Services — During Fiscal 2017, our gross margin for services increased 100% to $6.4 billion, and our services gross margin percentage increased 1,030 basis points to 49.6%. The increase in services gross margin was primarily attributable to gross margin from the EMC acquired businesses. Purchase accounting adjustments totaled $0.9 billion during Fiscal 2017, compared to $0.5 billion during Fiscal 2016. Excluding these costs, transaction-related expensesstock-based compensation expense, and other corporate expenses, non-GAAP gross margin for services increased 102%Fiscal 2021 decreased 1% to $7.5$31.3 billion. The decrease in our non-GAAP gross margin due to gross margin decreases for ISG and other businesses was partially offset by a gross margin increase for VMware. The decline in gross margin of other businesses was driven by the divestiture of RSA Security.
Non-GAAP gross margin percentage decreased 90 basis points to 33.2%. The decrease in our non-GAAP gross margin percentage was attributable to a shift in product mix due to strong CSG sales, as well as decreases in gross margin percentages for ISG and CSG.
•Products — During Fiscal 2021, product gross margin decreased 5% to $14.6 billion and non-GAAP product gross margin decreased 8% to $16.1 billion. The decreases in product gross margin and non-GAAP product gross margin were primarily driven by a shift in product mix due to strong CSG sales, as well as a decrease in ISG product net revenue. These unfavorable impacts to product net revenue were partially offset by a decrease in amortization of intangibles.
During Fiscal 2021, product gross margin percentage decreased 120 basis points to 20.8% and non-GAAP product gross margin percentage decreased 200 basis points to 23.1%. The decreases in product gross margin percentage and non-GAAP product gross margin percentage were attributable to a shift in product mix due to strong CSG sales, as well as decreases in product gross margin percentages for ISG and CSG.
•Services — During Fiscal 2021, services gross margin increased 10% to $14.9 billion primarily due to growth in VMware software maintenance. Services gross margin also benefited from growth in CSG third-party software and maintenance, in particular, from an increase in subscription-based licenses, as well as from a decrease in purchase accounting adjustments. Excluding purchase accounting adjustments, transaction-related expenses, stock-based compensation expense, and other corporate expenses, non-GAAP services gross margin increased 8% to $15.2 billion as a result of the same CSG and VMware growth drivers discussed above.
Services gross margin percentage increased 20 basis points to 61.1% primarily due to the favorable impact of a decrease in purchase accounting and an increase in VMware services gross margin percentage. These favorable impacts were partially offset by a decrease in CSG services gross margin percentage increased 1,140 basis pointsdue to 54.1%.a product mix shift within CSG to entry-level commercial notebooks. Non-GAAP services gross margin percentage remained flat at 62.2% primarily due to an increase in VMware services gross margin percentage, offset by a decrease in CSG services gross margin percentage.
Vendor Programs and Settlements
Our gross margin is affected by our ability to achieve competitive pricing with our vendors and contract manufacturers, including through our negotiation of a variety of vendor 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 their pricing strategy. We account for vendor rebates and other discounts as a reduction in cost of net revenue. We manage our costs on a total net cost basis, which includes supplier list prices reduced by vendor rebates and other discounts.
The terms and conditions of our vendor rebate programs are largely based on product volumes and are generally negotiated either at the beginning of the annual or quarterly period, depending on the program. The timing and amount of vendor rebates and other discounts we receive under the programs may vary from period to period, reflecting changes in the competitive environment. 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 2018,2021, Fiscal 2017,2020, and Fiscal 20162019 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 changes to vendor pricing or rebate programs that may 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 periods. These settlements are allocated to our segments based on the relative amount of affected vendor products sold by each segment. Pricing settlements benefited product gross margins in Fiscal 2018, Fiscal 2017, and Fiscal 2016 by $68 million, $80 million, and $97 million, respectively.
Operating Expenses
The following table presents information regarding our operating expenses during each offor the periods presented:indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | | | | | January 29, 2021 | | | | January 31, 2020 | | | | February 1, 2019 |
| | | | | | | | | | | Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue |
| | | | | | | | | | | (in millions, except percentages) |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general, and administrative | | | | | | | | | | | $ | 18,998 | | | 20.1 | % | | (11) | % | | $ | 21,319 | | | 23.2 | % | | 3 | % | | $ | 20,640 | | | 22.7 | % |
Research and development | | | | | | | | | | | 5,275 | | | 5.6 | % | | 6 | % | | 4,992 | | | 5.4 | % | | 8 | % | | 4,604 | | | 5.1 | % |
Total operating expenses | | | | | | | | | | | $ | 24,273 | | | 25.7 | % | | (8) | % | | $ | 26,311 | | | 28.6 | % | | 4 | % | | $ | 25,244 | | | 27.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Fiscal Year Ended |
| | | | | | | | | | | January 29, 2021 | | | | January 31, 2020 | | | | February 1, 2019 |
| | | | | | | | | | | Dollars | | % of Non-GAAP Net Revenue | | % Change | | Dollars | | % of Non-GAAP Net Revenue | | % Change | | Dollars | | % of Non-GAAP Net Revenue |
| | | | | | | | | | (in millions, except percentages) |
Non-GAAP operating expenses | | | | | | | | | | | $ | 20,548 | | | 21.8 | % | | (4) | % | | $ | 21,415 | | | 23.2 | % | | 6 | % | | $ | 20,168 | | | 22.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | | | February 3, 2017 | | | | January 29, 2016 |
| Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue | | % Change | | Dollars | | % of Net Revenue |
| (in millions, except percentages) |
Operating expenses: | | | | | | | | | | | | | | | |
Selling, general, and administrative | $ | 19,003 |
| | 24.1 | % | | 40 | % | | $ | 13,575 |
| | 22.0 | % | | 73 | % | | $ | 7,850 |
| | 15.4 | % |
Research and development | 4,384 |
| | 5.6 | % | | 66 | % | | 2,636 |
| | 4.3 | % | | 151 | % | | 1,051 |
| | 2.1 | % |
Total operating expenses | $ | 23,387 |
| | 29.7 | % | | 44 | % | | $ | 16,211 |
| | 26.3 | % | | 82 | % | | $ | 8,901 |
| | 17.5 | % |
| | | | | | | | | | | | | | | |
Other Financial Information | | | | | | | | | | | | | | | |
Non-GAAP operating expenses | $ | 18,330 |
| | 22.9 | % | | 57 | % | | $ | 11,706 |
| | 18.6 | % | | 65 | % | | $ | 7,082 |
| | 13.8 | % |
Fiscal 2018 compared to Fiscal 2017
During Fiscal 2018,2021, total operating expenses increased 44%.decreased 8% primarily due to a decrease in selling, general, and administrative expenses, partially offset by an increase in research and development expenses. Our operating expenses include the impact of purchase accounting, associated with the EMC merger transaction and, to a lesser extent, the going-private transaction, amortization of intangible assets, transaction-related expenses, stock-based compensation expense, and other corporate expenses. In aggregate, these items totaled $5.1$3.7 billion and $4.5$4.9 billion forin Fiscal 20182021 and Fiscal 2017,2020, respectively. Excluding these costs, total non-GAAP operating expenses increased 57%. The increases in operating expenses and non-GAAP operating expenses were primarily due to the incremental operating costs from the EMC acquired businesses.decreased 4% for Fiscal 2021.
•Selling, General, and Administrative — Selling, general, and administrative ("(“SG&A"&A”) expenses increased 40%decreased 11% during Fiscal 2018.2021. The increasesdecrease in SG&A expenses were primarily driven by incremental operating costswas partly attributable to measures taken as a result of the EMC acquired businesses.COVID-19 pandemic, which included global hiring limitations, reductions in consulting and contractor costs and facilities-related costs, global travel restrictions, and suspension of the Dell 401(k) match program for U.S. employees, as well as a decrease in amortization of intangible assets. Additionally during Fiscal 2021, SG&A expenses benefited from the absence of Virtustream pre-tax impairment charges of $619 million recognized in Fiscal 2020 and from the derecognition of a VMware, Inc. patent litigation accrual in Fiscal 2021 of $237 million, which was initially recognized in Fiscal 2020.
Effective January 1, 2021, the Dell 401(k) match program for U.S. employees was reinstated. We expect that operating expenses will increase in Fiscal 2022 as we reinstate selected employee-related compensation benefits. We continue to invest in long-term projects, while focusing on operating expense controls in certain areas of the business.
•Research and Development — Research and development ("(“R&D"&D”) expenses are primarily composed of personnel-related expenses related to product development. R&D expenses as a percentage of net revenue for Fiscal 20182021 and Fiscal 20172020 were approximately 5.6% and 4.3%5.4%, respectively. The increase in R&D expenses was attributableas a percentage of net revenue increased during Fiscal 2021 primarily due to the expansion of our R&D capability through the EMC merger transaction.an increase in compensation-related expense, including stock-based compensation expense, driven by VMware. As our industry continues to change and as the needs of our customers evolve, we intend to support R&D initiatives to innovate and introduce new and enhanced solutions into the market.
We will continue to balancemake selective investments designed to enable growth, marketing, and R&D, while balancing our efforts to drive cost efficiencies in the business with strategicbusiness. We also expect to continue to make investments in areas that will enable growth, such assupport of our sales force, marketing,own digital transformation to modernize and R&D.streamline our IT operations.
Fiscal 2017 compared to Fiscal 2016Operating Income
During Fiscal 2017,2021, our total operating expensesincome increased 82%. The increase in total operating expenses was96% to $5.1 billion, primarily due to incremental costs associated withincreases in net revenue and operating income for CSG and VMware. Operating income during Fiscal 2021 also benefited from lower selling, general, and administrative expenses as we realized the EMC acquired businesses, including transaction-related expenses. These transaction-related expenses include consulting and advisory services and retention payments. Our operating expenses include purchase accounting adjustments associated with the EMC merger transaction and the going-private transaction,benefit of cost reduction initiatives. We also realized a decrease in amortization of intangible assets transaction-related expenses, and other corporate expenses. expenses, most notably resulting from the absence of Virtustream impairment charges of $619 million recognized in Fiscal 2020 and the derecognition of a VMware, Inc. patent litigation accrual in Fiscal 2021 of $237 million, which was initially recognized in Fiscal 2020. These benefits were partially offset by a decrease in operating income for ISG.
In aggregate, these itemsthe fourth quarter of Fiscal 2021, we began to reinstate selected employee-related compensation benefits, which we expect will put pressure on operating income in Fiscal 2022. We will continue to invest in long-term projects, while focusing on operating expense controls in certain areas of the business.
Amortization of intangible assets, stock-based compensation expense, and other corporate expenses that impacted operating income totaled $4.5$5.2 billion and $1.8$6.8 billion for Fiscal 20172021 and Fiscal 2016,2020, respectively. Excluding these costs, total non-GAAP operating expenses increased 65% primarily due to the impact from the EMC acquired businesses.
Selling, General,adjustments, and Administrative — SG&A expenses increased 73% during Fiscal 2017. The increases in SG&A expenses were primarily driven by incremental costs associated with the EMC acquired businesses and also reflected the impact of our increased investment in sales capabilities and marketing costs.
Research and Development — R&D expenses were approximately 4.3% and 2.1% of net revenue for Fiscal 2017 and Fiscal 2016, respectively. The increases in R&D expenses were attributable to the expansion of our R&D capability through the EMC merger transaction.
Operating Income/Loss
Fiscal 2018 compared to Fiscal 2017
Our operating loss increased 2% during Fiscal 2018, primarily due to higher operating expenses from the EMC acquired businesses as well as an increase in amortization of intangibles related to the EMC merger transaction, mostly offset by an increase in gross margin. While the EMC acquired businesses contributed higher gross margin overall, we experienced gross margin pressure in ISG related to the changing product mix within ISG as well as component cost inflation, particularly for memory components used in ISG products.
Our operating loss includes the impact of purchase accounting associated with the EMC merger transaction and to a lesser extent, the going-private transaction, amortization of intangible assets, transaction-related expenses, and other corporate expenses. In aggregate, these items totaled $10.2 billion and $8.4 billion for Fiscal 2018 and Fiscal 2017, respectively. Excluding these costs,our non-GAAP operating income forincreased 6% to $10.8 billion during Fiscal 2018 increased 34% to $6.9 billion.2021. The increase in non-GAAP operating income for Fiscal 20182021 was attributabledue to an increaseincreases in net revenue and operating income for CSG and VMware, which were partially offset by a decrease in operating income for VMware and CSG.ISG.
Fiscal 2017 compared to Fiscal 2016
Our operating loss was $3.3 billion and $0.5 billion during Fiscal 2017 and Fiscal 2016, respectively. The increase in operating loss was primarily attributable to higher operating expenses, partially offset by increases in gross margin. Our operating loss includes purchase accounting adjustments associated with the EMC merger transaction and the going-private transaction, amortization of intangible assets, transaction-related expenses, and other corporate expenses. In aggregate, these items totaled $8.4 billion and $2.7 billion for Fiscal 2017 and Fiscal 2016, respectively. Excluding these costs, non-GAAP operating income increased 130% to $5.1 billion during Fiscal 2017. The increase in non-GAAP operating income was primarily attributable to an increase in gross margin, which was partially offset by higher operating expenses from the EMC acquired businesses.
Interest and Other, Net
The following table providespresents information regardinginterest and other, net for each of the periods presented:indicated:
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | | | January 29, 2021 | | January 31, 2020 | | February 1, 2019 |
| | | | | (in millions) |
Interest and other, net: | | | | | | | | | |
Investment income, primarily interest | | | | | $ | 54 | | | $ | 160 | | | $ | 313 | |
Gain on strategic investments, net | | | | | 582 | | | 194 | | | 342 | |
Interest expense | | | | | (2,389) | | | (2,675) | | | (2,488) | |
Foreign exchange | | | | | (127) | | | (162) | | | (206) | |
Other | | | | | 406 | | | (143) | | | (131) | |
Total interest and other, net | | | | | $ | (1,474) | | | $ | (2,626) | | | $ | (2,170) | |
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
| (in millions) |
Interest and other, net: | |
| | |
| | |
|
Investment income, primarily interest | $ | 207 |
| | $ | 102 |
| | $ | 39 |
|
Gain (loss) on investments, net | 72 |
| | 4 |
| | (2 | ) |
Interest expense | (2,406 | ) | | (1,751 | ) | | (680 | ) |
Foreign exchange | (113 | ) | | (77 | ) | | (107 | ) |
Debt extinguishment | — |
| | (337 | ) | | — |
|
Other | (115 | ) | | (45 | ) | | (22 | ) |
Total interest and other, net | $ | (2,355 | ) | | $ | (2,104 | ) | | $ | (772 | ) |
Fiscal 2018 compared to Fiscal 2017
During Fiscal 2018, changes2021, the change in interest and other, net were unfavorablewas favorable by $251$1,152 million, primarily due to an increasea $396 million net gain on the fair value adjustment of one of our strategic investments and a pre-tax gain of $338 million on the sale of RSA Security reflected in Other in the table above. Interest and other, net also benefited from a decrease in interest expense from new borrowings associated with the EMC merger transaction, which was partially offset by expenses incurred in Fiscal 2017 of approximately $337 million relateddue to debt extinguishmentpaydowns over the periods and new borrowings that did not recur in Fiscal 2018. See Note 8a gain of $120 million recognized from the Notes to the Consolidated Financial Statements included in this report for further information regarding our debt.
sale of certain intellectual property assets.
Fiscal 2017 compared to Fiscal 2016
During Fiscal 2017, changes in interest and other, net were unfavorable by $1.3 billion, primarily due to an increase in interest expense from higher average debt balances from debt issued in connection with the EMC merger transaction, and to costs related to debt extinguishment associated with that transaction.
Income and Other Taxes
On December 22, 2017,The following table presents information regarding our income and other taxes for the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform” or the “Act”) was signed into law. U.S. Tax Reform lowers the U.S. corporate income tax rate to 21% from 35% and establishes a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries (the “Transition Tax”). periods indicated:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 29, 2021 | | January 31, 2020 | | February 1, 2019 |
| (in millions, except percentages) |
Income (loss) before income taxes | $ | 3,670 | | | $ | (4) | | | $ | (2,361) | |
Income tax expense (benefit) | $ | 165 | | | $ | (5,533) | | | $ | (180) | |
Effective income tax rate | 4.5 | % | | 138325.0 | % | | 7.6 | % |
For Fiscal 2019, U.S. Tax Reform also requires a minimum tax on certain future earnings generated by foreign subsidiaries while providing for future tax-free repatriation of earnings through a 100% dividends-received deduction,2021 and places limitations on the deductibility of net interest expense.
GAAP requires the effect of a change in tax laws to be recognized in the period that includes the enactment date. Accordingly, we recognized a provisional tax benefit in the fourth quarter of Fiscal 2018 of $0.3 billion related to U.S. Tax Reform, primarily driven by a $1.3 billion tax benefit related to the remeasurement of deferred tax assets and liabilities, offset by $1.0 billion of current and future income tax expenses related to the Transition Tax.
Our2020, our effective income tax rates for continuing operations were 32.2%, 30.2%,4.5% on pre-tax income of $3,670 million and 9.2%138325.0% on pre-tax losses from continuing operations of $5.7 billion, $5.4 billion, and $1.3 billion for Fiscal 2018, Fiscal 2017, and Fiscal 2016,$4 million, respectively. The change in our effective income tax rate for Fiscal 2018 as compared to Fiscal 2017 was primarily attributable todriven by discrete tax benefits from charges incurred associated with the EMC merger transaction, including purchase accounting adjustments, interest charges,items and stock-based compensation expense. Thea change in our jurisdictional mix of income.
For Fiscal 2021, our effective income tax rate was also impacted byincludes discrete tax benefits recognized in the current periodof $746 million related to U.S. Tax Reform, as well asan audit settlement, $159 million related to stock-based compensation, and $59 million from an intra-entity asset transfer of certain of Pivotal’s intellectual property to an Irish subsidiary that was completed by VMware, Inc. Our effective income tax charges recognized in the prior yearrate also includes discrete tax expense of $359 million related to the divestiture of Dell ServicesRSA Security during Fiscal 2021. For Fiscal 2020, our effective income tax rate includes discrete tax benefits of $4.9 billion related to similar intra-entity asset transfers. The tax benefit for each intra-entity asset transfer was recorded as a deferred tax asset in the period of transaction and DSG. The change in ourrepresents the book and tax basis difference on the transferred assets measured based on the applicable Irish statutory tax rate. We expect to be able to realize the deferred tax assets resulting from these intra-entity asset transfers. Our effective income tax rate for Fiscal 2017 as compared to Fiscal 2016 was primarily attributable to2020 also includes discrete tax benefits from charges associated with the EMC merger transaction, including purchase accounting adjustments, interest charges, andof $351 million related to stock-based compensation, expense, which were primarily incurred in higher tax jurisdictions. See Note 3 of the Notes$305 million related to the Consolidated Financial Statements included in this report for more information on the EMC merger transaction.an audit settlement, and $95 million related to Virtustream impairment charges.
Our effective income tax rate can fluctuate depending on the geographic distribution of our world-wideworldwide earnings, as our foreign earnings are generally taxed at lower rates than in the United States. The differences between our effective income tax rate and the U.S. federal statutory rate of 21% principally result from the geographical distribution of income, differences between the book and tax treatment of certain items and the discrete tax items described above. 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. A significant portion of these income tax benefits relates to a tax holiday that expired at the end of Fiscal 2017. We have negotiated new terms for the affected subsidiary. These new terms provide for a reduced income tax rate and will be effective for a two-year bridge period expiring at the end of Fiscal 2019. We are currently seeking new terms for the affected subsidiary beyond Fiscal 2019, and it is uncertain whether any terms will be agreed upon.until January 31, 2029. Our other tax holidays will expire in whole or in part during Fiscal 20192022 through Fiscal 2023.2030. 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 differences between our effective incomeAs of January 29, 2021, we were not aware of any matters of noncompliance related to these tax rate and the U.S. federal statutory rate of 33.7% principally resulted from the geographical distribution of taxable income discussed above and permanent differences between the book and tax treatment of certain items. As discussed above, starting in Fiscal 2019, our U.S. corporate income tax rate will be lowered from 35% to 21%. In addition, we will be subject to additional provisions of U.S. Tax Reform including a minimum tax on foreign earnings, and limitations on the deductibility of net interest expense. These provisions could have a material impact on our future effective income tax rate.holidays.
For further discussion regarding tax matters, including the status of income tax audits, see Note 1411 of the Notes to the Consolidated Financial Statements included in this report.
Net Income/Loss from Continuing OperationsIncome
Fiscal 2018 compared to Fiscal 2017
During Fiscal 2018,2021, net loss from continuing operations increased 3%income decreased 37% to a net loss from continuing operations of $3.9$3.5 billion. The increasedecrease in net loss from continuing operationsincome during Fiscal 20182021 was primarily attributabledue to an increase in operating loss and to an increase in interest and other, net expense,lower discrete tax benefits, which was partially offset by an increase in tax benefit. operating income.
