e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
October 30,
2009
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Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File
Number: 0-17017
Dell Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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74-2487834
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer Identification No.)
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One Dell
Way
Round Rock, Texas 78682
(Address
of principal executive offices) (Zip Code)
1-800-289-3355
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of the close of business on November 27, 2009,
1,956,656,359 shares of common stock, par value $.01 per
share, were outstanding.
PART I
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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DELL
INC.
(in millions)
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October 30,
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January 30,
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2009
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2009
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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12,795
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$
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8,352
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Short-term investments
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331
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740
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Accounts receivable, net
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5,279
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4,731
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Financing receivables, net
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2,318
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1,712
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Inventories, net
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952
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867
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Other current assets
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3,196
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3,749
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Total current assets
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24,871
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20,151
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Property, plant, and equipment, net
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1,978
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2,277
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Investments
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828
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454
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Long-term financing receivables, net
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311
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500
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Goodwill
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1,748
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1,737
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Purchased intangible assets, net
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607
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724
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Other non-current assets
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682
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657
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Total assets
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$
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31,025
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$
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26,500
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Short-term debt
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$
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351
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$
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113
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Accounts payable
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9,947
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8,309
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Accrued and other
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3,687
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3,788
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Short-term deferred enhanced services revenue
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2,876
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2,649
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Total current liabilities
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16,861
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14,859
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Long-term debt
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3,442
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1,898
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Long-term deferred enhanced services revenue
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3,054
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3,000
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Other non-current liabilities
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2,643
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2,472
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Total liabilities
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26,000
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22,229
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Commitments and contingencies (Note 8)
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Stockholders equity:
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Preferred stock and capital in excess of $.01 par value;
shares
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authorized: 5; issued and outstanding: none
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-
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-
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Common stock and capital in excess of $.01 par value; shares
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authorized: 7,000; shares issued: 3,350 and 3,338, respectively;
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shares outstanding: 1,956 and 1,944, respectively
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11,351
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11,189
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Treasury stock at cost: 919 shares
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(27,904
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)
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(27,904
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)
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Retained earnings
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21,776
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20,677
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Accumulated other comprehensive (loss) income
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(198
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)
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309
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Total stockholders equity
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5,025
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4,271
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Total liabilities and stockholders equity
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$
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31,025
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$
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26,500
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
1
DELL
INC.
(in millions, except per share
amounts; unaudited)
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Three Months Ended
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Nine Months Ended
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October 30,
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October 31,
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October 30,
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October 31,
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2009
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2008
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2009
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2008
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Net revenue:
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Products
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$
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10,746
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$
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12,970
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$
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31,601
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$
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41,073
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Services, including software related
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2,150
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2,192
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6,401
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6,600
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Total net revenue
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12,896
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15,162
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38,002
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47,673
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Cost of net revenue:
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Products
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9,269
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10,958
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27,033
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34,966
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Services, including software related
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1,394
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1,351
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4,177
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4,062
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Total cost of net revenue
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10,663
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12,309
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31,210
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39,028
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Gross margin
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2,233
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2,853
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6,792
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8,645
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Operating expenses:
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Selling, general, and administrative
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1,501
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1,671
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4,685
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5,423
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In-process research and development
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-
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-
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-
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2
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Research, development, and engineering
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155
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167
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445
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487
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Total operating expenses
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1,656
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1,838
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5,130
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5,912
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Operating income
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577
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1,015
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1,662
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2,733
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Investment and other income (expense), net
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(63
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)
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(6
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)
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(107
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)
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137
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Income before income taxes
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514
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1,009
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1,555
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2,870
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Income tax provision
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177
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282
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456
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743
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Net income
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$
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337
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$
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727
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$
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1,099
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$
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2,127
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Earnings per common share:
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Basic
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$
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0.17
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$
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0.37
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$
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0.56
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$
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1.07
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Diluted
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$
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0.17
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$
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0.37
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$
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0.56
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$
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1.06
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Weighted-average shares outstanding:
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Basic
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1,956
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1,953
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1,953
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1,993
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Diluted
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1,966
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1,957
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1,959
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1,998
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
2
DELL
INC.
(in millions; unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
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October 30,
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October 31,
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2009
|
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2008
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Cash flows from operating activities:
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Net income
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$
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1,099
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$
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2,127
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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593
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573
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Stock-based compensation
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211
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201
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In-process research and development charges
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-
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2
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Effects of exchange rate changes on monetary assets and
liabilities denominated in foreign currencies
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58
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(113
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)
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Deferred income taxes
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(33
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)
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209
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Provision for doubtful accounts - including financing
receivables
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290
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199
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Other
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75
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17
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Changes in operating assets and liabilities, net of effects from
acquisitions:
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Accounts receivable
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(456
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)
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(241
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)
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Financing receivables
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(556
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)
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(28
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)
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Inventories
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(83
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)
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65
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Other assets
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93
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(648
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)
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Accounts payable
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1,551
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(1,992
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)
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Deferred enhanced services revenue
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36
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424
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Accrued and other liabilities
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(240
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)
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370
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Change in cash from operating activities
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2,638
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1,165
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Cash flows from investing activities:
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Investments:
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Purchases
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(1,182
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)
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(1,150
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)
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Maturities and sales
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1,307
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2,034
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Capital expenditures
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(249
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)
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(401
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)
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Proceeds from sale of facility and land
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16
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44
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Acquisition of business, net of cash received
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(3
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)
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(165
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)
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Change in cash from investing activities
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(111
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)
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362
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|
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|
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Cash flows from financing activities:
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|
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Repurchase of common stock
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|
-
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|
(2,866
|
)
|
Issuance of common stock under employee plans
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|
-
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79
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|
Issuance of commercial paper (maturity 90 days or less), net
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|
43
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|
|
|
253
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|
Proceeds from debt
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1,748
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|
|
|
1,519
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Repayments of debt
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(62
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)
|
|
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(237
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)
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|
|
|
|
|
|
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Change in cash from financing activities
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|
1,729
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|
|
|
(1,252
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)
|
|
|
|
|
|
|
|
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|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
187
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
4,443
|
|
|
|
146
|
|
Cash and cash equivalents at beginning of period
|
|
|
8,352
|
|
|
|
7,764
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
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|
$
|
12,795
|
|
|
$
|
7,910
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
DELL
INC.
