| FINANCIAL SERVICES | FINANCIAL SERVICES The Company offers or arranges various financing options and services and alternative payment structures for its customers globally primarily through Dell Financial Services and its affiliates (“DFS”). The Company also arranges financing for some of its customers in various countries where DFS does not currently operate as a captive enterprise. The key activities of DFS include originating, collecting, and servicing customer financing arrangements primarily related to the purchase or use of Dell Technologies products and services. In some cases, DFS also offers financing for the purchase of third-party technology products that complement the Dell Technologies portfolio of products and services. New financing originations were $2.3 billion and $1.9 billion for the three months ended July 29, 2022 and July 30, 2021, respectively, and $4.4 billion and $3.8 billion for the six months ended July 29, 2022 and July 30, 2021, respectively. The Company’s lease and loan arrangements with customers are aggregated primarily into the following categories: Revolving loans — Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell Technologies. These private label credit financing programs are referred to as Dell Preferred Account (“DPA”) and Dell Business Credit (“DBC”). The DPA product is primarily offered to individual consumer customers, and the DBC product is primarily offered to small and medium-sized commercial customers. Revolving loans in the United States bear interest at a variable annual percentage rate that is tied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid within twelve months on average. Due to the short-term nature of the revolving loan portfolio, the carrying value of the portfolio approximates fair value. Fixed-term leases and loans — The Company enters into financing arrangements with customers who seek lease financing for equipment. DFS leases are generally classified as sales-type leases or operating leases. Leases with business customers have fixed terms of generally two The Company also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three The Company further strengthens customer relationships through flexible consumption models, which enable the Company to offer its customers the option to pay over time and, in certain cases, based on utilization, to provide them with financial flexibility to meet their changing technological requirements. Financing Receivables The following table presents the components of the Company’s financing receivables segregated by portfolio segment as of the dates indicated: July 29, 2022 January 28, 2022 Revolving Fixed-term Total Revolving Fixed-term Total (in millions) Financing receivables, net: Customer receivables, gross (a) $ 705 $ 9,638 $ 10,343 $ 750 $ 9,833 $ 10,583 Allowances for losses (91) (92) (183) (102) (87) (189) Customer receivables, net 614 9,546 10,160 648 9,746 10,394 Residual interest — 150 150 — 217 217 Financing receivables, net $ 614 $ 9,696 $ 10,310 $ 648 $ 9,963 $ 10,611 Short-term $ 614 $ 4,246 $ 4,860 $ 648 $ 4,441 $ 5,089 Long-term $ — $ 5,450 $ 5,450 $ — $ 5,522 $ 5,522 ____________________ (a) Customer receivables, gross include amounts due from customers under revolving loans, fixed-term loans, fixed-term sales-type or direct financing leases, and accrued interest. The following table presents the changes in allowance for financing receivable losses for the periods indicated: Three Months Ended July 29, 2022 July 30, 2021 Revolving Fixed-term Total Revolving Fixed-term Total (in millions) Allowance for financing receivable losses: Balances at beginning of period $ 94 $ 87 $ 181 $ 139 $ 177 $ 316 Charge-offs, net of recoveries (12) (2) (14) (10) (3) (13) Provision charged to income statement 9 7 16 (3) (13) (16) Balances at end of period $ 91 $ 92 $ 183 $ 126 $ 161 $ 287 Six Months Ended July 29, 2022 July 30, 2021 Revolving Fixed-term Total Revolving Fixed-term Total (in millions) Allowance for financing receivable losses: Balances at beginning of period $ 102 $ 87 $ 189 $ 148 $ 173 $ 321 Charge-offs, net of recoveries (25) (4) (29) (23) (5) (28) Provision charged to income statement 14 9 23 1 (7) (6) Balances at end of period $ 91 $ 92 $ 183 $ 126 $ 161 $ 287 Aging The following table presents the aging of the Company’s customer financing receivables, gross, including accrued interest, segregated by class, as of the dates indicated: July 29, 2022 January 28, 2022 Current Past Due Past Due Total Current Past Due Past Due Total (in millions) Revolving — DPA $ 472 $ 37 $ 13 $ 522 $ 520 $ 40 $ 11 $ 571 Revolving — DBC 164 16 3 183 158 18 3 179 Fixed-term — Consumer and