Net loss from continuing operationsincome for Fiscal 20182021 and Fiscal 2020 included amortization of intangible assets, the impact of purchase accounting,transaction-related expenses, andstock-based compensation expense, other corporate expenses.expenses, fair value adjustments on equity investments, and discrete tax items. Excluding these costs and the related tax impacts, non-GAAP net income from continuing operations increased 36%11% to $3.7$6.8 billion during the Fiscal 2018.2021. The increase in non-GAAP net income from continuing operations during Fiscal 2018 was primarily attributable to increases in operating income, the effect of which was partially offset by increases in interest and other, net expense and income tax expense.
Fiscal 2017 compared to Fiscal 2016
During Fiscal 2017, net loss from continuing operations increased 220% to a net loss from continuing operations of $3.7 billion. The increase in net loss from continuing operations for Fiscal 20172021 was primarily attributable to an increase in non-GAAP operating loss and to an increase in interest and other, net expense. The effectincome.
Non-controlling Interests
Fiscal 2018 compared to Fiscal 2017
During Fiscal 2018 and Fiscal 2017,2021, net lossincome attributable to non-controlling interests was $127$255 million, and $46 million, respectively. Netconsisted of net income or loss attributable to our non-controlling interests in VMware, Inc. and Secureworks. During Fiscal 2020, net income attributable to non-controlling interests primarilywas $913 million, and consisted of net income or loss attributable to theour non-controlling interests in VMware, Inc., Pivotal, and Secureworks. Pivotal was acquired by VMware, Inc. on December 30, 2019 and, as a result, we no longer have a separate non-controlling interest in Pivotal. The decrease in net income attributable to non-controlling interests in Fiscal 2021 was driven by lower discrete tax benefits for VMware, Inc. For more information about our non-controlling interests, see Note 1613 of the Notes to the Consolidated Financial Statements included in this report.
Fiscal 2017 compared to Fiscal 2016
During Fiscal 2017, net loss attributable to non-controlling interests was $46 million. Net loss attributable to non-controlling interests was primarily attributable to the net loss attributable to non-controlling interest in VMware, Inc. of $41 million. During Fiscal 2016, Dell Technologies did not have any non-controlling interests.
Net Income/LossIncome Attributable to Dell Technologies Inc.
Fiscal 2018 compared to Fiscal 2017
Net lossincome attributable to Dell Technologies Inc. represents net income/loss from continuing operations,income and an adjustment for non-controlling interests, and, in Fiscal 2017, an adjustment for discontinued operations. During Fiscal 2018 and Fiscal 2017, net lossinterests. Net income attributable to Dell Technologies Inc. was $3.7$3.3 billion and $1.7in Fiscal 2021, compared to $4.6 billion respectively.in Fiscal 2020. The increasedecrease in net lossincome attributable to Dell Technologies Inc. during Fiscal 20182021 was primarily attributable to an increasea decrease in net loss from continuing operations andincome for the absence of income from our discontinued operations in Fiscal 2018, due to completion of the divestiture transactions in Fiscal 2017.period.
Fiscal 2017 compared to Fiscal 2016
During Fiscal 2017 and Fiscal 2016, net loss attributable to Dell Technologies Inc. was $1.7 billion and $1.1 billion, respectively. The increase in Fiscal 2017 was due to an increase in net loss from continuing operations, offset partially by an increase in income from discontinued operations. For more information regarding our discontinued operations, see Note 4 of the Notes to the Consolidated Financial Statements included in this report.
Business Unit Results
Our reportable segments are based on the following business units: ISG, CSG, ISG, and VMware. A description of our three business units is provided under "Introduction."“Introduction.” See Note 2219 of the Notes to the Consolidated Financial Statements included in this report for a reconciliation of net revenue and operating income by reportable segment to consolidated net revenue and consolidated operating loss,income (loss), respectively.
Infrastructure Solutions Group
The following table presents net revenue and operating income attributable to ISG for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | | | | | January 29, 2021 | | % Change | | January 31, 2020 | | % Change | | February 1, 2019 |
| | | | | | | (in millions, except percentages) |
Net revenue: | | | | | | | | | | | | | | | |
Servers and networking | | | | | | | $ | 16,497 | | (4) | % | | $ | 17,127 | | (14) | % | | $ | 19,953 |
Storage | | | | | | | 16,091 | | (4) | % | | 16,842 | | — | % | | 16,767 |
Total ISG net revenue | | | | | | | $ | 32,588 | | (4) | % | | $ | 33,969 | | (7) | % | | $ | 36,720 |
| | | | | | | | | | | | | | | |
Operating income: | | | | | | | | | | | | | | | |
ISG operating income | | | | | | | $ | 3,776 | | (6) | % | | $ | 4,001 | | (4) | % | | $ | 4,151 |
% of segment net revenue | | | | | | | 11.6 | % | | | | 11.8 | % | | | | 11.3 | % |
Net Revenue— During Fiscal 2021, ISG net revenue decreased 4% due to decreases in sales of servers and networking and storage. ISG net revenue decreased primarily due to a weaker demand environment, as customers shifted their investments toward remote work and business continuity solutions.
Revenue from the sales of servers and networking decreased 4% during Fiscal 2021, primarily driven by a decline in demand of our PowerEdge servers due to the broader macroeconomic environment, including the effects of COVID-19.
Storage revenue decreased 4% during Fiscal 2021 primarily due to declines in demand for our core storage solutions offerings, partially offset by increased demand for converged and hyper-converged infrastructure solutions. We continue to make enhancements to our storage solutions offerings and expect that these offerings, including our new PowerStore storage array released in May 2020, will drive long-term improvements in the business.
ISG customers are interested in new and innovative models that address how they consume our solutions. We offer options that include as-a-service, utility, leases, and immediate pay models, all designed to match customers’ consumption and financing preferences. Our multiyear agreements typically result in recurring revenue streams over the term of the arrangement. We expect our flexible consumption models and as-a-service offerings will further strengthen our customer relationships and provide a foundation for growth in recurring revenue.
From a geographical perspective, net revenue attributable to ISG decreased in all regions during Fiscal 2021, driven by a weaker demand environment as a result of pervasive global COVID-19 disruptions.
Operating Income— During Fiscal 2021, ISG operating income as a percentage of net revenue decreased 20 basis points to 11.6%. The decline in ISG operating income percentage during Fiscal 2021 was driven by a decrease in ISG gross margin percentage from higher server configuration costs, increased freight costs, and lower benefits from component cost deflation. During Fiscal 2021, ISG component costs remained deflationary in the aggregate, but to a lesser degree relative to Fiscal 2020. The decline in ISG gross margin percentage in Fiscal 2021 was partially offset by a decrease in ISG operating expenses as a percentage of net revenue, as we realized the benefit of cost reduction initiatives.
Client Solutions Group:Group
The following table presents net revenue and operating income attributable to CSG for the respective periods:periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | | | | | January 29, 2021 | | % Change | | January 31, 2020 | | % Change | | February 1, 2019 |
| | | | | | | (in millions, except percentages) |
Net revenue: | | | | | | | | | | | | | | | |
Commercial | | | | | | | $ | 35,396 | | 3 | % | | $ | 34,277 | | 11 | % | | $ | 30,893 |
Consumer | | | | | | | 12,959 | | 12 | % | | 11,561 | | (6) | % | | 12,303 |
Total CSG net revenue | | | | | | | $ | 48,355 | | 5 | % | | $ | 45,838 | | 6 | % | | $ | 43,196 |
| | | | | | | | | | | | | | | |
Operating income: | | | | | | | | | | | | | | | |
CSG operating income | | | | | | | $ | 3,352 | | 7 | % | | $ | 3,138 | | 60 | % | | $ | 1,960 |
% of segment net revenue | | | | | | | 6.9 | % | | | | 6.8 | % | | | | 4.5 | % |
|
| | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | % Change | | February 3, 2017 | | % Change | | January 29, 2016 |
| (in millions, except percentages) |
Net Revenue: | | | | | | | | | |
Commercial | $ | 27,747 |
| | 7% | | $ | 26,006 |
| | 1% | | $ | 25,747 |
|
Consumer | 11,708 |
| | 9% | | 10,748 |
| | 6% | | 10,130 |
|
Total CSG net revenue | $ | 39,455 |
| | 7% | | $ | 36,754 |
| | 2% | | $ | 35,877 |
|
| | | | | | | | | |
Operating Income: | | | | | | | | | |
CSG operating income | $ | 2,193 |
| | 19% | | $ | 1,845 |
| | 31% | | $ | 1,410 |
|
% of segment net revenue | 5.6 | % | | | | 5.0 | % | | | | 3.9 | % |
Fiscal 2018 compared to Fiscal 2017
Net Revenue— During Fiscal 2018,2021, CSG net revenue increased 7%, driven by5% primarily due to an increase in overall average selling price in both the commercial and consumer product categories, as we managed our pricing in response to the cost environment during the period. During Fiscal 2018, CSG net revenue also benefited from increases in units sold, as we experienced a general improvement in customer demand, which favored premium notebooks and workstations.
From a geographical perspective, net revenue attributable to CSG increased across all regions during Fiscal 2018.
Operating Income— During Fiscal 2018, CSG operating income as a percentage of net revenue increased 60 basis points to 5.6% primarily due to a reduction in CSG operating expenses as a percentage of net revenue, as we continued to manage our cost position. This benefit was partially offset by increased component costs, which we were able to mitigate through pricing actions. We will continue to adjust our pricing practices as needed based upon relevant factors, including the competitive environment and component costs. We expect that component cost increases will moderate in Fiscal 2019. The impact of the vendor settlements recorded in Fiscal 2018 and Fiscal 2017 did not affect comparability for these periods.
Fiscal 2017 compared to Fiscal 2016
Net Revenue — During Fiscal 2017, CSG net revenue increased 2%, driven by an increase in both commercial and consumer net revenue. Commercial net revenue benefited from an increase in volume of premium notebook and workstation units sold,sales, partially offset by a decrease in overall average selling prices. The increase in consumer net revenuecommercial desktop sales. Much of this demand was driven by the imperative for remote work and remote learning solutions, as business, government, and education customers sought to maintain productivity in the midst of COVID-19.
Commercial revenue increased 3% during Fiscal 2021 due to an increase in the volume of notebook units sold, which also wascommercial notebooks sales, and particularly for entry-level commercial notebooks driven by customers in education and state and local government. The increases were partially offset by a decrease in overall average selling prices. The increase in volumelower sales of commercial and consumer notebooks sold was attributabledesktops.
Consumer revenue increased 12% during Fiscal 2021 due to an overall improvementincreases in customer demand. Both commercial and consumer businesses experienced a decrease in overall average selling prices as we strategically managed our pricing position given competitive conditionsacross all consumer product offerings, coupled with continued strong demand for consumer notebooks and the favorable cost environment.high-end and gaming systems.
From a geographical perspective, net revenue attributable to CSG increased in the Americas and EMEA during Fiscal 2021. These increases were partially offset by a decline in net revenue attributable to CSG in APJ during Fiscal 2017, while net revenue in EMEA was unchanged.the period.
Operating Income— During Fiscal 2017,2021, CSG operating income as a percentage of net revenue increased 11010 basis points to 5.0%6.9%. This increase was driven by improvement in our gross margin percentage, which was principally the result of a favorable cost position and a richer product mix of premium notebooks and workstations.
Infrastructure Solutions Group:
The following table presents net revenue and operating incomeprimarily attributable to ISG for the respective periods:
|
| | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | % Change | | February 3, 2017 | | % Change | | January 29, 2016 |
| (in millions, except percentages) |
Net Revenue: |
| |
| |
| |
| |
|
Servers and networking | $ | 15,398 |
| | 20% | | $ | 12,834 |
| | 1% | | $ | 12,761 |
|
Storage | 15,254 |
| | 71% | | 8,942 |
| | 303% | | 2,217 |
|
Total ISG net revenue | $ | 30,652 |
| | 41% | | $ | 21,776 |
| | 45% | | $ | 14,978 |
|
|
| |
| |
| |
| |
|
Operating Income: |
| |
| |
| |
| |
|
ISG operating income | $ | 2,179 |
| | (9)% | | $ | 2,393 |
| | 127% | | $ | 1,052 |
|
% of segment net revenue | 7.1 | % | |
| | 11.0 | % | |
| | 7.0 | % |
Fiscal 2018 compared to Fiscal 2017
Net Revenue— During Fiscal 2018, ISG net revenue increased 41% primarily due to incremental storage net revenue associated with the EMC acquired storage business, and to a lesser extent, increasesdecrease in servers and networking. Revenue from servers and networking increased 20% during Fiscal 2018, driven by an increase in both average selling price and units sold of our PowerEdge server product. Average selling prices increased as we managed our pricing in response to the current component cost environment, and also reflected the sale of servers with higher memory and storage content. Storage revenue increased 71% during Fiscal 2018 due to the incremental revenue from the EMC acquired storage business. Although we experienced strong growth in all-flash and hyper-converged infrastructure products, we are experiencing reduced demand in ISG for certain elements of our storage portfolio, including traditional high-end and midrange storage offerings. We are addressing this dynamic through investments in our go-to-market capability and product enhancements.
In ISG, we are seeing increased interest in flexible consumption models by our customers as they seek to build greater flexibility into their cost structures. We generally provide these solutions under multi-year contracts that typically result in recognition of revenue over the term of the arrangement. We expect these flexible consumption models will further strengthen our customer relationships, and will build more predictable revenue streams over time.
From a geographical perspective, during Fiscal 2018, ISG net revenue increased in all regions due to the incremental revenue from the EMC acquired storage business. The EMC acquired storage business operates on a world-wide basis with a geographic mix similar to that of the legacy Dell ISG business.
Operating Income— During Fiscal 2018, ISG operating income decreased 390 basis points to 7.1% primarily due to increasedCSG operating expenses from the EMC acquired businesses and larger investments in our go-to-market capabilities and research and development. While the EMC acquired storage business contributed higher gross margin overall, we experienced gross margin pressure due to changing product mix within ISG as well as component cost inflation, particularly for memory components used in ISG products, which we expect to moderate in Fiscal 2019.
Fiscal 2017 compared to Fiscal 2016
Net Revenue — During Fiscal 2017, ISG net revenue increased 45% due to incremental net revenue associated with the EMC acquired storage business, which caused storage revenue to increase 303%. Revenue from servers and networking was relatively unchanged over the period, resulting from the offsetting dynamics of an increase in average selling prices due to a shift to PowerEdge servers with richer configurations, as well as to a decline in volume of PowerEdge units, as customer demand has shifted to cloud and hyperscale servers, which generally have a lower average selling price.
From a geographical perspective, during Fiscal 2017, ISG net revenue increased in all regions due to the incremental revenue from the EMC acquired storage business.
Operating Income — During Fiscal 2017, ISG operating income as a percentage of net revenue, increased 400 basis points to 11.0%. The increaseas we realized the benefit of cost reduction initiatives. This benefit was mostly offset by a decrease in ISG operating income percentage was primarily driven by the favorable impact of higher gross margin percentages and operating income percentages from the EMC acquired businesses. TheCSG gross margin percentage for the legacy Dell ISG business was relatively flat over the period.driven by a shift in product mix to entry-level commercial notebooks and lower component cost deflation relative to pricing.
VMware:
VMware
The following table presents net revenue and operating income attributable to VMware for the respective periods:periods indicated. During Fiscal 2020, the Company reclassified Pivotal operating results from other businesses to the VMware reportable segment. Prior period results were recast to conform with the current period presentation. | | | | | | | | | | | | | | | Fiscal Year Ended |
| Fiscal Year Ended | | | January 29, 2021 | | % Change | | January 31, 2020 | | % Change | | February 1, 2019 |
| February 2, 2018 |
| % Change |
| February 3, 2017 |
| % Change |
| January 29, 2016 | | | (in millions, except percentages) |
| (in millions, except percentages) | |
Net Revenue: |
|
|
|
|
| |
Net revenue: | | Net revenue: | | |
VMware net revenue | $ | 7,925 |
|
| 146% |
| $ | 3,225 |
|
| NA |
| $ | — |
| VMware net revenue | | $ | 11,873 | | 9 | % | | $ | 10,905 | | 12 | % | | $ | 9,741 |
|
|
|
|
|
| | | | | | | |
Operating Income: |
|
|
|
|
| |
Operating income: | | Operating income: | | |
VMware operating income | $ | 2,520 |
|
| 126% |
| $ | 1,113 |
|
| NA |
| $ | — |
| VMware operating income | | $ | 3,571 | | 16 | % | | $ | 3,081 | | 5 | % | | $ | 2,926 |
% of segment net revenue | 31.8 | % |
| 34.5 | % |
|
| NA |
| % of segment net revenue | | 30.1 | % | | 28.3 | % | | 30.0 | % |
Fiscal 2018 compared to Fiscal 2017
Net Revenue— VMware net revenue, during Fiscal 2018inclusive of Pivotal, primarily consistedconsists of revenue from the sale of software licenses under perpetual licenses and subscription and software-as-a-service (“SaaS”) offerings, as well as related software maintenance andservices, support, training, consulting services, and hosted services. VMware net revenue during Fiscal 2021 increased 9% primarily due to growth in sales of subscriptions and SaaS offerings, as well as an increase in sales of software maintenance services. Growth in sales of subscriptions and SaaS offerings was primarily driven by increased demand for Fiscal 2018hybrid cloud offerings and digital workspaces. Software maintenance revenue benefited from balanced performancemaintenance contracts sold in all major geographies and broad strength across the product portfolio.previous periods.
From a geographical perspective, approximately half of VMware net revenue during Fiscal 20182021 was generated by sales to customers in the United States. VMware net revenue for Fiscal 2021 increased in both the United States and internationally.
Operating Income— During Fiscal 2018,2021, VMware operating income as a percentage of net revenue increased 180 basis points to 30.1%. The increase was 31.8%, primarily driven by strong gross margin performance during the year.
Fiscal 2017 compared to Fiscal 2016
Net Revenue —a decrease in VMware net revenue during Fiscal 2017 represents revenue from the EMC merger transaction date of September 7, 2016 through February 3, 2017. VMware net revenue for Fiscal 2017 primarily consisted of revenue from the sale of software licenses under perpetual licenses, related software maintenanceselling, general, and support, training, consulting services, and hosted services.
From a geographical perspective, approximately half of VMware net revenue during Fiscal 2017 was generated by sales to customers in the United States.
Operating Income — During Fiscal 2017, VMware operating incomeadministrative expenses as a percentage of net revenue, was 34.5%. Theas we benefited from decreased travel-related costs resulting from travel restrictions imposed in response to the COVID-19 pandemic. While the COVID-19 pandemic has not had a significant adverse financial impact on VMware operating income percentage during Fiscal 2017 was impacted byoperations to date, there continues to be significant uncertainty regarding the timingeconomic effects of the completionCOVID-19 pandemic and the extent to which it may have a negative impact on VMware’s sales and results of the EMC merger transaction.operations in Fiscal 2022.
OTHER BALANCE SHEET ITEMS
Accounts Receivable
We sell products and services directly to customers and through a variety of sales channels, including retail distribution. Our accounts receivable, net, was $11.2$12.8 billion and $9.4$12.5 billion as of February 2, 2018January 29, 2021 and February 3, 2017,January 31, 2020, respectively. We maintain an allowance for doubtful accountsexpected credit losses to cover receivables that may be deemed uncollectible. The allowance for expected credit losses is an estimate based on a provision for accounts that are collectively evaluated based onan analysis of historical bad debtloss experience, current receivables aging, and management’s assessment of current conditions and reasonable and supportable expectation of future conditions, as well as specific identifiable customer accounts that are deemed at risk. Our analysis includes assumptions regarding the impact of COVID-19 and continued market volatility, which is highly uncertain and subject to significant judgment. Given this uncertainty, our allowance for expected credit losses in future periods may vary from our current estimates. As of February 2, 2018January 29, 2021 and February 3, 2017,January 31, 2020, the allowance for doubtful accountsexpected credit losses was $103$104 million and $57$94 million,, respectively. Allowance for expected credit losses of trade receivables as of January 29, 2021 includes the impact of adoption of the new current expected credit losses (“CECL”) standard, which was adopted as of February 1, 2020 using the modified retrospective method. Based on our assessment, we believe that we are adequately reserved for expected credit losses. We will continue to monitor the aging of our accounts receivable and continue to take actions, where necessary, to reduce our exposure to credit losses.
Dell Financial Services and Financing Receivables
DFS supports Dell Financial ServicesTechnologies by offering and its affiliates ("DFS") offers a wide range of financialarranging various financing options and services for our customers globally, including originating, collecting,through captive financing operations in North America, Europe, Australia, and servicingNew Zealand. DFS originates, collects, and services customer receivables primarily related to the purchase of Dell Technologies' productsour product, software, and services. In someservice solutions. DFS further strengthens our customer relationships through its flexible consumption models, which enable us to offer our customers the option to pay over time and, in certain cases, we also offer financingbased on the purchase of third-party technology products that complement our portfolio of products and services.utilization, to provide them with financial flexibility to meet their changing technological requirements. New financing originations were $6.3$8.9 billion$4.5, $8.5 billion,, and $3.7$7.3 billion for Fiscal 2018,2021, Fiscal 2017,2020, and Fiscal 2016,2019, respectively.
Pursuant to the current lease accounting standard effective February 2, 2019, new DFS leases are classified as sales-type leases, direct financing leases, or operating leases. Amounts due from lessees under sales-type leases or direct financing leases are recorded as part of financing receivables, with interest income recognized over the contract term. On commencement of sales-type leases, we typically qualify for up-front revenue recognition. On originations of operating leases, we record equipment under operating leases, classified as property, plant, and equipment, and recognize rental revenue and depreciation expense, classified as cost of net revenue, over the contract term. Direct financing leases are immaterial. Leases that commenced prior to the effective date of the current lease accounting standard continue to be accounted for under previous lease accounting guidance.
