 2012 fiscal year-end, and which will appear in the end2012 proxy statement under the captions “Proposal 1 — Election of the fiscal year to which this report relates.Directors” and “Additional Information — Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11 — EXECUTIVE COMPENSATION
Information required by this Item 11 is incorporated herein by reference to the 2012 proxy statement, including the information in the 2012 proxy statement appearing under the captions “Proposal 1 — Election of Directors — Director Compensation” and “Executive Compensation.”
ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this Item 12 is incorporated herein by reference to the 2012 proxy statement, including the information in the 2012 proxy statement appearing under the captions “Stock Ownership” and “Executive Compensation — Equity Compensation Plans.”
ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item 13 is incorporated herein by reference to the 2012 proxy statement, including the information in the 2012 proxy statement appearing under the captions “Proposal 1 — Elections of Directors” and “Additional Information — Certain Relationships and Related Transactions.”
ITEM 14 — PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item 14 is incorporated herein by reference to the 2012 proxy statement, including the information in the 2012 proxy statement appearing under the caption “Proposal 2 — Ratification of Independent Auditor.”
PART IV
| |
ITEM 15 — | ITEM 15 — EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
Financial Statements
The following financial statements are filed as a part of this report under “Part II — Item 8 — Financial Statements and Supplementary Data:”Data”:
| | | | |
| |
| | Page |
|
| Financial Statements: | | | | |
| | | 50 | |
| | | 51 | |
Consolidated Statements of Income for the fiscal years ended February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007January 29, 2010 | | | 52 | |
Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007January 29, 2010 | | | 53 | |
Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 3, 2012, January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007January 29, 2010 | | | 54 | |
| | | 55 | |
A list of the exhibits filed or furnished with this report (or incorporated by reference to exhibits previously filed or furnished) is provided in the Exhibit index on page 100115 of this report.
96
Financial Statement Schedule
The following financial statement schedule is filed as a part of this report under Schedule II immediately preceding the signature page: Schedule II — Valuation and Qualifying Accounts for the three fiscal years ended February 3, 2012,January 30, 2009, February 1, 2008,28, 2011, and February 2, 2007.January 29, 2010 is included in Note 16 of Notes to Consolidated Financial Statements included in "Part II — Item 8 — Financial Statements and Supplementary Data." All other schedules called for byForm 10-K are omitted because they are inapplicable or the required information is shown in the consolidated financial statements, or notes thereto, included herein.
SIGNATURES
DELL INC.
VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | | | | |
| | | | | Balance at
| | | Charged to
| | | | | | Balance
| |
Fiscal
| | | | Beginning
| | | Income
| | | Charged to
| | | at End of
| |
Year | | Description | | of Period | | | Statement | | | Allowance | | | Period | |
| |
| | | | | | | | | | | | | | | | | |
| Trade Receivables: | | | | | | | | | | | | | | | | |
| 2009 | | Allowance for doubtful accounts | | $ | 103 | | | $ | 133 | | | $ | 124 | | | $ | 112 | |
| 2008 | | Allowance for doubtful accounts | | $ | 126 | | | $ | 82 | | | $ | 105 | | | $ | 103 | |
| 2007 | | Allowance for doubtful accounts | | $ | 96 | | | $ | 107 | | | $ | 77 | | | $ | 126 | |
| | | | | | | | | | | | | | | | | |
Customer Financing Receivables:(a) | | | | | | | | | | | | | | | | |
| 2009 | | Allowance for financing receivable losses | | $ | 96 | | | $ | 159 | | | $ | 106 | | | $ | 149 | |
| 2008 | | Allowance for financing receivable losses | | $ | 39 | | | $ | 105 | | | $ | 48 | | | $ | 96 | |
| 2007 | | Allowance for financing receivable losses | | $ | 22 | | | $ | 40 | | | $ | 23 | | | $ | 39 | |
| | | | | | | | | | | | | | | | | |
| Trade Receivables: | | | | | | | | | | | | | | | | |
| 2009 | | Allowance for customer returns | | $ | 91 | | | $ | 401 | | | $ | 423 | | | $ | 69 | |
| 2008 | | Allowance for customer returns | | $ | 53 | | | $ | 475 | | | $ | 437 | | | $ | 91 | |
| 2007 | | Allowance for customer returns | | $ | 57 | | | $ | 387 | | | $ | 391 | | | $ | 53 | |
| | |
(a) | | Charge-offs to the allowance for doubtful accounts for customer financing receivables includes principal and interest. |
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | DELL INC. |
| | |
| By: | /s/ MICHAEL S. DELL |
| | Michael S. Dell |
| | Chairman and Chief Executive Officer |
| | (Duly authorized officer) |
Michael S. DellDate: March 13, 2012
Chairman and Chief Executive Officer
98
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and onas of the datesdate indicated.