(unaudited)
NOTE 1
BASIS OF PRESENTATION
Basis of Presentation The accompanying
Condensed Consolidated Financial Statements of Dell Inc.
(Dell) should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes filed
with the U.S. Securities and Exchange Commission
(SEC) in Dells Annual Report on
Form 10-K
for the fiscal year ended January 30, 2009. The
accompanying Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). In
the opinion of management, the accompanying Condensed
Consolidated Financial Statements reflect all adjustments of a
normal recurring nature considered necessary to fairly state the
financial position of Dell and its consolidated subsidiaries at
October 30, 2009, the results of its operations for the
three and nine months ended October 30, 2009, and
October 31, 2008, and its cash flows for the nine months
ended October 30, 2009, and October 31, 2008.
The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in Dells Condensed
Consolidated Financial Statements and the accompanying Notes.
Actual results could differ materially from those estimates. The
results of operations and cash flows for the three and nine
months ended October 30, 2009, and October 31, 2008,
are not necessarily indicative of the results to be expected for
the full year.
Accounting
Pronouncements
The Financial Accounting Standards Board (FASB) is
the authoritative body for financial accounting and reporting in
the United States. On July 31, 2009, the FASB Accounting
Standards Codification (the Codification) became the
authoritative source of accounting principles to be applied to
the financial statements of nongovernmental entities prepared in
accordance with GAAP. The following is a list of recent
pronouncements issued by the FASB:
Recently
Issued and Adopted Accounting Pronouncements
|
|
|
Business Combinations: The pronouncement
requires the acquisition method of accounting be applied to a
broader set of business combinations and establishes principles
and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired,
liabilities assumed, any noncontrolling interest in the
acquiree, and the goodwill acquired. Dell adopted the
pronouncement in the first quarter of Fiscal 2010. The adoption
did not have a material impact on Dells Condensed
Consolidated Financial Statements at the time of adoption, but
the pronouncement will impact the accounting for acquisitions
subsequent to that date, including Dells acquisition of
Perot Systems Corporation (Perot Systems) on
November 3, 2009. Management is currently evaluating the
impact that the Perot Systems acquisition will have on
Dells consolidated financial statements. See Note 13
of Notes to Condensed Consolidated Financial Statements for
additional information.
|
|
|
Fair Value Measurements and Disclosures: The
pronouncements define fair value, establish guidelines for
measuring fair value, and expand disclosures regarding fair
value measurements.
|
In the first quarter of Fiscal 2010, Dell adopted the fair value
measurements guidance for all nonfinancial assets and
nonfinancial liabilities recognized or disclosed at fair value
in the financial statements on a nonrecurring basis. The
adoption did not have a material impact on Dells Condensed
Consolidated Financial Statements. See Note 4 of Notes to
Condensed Consolidated Financial Statements for additional
information.
In the second quarter of Fiscal 2010, Dell adopted the guidance
for measuring the fair value of financial instruments when
markets become inactive and quoted prices may reflect distressed
transactions. The adoption did not have a material impact on
Dells Condensed Consolidated Financial Statements. See
Note 4 of Notes to Condensed Consolidated Financial
Statements for additional information.
4
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
In the second quarter of Fiscal 2010, Dell adopted the fair
value disclosure provision that requires the reporting of
interim disclosures about the fair value of financial
instruments previously only disclosed on an annual basis. The
adoption did not have any impact on Dells Condensed
Consolidated Financial Statements as it relates only to
disclosures. The required disclosures are included in
Note 3 of Notes to Condensed Consolidated Financial
Statements.
In the third quarter of Fiscal 2010, Dell adopted the fair value
measurements guidance on the measurement of liabilities at fair
value. In circumstances whereby a quoted market price in an
active market for an identical liability is not available, an
entity is required to use the quoted price of an identical
liability traded as an asset, or if unavailable, quoted prices
for similar liabilities traded as assets, or a valuation
technique consistent with existing fair value principles. The
adoption did not have a material impact on Dells Condensed
Consolidated Financial Statements.
|
|
|
Noncontrolling Interests in Consolidated Financial
Statements: The pronouncement requires the
noncontrolling interest in the equity of a subsidiary be
accounted for and reported as equity, provides revised guidance
on the treatment and presentation of net income and losses
attributable to the noncontrolling interest and changes in
ownership interests in a subsidiary, and requires additional
disclosures that identify and distinguish between the interests
of the controlling and noncontrolling owners. Dell adopted the
pronouncement in the first quarter of Fiscal 2010. The adoption
did not have any impact on Dells Condensed Consolidated
Financial Statements.
|
|
|
Derivative Instruments and Hedging
Activities: The pronouncement requires additional
disclosures about the objectives of derivative instruments and
hedging activities, the method of accounting for such
instruments, and a tabular disclosure of the effects of such
instruments and related hedged items on Financial Statements.
The pronouncement does not change the accounting treatment for
derivative instruments. Dell adopted the pronouncement in the
first quarter of Fiscal 2010. The adoption did not have a
material impact on Dells Condensed Consolidated Financial
Statements. See Note 3 of Notes to Condensed Consolidated
Financial Statements for additional information.
|
|
|
Impairments of Debt Securities: The
pronouncement changed the impairment recognition and
presentation model for debt securities. An
other-than-temporary
impairment is now triggered when there is intent to sell the
security, it is more likely than not that the security will be
required to be sold before recovery in value, or the security is
not expected to recover its entire amortized cost basis
(credit related loss). Credit related losses on debt
securities will be considered an
other-than-temporary
impairment recognized in earnings, and any other losses due to a
decline in fair value relative to the amortized cost deemed not
to be
other-than-temporary
will be recorded in other comprehensive income. Dell adopted the
pronouncement in the second quarter of Fiscal 2010. The adoption
did not have a material impact on Dells Condensed
Consolidated Financial Statements. See Note 3 of Notes to
Condensed Consolidated Financial Statements for additional
information.
|
|
|
Subsequent Events: The pronouncement codifies
existing standards of accounting for and disclosures of events
that occur after the balance sheet date but before financial
statements are issued or are available to be issued. Dell
adopted the pronouncement in the second quarter of Fiscal 2010.