As of February 2, 2018January 29, 2021 and February 3, 2017,January 31, 2020, our financing receivables, net were $7.6$10.5 billion and $5.99.7 billion, respectively. The increases in new financing originations and financing receivables during Fiscal 2018 were attributable to growth in DFS offerings related to customer purchases of products and services from the EMC acquired businesses.
We have securitization facilities to fund revolving loans and fixed-term leases and loans through consolidated special purpose entities, referred to as SPEs, which we account for as secured borrowings. We transfer certain U.S. and European customer financing receivables to these SPEs, whose purpose is to facilitate the funding of customer receivables through financing arrangements with multi-seller conduits that issue asset-backed debt securities in the capital markets and to private investors. During Fiscal 2018 and Fiscal 2017, we transferred $3.9 billion and $3.3 billion, respectively, to these SPEs. The DFS debt related to all of our securitization facilities included as secured borrowings was $3.9 billion and $3.1 billion as of February 2, 2018 and February 3, 2017, respectively. In addition, the carrying amount of the corresponding financing receivables was $4.6 billion and $3.6 billion as of February 2, 2018 and February 3, 2017, respectively. As a result of the EMC merger transaction, we are expanding our existing securitization facilities to allow for additional funding of customer receivables in the capital markets.
respectively. We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. Allowance for expected credit losses of financing receivables as of January 29, 2021 includes the impact of adoption of the CECL standard referred to above. Our analysis includes assumptions regarding the impact of COVID-19 and continued market volatility, which is highly uncertain and subject to significant judgment. Given this uncertainty, our allowance for expected credit losses in future periods may vary from our current estimates. For Fiscal 2018,2021, Fiscal 2017,2020, and Fiscal 2016,2019, the principal charge-off rate for our totalfinancing receivables portfolio was 1.5%0.7%, 2.0%1.0%, and 2.5%1.2%,respectively. The credit quality of our financing receivables has improved in recent years due to an overall improvement in the credit environment and as the mix of high-quality commercial accounts in our portfolio has increased. The allowance for losses is determined based on various factors, including historical and anticipated experience, past due receivables, receivable type, and customer risk profile. As of February 2, 2018 and February 3, 2017, the allowance for financing receivable losses was $145 million and $143 million, respectively. In general, the loss rates on our financing receivables have improved over the periods presented. We expect relatively stable loss rates in future periods, with movements in these rates being primarily driven by seasonality and a continued shift in portfolio composition to lower risk commercial assets.increase. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an extensive process to manage our exposure to customer credit risk, including active management of credit lines and our collection activities. We also sell selected fixed-term financing receivables without recourse to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. Based on our assessment of the customer financing receivables, we believe that we are adequately reserved.
We retain a residual interest in equipment leased under our lease programs. As of January 29, 2021 and January 31, 2020, the residual interest recorded as part of financing receivables was $424 million and $582 million, respectively. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, we assess the carrying amount of our recorded residual values for impairment. Generally, residual value risk on equipment under lease is not considered to be significant, because of the existence of a secondary market with respect to the equipment. The
lease agreement also clearly defines applicable return conditions and remedies for non-compliance, to ensure that the leased equipment will be in good operating condition upon return. Model changes and updates, as well as market strength and product acceptance, are monitored and adjustments are made to residual values in accordance with the significance of any such changes. To mitigate our exposure, we work closely with customers and dealers to manage the sale of returned assets. No material impairment losses were recorded related to residual assets during Fiscal 2021 and Fiscal 2020.
As of January 29, 2021 and January 31, 2020, equipment under operating leases, net was $1.3 billion and $0.8 billion, respectively. Based on triggering events, we assess the carrying amount of the equipment under operating leases recorded for impairment. No material impairment losses were recorded related to such equipment during Fiscal 2021 and Fiscal 2020.
DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. For DFS offerings which qualify as sales-type leases, the initial funding of financing receivables is reflected as an impact to cash flows from operations, and is largely subsequently offset by cash proceeds from financing. For DFS operating leases, which have increased under the current lease accounting standard, the initial funding is classified as a capital expenditure and reflected as an impact to cash flows used in investing activities.
See Note 74 of the Notes to the Consolidated Financial Statements included in this report for additional information about our financing receivables and the associated allowances.allowances, and equipment under operating leases.
Deferred Revenue
Deferred revenue is recorded when billings have been generated or payments have been received for undelivered products or services, or in situations where revenue recognition criteria have not been met. Deferred revenue represents amounts received in advance for extended warranty services, software maintenance, unearned license fees, and deferred profit on third-party software offerings. Deferred revenue is recognized on these items when the revenue recognition criteria are met, generally resulting in ratable recognition over the contract term. We also have deferred revenue related to undelivered hardware and professional services, consisting of installations and consulting engagements, which are recognized as our obligations under the contract are completed.
Our total deferred revenue was $22.2 billion and $18.7 billion as of February 2, 2018 and February 3, 2017, respectively. The increase in our deferred revenue was driven by a $2.2 billion increase in deferrals, primarily related to maintenance, extended warranty services, and the introduction of our flexible consumption model offerings. The increase also reflected $1.2 billion of amortization of our deferred revenue fair value adjustment primarily related to purchase accounting for the EMC merger transaction. A majority of our deferred revenue as of February 2, 2018 is expected to be recognized over the next two years.
Off-Balance Sheet Arrangements
As of February 2, 2018,January 29, 2021, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition or results of operations.
MARKET CONDITIONS, LIQUIDITY, CAPITAL COMMITMENTS, AND CONTRACTUAL CASH OBLIGATIONS
Market Conditions
We regularly monitor economic conditions and associated impacts on the financial markets and our business. We consistently evaluate the financial health of our supplier base, carefully manage customer credit, diversify counterparty risk, and monitor the concentration risk of our cash and cash equivalents balances globally. We routinely monitor our financial exposure to borrowers and counterparties.
We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as credit ratings issued by nationally recognized credit 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.
We use derivative instruments to hedge certain foreign currency exposures. We use forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted transactions denominated in currencies other than the U.S. dollar. In addition, we primarily use forward contracts and may use purchased options to hedge monetary assets and liabilities denominated in a foreign currency. See Note 97 of the Notes to the Consolidated Financial Statements included in this report for more information about our use of derivative instruments.
We are exposed to interest rate risk related to our variable-rate debt and investment portfolio. In the normal course of business, we follow established policies and procedures to manage this risk, including monitoring of our asset and liability mix. As a result, we do not anticipate any material losses from interest rate risk. For additional information, see "Item 7A — Quantitative and Qualitative Disclosures About Market Risk."
The impact of any credit adjustments related to our use of counterparties on our Consolidated Financial Statements included in this report has been immaterial.
Liquidity and Capital Resources
To support our ongoing business operations, we rely on operating cash flows as our primary source of liquidity. We monitor the efficiency of our balance sheet to ensure that we have adequate liquidity to support our business and strategic initiatives. In addition to internally generated cash, we have access to otherother capital sources to finance our strategic initiatives and fund growth in our financing operations. As of February 2, 2018, we had $13.9 billion of total cash and cash equivalents, the majority of which was held outside of the United States. 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.
A significant portion of our income is earned in non-U.S. jurisdictions. Prior to the enactment of U.S. Tax Reform as discussed above, earnings available to be repatriated to the United States would be subject to U.S. federal income tax, less applicable foreign tax credits. U.S. Tax Reform fundamentally changes the U.S. approach to taxation of foreign earnings to a modified territorial tax system, which generally allows companies to make distributions of non-U.S. earnings to the United States without incurring additional U.S. federal tax. However, local and U.S. state taxes may still apply. We have provided for future tax liabilities on income earned in non-U.S. jurisdictions, except for foreign earnings that are considered indefinitely reinvested outside of the United States.
The following table summarizespresents our cash and cash equivalents as well as our available borrowings as of February 2, 2018 and February 3, 2017:the dates indicated:
| | | | | | | | | | | |
| January 29, 2021 | | January 31, 2020 |
| (in millions) |
Cash and cash equivalents, and available borrowings: | | | |
Cash and cash equivalents (a) | $ | 14,201 | | | $ | 9,302 | |
Remaining available borrowings under revolving credit facilities (b) | 5,467 | | | 5,972 | |
Total cash, cash equivalents, and available borrowings | $ | 19,668 | | | $ | 15,274 | |
|
| | | | | | | |
| February 2, 2018 | | February 3, 2017 |
| (in millions) |
Cash and cash equivalents, and available borrowings: | | | |
Cash and cash equivalents (a) | $ | 13,942 |
| | $ | 9,474 |
|
Remaining available borrowings under revolving credit facilities | 4,875 |
| | 2,678 |
|
Total cash, cash equivalents, and available borrowings | $ | 18,817 |
| | $ | 12,152 |
|
______________________________________
(a) Of the $13.9$14.2 billion of cash and cash equivalents as of February 2, 2018, $6.0January 29, 2021, $4.7 billion was held by VMware, Inc.
(b) Of the $5.5 billion of remaining available borrowings under revolving credit facilities, $1.0 billion was attributable to the VMware Revolving Credit Facility.
Our revolving credit facilities as of January 29, 2021 include the Revolving Credit Facility and China Facility. The Revolving Credit Facility. AvailableFacility has a maximum capacity of $4.5 billion, and available borrowings under these facilities this facility are reduced by draws on the facility and under the Revolving Credit Facility, outstanding letters of credit. As of February 2, 2018,January 29, 2021, there were no borrowings outstanding under eitherthe facility and remaining available borrowings totaled approximately $3.8$4.5 billion. TheseWe may regularly use our available borrowings may be used periodicallyfrom our Revolving Credit Facility on a short-term basis for general corporate purposes.
The VMware Revolving Credit Facility and Pivotalhas a maximum capacity of $1.0 billion. As of January 29, 2021, $1.0 billion was available under the VMware Revolving Credit Facility have maximum aggregate borrowings of $1.0 billion and $100 million, respectively.Facility. None of the net proceeds of such borrowings under the VMware Revolving Credit Facility will be made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of VMware, Inc., Pivotal, and their respectiveVMware, Inc.’s subsidiaries. As
See Note 6 of February 2, 2018, $1.0 billion was available under the VMware Revolving Credit Facility and $80 million was available underNotes to the Pivotal Revolving Credit Facility.Consolidated Financial Statements included in this report for additional information about each of the foregoing revolving credit facilities.
We believe that our current cash and cash equivalents, alongtogether with cash that will be provided by future operations and borrowings expected to be available under the Revolving Credit Facility and China Revolving Credit Facility,our revolving credit facilities, will be sufficient over at least the next twelve months and for the foreseeable future thereafterto fund our operations, debt service requirements and maturities, capital expenditures, share repurchases, debt service requirements, and other corporate needs.
Debt
The following table summarizespresents our outstanding debt as of February 2, 2018 and February 3, 2017:the dates indicated:
| | | | | | | | | | | | | | | | | |
| January 29, 2021 | | Increase (Decrease) | | January 31, 2020 |
| (in millions) |
Core debt | | | | | |
Senior Secured Credit Facilities and First Lien Notes | $ | 24,777 | | | $ | (4,887) | | | $ | 29,664 | |
Unsecured Notes and Debentures | 1,352 | | | — | | | 1,352 | |
Senior Notes | 2,700 | | | — | | | 2,700 | |
EMC Notes | 1,000 | | | (600) | | | 1,600 | |
DFS allocated debt | (666) | | | 829 | | | (1,495) | |
Total core debt | 29,163 | | | (4,658) | | | 33,821 | |
DFS related debt | | | | | |
DFS debt | 9,666 | | | 1,901 | | | 7,765 | |
DFS allocated debt | 666 | | | (829) | | | 1,495 | |
Total DFS related debt | 10,332 | | | 1,072 | | | 9,260 | |
Margin Loan Facility and other | 4,235 | | | 151 | | | 4,084 | |
Debt of public subsidiary | | | | | |
VMware Notes | 4,750 | | | 750 | | | 4,000 | |
VMware Term Loan Facility | — | | | (1,500) | | | 1,500 | |
Total public subsidiary debt | 4,750 | | | (750) | | | 5,500 | |
Total debt, principal amount | 48,480 | | | (4,185) | | | 52,665 | |
Carrying value adjustments | (496) | | | 113 | | | (609) | |
Total debt, carrying value | $ | 47,984 | | | $ | (4,072) | | | $ | 52,056 | |
|
| | | | | | | |
| February 2, 2018 | | February 3, 2017 |
| (in millions) |
Restricted Subsidiary Debt | | | |
Core debt: | | | |
Senior Secured Credit Facilities and First Lien Notes | $ | 30,595 |
| | $ | 31,638 |
|
Unsecured Notes and Debentures | 2,452 |
| | 2,453 |
|
Senior Notes | 3,250 |
| | 3,250 |
|
EMC Notes | 5,500 |
| | 5,500 |
|
DFS allocated debt | (1,892 | ) | | (1,675 | ) |
Total core debt | 39,905 |
| | 41,166 |
|
DFS related debt: | | | |
DFS debt | 4,796 |
| | 3,464 |
|
DFS allocated debt | 1,892 |
| | 1,675 |
|
Total DFS related debt | 6,688 |
| | 5,139 |
|
Other | 2,054 |
| | 4,051 |
|
Unrestricted Subsidiary Debt | | | |
VMware Notes | 4,000 |
| | — |
|
Other | 47 |
| | — |
|
Total unrestricted subsidiary debt | 4,047 |
| | — |
|
Total debt, principal amount | 52,694 |
| | 50,356 |
|
Carrying value adjustments | (823 | ) | | (966 | ) |
Total debt, carrying value | $ | 51,871 |
| | $ | 49,390 |
|
TheDuring Fiscal 2021, the outstanding principal amount of our debt was $52.7decreased by $4.2 billion to $48.5 billion as of February 2, 2018, which includedJanuary 29, 2021, primarily driven by net repayments of core debt of $39.9 billion. and VMware, Inc. debt, partially offset by a net increase in DFS debt.
We define core debt as the total principal amount of our debt, less: (a)less DFS related debt, (b)our Margin Loan Facility and other debt, and (c) unrestrictedpublic subsidiary debt. Our core debt was $29.2 billion and $33.8 billion as of January 29, 2021 and January 31, 2020, respectively. The decrease in our core debt during Fiscal 2021 was driven by principal repayments. Proceeds of $2.082 billion from the sale of RSA Security in Fiscal 2021 were used to pay down core debt. See Note 6 of the Notes to the Consolidated Financial Statements included in this report for more information about our debt.
We will continue to prioritize debt paydown as part of our overall capital allocation strategy, including $1.5 billion of scheduled maturities due in Fiscal 2022. Subsequent to January 29, 2021, we repaid $400 million principal amount of our 4.625% Unsecured Notes due April 2021 and $600 million principal amount of our 5.875% Senior Notes due June 2021.
During Fiscal 2021, we issued an additional $1.9 billion, net, in DFS debt to support the expansion of its financing receivables portfolio. DFS related debt primarily represents debt from our securitization and structured financing programs. The majority of DFS debt represents borrowings under securitization programs and structured financing programs, for which our risk of loss is limited to transferred lease and loan payments and associated equipment, and under which the credit holders have no recourse to Dell Technologies.
To fund expansion of the DFS business, we balance the use of ourthe securitization and structurestructured financing programs with other sources of liquidity. We approximate the amount of our debt used to fund the DFS business by applying a 7:1 debt to equity ratio to the sum of our financing receivables balance and equipment under our DFS operating leases, net. The debt to equity ratio is based on the underlying credit quality of the assets. See Note 74 of the Notes to the Consolidated Financial Statements included in this report for more information about our DFS debt.
As of February 2, 2018,January 29, 2021 and January 31, 2020, margin loan and other debt primarily consisted of the $2.0$4.0 billion Margin Loan Facility. As
Public subsidiary debt represents VMware, Inc. indebtedness. The decrease in debt of February 3, 2017, other debt primarily consisted of the Margin Bridge Facility and VMware Note Bridge Facility which were repaidpublic subsidiary during Fiscal 2018.
2021 was driven by principal repayments by VMware, Inc., Pivotal, VMware, Inc. and theirits respective subsidiaries are unrestricted subsidiaries for purposes of the existingcore debt of Dell Technologies. Neither Dell Technologies nor any of its subsidiaries, other than VMware, Inc., is obligated to make payment on the VMware Notes. None of the net proceeds of the VMware Notes will beare made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of VMware, Inc. and its subsidiaries. See Note 6 of the Notes to the Consolidated Financial Statements included in this report for more information about VMware, Inc. debt.
Our requirements for cashWe have made steady progress in paying down core debt. We believe we will continue to paybe able to make our debt principal and interest have increased significantly duepayments, including the short-term maturities, from existing and expected sources of cash, primarily from operating cash flows. Cash used for debt principal and interest payments may include short-term borrowings under our revolving credit facilities. We will continue to focus on paying down core debt. Under our variable-rate debt, we could experience variations in our future interest expense from potential fluctuations in applicable reference rates, or from possible fluctuations in the borrowings that werelevel of DFS debt required to finance the EMC merger transaction.meet future demand for customer financing. We or our affiliates or their related persons, at our or their sole discretion, may purchase, redeem, prepay, refinance, or otherwise retire any amount of our outstanding indebtedness under the terms of such indebtedness at any time and from time to time, in open market or negotiated transactions with the holders of such indebtedness or otherwise, as appropriate market conditions exist.
See Note 8 of the Notes to the Consolidated Financial Statements included in this report for more information about our debt and our unrestricted subsidiaries.
Fiscal 2018
During Fiscal 2018, we completed two refinancing transactions of the Senior Secured Credit Facilities. In the first refinancing transaction, which occurred during the first quarter of Fiscal 2018, we refinanced the Term Loan B Facility to reduce the interest rate margin by 0.75% and to increase the outstanding principal amount by $0.5 billion. We applied the proceeds from the Term Loan B Facility refinancing to repay $0.5 billion principal amount of the Margin Bridge Facility. Additionally, during the first quarter of Fiscal 2018, we entered into the Margin Loan Facility in the principal amount of $2.0 billion, and used the proceeds of the new facility to repay the Margin Bridge Facility in full.
In the second refinancing transaction, which occurred during the third quarter of Fiscal 2018, we refinanced the Term Loan A-2 Facility, Term Loan A-3 Facility, Term Loan B Facility, and the Revolving Credit Facility. As a result of the refinancing, the interest rate margin under each of these facilities decreased by 0.50% and the outstanding principal amount of the Term Loan A-2 Facility increased by $672 million, which was used to pay $212 million principal amount of the Term Loan A-3 Facility and $460 million principal amount of the Term Loan B Facility. Further, the Revolving Credit Facility's borrowing capacity increased by $180 million to $3.3 billion.
During Fiscal 2018, we repaid approximately $1.2 billion principal amount of our term loan facilities and $0.4 billion under the Revolving Credit Facility and issued an additional $1.3 billion, net, in DFS debt to support the expansion of the DFS financing receivables portfolio.
Further, during the third quarter of Fiscal 2018, VMware, Inc. completed a public offering of senior notes in the aggregate principal amount of $4.0 billion (the "VMware Notes"). VMware, Inc. used a portion of the net proceeds from the offering to repay certain intercompany promissory notes previously issued by it to EMC in the aggregate principal amount of $1.2 billion. We applied the proceeds of this repayment, and other cash, to repay $1.5 billion principal amount of the VMware Note Bridge Facility. VMware, Inc. has disclosed that it intends to use the remaining net proceeds of the debt issuance to fund additional repurchases of up to $1.0 billion of its Class A common stock through August 31, 2018, and for general VMware, Inc. corporate purposes, including mergers and acquisitions and repaying other indebtedness.
Fiscal 2017
To finance the EMC merger transaction, we issued an aggregate principal amount of $45.9 billion in new debt, which included proceeds from the sale of the First Lien Notes and Senior Notes, as well as borrowings under the Senior Secured Credit Facilities (including the Revolving Credit Facility), the Asset Sale Bridge Facility, the Margin Bridge Facility, and the VMware Note Bridge Facility at the closing of the transaction. Additionally, on September 7, 2016, EMC had outstanding senior notes (the "EMC Notes") consisting of $2.5 billion aggregate principal amount of its 1.875% Notes due June 2018, $2.0 billion aggregate principal amount of its 2.650% Notes due June 2020 and $1.0 billion aggregate principal amount of its 3.375% Notes due June 2023. The EMC Notes remain outstanding following the closing of the EMC merger transaction.