|
| | | | | | |
| Name | | Title | | Date |
| | | | |
| /s/ MICHAEL S. DELL | | Chairman and Chief Executive Officer (principal executive officer) | | March 13, 2012 |
| Michael S. Dell | | | |
| | | | |
| /s/ JAMES W. BREYER | | Director | | March 13, 2012 |
| James W. Breyer | | | | |
| | | | |
| /s/ DONALD J. CARTY | | Director | | March 13, 2012 |
| Donald J. Carty | | | | |
| | | | |
| /s/ JANET F. CLARK | | Director | | March 13, 2012 |
| Janet F. Clark | | | | |
| | | | |
| /s/ LAURA CONIGLIARO | | Director | | March 13, 2012 |
Laura Conigliaro
| | | | |
| | | | |
| /s/ KENNETH M. DUBERSTEIN | | Director | | March 13, 2012 |
| Kenneth M. Duberstein | | | | |
| | | | |
| /s/ WILLIAM H. GRAY, III | | Director | | March 13, 2012 |
| William H. Gray, III | | | | |
| | | | | |
/s/ MICHAEL S. DELLGERARD J. KLEISTERLEE
Michael S. Dell | | Chairman and Chief Executive Officer (principal executive officer)Director | | March 26, 200913, 2012 |
| Gerard J. Kleisterlee | | | | |
| | | | | |
/s/ DONALD J. CARTYTHOMAS W. LUCE, III
Donald J. Carty | | Director | | March 26, 200913, 2012 |
| Thomas W. Luce, III | | | | |
| | | | | |
/s/ WILLIAM H. GRAY, IIIKLAUS S. LUFT
William H. Gray, III | | Director | | March 26, 200913, 2012 |
| Klaus S. Luft | | | | |
| | | | | |
/s/ SALLIE L. KRAWCHECKALEX J. MANDL
Sallie L. Krawcheck | | Director | | March 26, 200913, 2012 |
| Alex J. Mandl | | | | |
| | | | | |
/s/ ALAN G. LAFLEYSHANTANU NARAYEN
Alan G. Lafley | | Director | | March 26, 200913, 2012 |
| Shantanu Narayen | | | | |
| | | | | |
/s/ JUDY C. LEWENTH. ROSS PEROT, JR.
Judy C. Lewent | | Director | | March 26, 200913, 2012 |
| H. Ross Perot, Jr. | | | | |
| | | | | |
/s/ THOMAS W. LUCE IIIBRIAN T. GLADDEN
Thomas W. Luce III | | DirectorSenior Vice President and Chief Financial Officer (principal financial officer) | | March 26, 200913, 2012 |
| Brian T. Gladden | | | |
| | | | | |
/s/ KLAUS S. LUFTTHOMAS W. SWEET
Klaus S. Luft | | DirectorVice President, Corporate Finance and Chief Accounting Officer (principal accounting officer) | | March 26, 200913, 2012 |
| Thomas W. Sweet | | | |
Exhibits
/s/ ALEX J. MANDL
Alex J. Mandl | | Director | | March 26, 2009 |
| | | | |
/s/ MICHAEL A. MILES
Michael A. Miles | | Director | | March 26, 2009 |
| | | | |
/s/ SAMUEL A. NUNN, JR.