Commercial 9,343 271 24 9,638 9,444 345 44 9,833 Total customer receivables, gross $ 9,979 $ 324 $ 40 $ 10,343 $ 10,122 $ 403 $ 58 $ 10,583 Aging is likely to fluctuate as a result of the variability in volume of large transactions entered into over the period, and the administrative processes that accompany those transactions. Aging is also impacted by the timing of the Dell Technologies fiscal period end date relative to calendar month-end customer payment due dates. As a result of these factors, fluctuations in aging from period to period do not necessarily indicate a material change in the collectibility of the portfolio. Fixed-term consumer and commercial customer receivables are placed on non-accrual status if principal or interest is past due and considered delinquent, or if there is concern about collectibility of a specific customer receivable. The receivables identified as doubtful for collectibility may be classified as current for aging purposes. Aged revolving portfolio customer receivables identified as delinquent are charged off. Credit Quality The following tables present customer receivables, gross, including accrued interest, by credit quality indicator segregated by class, as of the dates indicated: July 29, 2022 Fixed-term — Consumer and Commercial Fiscal Year of Origination 2023 2022 2021 2020 2019 Years Prior Revolving — DPA Revolving — DBC Total (in millions) Higher $ 1,785 $ 2,347 $ 1,291 $ 578 $ 109 $ 7 $ 126 $ 46 $ 6,289 Mid 690 773 540 194 47 4 149 57 2,454 Lower 392 458 297 104 19 3 247 80 1,600 Total $ 2,867 $ 3,578 $ 2,128 $ 876 $ 175 $ 14 $ 522 $ 183 $ 10,343 January 28, 2022 Fixed-term — Consumer and Commercial Fiscal Year of Origination 2022 2021 2020 2019 2018 Years Prior Revolving — DPA Revolving — DBC Total (in millions) Higher $ 3,279 $ 1,824 $ 914 $ 221 $ 25 $ 3 $ 150 $ 46 $ 6,462 Mid 1,071 751 329 94 17 — 166 57 2,485 Lower 599 450 208 42 6 — 255 76 1,636 Total $ 4,949 $ 3,025 $ 1,451 $ 357 $ 48 $ 3 $ 571 $ 179 $ 10,583 The categories shown in the tables above segregate customer receivables based on the relative degrees of credit risk. The credit quality indicators for DPA revolving accounts are measured primarily as of each quarter-end date, while all other indicators are generally updated on a periodic basis. For DPA revolving receivables shown in the table above, the Company makes credit decisions based on proprietary scorecards, which include the customer’s credit history, payment history, credit usage, and other credit agency-related elements. The higher quality category includes prime accounts generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720 or above. The mid-category represents the mid-tier accounts that are comparable to U.S. customer FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to U.S. customer FICO scores below 660. For the DBC revolving receivables and fixed-term commercial receivables shown in the table above, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. The grading criteria and classifications for the fixed-term products differ from those for the revolving products as loss experience varies between these product and customer groups. The credit quality categories cannot be compared between the different classes as loss experience varies substantially between the classes. Leases The following table presents the net revenue, cost of net revenue, and gross margin recognized at the commencement date of sales-type leases for the periods indicated: Three Months Ended Six Months Ended July 29, 2022 July 30, 2021 July 29, 2022 July 30, 2021 (in millions) Net revenue — products $ 219 $ 194 $ 439 $ 424 Cost of net revenue — products 164 142 368 305 Gross margin — products $ 55 $ 52 $ 71 $ 119 The following table presents the future maturity of the Company’s fixed-term customer leases and associated financing payments, and reconciles the undiscounted cash flows to the customer receivables, gross recognized on the Condensed Consolidated Statements of Financial Position as of the date indicated: July 29, 2022 (in millions) Fiscal 2023 (remaining six months) $ 1,329 Fiscal 2024 1,950 Fiscal 2025 1,277 Fiscal 2026 659 Fiscal 2027 and beyond 217 Total undiscounted cash flows 5,432 Fixed-term loans 4,795 Revolving loans 705 Less: Unearned income (589) Total customer receivables, gross $ 10,343 Operating Leases The following table presents the components of the Company’s operating lease portfolio included in property, plant, and equipment, net as of the dates indicated: July 29, 2022 January 28, 2022 (in millions) Equipment under operating lease, gross $ 3,202 $ 2,643 Less: Accumulated depreciation (1,202) (935) Equipment