The adoption did not have any impact on Dells Condensed
Consolidated Financial Statements. See Note 13 of Notes to
Condensed Consolidated Financial Statements for additional
information.
|
Recently
Issued but Not Yet Adopted Accounting
Pronouncements
|
|
|
Revenue Arrangements with Multiple
Deliverables: The guidance amends the current
revenue recognition guidance for multiple deliverable
arrangements. It allows the use of managements best
estimate of selling price for individual elements of an
arrangement when vendor specific objective evidence, vendor
objective evidence, or third-party evidence is unavailable.
Additionally, it eliminates the residual method of revenue
|
5
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
|
recognition in accounting for multiple deliverable arrangements.
The guidance is effective for fiscal years beginning on or after
June 15, 2010 (Dells Fiscal 2012), but early adoption
is permitted. Based on a preliminary evaluation, Management does
not expect the adoption of this guidance to have a material
impact on Dells Condensed Consolidated Financial
Statements. Management is presently considering early adoption
of the pronouncement in the first quarter of Fiscal 2011.
|
|
|
|
Revenue Arrangements with Software
Elements: The pronouncement modifies the scope of
the software revenue recognition guidance to exclude tangible
products that contain both software and non-software components
that function together to deliver the products essential
functionality. The pronouncement is effective for fiscal years
beginning on or after June 15, 2010 (Dells Fiscal
2012), but early adoption is permitted. This guidance must be
adopted in the same period an entity adopts the amended revenue
arrangements with multiple deliverables guidance described
above. Based on a preliminary evaluation, Management does not
expect the adoption of this guidance to have a material impact
on Dells Condensed Consolidated Financial Statements.
Management is presently considering early adoption of the
pronouncement in the first quarter of Fiscal 2011.
|
|
|
Variable Interest Entities and Transfers of Financial Assets
and Extinguishments of Liabilities: The
pronouncement on transfers of financial assets and
extinguishments of liabilities removes the concept of a
qualifying special-purpose entity and removes the exception from
applying variable interest entity accounting to qualifying
special-purpose entities. The new guidance on variable interest
entities requires an entity to perform an ongoing analysis to
determine whether the entitys variable interest or
interests give it a controlling financial interest in a variable
interest entity. The pronouncements are effective for fiscal
years beginning after November 15, 2009. Dell will adopt
the pronouncements for interim and annual reporting periods
beginning in the first quarter of Fiscal 2011. Dell expects the
adoption of these two pronouncements to result in the
consolidation of its qualifying special purpose entities
beginning in the first quarter of Fiscal 2011. The impact of the
required consolidations is not expected to be material to
Dells financial position, net income, or cash flows. See
Note 5 of Notes to Condensed Consolidated Financial
Statements for additional information.
|
Reclassifications To maintain
comparability among the periods presented, Dell has revised the
Fiscal 2009 presentation of the components of net revenue and
cost of net revenue presented in the Condensed Consolidated
Statements of Income in order to disclose net revenue and cost
of net revenue for services as required by SEC
Regulation S-X
Rule 5-03
Income Statements. The revision had no impact to
total net revenue and total cost of net revenue. Dell has
revised the presentation of certain prior period amounts
reported within cash flows from operating activities presented
in the Condensed Consolidated Statement of Cash Flows. The
revision had no impact to the total change in cash from
operating activities.
NOTE 2
INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
January 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Production materials
|
|
$
|
459
|
|
|
$
|
454
|
|
Work-in-process
|
|
|
150
|
|
|
|
150
|
|
Finished goods
|
|
|
343
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
952
|
|
|
$
|
867
|
|
|
|
|
|
|
|
|
|
|
6
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
NOTE 3
FINANCIAL INSTRUMENTS
Investments
The following table summarizes, by major security type, the fair
value and amortized cost of Dells investments. All debt
security investments with remaining maturities in excess of one
year and substantially all equity and other securities are
recorded as long-term investments in the Condensed Consolidated
Statements of Financial Position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2009
|
|
|
January 30, 2009
|
|
|
|
Fair
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Value
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
112
|
|
|
$
|
112
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
539
|
|
|
$
|
537
|
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
U.S. corporate
|
|
|
602
|
|
|
|
602
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
484
|
|
|
|
491
|
|
|
|
2
|
|
|
|
(9
|
)
|
International corporate
|
|
|
334
|
|
|
|
334
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
78
|
|
|
|
77
|
|
|
|
1
|
|
|
|
(0
|
)
|
State and municipal governments
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
|
|
0
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
1,051
|
|
|
|
1,051
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
1,106
|
|
|
|
1,110
|
|
|
|
6
|
|
|
|
(10
|
)
|
Equity and other securities
|
|
|
108
|
|
|
|
108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,159
|
|
|
$
|
1,159
|
|
|
$
|
4
|
|
|
$
|
(4
|
)
|
|
$
|
1,194
|
|
|
$
|
1,198
|
|
|
$
|
6
|
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dells investments in debt securities are classified as
available-for-sale.
Equity and other securities primarily relate to investments held
in Dells Deferred Compensation Plan, which are classified
as trading securities. These securities are reported at fair
value (based on quoted prices and market observable inputs)
using the specific identification method. All other investments
are initially recorded at cost and reduced for any impairment
losses. The fair value of Dells portfolio is affected
primarily by interest rate movements rather than credit and
liquidity risks. Dell attempts to mitigate interest rate,
credit, and liquidity risks by investing primarily in high
credit quality securities with AAA and AA ratings and short-term
securities with an
A-1 rating,
limiting the amount that can be invested in any single issuer,
and investing primarily in shorter term investments whose market
value is less sensitive to interest rate changes. As part of its
cash and risk management process, Dell performs periodic
evaluations of the credit standing of the institutions in
accordance with its investment policy. Most of Dells
investments in debt securities have effective maturities of less
than five years.