Samuel A. Nunn, Jr. | | Director | | March 26, 2009 |
| | | | |
/s/ BRIAN T. GLADDEN
Brian T. Gladden | | Senior Vice President and Chief Financial Officer | | March 26, 2009 |
| | | | |
/s/ THOMAS W. SWEET
Thomas W. Sweet | | Vice President, Corporate Finance
(principal accounting officer) | | March 26, 2009 |
99
Exhibits
| | | | |
Exhibit
| | | | |
| No. | | | | Description of Exhibit |
| 3.1 |
3.1 | | — |
| | Restated Certificate of Incorporation filed February 1, 2006 (incorporated by reference to Exhibit 3.3 of Dell’s Current Report onForm 8-K filed on February 2, 2006, Commission FileNo. 0-17017) |
3.2 | | — | | Restated Bylaws, as amended and effective March 8, 2007 (incorporated by reference to Exhibit 3.1 of Dell’s Currentthe Quarterly Report onForm 8-K filed on March 13, 2007,10-Q of Dell Inc. (“Dell”) for the fiscal quarter ended April 29, 2011, Commission FileNo. 0-17017)
|
| 3.2 | | | — |
| | Restated Bylaws, as amended and effective as of August 16, 2010 (incorporated by reference to Exhibit 3.2 of Dell's Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 2010, Commission File No. 0-17017)
|
| 4.1 | | | — |
| | Indenture, dated as of April 27, 1998, between Dell Computer Corporation and Chase Bank of Texas, National Association (incorporated by reference to Exhibit 99.2 of Dell’sDell's Current Report onForm 8-K filed April 28, 1998, Commission FileNo. 0-17017)
|
| 4.2 | | | — |
| | Officers’Officers' Certificate pursuant to Section 301 of the Indenture establishing the terms of Dell’sDell's 7.10% Senior Debentures Due 2028 (incorporated by reference to Exhibit 99.4 of Dell’sDell's Current Report onForm 8-K filed April 28, 1998, Commission FileNo. 0-17017)
|
| 4.3 | | | — |
| | Form of Dell’sDell's 7.10% Senior Debentures Due 2028 (incorporated by reference to Exhibit 99.6 of Dell’sDell's Current Report onForm 8-K filed April 28, 1998, Commission FileNo. 0-17017)
|
| 4.4 | | | — |
| | Indenture, dated as of April 17, 2008, between Dell Inc. and The Bank of New York Mellon Trust Company, N.A. (formerly The Bank of New York Trust Company, N.A.), as trustee (including the form of notes), (incorporated by reference to Exhibit 4.1 of Dell’sDell's Current Report onForm 8-K filed April 17, 2008, Commission fileFile No. 0-17017)
|
10.1*4.5 | | | — |
| | Indenture, dated as of April 6, 2009, between Dell and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Dell's Current Report on Form 8-K filed April 6, 2009, Commission File No. 0-17017)
|
| 4.6 | | | — |
| | First Supplemental Indenture, dated April 6, 2009, between Dell and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 of Dell's Current Report on Form 8-K filed April 6, 2009, Commission File No. 0-17017)
|
| 4.7 | | | — |
| | Form of 5.625% Notes due 2014 (incorporated by reference to Exhibit 4.3 of Dell's Current Report on Form 8-K filed April 6, 2009, Commission File No. 0‑17017)
|
| 4.8 | | | — |
| | Second Supplemental Indenture, dated June 15, 2009, between Dell and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Dell's Current Report on Form 8-K filed June 15, 2009, Commission File No. 0-17017)
|
| 4.9 | | | — |
| | Form of 3.375% Notes due 2012 (incorporated by reference to Exhibit 4.2 of Dell's Current Report on Form 8-K filed June 15, 2009, Commission File No. 0‑17017) |
| 4.10 | | | — |
| | Form of 5.875% Notes due 2019 (incorporated by reference to Exhibit 4.3 of Dell's Current Report on Form 8-K filed June 15, 2009, Commission File No. 0‑17017)
|
| 4.11 | | | — |
| | Third Supplemental Indenture, dated September 10, 2010, between Dell and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Dell's Current Report on Form 8-K filed September 10, 2010, Commission File No. 0-17017)
|
| 4.12 | | | — |