under operating lease, net $ 2,000 $ 1,708 The following table presents operating lease income related to lease payments and depreciation expense for the Company’s operating lease portfolio for the periods indicated: Three Months Ended Six Months Ended July 29, 2022 July 30, 2021 July 29, 2022 July 30, 2021 (in millions) Income related to lease payments $ 253 $ 167 $ 485 $ 323 Depreciation expense $ 194 $ 127 $ 359 $ 243 The following table presents the future payments to be received by the Company as lessor in operating lease contracts as of the date indicated: July 29, 2022 (in millions) Fiscal 2023 (remaining six months) $ 469 Fiscal 2024 760 Fiscal 2025 512 Fiscal 2026 198 Fiscal 2027 and beyond 64 Total $ 2,003 DFS Debt The Company maintains programs that facilitate the funding of leases, loans, and other alternative payment structures in the capital markets. The majority of DFS debt is non-recourse to Dell Technologies and represents borrowings under securitization programs and structured financing programs, for which the Company’s risk of loss is limited to transferred loan and lease payments and associated equipment. The following table presents DFS debt as of the dates indicated and excludes the allocated portion of the Company’s other borrowings, which represents the additional amount considered to fund the DFS business: July 29, 2022 January 28, 2022 DFS debt (in millions) DFS U.S. debt: Asset-based financing and securitization facilities $ 2,271 $ 3,054 Fixed-term securitization offerings 3,968 3,011 Other 117 135 Total DFS U.S. debt 6,356 6,200 DFS international debt: Securitization facility 694 739 Other borrowings 810 785 Note payable 250 250 Dell Bank senior unsecured eurobonds 1,530 1,672 Total DFS international debt 3,284 3,446 Total DFS debt $ 9,640 $ 9,646 Total short-term DFS debt $ 5,565 $ 5,803 Total long-term DFS debt $ 4,075 $ 3,843 DFS U.S. Debt Asset-Based Financing and Securitization Facilities — The Company maintains separate asset-based financing facilities and a securitization facility in the United States, which are revolving facilities for fixed-term leases and loans and for revolving loans, respectively. This debt is collateralized solely by the U.S. loan and lease payments and associated equipment in the facilities. The debt has a variable interest rate and the duration of the debt is based on the terms of the underlying loan and lease payment streams. As of July 29, 2022, the total debt capacity related to the U.S. asset-based financing and securitization facilities was $5.0 billion. The Company enters into interest swap agreements to effectively convert a portion of this debt from a floating rate to a fixed rate. See Note 8 of the Notes to the Condensed Consolidated Financial Statements for additional information about interest rate swaps. The Company’s U.S. securitization facility for revolving loans is effective through June 25, 2025. The Company’s two U.S. asset-based financing facilities for fixed-term leases and loans are effective through July 10, 2023 and June 21, 2024, respectively. The asset-based financing and securitization facilities contain standard structural features related to the performance of the funded receivables, which include defined credit losses, delinquencies, average credit scores, and minimum collection requirements. In the event one or more of these criteria are not met and the Company is unable to restructure the facility, no further funding of receivables will be permitted and the timing of the Company’s expected cash flows from over-collateralization will be delayed. As of July 29, 2022, these criteria were met. Fixed-Term Securitization Offerings — The Company periodically issues asset-backed debt securities under fixed-term securitization programs to private investors. The asset-backed debt securities are collateralized solely by the U.S. fixed-term leases and loans in the offerings, which are held by Special Purpose Entities (“SPEs”), as discussed below. The interest rate on these securities is fixed and ranges from 0.33% to 5.92% per annum, and the duration of these securities is based on the terms of the underlying lease and loan payment streams. DFS International Debt Securitization Facility — The Company maintains a securitization facility in Europe for fixed-term leases and loans. This facility is effective through December 21, 2022 and had a total debt capacity of $816 million as of July 29, 2022. The securitization facility contains standard structural features related to the performance of the securitized receivables, which include defined credit losses, delinquencies, average credit scores, and minimum collection