The following table summarizes Dells debt securities,
including securities classified as cash equivalents, that had
unrealized losses as of October 30, 2009, and their
duration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
(Loss)
|
|
|
Value
|
|
|
(Loss)
|
|
|
Value
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
11
|
|
|
$
|
-
|
|
U.S. corporate
|
|
|
137
|
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
142
|
|
|
|
(3
|
)
|
International corporate
|
|
|
178
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
178
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
325
|
|
|
$
|
(3
|
)
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
331
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 30, 2009, Dell held investments in 77 debt
securities that had fair value below their carrying values for a
period of less than 12 months and 3 debt securities that
had fair value below their carrying values for a period of
12 months or more. The unrealized losses are due to
interest rate movements and are expected to be recovered over
the contractual term of the instruments.
7
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
At the beginning of the second quarter of Fiscal 2010, Dell
adopted the new pronouncement that changed the impairment
recognition and presentation model for debt securities. Dell
reviews its investment portfolio quarterly to determine if any
investment is
other-than-temporarily
impaired. Under the amended impairment model for debt
securities, an
other-than-temporary
impairment (OTTI) loss is recognized in earnings if
the entity has the intent to sell the debt security, or if it is
more likely than not that it will be required to sell the debt
security before recovery of its amortized cost basis. However,
if an entity does not expect to sell a debt security, it still
evaluates expected cash flows to be received and determines if a
credit loss exists. In the event of a credit loss, only the
amount of impairment associated with the credit loss is
recognized currently in earnings. Amounts relating to factors
other than credit losses are recorded in other comprehensive
income. Upon adoption of the new pronouncement at the beginning
of the second quarter of Fiscal 2010, the amounts Dell recorded
for the cumulative-effect adjustment were immaterial. As of
October 30, 2009, Dell evaluated debt securities classified
as available for sale for OTTI and the existence of credit
losses. Dell did not record any loss for OTTI during the third
quarter of Fiscal 2010.
The following table summarizes recognized gains and losses on
investments recorded in investment and other income (expense),
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Gains
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
14
|
|
Losses
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains (losses)
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Instruments and Hedging Activities
Foreign
Currency Instruments
As part of its risk management strategy, Dell uses derivative
instruments, primarily forward contracts and purchased options,
to hedge certain foreign currency exposures. Dells
objective is to offset gains and losses resulting from these
exposures with gains and losses on the derivative contracts used
to hedge them, thereby reducing volatility of earnings and
protecting fair values of assets and liabilities. Dell applies
hedge accounting based upon the criteria established by
accounting guidance for derivative instruments and hedging
activities, including designation of its derivatives as
fair value hedges or cash flow hedges and assessment of hedge
effectiveness. Dell estimates the fair values of derivatives
using internal models based on market observable inputs,
including forward and spot prices for currencies and implied
volatilities, and records all derivatives in its Consolidated
Statement of Financial Position at fair value.
Cash
Flow Hedges
Dell uses a combination of forward contracts and purchased
options designated as cash flow hedges to protect against the
foreign currency exchange rate risks inherent in its forecasted
transactions denominated in currencies other than the
U.S. dollar. The risk of loss associated with purchased
options is limited to premium amounts paid for the option
contracts. The risk of loss associated with forward contracts is
equal to the exchange rate differential from the time the
contract is entered into until the time it is settled. These
contracts typically expire in 12 months or less. For
derivative instruments that are designated and qualify as cash
flow hedges, Dell records the effective portion of the gain or
loss on the derivative instrument in accumulated other
comprehensive income (loss) (OCI) as a separate
component of stockholders equity and reclassifies these
amounts into earnings in the period during which the hedged
transaction is recognized in earnings. Dell reports the
effective portion of cash flow hedges in the same financial
statement line item within earnings as the changes in value of
the hedged item.
8
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
For foreign currency forward contracts and purchased options
designated as cash flow hedges, Dell assesses hedge
effectiveness both at the onset of the hedge as well as at the
end of each fiscal quarter throughout the life of the
derivative. Dell measures hedge ineffectiveness by comparing the
cumulative change in the fair value of the hedge contract with
the cumulative change in the fair value of the hedged item, both
of which are based on forward rates. Dell recognizes any
ineffective portion of the hedge, as well as amounts not
included in the assessment of effectiveness, in earnings as a
component of investment and other income (expense), net. Hedge
ineffectiveness for cash flow hedges was not material for the
three and nine months ended October 30, 2009. During the
three and nine months ended October 30, 2009, Dell did not
discontinue any cash flow hedges that had a material impact on
Dells results of operations, as substantially all
forecasted foreign currency transactions were realized in
Dells actual results.
As of October 30, 2009, the total notional amount of
foreign currency option and forward contracts designated as cash
flow hedges was $6.6 billion from selling local currency.
The following tables summarize the fair value of the foreign
exchange contracts on the Condensed Consolidated Statement of
Financial Position, as well as the amount of hedge
ineffectiveness on cash flow hedges recorded in earnings for the
respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI, Net
|
|
|
Location of Gain (Loss)
|
|
Gain (Loss) Reclassified
|
|
|
Location of Gain (Loss)
|
|
Gain (Loss)
|
|
Derivatives in
|
|
of Tax, on
|
|
|
Reclassified from
|
|
from Accumulated
|
|
|
Recognized in Income
|
|
Recognized in
|
|
Cash Flow
|
|
Derivatives
|
|
|
Accumulated OCI into
|
|
OCI into Income
|
|
|
on Derivative
|
|
Income on Derivative
|
|
Hedging Relationships
|
|
(Effective Portion)
|
|
|
Income (Effective Portion)
|
|
(Effective Portion)
|
|
|
(Ineffective Portion)
|
|
(Ineffective Portion)
|
|
|
|
(in millions)
|
|
|
For the Three Months Ended October 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
|
|
|
|
Total net revenue
|
|
$
|
(166
|
)
|
|
Investment and other
|
|
|
|
|
contracts
|
|
$
|
(144
|
)
|
|
Total cost of net revenue
|
|
|
(6
|
)
|
|
income (expense), net
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(144
|
)
|
|
|
|
$
|
(172
|
)
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended October 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
|
|
|
|
Total net revenue
|
|
$
|
(92
|
)
|
|
Investment and other
|
|
|
|
|
contracts
|
|
$
|
(557
|
)
|
|
Total cost of net revenue
|
|
|
(16
|
)
|
|
income (expense), net
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(557
|
)
|
|
|
|
$
|
(108
|
)
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Foreign Currency Derivative Instruments
Dell uses forward contracts to hedge monetary assets and
liabilities, primarily receivables and payables, denominated in
a foreign currency. The change in the fair value of these
instruments represents a natural hedge as their gains and losses
offset the changes in the underlying fair value of the monetary
assets and liabilities due to movements in currency exchange
rates. These contracts generally expire in three months or less.