| | Form of 1.40% Notes due 2013 (incorporated by reference to Exhibit 4.2 of Dell's Current Report on Form 8-K filed September 10, 2010, Commission File No. 0-17017)
|
| 4.13 | | | — |
| | Form of 2.30% Notes due 2015 (incorporated by reference to Exhibit 4.3 of Dell's Current Report on Form 8-K filed September 10, 2010, Commission File No. 0-17017)
|
| 4.14 | | | — |
| | Form of 5.40% Notes due 2040 (incorporated by reference to Exhibit 4.4 of Dell's Current Report on Form 8-K filed September 10, 2010, Commission File No. 0-17017)
|
| 4.15 | | | — |
| | Fourth Supplemental Indenture, dated March 31, 2011, between Dell and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Dell's Current Report on Form 8-K filed March 31, 2011, Commission File No. 0-17017)
|
| 4.16 | | | — |
| | Form of Floating Rate Notes due 2014 (incorporated by reference to Exhibit 4.2 of Dell's Current Report on Form 8-K filed March 31, 2011, Commission File No. 0-17017)
|
| 4.17 | | | — |
| | Form of 2.100% Notes due 2014 (incorporated by reference to Exhibit 4.3 of Dell's Current Report on Form 8-K filed March 31, 2011, Commission File No. 0-17017)
|
| 4.18 | | | — |
| | Form of 3.100% Notes due 2016 (incorporated by reference to Exhibit 4.4 of Dell's Current Report on Form 8-K filed March 31, 2011, Commission File No. 0-17017)
|
| 4.19 | | | — |
| | Form of 4.625% Notes due 2021 (incorporated by reference to Exhibit 4.5 of Dell's Current Report on Form 8-K filed March 31, 2011, Commission File No. 0-17017)
|
|
| | | | | | | |
| Exhibit No. | | | Description of Exhibit |
| 10.1 | | * | — |
| | Amended and Restated Dell Computer Corporation 1994 Incentive Plan (incorporated by reference to Exhibit 99 of Dell’sDell's Registration Statement onForm S-8 filed October 31, 2000, RegistrationNo. 333-49014) |
10.2*10.2 | | * | — |
| | Amended and Restated Dell Computer Corporation 1998 Broad-Based Stock Option Plan (incorporated by reference to Exhibit 99 of Dell’sDell's Registration Statement onForm S-8 filed October 31, 2000, RegistrationNo. 333-49016) |
10.3*10.3 | | * | — |
| | Dell Computer Corporation 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Dell’sDell's Quarterly Report onForm 10-Q for the fiscal quarter ended August 2, 2002, Commission FileNo. 0-17017) |
10.4*10.4 | | * | — |
| | Dell Inc. Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Appendix A of Dell’sDell's 2007 proxy statement filed on October 31, 2007, Commission FileNo. 0-17017) |
10.5*10.5 | | — | | Amended and Restated Dell Inc. 401(k) Plan, adopted effective as of January 1, 2007 (incorporated by reference to Exhibit 10.5 of Dell’s Annual Report onForm 10-K for the fiscal year ended February 1, 2008, Commission FileNo. 0-17017) |
10.6*† | * | — | | Amendment One to the Amended and Restated Dell Inc. 401(k) Plan, effective as of January 1, 2008 |
10.7*† | | —
| | Amended and Restated Dell Inc. Deferred Compensation Plan effective as of January 1, 2005 (incorporated by reference to Exhibit 10.7 of Dell's Annual Report on Form 10-K for the fiscal year ended January 30, 2009, Commission File No. 0-17017) |
10.8*†10.6 | | * | — |
| | Amended and Restated Dell Inc. Deferred Compensation Plan for Non-Employee Directors effective as of January 1, 2005 |
10.9* | | — | | Executive Incentive Bonus Plan, adopted July 18, 2003 (incorporated by reference to Exhibit 10.110.8 of Dell’s QuarterlyDell's Annual Report onForm 10-Q10-K for the fiscal quarteryear ended August 1, 2003,January 30, 2009, Commission FileNo. 0-17017) |
10.10*10.7 | | * | — |
| | Executive Annual Incentive Bonus Plan (incorporated by reference to Appendix A of Dell’sDell's 2008 proxy statement filed on June 2, 2008, Commission FileNo. 0-17017) |