Cash Flows
The following table containspresents a summary of our Consolidated Statements of Cash Flows for the respective periods:periods indicated:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 29, 2021 | | January 31, 2020 | | February 1, 2019 |
| (in millions) |
Net change in cash from: | | | | | |
Operating activities | $ | 11,407 | | | $ | 9,291 | | | $ | 6,991 | |
Investing activities | (460) | | | (4,686) | | | 3,389 | |
Financing activities | (5,950) | | | (4,604) | | | (14,329) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 36 | | | (90) | | | (189) | |
Change in cash, cash equivalents, and restricted cash | $ | 5,033 | | | $ | (89) | | | $ | (4,138) | |
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
| (in millions) |
Net change in cash from: | | | | | |
Operating activities | $ | 6,810 |
| | $ | 2,309 |
| | $ | 2,162 |
|
Investing activities | (2,881 | ) | | (31,256 | ) | | (321 | ) |
Financing activities | 364 |
| | 31,821 |
| | (496 | ) |
Effect of exchange rate changes on cash and cash equivalents | 175 |
| | 24 |
| | (167 | ) |
Change in cash and cash equivalents | $ | 4,468 |
| | $ | 2,898 |
| | $ | 1,178 |
|
Operating Activities — Cash provided by operating activities was $6.8$11.4 billion forand $9.3 billion during Fiscal 2018 compared2021 and Fiscal 2020, respectively. Our record cash flow from operations in Fiscal 2021 was due to $2.3 billion forstrong profitability, revenue growth, and working capital dynamics. COVID-19 impacts to working capital normalized by the end of Fiscal 2017. The increase in operating2021.
DFS offerings are initially funded through cash on hand at the time of origination, most of which is subsequently replaced with third-party financing. For DFS offerings that qualify as sales-type leases, the initial funding of financing receivables is reflected as an impact to cash flows during Fiscal 2018 was driven by improved profitability, predominantly due to the incremental profitability from the EMC acquired businesses,operations, and ongoing working capital initiatives. Further, cash paid for transaction costs during Fiscal 2017 did not recur in Fiscal 2018. The increase in operating cash flows was partially offset by the growth in our financing receivables portfolio and cash paid for interest and taxes.
Cash provided by operating activities was $2.3 billion for Fiscal 2017 compared to $2.2 billion for Fiscal 2016. Cash flow performance during both periods was strong and remained relatively unchanged as the incremental profitability from the EMC acquired businesses during Fiscal 2017 wasis largely subsequently offset by cash paid for transaction costs.proceeds from financing. For
DFS operating leases, which have increased under the current lease accounting standard, the initial funding is classified as a capital expenditure and reflected as cash flows used in investing activities. DFS new financing originations were $8.9 billion and $8.5 billion during Fiscal 2021 and Fiscal 2020, respectively. As of January 29, 2021, DFS had $10.5 billion of total net financing receivables and $1.3 billion of equipment under DFS operating leases, net.
Investing Activities — Investing activities primarily consist of cash used to fund strategic investments, the maturities, sales, and purchases of investments, capital expenditures for property, plant, and equipment, andwhich includes equipment under DFS operating leases, capitalized software development costs.costs, strategic investments, acquisitions of businesses, and the maturities, sales, and purchases of investments. During Fiscal 2018,2021, cash used byin investing activities was $2.9 billion$460 million and was primarily driven by capital expenditures VMware Inc.'s Fiscal 2018 acquisitions, and cash used in acquisition of businesses, largely offset by net cash proceeds from the net purchasesdivestiture of investments. See Note 3 of the Notes to the Consolidated Financial Statements included in this report for further information regarding VMware, Inc.'s acquisitions.RSA Security. In comparison, cash used in investing activities was $31.3$4.7 billion during Fiscal 2017, principally due to our use of $37.6 billion, net cash to fund the EMC merger transaction.
Cash used in investing activities during Fiscal 2016, which2020 and was primarily consisted ofdriven by capital expenditures was $0.3 billion.and acquisitions of businesses.
Financing Activities — Financing activities primarily consist of the proceeds and repayments of debt, and cash used to repurchase common stock, and proceeds from the issuance of common stock. Cash provided byused in financing activities of $0.4$6.0 billion during Fiscal 2018 was driven2021 primarily consisted of debt repayments and repurchases of common stock by net proceeds from debt, primarily due to the issuance of the VMware Notes,our public subsidiaries, partially offset by cash used for share repurchases.
In comparison, during Fiscal 2017, cash provided by financing activities was $31.8 billion. Cash provided by financing activities consisted primarily of $46.9 billion in cash proceeds from debt, $43.2 billion of which was issued in connection with the EMC merger transaction, and $4.4 billion in proceeds from the saleissuances of multiple series of First Lien Notes and issuance of our Class A, Class B, and Class C Common Stock for financing of that transaction. These issuances were partially offset by $17.0 billion in repayments of debt, $0.9 billion in payments of debt issuance costs, $1.3 billion in payments to repurchase common stock, and $0.4 billion in payments in connection with the appraisal litigation related to the going-private transaction.
During Fiscal 2016,VMware Notes. In comparison, cash used in financing activities was $0.5of $4.6 billion andduring Fiscal 2020 primarily consisted of net repayments of debt.
Key Performance Metrics
Our key performance metrics are net revenue, operating income, adjusted EBITDA, and cash flows from operations, and are discussed elsewhere in this report. Our cash conversion cycle is presented below. Our approachcommon stock by our public subsidiaries, primarily related to and use of the cash conversion cycle has evolved since the EMC merger transaction. Accordingly, we believe a consolidated cash conversion cycle no longer constitutes a key performance metric for Dell Technologies. Beginning in the first quarter of Fiscal 2019, we will no longer present information about this metric as part of our management's discussion and analysis.
Cash Conversion Cycle
The following table presents the components of our cash conversion cycle for the periods presented:
|
| | | | | | | | |
| Three Months Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
Days of sales outstanding (a) | 49 |
| | 48 |
| | 39 |
|
Days of supply in inventory (b) | 16 |
| | 18 |
| | 14 |
|
Days in accounts payable (c) | (109 | ) | | (100 | ) | | (112 | ) |
Cash conversion cycle (d) | (44 | ) | | (34 | ) | | (59 | ) |
__________________
| |
(a) | Days of sales outstanding, referred to as DSO, calculates the average collection period of our receivables. DSO is based on the ending net trade receivables and the most recent quarterly non-GAAP net revenue for each period. DSO also includes the effect of product costs related to customer shipments not yet recognized as revenue that are classified in other current assets, as we believe this provides a more relevant metric that aligns with actual sales activity in the quarter, regardless of revenue recognition under GAAP. DSO is calculated by adding accounts receivable, net of allowance for doubtful accounts, and customer shipments in transit and dividing that sum by average non-GAAP net revenue per day for the current quarter (90 days for the three months ended February 2, 2018 and January 29, 2016, and 97 days for the three months ended February 3, 2017). As of February 2, 2018, DSO and days of customer shipments not yet recognized were 45 and 4 days, respectively. As of February 3, 2017, DSO and days of customer shipments not yet recognized were 44 and 3 days, respectively. As of January 29, 2016, DSO and days of customer shipments not yet recognized were 34 and 5 days, respectively. |
| |
(b) | Days of supply in inventory, referred to as DSI, measures the average number of days from procurement to sale of our products. DSI is based on ending inventory and non-GAAP cost of goods sold for each period. DSI is calculated by dividing ending inventory by average non-GAAP cost of goods sold per day for the current quarter (90 days for the three months ended February 2, 2018 and January 29, 2016, and 97 days for the three months ended February 3, 2017). |
| |
(c) | Days in accounts payable, referred to as DPO, calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and non-GAAP cost of goods sold for each period. DPO is calculated by dividing accounts payable by average non-GAAP cost of goods sold per day for the current quarter (90 days for the three months ended February 2, 2018 and January 29, 2016, and 97 days for the three months ended February 3, 2017). |
| |
(d) | We calculate our cash conversion cycle using non-GAAP net revenue and non-GAAP cost of goods sold because we believe that excluding certain items from the GAAP results facilitates management's understanding of this key performance metric. |
The table below provides reconciliations of each non-GAAP financial measure used in calculating the DSO, DSI, and DPO metrics to its most directly comparable GAAP financial measure:
|
| | | | | | | | | | | |
| Three Months Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
| (in millions) |
Net revenue | $ | 21,935 |
| | $ | 20,074 |
| | $ | 12,679 |
|
Non-GAAP adjustments: | | | | | |
Impact of purchase accounting | 284 |
| | 507 |
| | 89 |
|
Non-GAAP net revenue | $ | 22,219 |
| | $ | 20,581 |
| | $ | 12,768 |
|
| | | | | |
Cost of goods sold | $ | 16,155 |
| | $ | 15,543 |
| | $ | 10,425 |
|
Non-GAAP adjustments: | | | | | |
Amortization of intangibles | (910 | ) | | (847 | ) | | (97 | ) |
Impact of purchase accounting | (8 | ) | | (603 | ) | | (15 | ) |
Transaction-related expenses | (2 | ) | | (18 | ) | | — |
|
Other corporate expenses | (38 | ) | | (89 | ) | | (3 | ) |
Non-GAAP cost of goods sold | $ | 15,197 |
| | $ | 13,986 |
| | $ | 10,310 |
|
For the three months ended February 2, 2018, the change in our cash conversion cycle was favorable by 10 days when compared to the three months ended February 3, 2017. This change was driven by a nine day improvement in DPO, which was primarily attributable to alignment of supplier payment terms as part of our ongoing integration efforts following the EMC merger transaction. DSI also improved by two days, driven by efficient inventory management despite increased sales volume, while DSO was essentially flat.
For the three months ended February 3, 2017, changes in our cash conversion cycle were unfavorable by 25 days when compared to the three months ended January 29, 2016. This change was primarily driven by theVMware Inc.’s acquisition of EMC, which had a negative impact across all three components. DPO decreased 12 days primarily due to supplier payments terms of the EMC acquired businesses, DSO increased 9 days primarily due to differences in collections management from the EMC acquired businesses, and a DSI increased 4 days primarily as a result of a longer inventory cycle associated with the EMC acquired product lines.Pivotal.
We believe our business model allows us to maintain an efficient cash conversion cycle, which compares favorably with that of others in our industry.
Capital Commitments
Capital Expenditures— During Fiscal 20182021 and Fiscal 2017,2020, we spent $1.2$1.8 billion and $0.7$2.2 billion, respectively, on property, plant, and equipment. These expenditures were primarily incurred in connection with our global expansion efforts and infrastructure investments made to support future growth.growth, and the funding of equipment under DFS operating leases. During Fiscal 2021 and Fiscal 2020, funding of equipment under DFS operating leases was $0.7 billion and $0.9 billion, respectively. Product demand, product mix, and the use of contract manufacturers, as well as ongoing investments in operating and information technology infrastructure, influence the level and prioritization of our capital expenditures. Aggregate capital expenditures for Fiscal 2019, which will be primarily related to infrastructure investments and strategic initiatives,2022 are currently expected to total between $1.1$2.4 billion and $1.3 billion.$2.6 billion, of which approximately $0.8 billion is expected for equipment under DFS operating leases.
Repurchases of Common Stock
Class VDell Technologies Common Stock Repurchases by Dell Technologies Inc.—
On September 7, 2016,February 24, 2020, our board of directors approved a stock repurchase program (the "DHI Group Repurchase Program") under which we are authorized to use assets of the DHI Group to repurchase up to $1.0 billion of shares of Class VC Common Stock over a 24-month period expiring on February 28, 2022, of two years.which approximately $760 million remained available as of January 29, 2021. During the fiscal year ended February 3, 2017,Fiscal 2021, we repurchased 7approximately 6 million shares of Class VC Common Stock for $324 million using cashapproximately $240 million. During the first quarter of the DHI Group. Shares repurchasedFiscal 2021, we suspended activity under the DHI Group Repurchase Program are being held as treasury stock at cost. On December 13, 2016, the board of directors approved the suspension of the DHI Group Repurchase Program until such time as the board of directors authorizes the reinstatement of that program. As of February 2, 2018, remaining authorized amount for share repurchases under the DHI Group Repurchase Program was $676 million.
On December 13, 2016, the board of directors approved aour stock repurchase program (the “Class V Group Repurchase Program”) which authorized us to use assets of the Class V Group to repurchase up to $500 million of shares of Class Vprogram. During Fiscal 2020, Dell Technologies Common Stock over a period of six months. During Fiscal 2018, we repurchased 1.3 million shares of Class V Common Stock for $82 million pursuant to and in completion of this initial authorization. A total of 8.4 million sharesrepurchases were repurchased under this initial authorization, including shares repurchased during Fiscal 2017.immaterial.
On March 27, 2017 and August 18, 2017, the board of directors approved two amendments of the Class V Group Repurchase Program (the "March 2017 Class V Group Repurchase Program" and the “August 2017 Class V Group Repurchase Program,” respectively) which, when combined, authorized us to use assets of the Class V Group to repurchase up to an additional $600 million of shares of Class V Common Stock over additional six month periods from the respective board approval dates. On May 9, 2017, we completed the March 2017 Class V Group Repurchase Program, pursuant to which we repurchased 4.6 million shares of Class V Common Stock for $300 million. On October 31, 2017, we completed August 2017 Class V Group Repurchase Program, pursuant to which we repurchased 3.8 million shares of Class V Common Stock for $300 million.
VMware, Inc. Class A Common Stock Repurchases by VMware, Inc. —
On December 15, 2016, we entered into a stock purchase agreement withMay 29, 2019, VMware, Inc. (the "December 2016 Stock Purchase Agreement"), pursuant to which VMware, Inc. agreed to repurchase for cash $500 million of shares of VMware, Inc. Class A common stock from a subsidiary of Dell Technologies. During Fiscal 2018, VMware, Inc. repurchased 1.4 million shares for $125 million pursuant to and in completion of the December 2016 Stock Purchase Agreement. VMware, Inc. repurchased a total of 6.2 million shares under this agreement, including shares repurchased during Fiscal 2017. We applied the proceeds from the sale to the repurchase of shares of our Class V Common Stock under the Class V Group Repurchase Program described above. All shares repurchased under VMware, Inc.'s stock repurchase programs are retired.
In January 2017 and August 2017, VMware, Inc.'s’s board of directors authorized the repurchase of up to $2.2$1.5 billion of shares of VMware, Inc. Class A common stock (the "January 2017 Authorization" for up to $1.2 billion through the end of Fiscal 2018, and the "August 2017 Authorization" for up to $1 billion through August 31, 2018). On March 29, 2017 and August 23, 2017, we entered into two new stock purchase agreements with VMware, Inc. (the "March 2017 Stock Purchase Agreement" and the "August 2017 Stock Purchase Agreement," respectively), pursuant to which VMware, Inc. agreed to repurchase for cash a total of $600 million of shares of VMware, Inc.’s Class A common stock from a subsidiarythrough January 29, 2021. On July 15, 2020, VMware, Inc.’s board of Dell Technologies.directors extended authorization of VMware, Inc. repurchased approximately 6.1 million shares’s existing repurchase program and authorized the repurchase of up to an additional $1.0 billion of VMware, Inc.’s Class A common stock consisting of 3.4 million shares pursuant to the March 2017 Stock Purchase Agreement and 2.7 million shares pursuant to the August 2017 Stock Purchase Agreement. We applied the proceeds of the sales to the repurchase of shares of the Class V Common Stock under the March 2017 and August 2017 Class V Group Repurchase Programs described above.through January 28, 2022. As of November 3, 2017,January 29, 2021, the sale transactions under the March 2017 and August 2017 Stock Purchase Agreements were completed. The purchase prices of the 3.4 million shares and 2.7 million shares repurchased by VMware, Inc. were each based on separate volume-weighted average per share prices of the Class A commoncumulative authorized amount remaining for stock as reported on the New York Stock Exchange during separate specified reference periods, less a discount of 3.5% from the respective volume-weighted average per share price.repurchases was $1.1 billion.
During Fiscal 2018,2021, VMware, Inc. repurchased 6.46.9 million shares of its Class A common stock in the open market for $724approximately $945 million.
As of February 2, 2018, the cumulative authorized amount remaining for share repurchases by During Fiscal 2020, VMware, Inc. was $876repurchased 7.7 million which represents the $2.2 billion authorized since January 2017, less $600 millionshares of its Class A common stock repurchases from a subsidiary of the Company during Fiscal 2018, and less $724 million of the Class A common stock repurchases in the open market during Fiscal 2018.for approximately $1.3 billion, of which approximately $0.2 billion impacted Dell Technologies’ accumulated deficit balance as of January 31, 2020 as a result of the full depletion of VMware, Inc.’s additional paid-in capital balance in the same period.
For more information regarding share repurchase programs, see Note 18 of the Notes to the Consolidated Financial Statements included in this report.
Contractual Cash Obligations
The following table summarizespresents a summary our contractual cash obligations as of February 2, 2018:January 29, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Fiscal Year |
| Total | | 2022 | | 2023-2024 | | 2025-2026 | | Thereafter |
| (in millions) |
Contractual cash obligations: | | | | | | | | | |
Principal payments on long-term debt: | | | | | | | | | |
Core debt | $ | 29,829 | | | $ | 1,475 | | | $ | 7,264 | | | $ | 7,388 | | | $ | 13,702 | |
DFS debt | 9,666 | | | 4,888 | | | 4,061 | | | 717 | | | — | |
Margin Loan Facility and other | 4,235 | | | 11 | | | 4,184 | | | 16 | | | 24 | |
VMware Notes | 4,750 | | | — | | | 1,500 | | | 750 | | | 2,500 | |
Total principal payments on long-term debt | 48,480 | | | 6,374 | | | 17,009 | | | 8,871 | | | 16,226 | |
Interest | 13,966 | | | 1,911 | | | 3,256 | | | 2,368 | | | 6,431 | |
Purchase obligations | 5,878 | | | 4,885 | | | 922 | | | 52 | | | 19 | |
Operating leases | 2,652 | | | 472 | | | 769 | | | 436 | | | 975 | |
Tax obligations | 164 | | | 19 | | | 84 | | | 61 | | | — | |
Contractual cash obligations | $ | 71,140 | | | $ | 13,661 | | | $ | 22,040 | | | $ | 11,788 | | | $ | 23,651 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Fiscal Year |
| Total | | 2019 | | 2020-2021 | | 2022-2023 | | Thereafter |
| (in millions) |
Contractual cash obligations: | | | | | | | | | |
Principal payments on long-term debt | $ | 52,694 |
| | $ | 7,888 |
| | $ | 9,899 |
| | $ | 13,567 |
| | $ | 21,340 |
|
Operating leases | 2,060 |
| | 405 |
| | 620 |
| | 335 |
| | 700 |
|
Purchase obligations | 3,521 |
| | 3,046 |
| | 375 |
| | 96 |
| | 4 |
|
Interest | 16,751 |
| | 2,181 |
| | 3,769 |
| | 2,738 |
| | 8,063 |
|
Uncertain tax positions (a) | — |
| | — |
| | — |
| | — |
| | — |
|
Contractual cash obligations | $ | 75,026 |
| | $ | 13,520 |
| | $ | 14,663 |
| | $ | 16,736 |
| | $ | 30,107 |
|
____________________
| |
(a) | We have approximately $3.2 billion in additional liabilities associated with uncertain tax positions as of February 2, 2018. We are unable to reliably estimate the expected payment dates for any liabilities for uncertain tax positions. |
Principal Payments on Long-Term Debt— Our expected principal cash payments on borrowings are exclusive of discounts and premiums. We have outstanding long-term notes with varying maturities. As of February 2, 2018, the future principal payments related to our DFS debt were expected to be $3.3 billion in Fiscal 2019, $1.4 billion in Fiscal 2020-2021, and immaterial thereafter. For additional information about our debt, see Note 86 of the Notes to the Consolidated Financial Statements included in this report.
Operating LeasesInterest— We lease property Of the total cash obligations for interest presented in the table above, the amounts related to our DFS debt were expected to be $105 million in Fiscal 2022, $48 million in Fiscal 2023-2024, and equipment, manufacturing facilities,$1 million in Fiscal 2025-2026. See Note 6 of the Notes to the Consolidated Financial Statements included in this report for further discussion of our debt and office space under non-cancelable leases. Certain of these leases obligate us to pay taxes, maintenance, and repair costs.related interest expense.
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 canceled without penalty.
We utilize several suppliers to manufacture sub-assemblies for our products. Our efficient supply chain management allows us to enter into flexible and mutually beneficial purchase arrangements with our suppliers in order to minimize inventory risk. Consistent with industry practice, we acquire raw materials or other goods and services, including product components, by issuing to suppliers authorizations to purchase based on our projected demand and manufacturing needs. These purchase orders are typically fulfilled within 30 days and are entered into during the ordinary course of business in order to establish best pricing and continuity of supply for our production. Purchase orders are not included in purchase obligations, as they typically represent our authorization to purchase rather than binding purchase obligations.
InterestOperating Leases— We lease property and equipment, manufacturing facilities, and office space under non-cancelable leases. Certain of these leases obligate us to pay taxes, maintenance, and repair costs. See Note 85 of the Notes to the Consolidated Financial Statements included in this report for further discussionadditional information about our leasing transactions in which we are the lessee.
Tax Obligations— Tax obligations represent a one-time mandatory deemed repatriation tax on undistributed earnings of our debt and related interest expense.
foreign subsidiaries. Excluded from the table above are $1.4 billion in additional liabilities associated with uncertain tax positions as of January 29, 2021. We are unable to reliably estimate the expected payment dates for any liabilities for uncertain tax positions. See Note 11 of the Notes to the Consolidated Financial Statements included in this report for more information on these tax matters.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with GAAP, which requires certain estimates, assumptions, and judgments to be made that may affect our Consolidated Statements of Financial Position and Consolidated Statements of Income.Income (Loss). Accounting policies that have a significant impact on our Consolidated Financial Statements are described in Note 2 of the Notes to the Consolidated Financial Statements included in this report. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical. We consider an accounting policy to be critical if the nature of the estimate or assumption is subject to a material level of judgment and if changes in those estimates or assumptions are reasonably likely to materially impact our Consolidated Financial Statements. We have discussed the development, selection, and disclosure of our critical accounting policies with the Audit Committee of our board of directors.