These contracts are considered economic hedges and are not
designated as hedges under derivative instruments and hedging
activities accounting, and therefore, the change in the
instruments fair value is recognized currently in earnings
as a component of investment and other income (expense), net.
For the third quarter and first nine months of Fiscal 2010,
losses recognized on foreign currency forward contracts were
$64 million and $90 million, respectively. As of
October 30, 2009, the total notional amount of other
foreign currency forward contracts not designated as hedges was
$987 million from buying local currency.
Derivative
Instruments Additional Information
Cash flows from derivative instruments are presented in the same
category on the Condensed Consolidated Statements of Cash flows
as the cash flows from the intended hedged items or the economic
hedges.
9
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
While Dell has derivative contracts in more than 20 currencies,
the majority of the notional amounts are denominated in the
Euro, British Pound, Japanese Yen, Canadian Dollar, and
Australian Dollar.
Dell presents its derivative instruments on a net basis in the
statement of financial position due to right of offset by
counterparty under master netting arrangements. The fair value
of those derivative instruments presented on a gross basis for
the period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2009
|
|
|
|
Other Current
|
|
|
Other Current
|
|
|
Total
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts in an asset position
|
|
$
|
15
|
|
|
$
|
74
|
|
|
$
|
89
|
|
Foreign exchange contracts in a liability position
|
|
|
(11
|
)
|
|
|
(211
|
)
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
4
|
|
|
|
(137
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts in an asset position
|
|
|
40
|
|
|
|
81
|
|
|
|
121
|
|
Foreign exchange contracts in a liability position
|
|
|
(37
|
)
|
|
|
(122
|
)
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
|
3
|
|
|
|
(41
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives at fair value
|
|
$
|
7
|
|
|
$
|
(178
|
)
|
|
$
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dell has reviewed the existence and nature of
credit-risk-related contingent features in derivative trading
agreements with its counterparties. Certain agreements contain
clauses whereby upon a change of control and if Dells
credit ratings were to fall below investment grade,
counterparties would have the right to terminate those
derivative contracts where Dell is in a net liability position.
As of October 30, 2009, there have been no such triggering
events.
10
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
Debt
The following table summarizes Dells long-term and
short-term debt:
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
January 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Long-Term Debt
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
|
|
|
|
|
|
$400 million issued on June 10, 2009, at 3.375% due
June 2012 (2012 Notes) with interest payable June 15
and December 15
|
|
$
|
400
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
$600 million issued on April 17, 2008, at 4.70% due
April 2013 (2013 Notes) with interest payable April
15 and October 15
|
|
|
599
|
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
$500 million issued on April 1, 2009, at 5.625% due
April 2014 (2014 Notes) with interest payable April
15 and October 15
|
|
|
500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$500 million issued on April 17, 2008, at 5.65% due
April 2018 (2018 Notes) with interest payable April
15 and October 15
|
|
|
499
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
$600 million issued on June 10, 2009, at 5.875% due
June 2019 (2019 Notes) with interest payable June 15
and December 15
|
|
|
600
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$400 million issued on April 17, 2008, at 6.50% due
April 2038 (2038 Notes) with interest payable April
15 and October 15
|
|
|
400
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
Senior Debentures
|
|
|
|
|
|
|
|
|
$300 million issued in April 1998 at 7.10% due April 2028
with interest payable April 15 and October 15 (includes the
unamortized amount related to interest rate swap terminations)
|
|
|
395
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
India term notes
|
|
|
49
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
3,442
|
|
|
|
1,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Debt
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
351
|
|
|
|
100
|
|
Other
|
|
|
-
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
351
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
3,793
|
|
|
$
|
2,011
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
During Fiscal 2010, Dell issued the 2012 Notes, 2014 Notes, and
the 2019 Notes (collectively, the Notes). The net
proceeds from the Notes, after payment of expenses, were
approximately $994 million for the 2012 Notes and the 2019
Notes and $497 million for the 2014 Notes. The estimated
fair value of all the notes included in long-term debt was
approximately $3.2 billion at October 30, 2009,
compared to a carrying value of $3.0 billion at that date.
11
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
The principal amount of the Senior Debentures was
$300 million at October 30, 2009. The estimated fair
value of the long-term debt was approximately $333 million
at October 30, 2009, compared to a carrying value of
$395 million at that date. The carrying value includes an
unamortized amount related to the termination of interest rate
swap agreements, that were previously designated as hedges of
the debt, in the fourth quarter of Fiscal 2009.
The Indentures governing the Notes and the Senior Debentures
contain customary events of default, including failure to make
required payments, failure to comply with certain agreements or
covenants, and certain events of bankruptcy and insolvency. The
Indentures also contain covenants limiting Dells ability
to create certain liens; enter into
sale-and-lease
back transactions; and consolidate or merge with, or convey,
transfer or lease all or substantially all of Dells assets
to another person.
As of October 30, 2009, there were no events of default
with respect to the Notes and the Senior Debentures.
Commercial
Paper
Dell has a $1.5 billion commercial paper program with a
supporting $1.5 billion senior unsecured revolving credit
facility that allows Dell to obtain favorable short-term
borrowing rates. The credit facility requires compliance with
conditions that must be satisfied prior to any borrowing, as
well as ongoing compliance with specified affirmative and
negative covenants, including maintenance of a minimum interest
coverage ratio. Amounts outstanding under the facility may be
accelerated for events of default, including failure to pay
principal or interest, breaches of covenants, or non-payment of
judgments or debt obligations. There were no events of default
as of October 30, 2009.