10.11*10.8 | | — | | Form of Indemnification Agreement between Dell and each Non-Employee Director of Dell (incorporated by reference to Exhibit 10.11 to Dell’s Annual Report onForm 10-K for the fiscal year ended January 31, 2003, Commission FileNo. 0-17017) |
10.12* | * | — | | Form of Performance Based Stock Unit Agreement for employees under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.2 of Dell’s Current Report onForm 8-K filed March 14, 2006, Commission FileNo. 0-17017) |
10.13* | | —
| | Form of Restricted Stock Agreement for Non-Employee Directors under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 of Dell’sDell's Current Report onForm 8-K filed July 27, 2006, Commission FileNo. 0-17017) |
10.14*10.9 | | * | — |
| | Form of Restricted Stock Unit Agreement for Non-Employee Directors under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.2 of Dell’sDell's Current Report onForm 8-K filed July 27, 2006, Commission FileNo. 0-17017) |
10.15*10.10 | | — | | Form of Nonstatutory Stock Option Agreement for Non-Employee Directors under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.3 of Dell’s Current Report onForm 8-K filed July 27, 2006, Commission FileNo. 0-17017) |
100
| | | | |
Exhibit
| | | | |
No. | | | | Description of Exhibit |
|
10.16* | * | — | | Form of Nonstatutory Stock Option Agreement for grant to Donald J. Carty under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 of Dell’s Current Report onForm 8-K filed December 20, 2006, Commission FileNo. 0-17017) |
10.17* | | —
| | Form of Stock Unit Agreement for grant to Donald J. Carty under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.2 of Dell’sDell's Current Report onForm 8-K filed December 20, 2006, Commission FileNo. 0-17017) |
10.18*10.11 | | * | — |
| | Form of Restricted Stock Unit Agreement for Non-Employee Directors under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.10 of Dell’sDell's Quarterly Report onForm 10-Q filed October 30, for the fiscal quarter ended May 4, 2007, Commission FileNo. 0-17017) |
10.19*10.12 | | * | — |
| | Form of NonstatutoryRestricted Stock OptionUnit Agreement for Non-Employee Directors under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1110.12 of Dell’sDell's Annual Report on Form 10-K for the fiscal year ended January 28, 2011, Commission File No. 0-17017) |
| 10.13 | | * | — |
| | Form of Restricted Stock Unit Agreement for Executive Officers under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.23 of Dell's Annual Report on Form 10-K for the fiscal year ended January 30, 2009, Commission File No. 0-17017) |
| 10.14 | | * | — |
| | Form of Restricted Stock Unit Agreement for Executive Officers under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4 of Dell's Quarterly Report onForm 10-Q filed October for the fiscal quarter ended April 30, 2007,2010, Commission FileNo. 0-17017) |
10.20*10.15 | | * | — |
| | Form of Restricted Stock Unit Agreement for New Hire Senior Executive Officers under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.5 of Dell's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010, Commission File No. 0-17017) |
| 10.16 | | * | — |
| | Form of Performance Based Stock Unit Agreement for employees under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.2 of Dell's Current Report on Form 8-K filed March 14, 2006, Commission File No. 0-17017) |
| 10.17 | | * | — |
| | Form of Performance Based Stock Unit Agreement for Executive Officers under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.17 of Dell’sDell's Annual Report onForm 10-K for the fiscal year ended February 1, 2008, Commission FileNo. 0-17017) |
10.21*†10.18 | | * | — |
| | Form of Performance Based Stock Unit Agreement for Executive Officers under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.21 of Dell's Annual Report on Form 10-K for the fiscal year ended January 30, 2009, Commission File No. 0-17017) |