Revenue Recognition and Related Allowances — We enter into contracts to sell our products and services, and frequently enter into sales arrangements with customers that contain multiple elements or deliverables, such as hardware, services, software licenses, and peripherals. Significant judgments and estimates are necessary for the allocation of the proceeds received from an arrangement to the multiple elements, and the appropriate timing of revenue recognition.
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 and allowance for doubtful accounts, and adjust the amounts as necessary.
We sell our products directly to customers as well as through other channels, including value-added resellers, system integrators, distributors, and retailers. Sales through our sales channels are primarily made under agreements allowing for limited rights of return, price protection, rebates, and marketing development funds. We have generally limited return rights through contractual caps or we have an established selling history for these arrangements. Therefore, there are sufficient data to establish reasonable and reliable estimates of returns for the majority of these sales. To the extent price protection or return rights are not limited and a reliable estimate cannot be made, all of the revenue and related costs are deferred until the product has been sold to the end-user or the rights expire. We record estimated reductions to revenue or an expense for channel programs at the later of the offer or the time revenue is recognized.
Another significant judgment includes determining whether Dell or a reseller is acting as the principal in a transaction. For arrangements in which a reseller is the principal, revenue is recognized on a net basis. All other revenue is recognized on a gross basis.
As our business evolves, the mixwide portfolio of products and services offerings to our customers. Our agreements have varying requirements depending on the goods and services being sold, will impact the timingrights and obligations conveyed, and the legal jurisdiction of the arrangement.
Our contracts with customers often include multiple performance obligations for various distinct goods and services such as hardware, software licenses, support and maintenance agreements, and other service offerings and solutions. We use significant judgment to assess whether these promises are distinct performance obligations that should be accounted for separately. In certain hardware solutions, the hardware is highly interdependent on, and interrelated with, the embedded software. In these offerings, the hardware and software licenses are accounted for as a single performance obligation.
The transaction price reflects the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to the customer. If the consideration promised in a contract includes a variable amount, we estimate the amount to which we expect to be entitled using either the expected value or most likely amount method. Estimates are updated each reporting period as the variability is resolved or if additional information becomes available. Generally, volume discounts, rebates, and sales returns reduce the transaction price. When we determine the transaction price, we only include amounts that are not subject to significant future reversal.
When a contract includes multiple performance obligations, the transaction price is allocated to each performance obligation in proportion to the standalone selling price (“SSP”) of each performance obligation.
Judgment is required when revenue and related costs are recognized.determining the SSP of our performance obligations. If the observable price is available, we utilize that price for the SSP. If the observable price is not available, the SSP must be estimated. We analyze variousestimate SSP by considering multiple factors, including, a review ofbut not limited to, pricing practices, internal costs, and profit objectives as well as overall market conditions, which include geographic or regional specific transactions, the credit-worthiness offactors, competitive positioning, and competitor actions. SSP for our customers, our historical experience, and market and economic conditions. Changes in judgments on these factors could materially impact the timing and amount of revenue and costs recognized.performance obligations is periodically reassessed.
Business Combinations and Intangible Assets, Including Goodwill — We account for business combinations usingallocate the purchase price of acquired companies to the identifiable assets acquired and liabilities assumed, which are measured based on acquisition date fair value. Goodwill is measured as the excess of consideration transferred over the net amounts of the identifiable tangible and intangible assets acquired and the liabilities assumed at the acquisition method of accounting, and, accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition.date. The excessallocation of the purchase price over the estimatedrequires us to make significant estimates and assumptions, including fair value is recordedestimates, to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as goodwill. Any changesof the acquisition date. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•future expected cash flows from sales, maintenance agreements, and acquired developed technologies;
•the acquired company’s trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company’s product portfolio; and
•discount rates used to determine the present value of estimated fair valuesfuture cash flows.
These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price allocable to goodwill. The cumulative impact of any subsequent changes to any purchase price allocations that are material to our consolidated financial results willfor the acquisition could be adjusted in the reporting period in which the adjustment amount is determined. All acquisition costs are expensed as incurred. Identifiable intangible assets with finite lives are amortized over their estimated useful lives. In-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Separately recognized transactions associated with business combinations are generally expensed subsequentallocated to the acquisition date. The application of business combinationacquired assets and impairment accounting requires the use of significant estimates and assumptions.
The results of operations of acquired businesses are included in our Consolidated Financial Statementsassumed liabilities differently from the acquisition date.allocation that we have made. Additionally, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates, or actual results.
Goodwill and Indefinite-Lived Intangible Assets Impairment Assessments — Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third fiscal quarter and whenever events or circumstances may indicate that an impairment has occurred. To determine whether goodwill is impaired, we first assess certain qualitative factors. Based on this assessment, if it is determined more likely than not that the fair value of a goodwill reporting unit is less than its carrying amount, we perform the quantitative analysis of the goodwill impairment test. Significant judgment is exercised in the identification of goodwill reporting units, assignment of assets and liabilities to goodwill reporting units, assignment of goodwill to reporting units, and determination of the fair value of each goodwill reporting unit. The fair value of each of our goodwill reporting units is generally estimated using a combination of public company multiples and discounted cash flow methodologies, and then compared to the carrying value of each goodwill reporting unit.
Standard Warranty Liabilities — We record warranty liabilities at the time The discounted cash flow and public company multiples methodologies require significant judgment, including estimation of sale for the estimated costs that may be incurred under the termsfuture revenues, gross margins, and operating expenses, which are dependent on internal forecasts, current and anticipated economic conditions and trends, selection of market multiples through assessment of the limited warranty. The liability for standard warranties is included in accruedreporting unit’s performance relative to peer competitors, the estimation of the long-term revenue growth rate and other current and other non-current liabilities on the Consolidated Statementsdiscount rate of Financial Position. The specific warranty terms and conditions vary depending upon the product soldour business, and the countrydetermination of our weighted average cost of capital. Changes in which we do business, butthese estimates and assumptions could materially affect the fair value of the goodwill reporting unit, potentially resulting in a non-cash impairment charge.
The fair value of the indefinite-lived trade names is generally include technical support, parts, and labor over a period ranging from one to three years. Factors that affect our warranty liability includeestimated using discounted cash flow methodologies. The discounted cash flow methodology requires significant judgment, including estimation of future revenue, the numberestimation 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 anticipatedthe long-term revenue growth rate of warranty claims isour business, and the primary factor impacting our estimated warranty obligation. The other factors are less significant due to the fact that the average remaining aggregate warranty perioddetermination of the covered installed base is approximately 16 months, repair parts are generally alreadyour weighted average cost of capital and royalty rates. Changes in stock or available at pre-determined prices,these estimates and labor rates are generally arranged at pre-established amounts with service providers. Warranty claims are reasonably predictable based on historical experience of failure rates. If actualresults differ from our estimates, we revise our estimated warranty liability to reflect such changes. Each quarter, we reevaluate our estimates to assessassumptions could materially affect the adequacyfair value of the recorded warranty liabilities and adjust the amounts as necessary.indefinite-lived intangible assets, potentially resulting in a non-cash impairment charge.
Income Taxes — We are subject to income tax in the United States and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for 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 account for the tax impact of including Global Intangible Low-Taxed Income (GILTI) in U.S. taxable income as a period cost. We provide related valuation allowances for deferred tax assets, where appropriate. Significant judgment is required in determining any valuation allowance against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence for each jurisdiction, including past operating results, estimates of future taxable income, and the feasibility of ongoing tax planning strategies. In the event we determine that all or part of the net deferred tax assets are not realizable in the future, we will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made.
Significant judgment is also required in evaluating our uncertain tax positions. Although we believe our tax return positions are sustainable, we recognize tax benefits from uncertain tax positions in the financial statements only when it is more likely than not that the positions will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority'sauthority’s administrative practices and precedents. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties. We believe we have provided adequate reserves for all uncertain tax positions.
LossLegal and Other Contingencies — WeThe outcomes of legal proceedings and claims brought against us 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.significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued whenby a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate current information available to us to determineIn determining whether such accrualsa loss should be adjustedaccrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and whether new accruals are required. Third parties havethe ability to make a reasonable estimate of the amount of loss. Changes 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,these factors could materially impact our business, operating results, andconsolidated financial condition could be materially and adversely affected.statements.
Inventories — We state our inventory at the lower of cost or market.net realizable value. We record a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. We perform a detailed review of inventory each fiscalquarter that considers multiple factors, including demand forecasts, product life cycle status, product development plans, current sales levels, product pricing, and component cost trends. The industries in which we compete are subject to demand changes. If future demand or market conditions for our products are less favorable thanforecasted or if unforeseen technological changes negatively impact the utility of component inventory, we may be required to record additional write-downs, which would adversely affect our gross margin.
Recently Issued Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements included in this report for a summary of recently issued accounting pronouncements that are applicable to our Consolidated Financial Statements.
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Dell Technologies is exposed to a variety of market risks, including risks associated with foreign currency exchange rate fluctuations, interest rate changes affecting its variable-rate debt, and changes in the market value of equity investments. In the normal course of business, Dell Technologies employs established policies and procedures to manage these risks.
Foreign Currency Risk
During Fiscal 20182021 and Fiscal 2017,2020, the principal foreign currencies in which Dell Technologies transacted business were the Euro, Chinese Renminbi, Japanese Yen, British Pound, and Canadian Dollar. The objective of Dell Technologies in managing its exposures to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations associated with foreign currency exchange rate changes on earnings and cash flows. Accordingly, Dell Technologies utilizes foreign currency option contracts and forward contracts to hedge its exposure on forecasted transactions and firm commitments for certain currencies. Dell Technologies monitors its foreign currency exchange exposures to ensure the overall effectiveness of its foreign currency hedge positions. However, there can be no assurance that the foreign currency hedging activities will continue to substantially offset the impact of fluctuations in currency exchange rates on Dell Technologies'Technologies’ results of operations and financial position in the future.
Based on the outstanding foreign currency hedge instruments of Dell Technologies, which include designated and non-designated instruments, there was a maximum potential one-day loss in fair value ata 95% confidence level of approximately$1715 million as of January 29, 2021 and $24 million as of February 2, 2018 and $25 million as of February 3, 2017January 31, 2020 using a Value-at-Risk ("VAR"(“VAR”) model. By using market implied rates and incorporating volatility and correlation among the currencies of a portfolio, the VAR model simulates 10,000 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 could be incurred. Additionally, as Dell Technologies utilizes 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
Dell Technologies is primarily exposed to interest rate risk related to its variable-rate debt and investment portfolio.
Variable-Rate Debt — As of February 2, 2018,January 29, 2021, Dell Technologies'Technologies’ variable-rate debt consisted of $10.6$6.3 billion of outstanding borrowings under its Senior Secured Credit Facilities, $2.0$4.0 billion of outstanding borrowings under its Margin Loan Facility, and $2.8$1.0 billion of unhedged outstanding DFS borrowings. Amounts outstanding under these facilities generally bear interest at variable rates equal to applicable margins plus specified base rates or LIBOR-based rates. Accordingly, Dell Technologies is exposed to market risk based on fluctuations in interest rates on borrowings under the facilities where we do not mitigate the interest rate risk through the use of interest rate swaps. As of February 2, 2018,January 29, 2021, outstanding borrowings under the Senior Secured Credit and Margin Loan facilities accrued interest at an annual rate between 0.87%1.90% and 9.45%2.75%, whereas unhedged DFS borrowings accrued interest at an annual rate between 1.26% and 4.17%.
Based on thisthe variable-rate debt outstanding as of February 2, 2018,January 29, 2021, a 100 basis point increase in interest rates would have resulted in an increase of approximately $140$93 million in annual interest expense. For more information about our debt, see Note 86 of the Notes to the Consolidated Financial Statements included in this report.
By comparison, as of February 3, 2017,January 31, 2020, Dell Technologies had $11.6$8.9 billion of outstanding borrowings under its Senior Secured Credit Facilities, and $4.0 billion of outstanding borrowings under its Margin BridgeLoan Facility, $1.5 billion of outstanding DFS borrowings, and $1.5 billion outstanding under the VMware Note BridgeTerm Loan Facility. Based on this variable-rate debt outstanding as of February 3, 2017,January 31, 2020, a 100 basis point increase in interest rates would have resulted in an increase of approximately $156$160 million in annual interest expense.
Investment Portfolio — We maintain an investment portfolio consisting of debt and equity securities of various types and maturities which is exposed to interest rate risk. The investments are classified as available-for-sale and are all denominated in U.S. dollars. These securities are recorded on the consolidated balance sheet at market value, with any unrealized gain or temporary non-credit related loss recorded in other comprehensive loss. These instruments are not leveraged and are not held for trading purposes. Dell Technologies mitigates the risks related to its investment portfolio by investing primarily in high-quality credit securities, limiting the amount that can be invested in any single issuer, and investing in short-to-intermediate-term investments. As of February 2, 2018 and February 3, 2017, a 100 basis point increase or decrease in interest rates would have resulted in a $79 million and $74 million impact, respectively, on the fair value of this portfolio. See Note 6 of the Notes to the Consolidated Financial Statements included in this report for more information on our investment portfolio.
Equity Price Risk
Strategic Investments — Our strategic investments include early-stage, privately-held companies that are considered to be in the start-up or development stages and are inherently risky. The technologies or products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of a substantial part of our initial investment in the companies. We account for these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar security of the same issuer. The evaluation is based on information provided by these companies, which are not subject to the same disclosure obligations as U.S. publicly-traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data provided. The carrying value of our strategic investments without readily determinable fair values was $990 million and $852 million as of January 29, 2021 and January 31, 2020, respectively.
ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Dell Technologies Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Dell Technologies Inc. and its subsidiaries (the "Company”“Company”) as of February 2, 2018January 29, 2021 and February 3, 2017,January 31, 2020, and the related consolidated statements of income (loss), of comprehensive income (loss), stockholders’of stockholders' equity (deficit) and of cash flows for each of the three years in the period ended February 2, 2018,January 29, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of February 2, 2018,January 29, 2021, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 2, 2018January 29, 2021 and February 3, 2017,January 31, 2020, and the results of theirits operations and theirits cash flows for each of the three years in the period ended February 2, 2018January 29, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 2, 2018,January 29, 2021, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of February 2, 2019.
Basis for OpinionsRecently Issued Accounting Pronouncements
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’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’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’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 29, 2018
We have served as the Company’s auditor since 1986.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
| | | | | | | |
| February 2, 2018 | | February 3, 2017 |
ASSETS |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 13,942 |
| | $ | 9,474 |
|
Short-term investments | 2,187 |
| | 1,975 |
|
Accounts receivable, net | 11,177 |
| | 9,420 |
|
Short-term financing receivables, net | 3,919 |
| | 3,222 |
|
Inventories, net | 2,678 |
| | 2,538 |
|
Other current assets | 5,054 |
| | 4,144 |
|
Total current assets | 38,957 |
| | 30,773 |
|
Property, plant, and equipment, net | 5,390 |
| | 5,653 |
|
Long-term investments | 4,163 |
| | 3,802 |
|
Long-term financing receivables, net | 3,724 |
| | 2,651 |
|
Goodwill | 39,920 |
| | 38,910 |
|
Intangible assets, net | 28,265 |
| | 35,053 |
|
Other non-current assets | 1,862 |
| | 1,364 |
|
Total assets | $ | 122,281 |
| | $ | 118,206 |
|
LIABILITIES, REDEEMABLE SHARES, AND STOCKHOLDERS’ EQUITY |
Current liabilities: | |
| | |
|
Short-term debt | $ | 7,873 |
| | $ | 6,329 |
|
Accounts payable | 18,334 |
| | 14,422 |
|
Accrued and other | 7,661 |
| | 7,119 |
|
Short-term deferred revenue | 12,024 |
| | 10,265 |
|
Total current liabilities | 45,892 |
| | 38,135 |
|
Long-term debt (Note 8) | 43,998 |
| | 43,061 |
|
Long-term deferred revenue | 10,223 |
| | 8,431 |
|
Other non-current liabilities | 6,797 |
| | 9,339 |
|
Total liabilities | 106,910 |
| | 98,966 |
|
Commitments and contingencies (Note 13) |
|
| |
|
|
Redeemable shares (Note 20) | 384 |
| | 231 |
|
Stockholders' equity: | | | |
Common stock and capital in excess of $.01 par value (Note 18) | 19,889 |
| | 20,199 |
|
Treasury stock at cost | (1,440 | ) | | (752 | ) |
Accumulated deficit | (9,253 | ) | | (5,609 | ) |
Accumulated other comprehensive income (loss) | 130 |
| | (595 | ) |
Total Dell Technologies Inc. stockholders’ equity | 9,326 |
| | 13,243 |
|
Non-controlling interests | 5,661 |
| | 5,766 |
|
Total stockholders' equity | 14,987 |
| | 19,009 |
|
Total liabilities, redeemable shares, and stockholders' equity | $ | 122,281 |
| | $ | 118,206 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except per share amounts)
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
Net revenue: | | | |
| | |
Products | $ | 58,801 |
| | $ | 48,706 |
| | $ | 42,742 |
|
Services | 19,859 |
| | 12,936 |
| | 8,169 |
|
Total net revenue | 78,660 |
| | 61,642 |
| | 50,911 |
|
Cost of net revenue: | | | | | |
Products | 50,215 |
| | 42,169 |
| | 37,563 |
|
Services | 8,391 |
| | 6,514 |
| | 4,961 |
|
Total cost of net revenue | 58,606 |
| | 48,683 |
| | 42,524 |
|
Gross margin | 20,054 |
| | 12,959 |
| | 8,387 |
|
Operating expenses: | | | | | |
Selling, general, and administrative | 19,003 |
| | 13,575 |
| | 7,850 |
|
Research and development | 4,384 |
| | 2,636 |
| | 1,051 |
|
Total operating expenses | 23,387 |
| | 16,211 |
| | 8,901 |
|
Operating loss | (3,333 | ) | | (3,252 | ) | | (514 | ) |
Interest and other, net | (2,355 | ) | | (2,104 | ) | | (772 | ) |
Loss from continuing operations before income taxes | (5,688 | ) | | (5,356 | ) | | (1,286 | ) |
Income tax benefit | (1,833 | ) | | (1,619 | ) | | (118 | ) |
Net loss from continuing operations | (3,855 | ) | | (3,737 | ) | | (1,168 | ) |
Income from discontinued operations, net of income taxes (Note 4) | — |
| | 2,019 |
| | 64 |
|
Net loss | (3,855 | ) | | (1,718 | ) | | (1,104 | ) |
Less: Net loss attributable to non-controlling interests | (127 | ) | | (46 | ) | | — |
|
Net loss attributable to Dell Technologies Inc. | $ | (3,728 | ) | | $ | (1,672 | ) | | $ | (1,104 | ) |
| | | | | |
Earnings (loss) per share attributable to Dell Technologies Inc. - basic: | | | | |
Continuing operations - Class V Common Stock - basic | $ | 1.41 |
| | $ | 1.44 |
| | $ | — |
|
Continuing operations - DHI Group - basic | $ | (7.08 | ) | | $ | (8.52 | ) | | $ | (2.88 | ) |
Discontinued operations - DHI Group - basic | $ | — |
| | $ | 4.30 |
| | $ | 0.16 |
|
| | | | | |
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted: | | | | |
Continuing operations - Class V Common Stock - diluted | $ | 1.39 |
| | $ | 1.43 |
| | $ | — |
|
Continuing operations - DHI Group - diluted | $ | (7.08 | ) | | $ | (8.52 | ) | | $ | (2.88 | ) |
Discontinued operations - DHI Group - diluted | $ | — |
| | $ | 4.30 |
| | $ | 0.16 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