At October 30, 2009, and January 30, 2009, there were
$351 million and $100 million, respectively,
outstanding under the commercial paper program. The
weighted-average interest rate on these outstanding short-term
borrowings was 0.28% and 0.19%, respectively. There were no
outstanding advances under the related revolving credit
facilities for the respective periods. Dell uses the proceeds of
the program for short-term liquidity needs.
India
Term Notes
Dell India Pvt Ltd, Dells wholly-owned subsidiary, entered
into two-year term note agreements on October 15, 2009,
with Citibank N.A, Bangalore Branch India and Citicorp Finance
(India) Limited for working capital needs and drew down on
October 28, 2009, against the two-year term notes.
Principal is due on the notes on October 28, 2011, and
interest of 8.9% is paid monthly. The term notes contain
customary events of default, including failure to make required
payments, failure to comply with certain agreements or
covenants, misrepresentation, change of ownership, and certain
events of bankruptcy and insolvency. Dell India Pvt Ltd has the
right to prepay principal at a 1% pre-payment premium. At
October 30, 2009, there was approximately $49 million
outstanding on the notes, which is included in long-term debt on
Dells Condensed Consolidated Statement of Financial
Position. There have been no events of default.
12
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
NOTE 4
FAIR VALUE MEASUREMENTS
Fair
Value Measurements
The following tables present the hierarchy for Dells
assets and liabilities measured at fair value on a recurring
basis as of October 30, 2009, and January 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2009
|
|
|
January 30, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
-
|
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
56
|
|
|
$
|
-
|
|
|
$
|
56
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
|
-
|
|
|
|
112
|
|
|
|
-
|
|
|
|
112
|
|
|
|
-
|
|
|
|
539
|
|
|
|
-
|
|
|
|
539
|
|
U.S. corporate
|
|
|
-
|
|
|
|
573
|
|
|
|
29
|
|
|
|
602
|
|
|
|
-
|
|
|
|
457
|
|
|
|
27
|
|
|
|
484
|
|
International corporate
|
|
|
-
|
|
|
|
334
|
|
|
|
-
|
|
|
|
334
|
|
|
|
-
|
|
|
|
78
|
|
|
|
-
|
|
|
|
78
|
|
State & municipal bonds
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Equity and other securities
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
|
|
93
|
|
|
|
1
|
|
|
|
73
|
|
|
|
-
|
|
|
|
74
|
|
Retained interest
|
|
|
-
|
|
|
|
-
|
|
|
|
134
|
|
|
|
134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
396
|
|
|
|
396
|
|
Derivative instruments
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
1,150
|
|
|
$
|
163
|
|
|
$
|
1,313
|
|
|
$
|
1
|
|
|
$
|
1,835
|
|
|
$
|
423
|
|
|
$
|
2,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
178
|
|
|
$
|
-
|
|
|
$
|
178
|
|
|
$
|
-
|
|
|
$
|
131
|
|
|
$
|
-
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
178
|
|
|
$
|
-
|
|
|
$
|
178
|
|
|
$
|
-
|
|
|
$
|
131
|
|
|
$
|
-
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following section describes the valuation methodologies Dell
uses to measure financial instruments at fair value:
Cash Equivalents The majority of
Dells cash equivalents consist of commercial paper and
U.S. treasuries with original maturities of less than
ninety days and are valued at fair value which approximates
cost. The valuation is based on models whereby all significant
inputs are observable or can be derived from or corroborated by
observable market data. Dell utilizes a pricing service to
assist in obtaining fair value pricing for the majority of this
investment portfolio. Dell conducts reviews on a quarterly basis
to verify pricing, assess liquidity, and determine if
significant inputs have changed that would impact the fair value
hierarchy disclosure.
Debt Securities The majority of
Dells debt securities consists of various fixed income
securities such as U.S. government and agencies,
U.S. and international corporate, and state and municipal
bonds. This portfolio of investments is valued based on model
driven valuations, whereby all significant inputs are observable
or can be derived from or corroborated by observable market data
for substantially the full term of the asset. Dell utilizes a
pricing service to assist management in obtaining fair value
pricing for the majority of the investment portfolio. Pricing
for securities is based on proprietary models, and inputs are
documented in accordance with the fair value measurements
hierarchy. Dell conducts reviews on a quarterly basis to verify
pricing, assess liquidity, and determine if significant
valuation inputs have changed that would impact the fair value
hierarchy disclosure. The Level 3
13
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
position as of October 30, 2009, and January 30, 2009,
represents a convertible debt security that Dell was unable to
corroborate with observable market data. The investment is
valued at cost plus accrued interest as this is
managements best estimate of fair value.
Equity and Other Securities The
majority of Dells investments in equity and other
securities consists of various mutual funds and equity
securities. The Level 1 securities are valued using quoted
prices for identical assets in active markets. The Level 2
securities include various mutual funds held in Dells
Deferred Compensation Plan. The valuation is based on models
whereby all significant inputs are observable or can be derived
from or corroborated by observable market data.
Retained Interest in Securitized
Receivables The fair value of the retained
interest is determined using a discounted cash flow model.
Significant assumptions to the model include pool credit losses,
payment rates, and discount rates. These assumptions are
supported by both historical experience and anticipated trends
relative to the particular receivable pool. Retained interest in
securitized receivables is included in financing receivables,
short-term and long-term, on the Condensed Consolidated
Statements of Financial Position. See Note 5 of Notes to
Condensed Consolidated Financial Statements for additional
information about the retained interest.
Derivative Instruments Dells
derivative financial instruments consist of foreign currency
forward and purchased option contracts. The portfolio is valued
using internal models based on market observable inputs,
including forward and spot prices for currencies and implied
volatilities. Credit risk is factored into the fair value
calculation of Dells derivative instrument portfolio.
Credit risk is determined for the net position of each
counterparty with the use of credit default spreads of either
Dell, if in a net liability position, or the relevant
counterparty, when in a net asset position.