|
10.22*† | | | | | | | |
| Exhibit No. | | | Description of Exhibit |
| 10.19 | | * | — |
| | Form of Performance Based Stock Unit Agreement for Key Vice Presidents under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Dell's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010, Commission File No. 0-17017) |
| 10.20 | | * | — |
| | Form of Performance Based Stock Unit Agreement for Communications Solutions Executive Officers under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 of Dell's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010, Commission File No. 0-17017) |
| 10.21 | | * | — |
| | Form of Nonstatutory Stock Option Agreement for Non-Employee Directors under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.3 of Dell's Current Report on Form 8-K filed July 27, 2006, Commission File No. 0-17017) |
| 10.22 | | * | — |
| | Form of Nonstatutory Stock Option Agreement for grant to Donald J. Carty under the 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 of Dell's Current Report on Form 8-K filed December 20, 2006, Commission File No. 0-17017) |
| 10.23 | | * | — |
| | Form of Nonstatutory Stock Option Agreement for Non-Employee Directors under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.11 of Dell's Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 2007, Commission File No. 0-17017) |
| 10.24 | | * | — |
| | Form of Nonstatutory Stock Option Agreement for Executive Officers under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.22 of Dell's Annual Report on Form 10-K for the fiscal year ended January 30, 2009, Commission File No. 0-17017) |
10.23*†10.25 | | * | — |
| | Form of RestrictedNonstatutory Stock UnitOption Agreement for Executive Officers under the Amended and Restated 2002 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 of Dell's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010, Commission File No. 0-17017) |
10.24*10.26 | | * | — |
| | Form of Indemnification Agreement between Dell and each Non-Employee Director of Dell (incorporated by reference to Exhibit 10.11 to Dell's Annual Report on Form 10-K for the fiscal year ended January 31, 2003, Commission File No. 0-17017) |
| 10.27 | | * | — |
| | Form of Indemnification Agreement between Dell and each Executive Officer of Dell (incorporated by reference to Exhibit 10.27 of Dell's Annual Report on Form 10-K for the Fiscal year ended January 28, 2011, Commission File No. 0-17017)
|
| 10.28 | | * | — |
| | Form of Protection of Sensitive Information, Noncompetition and Nonsolicitation Agreement (incorporated by reference to Exhibit 99.3 of Dell's Current Report on Form 8-K filed February 21, 2007, Commission File No. 0-17017) |
| 10.29 | | * | — |
| | Form of Protection of Sensitive Information, Noncompetition and Nonsolicitation Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 of Dell’sDell's Current Report onForm 8-K filed on July 16, 2007, Commission fileFile No. 0-17017) |
10.25*10.30 | | — | | Protection of Sensitive Information, Noncompetition and Nonsolicitation Agreement between Kevin B. Rollins and Dell Inc. (incorporated by reference to Exhibit 99.2 of Dell’s Current Report onForm 8-K filed February 20, 2007, Commission FileNo. 0-17017) |
10.26* | * | — | | Letter Agreement regarding Severance Benefits between Michael R. Cannon and Dell Inc. (incorporated by reference to Exhibit 99.1 of Dell’s Current Report onForm 8-K filed February 21, 2007, Commission FileNo. 0-17017) |
10.27* | | — | | Letter Agreement regarding Severance Benefits between Ronald G. Garriques and Dell Inc. (incorporated by reference to Exhibit 99.2 of Dell’s Current Report onForm 8-K filed February 21, 2007, Commission FileNo. 0-17017) |