requirements. In the event one or more of these criteria are not met and the Company is unable to restructure the program, no further funding of receivables will be permitted and the timing of the Company’s expected cash flows from over-collateralization will be delayed. As of July 29, 2022, these criteria were met. Other Borrowings — In connection with the Company’s international financing operations, the Company has entered into revolving structured financing debt programs related to its fixed-term lease and loan products sold in Canada, Europe, Australia, and New Zealand. The Canadian facility, which is collateralized solely by Canadian loan and lease payments and associated equipment, had a total debt capacity of $351 million as of July 29, 2022 and is effective through January 16, 2025. The European facility, which is collateralized solely by European loan and lease payments and associated equipment, had a total debt capacity of $612 million as of July 29, 2022 and is effective through December 14, 2023. The Australia and New Zealand facility, which is collateralized solely by Australia and New Zealand loan and lease payments and associated equipment, had a total debt capacity of $315 million as of July 29, 2022 and is effective through April 20, 2023. Note Payable — On May 25, 2022, the Company entered into an unsecured credit agreement to fund receivables in Mexico. As of July 29, 2022, the aggregate principal amount of the note payable was $250 million. The note bears interest at an annual rate of 4.24% and will mature on May 31, 2024. Dell Bank Senior Unsecured Eurobonds — On October 17, 2019, Dell Bank International D.A.C. (“Dell Bank”) issued 500 million Euro of 0.625% senior unsecured three year eurobonds due October 2022. On June 24, 2020, Dell Bank issued 500 million Euro of 1.625% senior unsecured four year eurobonds due June 2024. On October 27, 2021, Dell Bank issued 500 million Euro of 0.5% senior unsecured five year eurobonds due October 2026. The issuances of the senior unsecured eurobonds support the expansion of the financing operations in Europe. Variable Interest Entities In connection with the asset-based financing facilities, securitization facilities, and fixed-term securitization offerings discussed above, the Company transfers certain U.S. and European lease and loan payments and associated equipment to SPEs that meet the definition of a VIE and are consolidated, along with the associated debt detailed above, into the Condensed Consolidated Financial Statements, as the Company is the primary beneficiary of the VIEs. The SPEs are bankruptcy-remote legal entities with separate assets and liabilities. The purpose of the SPEs is to facilitate the funding of customer loan and lease payments and associated equipment in the capital markets. Some of the SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. DFS debt outstanding held by the consolidated VIEs is collateralized by the lease and loan payments and associated equipment. The Company’s risk of loss related to securitized receivables is limited to the amount by which the Company’s right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities. The Company provides credit enhancement to the securitization in the form of over-collateralization. The following table presents the assets and liabilities held by the consolidated VIEs as of the dates indicated, which are included in the Condensed Consolidated Statements of Financial Position: July 29, 2022 January 28, 2022 (in millions) Assets held by consolidated VIEs Other current assets $ 574 $ 535 Financing receivables, net of allowance Short-term $ 3,313 $ 3,368 Long-term $ 3,181 $ 3,141 Property, plant, and equipment, net $ 1,069 $ 945 Liabilities held by consolidated VIEs Debt, net of unamortized debt issuance costs Short-term $ 4,469 $ 4,560 Long-term $ 2,450 $ 2,235 Lease and loan payments and associated equipment transferred via securitization through SPEs were $1.2 billion and $1.3 billion for the three months ended July 29, 2022 and July 30, 2021, respectively, and $2.9 billion and $2.7 billion for the six months ended July 29, 2022 and July 30, 2021, respectively. Customer Receivable Sales To manage certain concentrations of customer credit exposure, the Company may sell selected fixed-term customer receivables to unrelated third parties on a periodic basis, without recourse. The amount of customer receivables sold for this purpose was $425 million and $101 million for the six months ended July 29, 2022 and July 30, 2021, respectively. The Company’s continuing involvement in these customer receivables is primarily limited to servicing arrangements. |