14
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
The following tables show a reconciliation of the beginning and
ending balances for fair value measurements using significant
unobservable inputs for the three and nine months ended
October 30, 2009, and October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
October 30, 2009
|
|
|
October 31, 2008
|
|
|
|
Retained
|
|
|
U.S.
|
|
|
|
|
|
Retained
|
|
|
U.S.
|
|
|
|
|
|
|
Interest
|
|
|
Corporate
|
|
|
Total
|
|
|
Interest
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Balance at beginning of the period
|
|
$
|
119
|
|
|
$
|
29
|
|
|
$
|
148
|
|
|
$
|
312
|
|
|
$
|
26
|
|
|
$
|
338
|
|
Net unrealized gains included in
earnings(a)
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
|
|
10
|
|
|
|
1
|
|
|
|
11
|
|
Issuances and settlements
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
134
|
|
|
$
|
29
|
|
|
$
|
163
|
|
|
$
|
308
|
|
|
$
|
27
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
October 30, 2009
|
|
|
October 31, 2008
|
|
|
|
Retained
|
|
|
U.S.
|
|
|
|
|
|
Retained
|
|
|
U.S.
|
|
|
|
|
|
|
Interest
|
|
|
Corporate
|
|
|
Total
|
|
|
Interest
|
|
|
Corporate
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at beginning of period
|
|
$
|
396
|
|
|
$
|
27
|
|
|
$
|
423
|
|
|
$
|
223
|
|
|
$
|
-
|
|
|
$
|
223
|
|
Net unrealized gains included in
earnings(a)
|
|
|
17
|
|
|
|
2
|
|
|
|
19
|
|
|
|
7
|
|
|
|
2
|
|
|
|
9
|
|
Issuances and settlements
|
|
|
223
|
|
|
|
-
|
|
|
|
223
|
|
|
|
78
|
|
|
|
-
|
|
|
|
78
|
|
Purchases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
25
|
|
Impact of special purpose entity
consolidation(b)
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
134
|
|
|
$
|
29
|
|
|
$
|
163
|
|
|
$
|
308
|
|
|
$
|
27
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The unrealized gains on equity and
other includes accrued interest.
|
|
|
|
(b)
|
|
See Note 5 of Notes to
Condensed Consolidated Financial Statements for additional
information about the impact of the special purpose entity
consolidation.
|
Unrealized gains on the retained interest and the convertible
debt security are reported in income.
Other Financial Items Measured at Fair Value on a
Nonrecurring Basis Certain assets and
liabilities are measured at fair value on a nonrecurring basis
and therefore are not included in the above recurring fair value
table. The balances relate primarily to investments accounted
for under the cost method and are not material relative to
Dells consolidated statement of financial position. There
were no material nonrecurring fair value adjustments to earnings
for the quarter or nine months ended October 30, 2009.
These investment balances, included in equity and other
securities, approximate $15 million and $14 million,
respectively.
Nonfinancial Items Measured at Fair Value on a
Nonrecurring Basis Nonfinancial assets such
as goodwill and intangible assets are measured at fair value
when there is an indicator of impairment and recorded at fair
value only
15
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
when impairment is recognized. No impairment charges of goodwill
and intangible assets were recorded for the quarter or nine
months ended October 30, 2009. See Note 6 of Notes to
Condensed Consolidated Financial Statements for additional
information about goodwill and intangible assets.
NOTE 5
FINANCIAL SERVICES
Dell
Financial Services L.L.C.
Dell offers or arranges various financing options and services
for its business and consumer customers in the U.S. through
Dell Financial Services L.L.C. (DFS), a wholly-owned
subsidiary of Dell. DFSs key activities include the
origination, collection, and servicing of customer receivables
related to the purchase of Dell products. New financing
originations, which represent the amounts of financing provided
to customers for equipment and related software and services
through DFS, were $0.9 billion and $1.0 billion,
during the three months ended October 30, 2009, and
October 31, 2008, respectively, and $2.6 billion and
$3.3 billion for the nine months ended October 30,
2009, and October 31, 2008, respectively.
Financing
Receivables
The following table summarizes the components of Dells
financing receivables:
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
January 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Financing receivables
|
|
|
|
|
|
|
|
|
Customer receivables
|
|
|
|
|
|
|
|
|
Revolving loans
|
|
$
|
1,185
|
|
|
$
|
963
|
|
Fixed-term leases and loans
|
|
|
736
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,921
|
|
|
|
1,686
|
|
Customer receivables previously unconsolidated
|
|
|
499
|
|
|
|
-
|
|
Allowance for losses
|
|
|
(182
|
)
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
Customer receivables, net
|
|
|
2,238
|
|
|
|
1,537
|
|
Residual interest
|
|
|
257
|
|
|
|
279
|
|
Retained interest
|
|
|
134
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
2,629
|
|
|
$
|
2,212
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
2,318
|
|
|
$
|
1,712
|
|
Long-term
|
|
|
311
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
2,629
|
|
|
$
|
2,212
|
|
|
|
|
|
|
|
|
|
|
Customer
Receivables
The following is the description of the components of
Dells customer receivables:
|
|
|
|
|
Revolving loans offered under private label credit financing
programs provide qualified customers with a revolving credit
line for the purchase of products and services offered by Dell.