10.28* | | — | | Form of Protection of Sensitive Information, Noncompetition and Nonsolicitation Agreement (incorporated by reference to Exhibit 99.3 of Dell’s Current Report onForm 8-K filed February 21, 2007, Commission FileNo. 0-17017) |
10.29* | | —
| | Form of Protection of Sensitive Information, Noncompetition and Nonsolicitation Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 of Dell’sDell's Current Report onForm 8-K filed on September 12, 2007, Commission fileFile No. 0-17017) |
10.30*10.31 | | *† | — |
| | SeparationForm of Protection of Sensitive Information, Noncompetition and Nonsolicitation Agreement and Release between Kevin B. Rollins and Dell Inc. (incorporated by reference to Exhibit 99.1 of Dell’s Current Report onForm 8-K filed February 20, 2007, Commission FileNo. 0-17017)
|
10.31*10.32 | | * | — |
| | Separation Agreement and Release between Michael R. Cannon and Dell Inc. (incorporated by reference to Exhibit 99.1 of Dell’s Current Report onForm 8-K filed January 8, 2009, Commission fileNo. 0-17017) |
10.32* | | — | | Consultancy Agreement between Michael R. Cannon and Dell Inc. (incorporated by reference to Exhibit 99.2 of Dell’s Current Report onForm 8-K filed January 8, 2009, Commission fileNo. 0-17017) |
10.33* | | — | | Separation Agreement and Release between Mark Jarvis and Dell Inc. (incorporated by reference to Exhibit 99.3 of Dell’s Current Report onForm 8-K filed January 8, 2009, Commission fileNo. 0-17017) |
10.34* | | — | | Retention Bonus, Merger and Modification Agreement between Dell and Mr.Ronald G. Garriques (incorporated by reference to Exhibit 99.1 of Dell’sDell's Current Report onForm 8-K filed March 9, 2009, Commission fileFile No. 0-17017)
|
12.1†10.33 | | * | — |
| | Separation Agreement and Release between Ronald G. Garriques and Dell (incorporated by reference to Exhibit 99.1 of Dell's Current Report on Form 8-K filed November 17, 2010, Commission File No. 0-17017)
|
| 10.34 | | * | — |
| | Separation Agreement and Release between Dell and Peter Altabef (incorporated by reference to Exhibit 10.1 of Dell's Current Report on Form 8-K filed January 13, 2011, Commission File No. 0-17017)
|
| 12.1 | | † | — |
| | Computation of ratio of earnings to fixed charges |
21†21 | | † | — |
| | Subsidiaries of Dell |
23†23 | | † | — |
| | Consent of PricewaterhouseCoopers LLP |
101
| 31.1 | | | | |
Exhibit
| | | | |
No. | | | | Description of Exhibit |
|
31.1† | † | — |
| | Certification of Michael S. Dell, Chairman and Chief Executive Officer, pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
| | | | | | | |
| Exhibit No. | | | Description of Exhibit |
| 31.2 | | † | — |
| | Certification of Brian T. Gladden, Senior Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2†32.1 | | †† | — | | Certification of Brian T. Gladden, Senior Vice President and Chief Financial Officer, pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1†† | | —
| | Certifications of Michael S. Dell, Chairman and Chief Executive Officer, and Brian T. Gladden, Senior Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101 | | .INS§ | — |
| | XBRL Instance Document |
| 101 | | .SCH§ | — |
| | XBRL Taxonomy Extension Schema Document |
| 101 | | .CAL§ | — |
| | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101 | | .LAB§ | — |
| | XBRL Taxonomy Extension Label Linkbase Document |
| 101 | | .PRE§ | — |
| | XBRL Taxonomy Extension Presentation Linkbase Document |
| 101 | | .DEF§ | — |
| | XBRL Taxonomy Extension Definition Linkbase Document |
|
| | |
| * | | Identifies Exhibit that consists of or includes a management contract or compensatory plan or arrangement. |
|
| † | | Filed herewith. |
| with this report. |
| †† | | Furnished herewith.with this report. |
| § | | Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. |
102