Net loss | $ | (3,855 | ) | | $ | (1,718 | ) | | $ | (1,104 | ) |
| | | | | |
Other comprehensive income (loss), net of tax | | | | | |
Foreign currency translation adjustments | 791 |
| | (254 | ) | | (138 | ) |
Available-for-sale investments: | | | | | |
Change in unrealized gains (losses) | 31 |
| | (17 | ) | | — |
|
Reclassification adjustment for net losses realized in net loss | 2 |
| | 1 |
| | — |
|
Net change in market value of investments | 33 |
| | (16 | ) | | — |
|
Cash flow hedges: | | | | | |
Change in unrealized gains (losses) | (248 | ) | | 20 |
| | 152 |
|
Reclassification adjustment for net (gains) losses included in net loss | 134 |
| | (43 | ) | | (367 | ) |
Net change in cash flow hedges | (114 | ) | | (23 | ) | | (215 | ) |
Pension and other postretirement plans: | | | | | |
Recognition of actuarial net gain from pension and other postretirement plans | 13 |
| | 19 |
| | — |
|
Reclassification adjustments for net gains (losses) from pension and other postretirement plans | — |
| | — |
| | — |
|
Net change in actuarial net gain from pension and other postretirement plans | 13 |
| | 19 |
| | — |
|
| | | | | |
Total other comprehensive income (loss), net of tax expense (benefit) of $12, $(3), and $(8), respectively | 723 |
| | (274 | ) | | (353 | ) |
Comprehensive loss, net of tax | (3,132 | ) | | (1,992 | ) | | (1,457 | ) |
Less: Net loss attributable to non-controlling interests | (127 | ) | | (46 | ) | | — |
|
Less: Other comprehensive loss attributable to non-controlling interests | (2 | ) | | (3 | ) | | — |
|
Comprehensive loss attributable to Dell Technologies Inc. | $ | (3,003 | ) | | $ | (1,943 | ) | | $ | (1,457 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; continued on next page) |
| | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
Cash flows from operating activities: | | | | | |
Net loss | $ | (3,855 | ) | | $ | (1,718 | ) | | $ | (1,104 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 8,634 |
| | 4,938 |
| | 2,872 |
|
Amortization of debt issuance costs | 183 |
| | 268 |
| | 59 |
|
Stock-based compensation expense | 835 |
| | 398 |
| | 72 |
|
Deferred income taxes | (2,595 | ) | | (2,201 | ) | | (205 | ) |
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | 113 |
| | 74 |
| | 122 |
|
Net (gain)/loss on sale of businesses | 16 |
| | (2,319 | ) | | — |
|
Provision for doubtful accounts — including financing receivables | 164 |
| | 120 |
| | 171 |
|
Other | 230 |
| | 60 |
| | 56 |
|
Changes in assets and liabilities, net of effects from acquisitions and dispositions: | | | | | |
Accounts receivable | (1,515 | ) | | (1,776 | ) | | 187 |
|
Financing receivables | (1,653 | ) | | (751 | ) | | (321 | ) |
Inventories | (325 | ) | | 1,076 |
| | (5 | ) |
Other assets | (1,009 | ) | | 215 |
| | (28 | ) |
Accounts payable | 3,779 |
| | 751 |
| | (374 | ) |
Deferred revenue | 3,298 |
| | 2,622 |
| | 867 |
|
Accrued and other liabilities | 510 |
| | 552 |
| | (207 | ) |
Change in cash from operating activities | 6,810 |
| | 2,309 |
| | 2,162 |
|
Cash flows from investing activities: | | | | | |
Investments: | | | | | |
Purchases | (4,389 | ) | | (778 | ) | | (27 | ) |
Maturities and sales | 3,878 |
| | 1,173 |
| | 7 |
|
Capital expenditures | (1,212 | ) | | (699 | ) | | (482 | ) |
Proceeds from sale of facilities, land, and other assets | — |
| | 24 |
| | 88 |
|
Capitalized software development costs | (369 | ) | | (207 | ) | | — |
|
Collections on purchased financing receivables | 30 |
| | 35 |
| | 85 |
|
Acquisition of businesses, net | (658 | ) | | (37,629 | ) | | — |
|
Divestitures of businesses, net | — |
| | 6,873 |
| | 8 |
|
Asset acquisitions, net | (96 | ) | | — |
| | — |
|
Asset dispositions, net | (59 | ) | | — |
| | — |
|
Other | (6 | ) | | (48 | ) | | — |
|
Change in cash from investing activities | (2,881 | ) | | (31,256 | ) | | (321 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued; in millions)
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| February 2, 2018 | | February 3, 2017 | | January 29, 2016 |
Cash flows from financing activities: | | | | | |
Payment of dissenting shares obligation | — |
| | (446 | ) | | — |
|
Share repurchases for tax withholdings of equity awards | (385 | ) | | (93 | ) | | (2 | ) |
Proceeds from the issuance of DHI Group Common Stock | — |
| | 4,422 |
| | — |
|
Proceeds from the issuance of common stock of subsidiaries | 131 |
| | 164 |
| | — |
|
Repurchases of DHI Group Common Stock | (6 | ) | | (10 | ) | | — |
|
Repurchases of Class V Common Stock | (723 | ) | | (701 | ) | | — |
|
Repurchases of common stock of subsidiaries | (724 | ) | | (611 | ) | | — |
|
Payments for debt issuance costs | (48 | ) | | (853 | ) | | (10 | ) |
Proceeds from debt | 14,439 |
| | 46,893 |
| | 5,460 |
|
Repayments of debt | (12,321 | ) | | (16,960 | ) | | (5,950 | ) |
Other | 1 |
| | 16 |
| | 6 |
|
Change in cash from financing activities | 364 |
| | 31,821 |
| | (496 | ) |
Effect of exchange rate changes on cash and cash equivalents | 175 |
| | 24 |
| | (167 | ) |
Change in cash and cash equivalents | 4,468 |
| | 2,898 |
| | 1,178 |
|
Cash and cash equivalents at beginning of period, including amounts held for sale | 9,474 |
| | 6,576 |
| | 5,398 |
|
Cash and cash equivalents at end of the period | 13,942 |
| | 9,474 |
| | 6,576 |
|
Less: Cash included in current assets held for sale | — |
| | — |
| | 254 |
|
Cash and cash equivalents from continuing operations | $ | 13,942 |
| | $ | 9,474 |
| | $ | 6,322 |
|
Income tax paid | $ | 924 |
| | $ | 978 |
| | $ | 264 |
|
Interest paid | $ | 2,192 |
| | $ | 1,575 |
| | $ | 585 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions; continued on next page)
|
| | | | | | | | | | | | | | | | | | |
| Common Stock and Capital in Excess of Par Value | | | | | | |
| Issued Shares | | Amount | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | Total Stockholders' Equity |
Balances as of January 30, 2015 | 405 |
| | $ | 5,708 |
| | $ | (2,833 | ) | | $ | 29 |
| | $ | 2,904 |
|
Net loss | — |
| | — |
| | (1,104 | ) | | — |
| | (1,104 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | (138 | ) | | (138 | ) |
Cash flow hedges, net change | — |
| | — |
| | — |
| | (215 | ) | | (215 | ) |
Stock-based compensation expense | — |
| | 72 |
| | — |
| | — |
| | 72 |
|
Revaluation of redeemable shares | — |
| | (53 | ) | | — |
| | — |
| | (53 | ) |
Balances as of January 29, 2016 | 405 |
| | $ | 5,727 |
| | $ | (3,937 | ) | | $ | (324 | ) | | $ | 1,466 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions; continued on next page)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Capital in Excess of Par Value | | Treasury Stock | | | | | | | | | | |
| DHI Group | | Class V Common Stock | | DHI Group | | Class V Common Stock | | | | | | | | | | |
| Issued Shares | | Amount | | Issued Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | Dell Technologies Stockholders' Equity | | Non-Controlling Interests | | Total Stockholders' Equity |
Balances as of January 29, 2016 | 405 |
| | $ | 5,727 |
| | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | (3,937 | ) | | $ | (324 | ) | | $ | 1,466 |
| | $ | — |
| | $ | 1,466 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,672 | ) | | — |
| | (1,672 | ) | | (46 | ) | | (1,718 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (254 | ) | | (254 | ) | | — |
| | (254 | ) |
Investments, net change | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13 | ) | | (13 | ) | | (3 | ) | | (16 | ) |
Cash flow hedges, net change | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (23 | ) | | (23 | ) | | — |
| | (23 | ) |
Pension and other post-retirement | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | 19 |
| | — |
| | 19 |
|
Fair value of non-controlling interests assumed in business combination | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,048 |
| | 6,048 |
|
Issuance of common stock | 164 |
| | 4,441 |
| | 223 |
| | 10,041 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,482 |
| | — |
| | 14,482 |
|
Stock-based compensation expense | — |
| | 98 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 98 |
| | 300 |
| | 398 |
|
Tax benefit from stock-based compensation | — |
| | 9 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | 1 |
| | 10 |
|
Treasury stock repurchases | — |
| | — |
| | — |
| | — |
| | — |
| | (10 | ) | | 14 |
| | (742 | ) | | — |
| | — |
| | (752 | ) | | — |
| | (752 | ) |
Revaluation of redeemable shares | — |
| | (125 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (125 | ) | | — |
| | (125 | ) |
Impact from equity transactions of non-controlling interests | — |
| | 18 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 18 |
| | (534 | ) | | (516 | ) |
Other | — |
| | (10 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10 | ) | | — |
| | (10 | ) |
Balances as of February 3, 2017 | 569 |
| | $ | 10,158 |
| | 223 |
| | $ | 10,041 |
| | — |
| | $ | (10 | ) | | 14 |
| | $ | (742 | ) | | $ | (5,609 | ) | | $ | (595 | ) | | $ | 13,243 |
| | $ | 5,766 |
| | $ | 19,009 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(continued; in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Capital in Excess of Par Value | | Treasury Stock | | | | | | | | | | |
| DHI Group | | Class V Common Stock | | DHI Group | | Class V Common Stock | | | | | | | | | | |
| Issued Shares | | Amount | | Issued Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | Dell Technologies Stockholders' Equity | | Non-Controlling Interests | | Total Stockholders' Equity |
Balances as of February 3, 2017 | 569 |
| | $ | 10,158 |
| | 223 |
| | $ | 10,041 |
| | — |
| | $ | (10 | ) | | 14 |
| | $ | (742 | ) | | $ | (5,609 | ) | | $ | (595 | ) | | $ | 13,243 |
| | $ | 5,766 |
| | $ | 19,009 |
|
Adjustment for adoption of accounting standard (Note 1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 84 |
| | — |
| | 84 |
| | — |
| | 84 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,728 | ) | | — |
| | (3,728 | ) | | (127 | ) | | (3,855 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 791 |
| | 791 |
| | — |
| | 791 |
|
Investments, net change | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35 |
| | 35 |
| | (2 | ) | | 33 |
|
Cash flow hedges, net change | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (114 | ) | | (114 | ) | | — |
| | (114 | ) |
Pension and other post-retirement | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
| | — |
| | 13 |
|
Issuance of common stock | 2 |
| | (31 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | — |
| | (31 | ) |
Stock-based compensation | — |
| | 109 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 109 |
| | 730 |
| | 839 |
|
Treasury stock repurchases | — |
| | — |
| | — |
| | — |
| | 1 |
| | (6 | ) | | 10 |
| | (682 | ) | | — |
| | — |
| | (688 | ) | | — |
| | (688 | ) |
Revaluation of redeemable shares | — |
| | (153 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (153 | ) | | — |
| | (153 | ) |
Impact from equity transactions of non-controlling interests | — |
| | (235 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (235 | ) | | (706 | ) | | (941 | ) |
Balances as of February 2, 2018 | 571 |
| | $ | 9,848 |
| | 223 |
| | $ | 10,041 |
| | 1 |
| | $ | (16 | ) | | 24 |
| | $ | (1,424 | ) | | $ | (9,253 | ) | | $ | 130 |
| | $ | 9,326 |
| | $ | 5,661 |
| | $ | 14,987 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION
EMC Merger Transaction — On September 7, 2016, a wholly-owned subsidiary of Dell Technologies Inc. ("Merger Sub") merged with and into EMC Corporation, a Massachusetts corporation ("EMC"), with EMC surviving the merger as a wholly-owned subsidiary of Dell Technologies Inc. (the "EMC merger transaction"). See Note 32 of the Notes to the Consolidated Financial Statements included in this report for additional information ona summary of recently issued accounting pronouncements that are applicable to our Consolidated Financial Statements.
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Dell Technologies is exposed to a variety of market risks, including risks associated with foreign currency exchange rate fluctuations, interest rate changes affecting its variable-rate debt, and changes in the EMC merger transaction.market value of equity investments. In the normal course of business, Dell Technologies employs established policies and procedures to manage these risks.
Divestitures — On November 2, 2016,Foreign Currency Risk
During Fiscal 2021 and Fiscal 2020, the principal foreign currencies in which Dell Inc. ("Dell"), a wholly-owned subsidiaryTechnologies transacted business were the Euro, Chinese Renminbi, Japanese Yen, British Pound, and Canadian Dollar. The objective of Dell Technologies Inc., completedin managing its exposures to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations associated with foreign currency exchange rate changes on earnings and cash flows. Accordingly, Dell Technologies utilizes foreign currency option contracts and forward contracts to hedge its exposure on forecasted transactions and firm commitments for certain currencies. Dell Technologies monitors its foreign currency exchange exposures to ensure the overall effectiveness of its foreign currency hedge positions. However, there can be no assurance that the foreign currency hedging activities will continue to substantially alloffset the impact of fluctuations in currency exchange rates on Dell Technologies’ results of operations and financial position in the future.
Based on the outstanding foreign currency hedge instruments of Dell Technologies, which include designated and non-designated instruments, there was a maximum potential one-day loss in fair value at a 95% confidence level of approximately $15 million as of January 29, 2021 and $24 million as of January 31, 2020 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 10,000 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 could be incurred. Additionally, as Dell Technologies utilizes 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 divestitureunderlying exposure.
Interest Rate Risk
Dell Technologies is primarily exposed to interest rate risk related to its variable-rate debt portfolio.
Variable-Rate Debt — As of January 29, 2021, Dell Services. On October 31, 2016,Technologies’ variable-rate debt consisted of $6.3 billion of outstanding borrowings under its Senior Secured Credit Facilities, $4.0 billion of outstanding borrowings under its Margin Loan Facility, and $1.0 billion of unhedged outstanding DFS borrowings. Amounts outstanding under these facilities generally bear interest at variable rates equal to applicable margins plus specified base rates or LIBOR-based rates. Accordingly, Dell completedTechnologies is exposed to market risk based on fluctuations in interest rates on borrowings under the divestiturefacilities where we do not mitigate the interest rate risk through the use of Dell Software Group ("DSG"). Oninterest rate swaps. As of January 23, 2017, EMC,29, 2021, outstanding borrowings under the Senior Secured Credit and Margin Loan facilities accrued interest at an annual rate between 1.90% and 2.75%, whereas unhedged DFS borrowings accrued interest at an annual rate between 1.26% and 4.17%.
Based on the variable-rate debt outstanding as of January 29, 2021, a subsidiary100 basis point increase in interest rates would have resulted in an increase of the Company, completed the divestiture of the Dell EMC Enterprise Content Division ("ECD"). In accordance with applicable accounting guidance, the results of Dell Services, DSG, and ECD are presented as discontinued operationsapproximately $93 million in the Consolidated Statements of Income (Loss) and, as such, have been excluded from both continuing operations and segment results for the relevant periods. Seeannual interest expense. For more information about our debt, see Note 46 of the Notes to the Consolidated Financial Statements for additional information.included in this report.
Going-Private Transaction - On October 29, 2013,By comparison, as of January 31, 2020, Dell Technologies acquired Dellhad $8.9 billion of outstanding borrowings under its Senior Secured Credit Facilities, $4.0 billion of outstanding borrowings under its Margin Loan Facility, $1.5 billion of outstanding DFS borrowings, and $1.5 billion outstanding under the VMware Term Loan Facility. Based on this variable-rate debt outstanding as of January 31, 2020, a 100 basis point increase in interest rates would have resulted in an increase of approximately $160 million in annual interest expense.
Equity Price Risk
Strategic Investments — Our strategic investments include early-stage, privately-held companies that are considered to be in the start-up or development stages and are inherently risky. The technologies or products these companies have under development are typically in the early stages and may never materialize, which could result in a transactionloss of a substantial part of our initial investment in the companies. We account for these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar security of the same issuer. The evaluation is based on information provided by these companies, which are not subject to the same disclosure obligations as U.S. publicly-traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data provided. The carrying value of our strategic investments without readily determinable fair values was $990 million and $852 million as of January 29, 2021 and January 31, 2020, respectively.
ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Dell Technologies Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Dell Technologies Inc. and its subsidiaries (the “Company”) as of January 29, 2021 and January 31, 2020, and the related consolidated statements of income (loss), of comprehensive income (loss), of stockholders' equity (deficit) and of cash flows for each of the three years in the period ended January 29, 2021, including the related notes (collectively referred to as the going-private transaction.“consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 29, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
BasisIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Presentation — These Consolidated Financial Statements have been preparedthe Company as of January 29, 2021 and January 31, 2020, and the results of its operations and its cash flows for each of the three years in accordancethe period ended January 29, 2021 in conformity with accounting principles generally accepted in the United States of America ("GAAP"). ReferencesAmerica. Also in these Notes toour opinion, the Consolidated Financial Statements toCompany maintained, in all material respects, effective internal control over financial reporting as of January 29, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the "Company" or "Dell Technologies" mean Dell Technologies Inc. individually and together with its consolidated subsidiaries.COSO.
Change in Accounting Principle
As a result of the EMC merger transaction completed on September 7, 2016, the Company's results of operations, comprehensive income (loss), and cash flows for the fiscal periods reflecteddiscussed in these Consolidated Financial Statements are not directly comparable as the results of the acquired businesses are only included in the consolidated results from September 7, 2016.
Unless the context indicates otherwise, references in these NotesNote 2 to the Consolidated Financial Statements to "VMware" mean the VMware reportable segment, which reflects the operations of VMware, Inc. (NYSE: VMW) within Dell Technologies. See Exhibit 99.1 filed with the annual report on Form 10-K for the fiscal year ended February 2, 2018 for information on the differences between VMware reportable segment results and VMware, Inc. results.
DELL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2— DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business — The Company is a strategically aligned family of businesses that offers a broad range of technology solutions, including desktops, notebooks, servers and networking products, storage products, cloud solutions products, services, software, and third-party software and peripherals.
Fiscal Year — The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. The fiscal years ended February 2, 2018 ("Fiscal 2018") and January 29, 2016 ("Fiscal 2016") were 52-week periods. The fiscal year ended February 3, 2017 ("Fiscal 2017") was a 53-week period.
Principles of Consolidation — These consolidated financial statements, include the Company changed the manner in which it accounts of Dell Technologies and its wholly-owned subsidiaries, as well as the accounts of SecureWorks Corp. (“SecureWorks"), VMware, Inc., and Pivotal Software, Inc. ("Pivotal"), companies which are majority-owned by Dell Technologies. All intercompany transactions have been eliminated.
On April 27, 2016, SecureWorks completed a registered underwritten initial public offering of its Class A common stock. As of February 2, 2018, Dell Technologies held approximately 87.1% of the outstanding equity interest in SecureWorks. As Dell Technologies is the controlling stockholder of SecureWorks, SecureWorks' financial results have been consolidated with those of Dell Technologies. The portion of the results of operations of SecureWorks allocable to its other owners is shown as net income (loss) attributable to the non-controlling interests in the Consolidated Statements of Income (Loss), as an adjustment to net income (loss) attributable to Dell Technologies stockholders. Additionally, the cumulative portion of the results of operations of SecureWorks allocable to those other owners, along with the interest in the net assets of SecureWorks attributable to those other owners, is shown as a component of non-controlling interests in the Consolidated Statements of Financial Positionfor leases as of February 2, 2018.2019.
As of February 2, 2018, Dell Technologies held approximately 81.9% of the outstanding equity interest in VMware, Inc. VMware, Inc.'s financial results have been consolidated with those of Dell Technologies since September 7, 2016, at which time Dell Technologies became VMware, Inc.'s controlling stockholder. The portion of the results of operations of VMware, Inc. allocable to its other owners is shown as net income (loss) attributable to the non-controlling interests in the Consolidated Statements of Income (Loss) as an adjustment to net income (loss) attributable to Dell Technologies stockholders. Additionally, the cumulative portion of the results of operations of VMware, Inc. allocable to those other owners, along with the interest in the net assets of VMware, Inc. attributable to those other owners, is shown as a component of non-controlling interests in the Consolidated Statements of Financial Position as of February 2, 2018.
As of February 2, 2018, Dell Technologies held approximately 77.1% of the outstanding equity interest in Pivotal. Pivotal's financial results have been consolidated with those of Dell Technologies since September 7, 2016, at which time Dell Technologies became Pivotal's controlling stockholder. A portion of the non-controlling interest in Pivotal is held by third parties in the form of preferred equity instruments. Accordingly, there is no net income attributable to this portion of non-controlling interest in the Consolidated Statements of Income (Loss). The other portion of the non-controlling interest in Pivotal is held by third parties in the form of common stock. As such, there is net income (loss) attributable to this portion of non-controlling interest in the Consolidated Statements of Income (Loss) as an adjustment to net income (loss) attributable to Dell Technologies stockholders. Additionally, the interest in the net assets of Pivotal attributable to those other owners is shown as a component of non-controlling interests in the Consolidated Statements of Financial Position as of February 2, 2018.
Use of Estimates — The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes. Actual results could differ materially from those estimates.
Cash and Cash Equivalents — All highly liquid investments, including credit card receivables due from banks, with original maturities of 90 days or less at date of purchase, are reported at fair value and are considered to be cash equivalents. All other investments not considered to be cash equivalents are separately categorized as investments.
Investments — All debt security investments with effective 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. In comparison, debt security instruments with an effective maturity of one year or less are classified as short-term investments in the Consolidated Statements of Financial Position.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gain and loss positions on investments classified as available-for-sale are included within accumulated other comprehensive income (loss), net of any related tax effect. Realized gains and losses and other-than-temporary impairments are reclassified from accumulated other comprehensive income (loss) to interest and other, net. Investments accounted for under the cost method are recorded at cost initially, which approximates fair value. Subsequently, if there is an indicator of impairment, the impairment is recognized in interest and other, net in the Consolidated Statements of Income (Loss).
Allowance for Doubtful Accounts — The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses, net of recoveries. The allowance is based on an analysis of 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 in selling, general, and administrative expenses.
Financing Receivables — Financing receivables are presented net of allowance for losses and consist of customer receivables and residual interest. Customer receivables include revolving loans and fixed-term leases and loans resulting primarily from the sale of the Company's products and services. The Company has two portfolios: (1) fixed-term leases and loans and (2) revolving loans, and assesses risk at the portfolio level to determine the appropriate allowance levels. The portfolio segments are further segregated into classes based on products, customer type, and credit risk evaluation: (1) Revolving - Dell Preferred Account ("DPA"); (2) Revolving - Dell Business Credit ("DBC"); and (3) Fixed-term - Consumer and Commercial. Fixed-term leases and loans are offered to qualified small and medium-sized businesses, large commercial accounts, governmental organizations, and educational entities. Additionally, fixed-term loans are also offered to certain individual consumer customers. Revolving loans are offered under private label credit financing programs. The DPA revolving loan programs are offered to individual consumers and the DBC revolving loan programs are offered to small and medium-sized business customers.
The Company retains a residual interest in equipment leased under its fixed-term lease programs. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, the Company 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 Receivable Losses — The Company recognizes an allowance for losses on financing receivables in an amount equal to the probable 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 profile. Customer account principal and interest are charged to the allowance for losses when an account is deemed to be uncollectible or generally when the account is 180 days delinquent. While the Company 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, therefore, the Company is adequately reserved in the event of charge off. Recoveries on receivables previously charged off as uncollectible are recorded to the allowance for financing 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 gross domestic product ("GDP") growth, unemployment rates, the level of commercial capital equipment investment, and the credit quality of the borrower.
Asset Securitization — The Company transfers certain U.S. and European customer financing receivables to Special Purpose Entities ("SPEs") that meet the definition of a Variable Interest Entity ("VIE") and are consolidated into the Consolidated Financial Statements. These 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. The asset securitizations in the SPEs are accounted for as secured borrowings. See Note 7 of the Notes to the Consolidated Financial Statements for additional information on the impact of the consolidation.
Inventories — Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out basis. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence, or impaired balances.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property, Plant, and Equipment— Property, plant, and equipment are carried at depreciated cost. Depreciation is determined using the straight-line method over the shorter of the estimated economic lives of the assets or the lease term. The estimated useful lives of the Company's property, plant, and equipment are generally as follows:
|
| |
| Estimated Useful Life |
Computer equipment | 3-5 years |
Buildings | 10-30 years or term of underlying land lease |
Leasehold improvements | Shorter of 5-20 years or lease term |
Machinery and equipment | 3-5 years |
Gains or losses related to retirements or dispositions of fixed assets are recognized in the period during which the retirement or disposition occurs.
Capitalized Software Development Costs — In accordance with the applicable accounting standards, software development costs related to the development of new product offerings are capitalized subsequent to the establishment of technological feasibility, which is demonstrated by the completion of a detailed program design or working model, if no program design is completed. The Company amortizes capitalized costs straight line over the estimated useful lives of the products, which is generally two years.
As of February 2, 2018, capitalized software development costs were $489 million and are included in other non-current assets, net in the accompanying Consolidated Statements of Financial Position. Amortization expense for the period ended February 2, 2018 was $82 million. Amortization expense for the period from September 7, 2016 through February 3, 2017 was immaterial.
Prior to the EMC merger transaction, there were no significant capitalized software development costs specific to the legacy businesses of Dell Technologies due to the timing in the research and development process of establishing technological feasibility.
The Company capitalizes certain internal and external costs to acquire or create internal use software which are incurred subsequent to the completion of the preliminary project stage. Development costs are amortized straight line 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 the Company's website are expensed as incurred.
Impairment of Long-Lived Assets — The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows expected from the use and eventual disposition 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. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Business Combinations — The Company accounts for business combinations, including the EMC merger transaction and the going-private transaction described in Note 1 of the Notes to the Consolidated Financial Statements. See Note 3 of the Notes to the Consolidated Financial Statements for more information on the EMC merger transaction. Accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the tangible and intangible assets acquired and the liabilities assumed is recorded as goodwill. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date, cumulative changes in the estimated fair values of the net assets recorded may change the amount of the purchase price allocable to goodwill. During the measurement period, which expires one year from the acquisition date, changes to any purchase price allocations that are material to the Company's consolidated financial results will be adjusted in the reporting period in which the adjustment amount is determined.
In-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. All acquisition costs are expensed as incurred, and the results of operations of acquired businesses are included in the Consolidated Financial Statements from the acquisition date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible Assets Including Goodwill — Identifiable intangible assets with finite lives are amortized over their estimated useful lives. Intangible assets are reviewed for impairment when events and circumstances indicate the asset may be impaired. Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third fiscal quarter and whenever events or circumstances indicate that an impairment may have occurred.
Foreign Currency Translation — The majority of the Company's international sales are made by international subsidiaries, most of which have the U.S. dollar as their functional currency. The Company'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 transactions occur. Foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) ("OCI") 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 the current rates of exchange for monetary assets and liabilities and historical rates of exchange for non-monetary assets and liabilities. Gains and losses from remeasurement of monetary assets and liabilities are included in interest and other, net.
Hedging Instruments — The Company uses derivative financial instruments, primarily forwards, options, and swaps, to hedge certain foreign currency and interest rate exposures. The relationships between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking hedge transactions, are formally documented. The Company does not use derivatives for speculative purposes.
All derivative instruments are recognized as either assets or liabilities in the Consolidated Statements of Financial Position and are measured at fair value. Hedge accounting is applied based upon the criteria established by accounting guidance for derivative instruments and hedging activities. Derivatives 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. For derivatives that are not designated as hedges or do not qualify for hedge accounting treatment, the Company recognizes the change in the instrument's fair value currently in earnings as a component of interest and other, net. The Company's hedge portfolio includes non-designated derivatives and derivatives designated as cash flow 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. The Company 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 the gain or loss into earnings in the period during which the hedged transaction is recognized in earnings.
Cash flows from derivative instruments are presented in the same category on the Consolidated Statements of Cash Flows as the cash flows from the underlying hedged items. See Note 9 of the Notes to the Consolidated Financial Statements for a description of the Company's derivative financial instrument activities.
Revenue Recognition — Net revenue primarily includes sales of hardware, services, software licenses, and peripherals. The Company recognizes revenue for these products and services when it is realized or realizable and earned. Revenue is recognized when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the Company's fee to its customer is fixed or determinable; and collection of the resulting receivable is reasonably assured. This policy is applicable to all sales, including sales to resellers and end-users.
Revenue from certain third-party software sales and extended warranties for third-party products, for which the Company does not meet the criteria for gross revenue recognition, is recognized on a net basis. All other revenue is recognized on a gross basis.
The following summarizes the major terms of contractual relationships with customers and the manner in which the Company accounts for sales transactions.
DELL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Products
Product revenue consists of computer hardware, enterprise hardware, and software licenses sales that are delivered, sold as a subscription or sold on a consumption basis. Computer hardware and enterprise hardware include notebooks and desktop PCs, servers, storage hardware, and other hardware-related devices. Software license sales include optional, stand-alone software applications. Software applications provide customers with resource management, backup and archiving, information security, information management and intelligence, data analytics, and server virtualization capabilities. Revenue from the sale of hardware products and systems is recognized when title and risk of loss pass to the customer. Delivery is considered complete when products have been shipped to the Company's customer, title and risk of loss have transferred to the customer, and customer acceptance has been satisfied. Customer acceptance is satisfied if acceptance is obtained from the customer, if all acceptance provisions lapse, or if the Company has evidence that all acceptance provisions have been satisfied. Depending on the nature of the arrangement, revenue from software license sales is generally recognized upon shipment or electronic delivery. For certain arrangements, revenue is recognized based on usage or ratably over the term of the arrangement. License revenue from royalty arrangements is recognized upon either receipt of royalty reports or payments from third parties.
The Company 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 the Company'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.
The Company sells its products directly to customers as well as through other sales channels, such as value-added resellers, system integrators, distributors, and retailers. The Company recognizes revenue on these sales when the reseller has economic substance apart from the Company; any credit risk has been identified and quantified; title and risk of loss have passed to the channel; the fee paid to the Company is not contingent upon resale or payment by the end user; and the Company has no further obligations related to bringing about resale or delivery.
Sales through the Company's sales channels are primarily made under agreements allowing for limited rights of return, price protection, rebates, and marketing development funds. The Company has generally limited return rights through contractual caps or has an established selling history for these arrangements. Therefore, there is sufficient data to establish reasonable and reliable estimates of returns for the majority of these sales. To the extent price protection or return rights are not limited and a reliable estimate cannot be made, all of the revenue and related costs are deferred until the product has been sold to the end-user or the rights expire. The Company records estimated reductions to revenue or an expense for channel programs at the later of the offer or the time revenue is recognized.
The Company defers the cost of shipped products awaiting revenue recognition until revenue is recognized.
Services
Services revenue consists of hardware and software maintenance, installation services, professional services, training revenue, third-party software revenue, and software sold as a service. The Company recognizes revenue from fixed-price support or maintenance contracts sold for both hardware and software ratably over the contract period and recognizes the costs associated with these contracts as incurred. For sales of extended warranties with a separate contract price, the Company 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 the Company is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract on a straight-line basis or when the service is completed and the costs associated with these contracts are recognized as incurred.
DELL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Multiple Deliverables
When an arrangement has more than one element, such as hardware, software, and services contained in a single arrangement, the Company first allocates revenue based upon the relative selling price into two categories: (1) non-software components, such as hardware and any hardware-related items, such as required system software that functions with the hardware to deliver the essential functionality of the hardware and related post-contract customer support, software as a service subscriptions, and other services; and (2) software components, such as optional software applications and related items, such as post-contract customer support and other services. The Company then allocates revenue within the non-software category to each element based upon its relative selling price using a hierarchy of vendor-specific objective evidence ("VSOE"), third-party evidence of selling price ("TPE"), or estimated selling prices ("ESP"), if VSOE or TPE does not exist. The Company allocates revenue within the software category to the undelivered elements based upon their fair value using VSOE, with the residual revenue allocated to the delivered elements. If the Company cannot objectively determine the VSOE of the fair value of any undelivered software element, it defers revenue for all software components until all elements are delivered and services have been performed, until fair value can objectively be determined for any remaining undelivered elements, or until software maintenance is the only undelivered element, in which case revenue is recognized over the maintenance term for all software elements.
The Company allocates the amount of revenue recognized for delivered elements to the amount that is not subject to forfeiture or refund or contingent on the future delivery of products or services.
Customers under software maintenance agreements are entitled to receive updates and upgrades on a when-and-if-available basis, and various types of technical support based on the level of support purchased. In the event specific features, functionality, entitlements, or the release version of an upgrade or new product have been announced but not delivered, and customers will receive that upgrade or new product as part of a current software maintenance contract, a specified upgrade is deemed created and product revenues are deferred on purchases made after the announcement date until delivery of the upgrade or new product. The amount and elements to be deferred are dependent on whether the Company has established VSOE of fair value for the upgrade or new product.
Other
The Company 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 is included in net products revenue in the Consolidated Statements of Income (Loss) and is recognized at consistent rates of return over the lease term. Revenue from operating leases is recognized over the lease period. The Company also offers qualified customers revolving credit lines for the purchase of products and services offered by the Company. Financing income attributable to these revolving loans is recognized in net products revenue on an accrual basis.
The Company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrently with specific revenue-producing transactions.
Standard Warranty Liabilities — The Company records warranty liabilities for estimated costs of fulfilling its obligations under standard limited hardware and software warranties at the time of sale. The liability for standard warranties is included in accrued and other current and other non-current liabilities in the Consolidated Statements of Financial Position. The specific warranty terms and conditions vary depending upon the product sold and the country in which the Company does business, but generally includes technical support, parts, and labor over a period ranging from one to three years. Factors that affect the Company'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 the Company'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 19 months, repair parts are generally already in stock or available at pre-determined prices, and labor rates are generally arranged at pre-established amounts with service providers. Warranty claims are relatively predictable based on historical experience of failure rates. If actual results differ from the estimates, the Company revises its estimated warranty liability. Each quarter, the Company reevaluates its estimates to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
DELL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Revenue — Deferred revenue is recorded when billings have been generated or payments have been received for undelivered products or services, or in the situation where revenue recognition criteria have not been met. Deferred revenue represents amounts received in advance for extended warranty services, software maintenance, unearned license fees, and deferred profit on third-party software offerings. Deferred revenue is recognized on these items when the revenue recognition criteria are met, generally resulting in ratable recognition over the contract term. The Company also has deferred revenue related to undelivered hardware and professional services, consisting of installations and consulting engagements, which are recognized as the Company's obligations under the contract are completed.
Vendor Rebates and Settlements — The Company 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 the Company to sell the vendor's products. The Company recognizes a reduction of cost of goods sold if the funds are determined to be a reduction of the price of the vendor's products. If the consideration is a reimbursement of costs incurred by the Company to sell or develop the vendor's products, then the consideration is classified as a reduction of that cost, most often operating expenses, in the Consolidated Statements of Income (Loss). In order to be recognized as a reduction of operating expenses, the reimbursement must be for a specific, incremental, and identifiable cost incurred by the Company in selling the vendor's products or services.
In addition, the Company may settle commercial disputes with vendors from time to time. Claims for loss recoveries are recognized when a loss event has occurred, recovery is considered probable, the agreement is finalized, and collectibility is assured. Amounts received by the Company from vendors for loss recoveries are generally recorded as a reduction of cost of goods sold.
Loss Contingencies — The Company is subject to the possibility of various losses arising in the ordinary course of business. The Company considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as the Company'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. The Company regularly evaluates current information available to determine whether such accruals should be adjusted and whether new accruals are required.
Shipping Costs — The Company's shipping and handling costs are included in cost of net revenue in the Consolidated Statements of Income (Loss).
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 in selling, general, and administrative expenses in the Consolidated Statements of Income (Loss). For the fiscal years ended February 2, 2018, February 3, 2017, and January 29, 2016, advertising expenses were $1,045 million, $772 million, and $594 million, respectively. General and administrative expenses include items for the Company'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 and Development — Research and development ("R&D") costs are expensed as incurred. R&D costs include salaries and benefits and other personnel-related costs associated with product development. Also included in R&D expenses are infrastructure costs, which consist of equipment and material costs, facilities-related costs, depreciation expense, and intangible asset amortization.
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. The Company 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. The Company provides valuation allowances for deferred tax assets, where appropriate. In assessing the need for a valuation allowance, the Company considers all available evidence for each jurisdiction, including past operating results, estimates of future taxable income, and the feasibility of ongoing tax planning strategies. In the event the Company determines that all or part of the net deferred tax assets are not realizable in the future, the Company will make an adjustment to the valuation allowance that would be charged to earnings in the period in which such determination is made.
DELL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The accounting guidance for uncertainties in income tax 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. The Company recognizes a tax 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 any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority's administrative practices and precedents.
The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Cuts and Reform Act signed into law on December 22, 2017 require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The Company has not yet elected an accounting policy related to how it will account for GILTI and therefore has not provided any deferred tax impacts of GILTI in its Consolidated Financial Statements for the fiscal year ended February 2, 2018.
Stock-Based Compensation — The Company measures stock-based compensation expense for all share-based awards granted based on the estimated fair value of those awards at grant date. For service-based stock options, the Company typically estimates the fair value of these awards using the Black-Scholes valuation model and for performance-based stock options, the Company estimates the fair value of these awards using the Monte Carlo valuation model.
The compensation cost of service-based stock options, restricted stock, and restricted stock units is recognized net of any estimated forfeitures on a straight-line basis over the employee requisite service period. Compensation cost for performance-based options, containing a market condition, is recognized on a graded accelerated basis net of estimated forfeitures over the requisite service period. Forfeiture rates are estimated at grant date based on historical experience and adjusted in subsequent periods for differences in actual forfeitures from those estimates. See Note 19 of the Notes to the Consolidated Financial Statements for further discussion of stock-based compensation.
Recently Issued Accounting Pronouncements
Revenue from ContractsSee Note 2 of the Notes to the Consolidated Financial Statements included in this report for a summary of recently issued accounting pronouncements that are applicable to our Consolidated Financial Statements.
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Dell Technologies is exposed to a variety of market risks, including risks associated with Customers— foreign currency exchange rate fluctuations, interest rate changes affecting its variable-rate debt, and changes in the market value of equity investments. In May 2014, the Financial Accounting Standards Board (the "FASB") issued amended guidance onnormal course of business, Dell Technologies employs established policies and procedures to manage these risks.
Foreign Currency Risk
During Fiscal 2021 and Fiscal 2020, the recognition of revenue from contracts with customers.principal foreign currencies in which Dell Technologies transacted business were the Euro, Chinese Renminbi, Japanese Yen, British Pound, and Canadian Dollar. The objective of the new standardDell Technologies in managing its exposures to foreign currency exchange rate fluctuations is to establishreduce the impact of adverse fluctuations associated with foreign currency exchange rate changes on earnings and cash flows. Accordingly, Dell Technologies utilizes foreign currency option contracts and forward contracts to hedge its exposure on forecasted transactions and firm commitments for certain currencies. Dell Technologies monitors its foreign currency exchange exposures to ensure the overall effectiveness of its foreign currency hedge positions. However, there can be no assurance that the foreign currency hedging activities will continue to substantially offset the impact of fluctuations in currency exchange rates on Dell Technologies’ results of operations and financial position in the future.
Based on the outstanding foreign currency hedge instruments of Dell Technologies, which include designated and non-designated instruments, there was a singlemaximum potential one-day loss in fair value at a 95% confidence level of approximately $15 million as of January 29, 2021 and $24 million as of January 31, 2020 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 10,000 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 could be incurred. Additionally, as Dell Technologies utilizes 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
Dell Technologies is primarily exposed to interest rate risk related to its variable-rate debt portfolio.
Variable-Rate Debt — As of January 29, 2021, Dell Technologies’ variable-rate debt consisted of $6.3 billion of outstanding borrowings under its Senior Secured Credit Facilities, $4.0 billion of outstanding borrowings under its Margin Loan Facility, and $1.0 billion of unhedged outstanding DFS borrowings. Amounts outstanding under these facilities generally bear interest at variable rates equal to applicable margins plus specified base rates or LIBOR-based rates. Accordingly, Dell Technologies is exposed to market risk based on fluctuations in interest rates on borrowings under the facilities where we do not mitigate the interest rate risk through the use of interest rate swaps. As of January 29, 2021, outstanding borrowings under the Senior Secured Credit and Margin Loan facilities accrued interest at an annual rate between 1.90% and 2.75%, whereas unhedged DFS borrowings accrued interest at an annual rate between 1.26% and 4.17%.
Based on the variable-rate debt outstanding as of January 29, 2021, a 100 basis point increase in interest rates would have resulted in an increase of approximately $93 million in annual interest expense. For more information about our debt, see Note 6 of the Notes to the Consolidated Financial Statements included in this report.
By comparison, as of January 31, 2020, Dell Technologies had $8.9 billion of outstanding borrowings under its Senior Secured Credit Facilities, $4.0 billion of outstanding borrowings under its Margin Loan Facility, $1.5 billion of outstanding DFS borrowings, and $1.5 billion outstanding under the VMware Term Loan Facility. Based on this variable-rate debt outstanding as of January 31, 2020, a 100 basis point increase in interest rates would have resulted in an increase of approximately $160 million in annual interest expense.
Equity Price Risk
Strategic Investments — Our strategic investments include early-stage, privately-held companies that are considered to be in the start-up or development stages and are inherently risky. The technologies or products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of a substantial part of our initial investment in the companies. We account for these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar security of the same issuer. The evaluation is based on information provided by these companies, which are not subject to the same disclosure obligations as U.S. publicly-traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data provided. The carrying value of our strategic investments without readily determinable fair values was $990 million and $852 million as of January 29, 2021 and January 31, 2020, respectively.
ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Dell Technologies Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Dell Technologies Inc. and its subsidiaries (the “Company”) as of January 29, 2021 and January 31, 2020, and the related consolidated statements of income (loss), of comprehensive modelincome (loss), of stockholders' equity (deficit) and of cash flows for entitieseach of the three years in the period ended January 29, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 29, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 29, 2021 and January 31, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of February 2, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’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’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’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 accounting for revenueconditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition- Identification of Performance Obligations in Revenue Contracts
As described in Notes 2 and 19 to the consolidated financial statements, the Company’s contracts with customers often include the promise to transfer multiple goods and will supersede substantially allservices to a customer. Distinct promises within a contract are referred to as performance obligations and are accounted for as separate units of account. Management assesses whether each promised good or service is distinct for the existing revenue recognition guidance, including industry-specific guidance. The new standardpurpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires entitiesmanagement to recognize revenue when it transfersmake judgments about the individual promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for thoseand whether such goods or services. Further,services are separable from the new standard requires additional disclosures to help enable usersother aspects of the contractual relationship. The Company’s performance obligations include various distinct goods and services such as hardware, software licenses, support and maintenance agreements, and other service offerings and solutions. For the year ended January 29, 2021, a significant portion of the $32.6 billion Infrastructure Solutions Group (“ISG”) and $11.9 billion VMware reportable segment net revenues relate to contracts with multiple performance obligations.
The principal considerations for our determination that performing procedures relating to the identification of performance obligations in revenue contracts is a critical audit matter are the significant judgment by management in identifying performance obligations in revenue contracts, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate whether performance obligations in revenue contracts were appropriately identified by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls related to the proper identification of performance obligations in revenue contracts. These procedures also included, among others, testing the completeness and accuracy of management’s identification of performance obligations by examining revenue contracts on a test basis.
Goodwill and Indefinite-lived Trade Names Impairment Assessments
As described in Note 8 to the consolidated financial statements, to better understand the nature, amount, timing, risks,Company’s consolidated goodwill and judgments related to revenue recognitionindefinite-lived trade names balances were $40.8 billion and related cash flows from contracts with customers. Concurrently, the FASB issued guidance on the accounting for costs to fulfill or obtain a customer contract.$3.8 billion as of January 29, 2021, respectively. The Company elected to adopt the new standards effective February 3, 2018 using the full retrospective method, which requires the Company to recast each prior period presented consistentgoodwill associated with the new guidance.
Adoption of the standard will have a material impact on the Company's Consolidated Financial Statements. The most significant changes are the following:
Software license revenue. Currently, the Company defers revenue for certain software arrangements due to the absence of vendor specific objective evidence ("VSOE"Infrastructure Solutions Group (“ISG”) of fair value for all orgoodwill reporting unit represents a portion of the deliverables. Undertotal goodwill balance. Goodwill and indefinite-lived intangible assets are tested for impairment annually during the new standard,third fiscal quarter and whenever events or circumstances may indicate that an impairment has occurred. Management performs a quantitative goodwill impairment test to measure the Company will no longer be required to establish VSOE of fair value in order to account for elements in an arrangement as separate units of accounting, and will be able to record revenue upon satisfaction of each goodwill reporting unit relative to its carrying amount, and to determine the amount of goodwill impairment loss to be recognized, if any. The fair value of the goodwill reporting units are generally estimated using a combination of public company multiples and discounted cash flow methodologies which require significant judgment, including estimation of future revenues, gross margins and operating expenses, which are dependent on internal forecasts, current and anticipated economic conditions and trends, selection of market multiples through assessment of the reporting unit’s performance obligation, resultingrelative to peer competitors, the estimation of the long-term revenue growth rate and discount rate of the Company’s business, and the determination of the Company’s weighted average cost of capital. The fair value of the indefinite-lived trade names is generally estimated using discounted cash flow methodologies. The discounted cash flow methodology requires significant judgment, including estimation of future revenue, the estimation of the long-term revenue growth rate of the Company’s business and the determination of the Company’s weighted average cost of capital and royalty rates.
The principal considerations for our determination that performing procedures relating to goodwill and indefinite-lived trade names impairment assessments is a critical audit matter are the significant judgment by management when developing the fair value measurement of the ISG reporting unit and certain of its indefinite-lived trade names, which in more up-front recognitionturn led to a high degree of software license revenue.
auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s selection of market multiples and cash flow projections, including significant assumptions related to the estimation of future revenues, gross margins and operating expenses. In addition, the Company currently accounts for third-party software licensesaudit effort involved the use of professionals with specialized skill and post-contract customer support ("PCS") as a single unitknowledge to assist in evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of account, because it does not have VSOE ofcontrols relating to management’s goodwill and indefinite-lived trade names impairment assessments, including controls over the fair value for PCS in most cases. Thus, the Company currently presents the entire arrangement for the software license and PCS together in services revenue and cost of services revenue. Under the new standard, the Company will separate the value of the license fromISG reporting unit and indefinite-lived trade names. These procedures also included, among others, testing management’s process for developing the fair value estimates, evaluating the appropriateness of the public company multiples and discounted cash flow methodologies, testing completeness and accuracy of underlying data used in the methodologies, and evaluating the reasonableness of management’s selection of market multiples, and significant assumptions used by management in estimating the fair value of the PCS. The license value will be recognized upon deliveryISG reporting unit and certain of the indefinite-lived trade names related to the estimation of future revenues, gross margins and operating expenses. Evaluating the assumptions related to the estimation of future revenues, gross margins and operating expenses involved evaluating whether assumptions used by management were reasonable considering the past performance of the ISG reporting unit and certain of the indefinite-lived trade names, consistency with third-party industry data, and whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s public company multiples and discounted cash flow methodologies and the PCS will be recognized oversignificant assumption related to the related contractual term. For presentation purposes, the license revenue and costselection of net revenue will be recorded in products, and the PCS revenue and cost of net revenue will be recorded in services onmarket multiples used.
/s/ PricewaterhouseCoopers LLP
Austin, Texas
March 26, 2021
We have served as the Company’s Consolidated Statement of Income (Loss).auditor since 1986.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions)
| | | | | | | | | | | |
| January 29, 2021 | | January 31, 2020 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 14,201 | | | $ | 9,302 | |
| | | |
Accounts receivable, net of allowance of $104 and $94 (Note 20) | 12,788 | | | 12,484 | |
Short-term financing receivables, net of allowance of $228 and $109 (Note 4) | 5,155 | | | 4,895 | |
Inventories | 3,402 | | | 3,281 | |
Other current assets | 8,021 | | | 6,906 | |
Total current assets | 43,567 | | | 36,868 | |
Property, plant, and equipment, net | 6,431 | | | 6,055 | |
Long-term investments | 1,624 | | | 864 | |
Long-term financing receivables, net of allowance of $93 and $40 (Note 4) | 5,339 | | | 4,848 | |
Goodwill | 40,829 | | | 41,691 | |
Intangible assets, net | 14,429 | | | 18,107 | |
Other non-current assets | 11,196 | | | 10,428 | |
Total assets | $ | 123,415 | | | $ | 118,861 | |
LIABILITIES, REDEEMABLE SHARES, AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | |
Short-term debt | $ | 6,362 | | | $ | 7,737 | |
Accounts payable | 21,696 | | | 20,065 | |
Accrued and other | 9,549 | | | 9,773 | |
Short-term deferred revenue | 16,525 | | | 14,881 | |
Total current liabilities | 54,132 | | | 52,456 | |
Long-term debt | 41,622 | | | 44,319 | |
Long-term deferred revenue | 14,276 | | | 12,919 | |
Other non-current liabilities | 5,360 | | | 5,383 | |
Total liabilities | 115,390 | | | 115,077 | |
Commitments and contingencies (Note 10) | 0 | | 0 |
Redeemable shares (Note 17) | 472 | | | 629 | |
Stockholders’ equity (deficit): | | | |
Common stock and capital in excess of $0.01 par value (Note 14) | 16,849 | | | 16,091 | |
Treasury stock at cost | (305) | | | (65) | |
Accumulated deficit | (13,751) | | | (16,891) | |
Accumulated other comprehensive loss | (314) | | | (709) | |
Total Dell Technologies Inc. stockholders’ equity (deficit) | 2,479 | | | (1,574) | |
Non-controlling interests | 5,074 | | | 4,729 | |
Total stockholders’ equity | 7,553 | | | 3,155 | |
Total liabilities, redeemable shares, and stockholders’ equity | $ | 123,415 | | | $ | 118,861 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 29, 2021 | | January 31, 2020 | | February 1, 2019 |
Net revenue: | | | | | |
Products | $ | 69,911 | | | $ | 69,918 | | | $ | 70,707 | |
Services | 24,313 | | | 22,236 | | | 19,914 | |
Total net revenue | 94,224 | | | 92,154 | | | 90,621 | |
Cost of net revenue: | | | | | |
Products | 55,347 | | | 54,525 | | | 57,889 | |
Services | 9,460 | | | 8,696 | | | 7,679 | |
Total cost of net revenue | 64,807 | | | 63,221 | | | 65,568 | |
Gross margin | 29,417 | | | 28,933 | | | 25,053 | |
Operating expenses: | | | | | |
Selling, general, and administrative | 18,998 | | | 21,319 | | | 20,640 | |
Research and development | 5,275 | | | 4,992 | | | 4,604 | |
Total operating expenses | 24,273 | | | 26,311 | | | 25,244 | |
Operating income (loss) | 5,144 | | | 2,622 | | | (191) | |
Interest and other, net | (1,474) | | | (2,626) | | | (2,170) | |
Income (loss) before income taxes | 3,670 | | | (4) | | | (2,361) | |
Income tax expense (benefit) | 165 | | | (5,533) | | | (180) | |
Net income (loss) | 3,505 | | | 5,529 | | | (2,181) | |
Less: Net income attributable to non-controlling interests | 255 | | | 913 | | | 129 | |
Net income (loss) attributable to Dell Technologies Inc. | $ | 3,250 | | | $ | 4,616 | | | $ | (2,310) | |
| | | | | |
Earnings (loss) per share attributable to Dell Technologies Inc. — basic: | | |
Dell Technologies Common Stock | $ | 4.37 | | | $ | 6.38 | | | |
Class V Common Stock | | | | | $ | 6.01 | |
DHI Group | | | | | $ | (6.02) | |
| | | | | |
Earnings (loss) per share attributable to Dell Technologies Inc. — diluted: | | |
Dell Technologies Common Stock | $ | 4.22 | | | $ | 6.03 | | | |
Class V Common Stock | | | | | $ | 5.91 | |
DHI Group | | | | | $ | (6.04) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 29, 2021 | | January 31, 2020 | | February 1, 2019 |
Net income (loss) | $ | 3,505 | | | $ | 5,529 | | | $ | (2,181) | |
| | | | | |
Other comprehensive income (loss), net of tax | | | | | |
Foreign currency translation adjustments | 528 | | | (226) | | | (631) | |
Available-for-sale investments: | | | | | |
Change in unrealized gains | 0 | | | 0 | | | 2 | |
Reclassification adjustment for net losses realized in net loss | 0 | | | 0 | | | 43 | |
Net change in market value of investments | 0 | | | 0 | | | 45 | |
Cash flow hedges: | | | | | |
Change in unrealized (losses) gains | (200) | | | 269 | | | 299 | |
Reclassification adjustment for net gains included in net income (loss) | 100 | | | (226) | | | (225) | |
Net change in cash flow hedges | (100) | | | 43 | | | 74 | |
Pension and other postretirement plans: | | | | | |
Recognition of actuarial net losses from pension and other postretirement plans | (38) | | | (60) | | | (21) | |
Reclassification adjustments for net losses from pension and other postretirement plans | 5 | | | 1 | | | 0 | |
Net change in actuarial net losses from pension and other postretirement plans | (33) | | | (59) | | | (21) | |
| | | | | |
Total other comprehensive income (loss), net of tax expense (benefit) of $(18), $(14), and $14, respectively | 395 | | | (242) | | | (533) | |
Comprehensive income (loss), net of tax | 3,900 | | | 5,287 | | | (2,714) | |
Less: Net income attributable to non-controlling interests | 255 | | | 913 | | | 129 | |
Less: Other comprehensive income attributable to non-controlling interests | 0 | | | 0 | | | 6 | |
Comprehensive income (loss) attributable to Dell Technologies Inc. | $ | 3,645 | | | $ | 4,374 | | | $ | (2,849) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| January 29, 2021 | | January 31, 2020 | | February 1, 2019 |
Cash flows from operating activities: | | | | | |
Net income (loss) | $ | 3,505 | | | $ | 5,529 | | | $ | (2,181) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 5,390 | | | 6,143 | | | 7,746 | |
Stock-based compensation expense | 1,609 | | | 1,262 | | | 918 | |
Deferred income taxes | (399) | | | (6,339) | | | (1,331) | |
Other, net | (88) | | | 938 | | | 756 | |
Changes in assets and liabilities, net of effects from acquisitions and dispositions: | | | | | |
Accounts receivable | (396) | | | (286) | | | (1,104) | |
Financing receivables | (728) | | | (1,329) | | | (1,302) | |
Inventories | (243) | | | 311 | | | (1,445) | |
Other assets and liabilities | (1,656) | | | (1,559) | | | 564 | |
Accounts payable | 1,598 | | | 894 | | | 952 | |
Deferred revenue | 2,815 | | | 3,727 | | | 3,418 | |
Change in cash from operating activities | 11,407 | | | 9,291 | | | 6,991 | |
Cash flows from investing activities: | | | | | |
Purchases of investments | (338) | | | (181) | | | (925) | |
Maturities and sales of investments | 169 | | | 497 | | | 6,612 | |
Capital expenditures and capitalized software development costs | (2,082) | | | (2,576) | | | (1,497) | |
Acquisition of businesses and assets, net | (424) | | | (2,463) | | | (971) | |
Divestitures of businesses and assets, net | 2,187 | | | (3) | | | 130 | |
Other | 28 | | | 40 | | | 40 | |
Change in cash from investing activities | (460) | | | (4,686) | | | 3,389 | |
Cash flows from financing activities: | | | | | |
Dividends paid to VMware, Inc.’s public stockholders | 0 | | | 0 | | | (2,134) | |
Proceeds from the issuance of common stock | 452 | | | 658 | | | 805 | |
Repurchases of parent common stock | (241) | | | (8) | | | (14,075) | |
Repurchases of subsidiary common stock | (1,363) | | | (3,547) | | | (415) | |
Proceeds from debt | 16,391 | | | 20,481 | | | 13,045 | |
Repayments of debt | (20,919) | | | (22,117) | | | (11,451) | |
Other | (270) | | | (71) | | | (104) | |
Change in cash from financing activities | (5,950) | | | (4,604) | | | (14,329) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 36 | | | (90) | | | (189) | |
Change in cash, cash equivalents, and restricted cash | 5,033 | | | (89) | | | (4,138) | |
Cash, cash equivalents, and restricted cash at beginning of the period | 10,151 | | | 10,240 | | | 14,378 | |
Cash, cash equivalents, and restricted cash at end of the period | $ | 15,184 | | | $ | 10,151 | | | $ | 10,240 | |
Income tax paid | $ | 1,421 | | | $ | 1,414 | | | $ | 747 | |
Interest paid | $ | 2,279 | | | $ | 2,500 | | | $ | 2,347 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in millions; continued on next page)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Capital in Excess of Par Value | | Treasury Stock | | | | | | | | | | |
| DHI Group | | Class V Common Stock | | DHI Group | | Class V Common Stock | | | | | | | | | | |
| Issued Shares | | Amount | | Issued Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | Dell Technologies Stockholders’ Equity (Deficit) | | Non-Controlling Interests | | Total Stockholders’ Equity (Deficit) |
Balances as of February 2, 2018 | 571 | | | $ | 9,848 | | | 223 | | | $ | 10,041 | | | 1 | | | $ | (16) | | | 24 | | | $ | (1,424) | | | $ | (6,860) | | | $ | 130 | | | $ | 11,719 | | | $ | 5,766 | | | $ | 17,485 | |
Adjustment for adoption of accounting standards (Note 2) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 58 | | | (58) | | | — | | | (5) | | | (5) | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,310) | | | — | | | (2,310) | | | 129 | | | (2,181) | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (631) | | | (631) | | | — | | | (631) | |
Investments, net change | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 39 | | | 39 | | | 6 | | | 45 | |
Cash flow hedges, net change | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 74 | | | 74 | | | — | | | 74 | |
Pension and other post-retirement | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (21) | | | (21) | | | — | | | (21) | |
Issuance of common stock | 150 | | | 6,845 | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,872) | | | — | | | (27) | | | — | | | (27) | |
Stock-based compensation expense | — | | | 99 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 99 | | | 819 | | | 918 | |
Treasury stock repurchases | — | | | — | | | — | | | — | | | 1 | | | (47) | | | — | | | — | | | — | | | — | | | (47) | | | — | | | (47) | |
Revaluation of redeemable shares | — | | | (812) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (812) | | | — | | | (812) | |
Repurchase of Class V Common Stock | — | | | — | | | (223) | | | (10,041) | | | — | | | — | | | (24) | | | 1,424 | | | (5,365) | | | — | | | (13,982) | | | — | | | (13,982) | |
Impact from equity transactions of non-controlling interests | — | | | 134 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 134 | | | (1,892) | | | (1,758) | |
Balances as of February 1, 2019 | 721 | | | $ | 16,114 | | | 0 | | | $ | 0 | | | 2 | | | $ | (63) | | | 0 | | | $ | 0 | | | $ | (21,349) | | | $ | (467) | | | $ | (5,765) | | | $ | 4,823 | | | $ | (942) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(continued; in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Capital in Excess of Par Value | | Treasury Stock | | | | | | | | | | |
| Dell Technologies Common Stock (a) | | | | | | | | | | |
| Issued Shares | | Amount | | Shares | | Amount | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | Dell Technologies Stockholders’ Equity (Deficit) | | Non-Controlling Interests | | Total Stockholders’ Equity (Deficit) |
Balances as of February 1, 2019 | 721 | | | $ | 16,114 | | | 2 | | | $ | (63) | | | $ | (21,349) | | | $ | (467) | | | $ | (5,765) | | | $ | 4,823 | | | $ | (942) | |
Adjustment for adoption of accounting standards (Note 2) | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | | | — | | | 3 | |
Net income | — | | | — | | | — | | | — | | | 4,616 | | | — | | | 4,616 | | | 913 | | | 5,529 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | (226) | | | (226) | | | — | | | (226) | |
| | | | | | | | | | | | | | | | | |
Cash flow hedges, net change | — | | | — | | | — | | | — | | | — | | | 43 | | | 43 | | | 0 | | | 43 | |
Pension and other post-retirement | — | | | — | | | — | | | — | | | — | | | (59) | | | (59) | | | — | | | (59) | |
Issuance of common stock | 24 | | | 345 | | | — | | | — | | | 0 | | | — | | | 345 | | | — | | | 345 | |
Stock-based compensation expense | — | | | 225 | | | — | | | — | | | — | | | — | | | 225 | | | 1,037 | | | 1,262 | |
Treasury stock repurchases | — | | | — | | | 0 | | | (2) | | | — | | | — | | | (2) | | | — | | | (2) | |
Revaluation of redeemable shares | — | | | 567 | | | — | | | — | | | — | | | — | | | 567 | | | — | | | 567 | |
Impact from equity transactions of non-controlling interests | — | | | (1,160) | | | — | | | — | | | (161) | | | — | | | (1,321) | | | (2,044) | | | (3,365) | |
Balances as of January 31, 2020 | 745 | | | $ | 16,091 | | | 2 | | | $ | (65) | | | $ | (16,891) | | | $ | (709) | | | $ | (1,574) | | | $ | 4,729 | | | $ | 3,155 | |
_________________
(a) See Note 14 of the Notes to the Consolidated Financial Statements for additional information on Dell Technologies Common Stock.
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(continued; in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock and Capital in Excess of Par Value | | Treasury Stock | | | | | | | | | | |
| Dell Technologies Common Stock (a) | | | | | | | | | | |
| Issued Shares | | Amount | | Shares | | Amount | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | Dell Technologies Stockholders’ Equity (Deficit) | | Non-Controlling Interests | | Total Stockholders’ Equity (Deficit) |
Balances as of January 31, 2020 | 745 | | | $ | 16,091 | | | 2 | | | $ | (65) | | | $ | (16,891) | | | $ | (709) | | | $ | (1,574) | | | $ | 4,729 | | | $ | 3,155 | |
Adjustment for adoption of accounting standards (Note 2) | — | | | — | | | — | | | — | | | (110) | | | — | | | (110) | | | — | | | (110) | |
Net income | — | | | — | | | — | | | — | | | 3,250 | | | — | | | 3,250 | | | 255 | | | 3,505 | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | 528 | | | 528 | | | — | | | 528 | |
Cash flow hedges, net change | — | | | — | | | — | | | — | | | — | | | (100) | | | (100) | | | 0 | | | (100) | |
Pension and other post-retirement | — | | | — | | | — | | | — | | | — | | | (33) | | | (33) | | | — | | | (33) | |
Issuance of common stock | 16 | | | 178 | | | — | | | — | | | 0 | | | — | | | 178 | | | — | | | 178 | |
Stock-based compensation expense | — | | | 462 | | | — | | | — | | | — | | | — | | | 462 | | | 1,147 | | | 1,609 | |
Treasury stock repurchases | — | | | — | | | 6 | | | (240) | | | — | | | — | | | (240) | | | — | | | (240) | |
Revaluation of redeemable shares | — | | | 157 | | | — | | | — | | | — | | | — | | | 157 | | | — | | | 157 | |
Impact from equity transactions of non-controlling interests | — | | | (39) | | | — | | | — | | | 0 | | | — | | | (39) | | | (1,057) | | | (1,096) | |
| | | | | | | | | | | | | | | | | |
Balances as of January 29, 2021 | 761 | | | $ | 16,849 | | | 8 | | | $ | (305) | | | $ | (13,751) | | | $ | (314) | | | $ | 2,479 | | | $ | 5,074 | | | $ | 7,553 | |
_________________
(a) See Note 14 of the Notes to the Consolidated Financial Statements for additional information on Dell Technologies Common Stock.
The accompanying notes are an integral part of these Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1 — BASIS OF PRESENTATION
Variable consideration. The Company will estimate the transaction price for elements of consideration which are variable, primarily customer rebates. This consideration will then be recognized
References in these Notes to the Consolidated Statement of Income (Loss) commensurate with the timing of the performance obligation to which it is related.