Revolving loans bear interest at a variable annual percentage
rate that is tied to the prime rate. Based on historical payment
patterns, revolving loan transactions are typically repaid on
average within 12 months. Revolving loans are included in
short-term financing receivables in the table above. From time
to time, account holders may have the
|
16
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
|
|
|
|
|
opportunity to finance their Dell purchases with special
programs during which, if the outstanding balance is paid in
full by a specific date, no interest is charged. These special
programs generally range from 3 to 12 months.
|
|
|
|
|
|
Dell enters into sales-type lease arrangements with customers
who desire lease financing. Leases with business customers have
fixed terms of two to five years. Future maturities of minimum
lease payments at October 30, 2009, for future fiscal years
are as follows: 2010 - $91 million; 2011
$249 million; 2012 $160 million;
2013 $49 million; and 2014
$4 million. Fixed-term loans are offered to qualified small
businesses, large commercial accounts, governmental
organizations, and educational entities.
|
Delinquency and charge-off statistics for customer receivables
(excluding customer receivables previously unconsolidated) are:
|
|
|
|
|
As of October 30, 2009, and January 30, 2009, customer
financing receivables 60 days or more delinquent were
$65 million and $58 million, respectively. These
amounts represent 3.4% of the ending gross customer financing
receivables balance for both periods.
|
|
|
|
Net principal charge-offs for the three months ended
October 30, 2009, and October 31, 2008, were
$30 million and $22 million, respectively. These
amounts, when annualized, represent 6.6% and 6.0% of the average
gross outstanding customer financing receivables balance
(including accrued interest) for the respective three month
periods.
|
|
|
|
Net principal charge-offs for the nine months ended
October 30, 2009, and October 31, 2008, were
$90 million and $60 million, respectively. These
amounts, when annualized, represent 6.6% and 5.0% of the average
gross outstanding customer financing receivables balance
(including accrued interest) for the respective nine month
periods.
|
Customer
Receivables Previously Unconsolidated
During the second quarter of Fiscal 2010, the beneficial
interest in the revolving securitization conduit owned by third
parties fell below 10%, and the previously qualifying special
purpose entity was consolidated. Upon consolidation, these
customer receivables were recorded at a fair value of
$561 million and retained interest of $502 million was
eliminated. Corresponding short-term debt of $48 million,
also recorded at the time of consolidation, was retired during
the third quarter of Fiscal 2010.
Residual
Interest
Dell retains a residual interest in equipment leased under its
fixed-term lease programs. The amount of the residual interest
is established at the inception of the lease based upon
estimates of the value of the equipment at the end of the lease
term using historical studies, industry data, and future
value-at-risk
demand valuation methods. On a quarterly basis, Dell assesses
the carrying amount of its recorded residual values for
impairment. Anticipated declines in specific future residual
values that are considered to be
other-than-temporary
are recorded currently in earnings.
Retained
Interest
Retained interest represents the residual beneficial interest
Dell retains in certain pools of securitized financing
receivables that are off-balance sheet. Retained interest is
stated at the present value of the estimated net beneficial cash
flows after payment of all senior interests. Dell values the
retained interest at the time of each receivable transfer and at
the end of each reporting period. The fair value of the retained
interest is determined using a discounted cash flow model with
various key assumptions, including payment rates, credit losses,
discount rates, and the remaining life of the receivables sold.
These assumptions are supported by both Dells historical
experience
17
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
and anticipated trends relative to the particular receivable
pool. The key valuation assumptions for retained interest can be
affected by many factors, including repayment terms and the
credit quality of receivables securitized.
The following table summarizes the activity in retained interest
balances for the three and nine months ended October 30,
2009, and October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Retained interest at beginning of period
|
|
$
|
119
|
|
|
$
|
312
|
|
|
$
|
396
|
|
|
$
|
223
|
|
Issuances
|
|
|
33
|
|
|
|
59
|
|
|
|
285
|
|
|
|
291
|
|
Distributions from conduits
|
|
|
(27
|
)
|
|
|
(73
|
)
|
|
|
(62
|
)
|
|
|
(213
|
)
|
Net accretion
|
|
|
4
|
|
|
|
11
|
|
|
|
28
|
|
|
|
31
|
|
Change in fair value for the period
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
(11
|
)
|
|
|
(24
|
)
|
Impact of special purpose entity consolidation
|
|
|
-
|
|
|
|
-
|
|
|
|
(502
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained interest at end of period
|
|
$
|
134
|
|
|
$
|
308
|
|
|
$
|
134
|
|
|
$
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the key assumptions used to measure
the fair value of the retained interest at time of transfer
within the quarter and at the balance sheet date,
October 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Key Assumptions
|
|
|
Monthly
|
|
Credit
|
|
Discount
|
|
|
|
|
Payment Rates
|
|
Losses
|
|
Rates
|
|
Life
|
|
|
|
|
(lifetime)
|
|
(annualized)
|
|
(months)
|
|
Time of transfer valuation of retained interest
|
|
|
5
|
%
|
|
|
1
|
%
|
|
|
12
|
%
|
|
|
19
|
|
Valuation of retained interest
|
|
|
8
|
%
|
|
|
3
|
%
|
|
|
12
|
%
|
|
|
14
|
|
The impact of adverse changes to the key valuation assumptions
to the fair value of retained interest at October 30, 2009,
is shown in the following table:
|
|
|
|
|
|
|
October 30, 2009
|
|
|
(in millions)
|
|
Adverse Change of:
|
|
|
|
|
Expected prepayment speed: 10%
|
|
$
|
(0.2
|
)
|
Expected prepayment speed: 20%
|
|
$
|
(0.2
|
)
|
|
|
|
|
|
Expected credit losses: 10%
|
|
$
|
(1.1
|
)
|
Expected credit losses: 20%
|
|
$
|
(2.3
|
)
|
|
|
|
|
|
Discount rate: 10%
|
|
$
|
(1.6
|
)
|
Discount rate: 20%
|
|
$
|
(3.1
|
)
|
The analyses above utilized 10% and 20% adverse variation in
assumptions to assess the sensitivities in the fair value of the
retained interest. However, these changes generally cannot be
extrapolated because the relationship between a change in one
assumption to the resulting change in fair value may not be
linear. For the above sensitivity analyses, each key assumption
was isolated and evaluated separately. Each assumption was
adjusted by 10% and 20% while holding the other key assumptions
constant. Assumptions may be interrelated, and changes to one
18
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
assumption may impact others and the resulting fair value of the
retained interest. For example, increases in market interest
rates may result in lower prepayments and increases in credit
losses. The effect of multiple assumption changes were not
considered in the analyses.
Asset
Securitization
During the first nine months of Fiscal 2010 and Fiscal 2009,
Dell securitized $641 million and $1.1 billion,
respectively, of fixed-term leases and loans and revolving loans
via special purpose entities. The purpose of these special
purpose entities is to facilitate the funding of financing
receivables in the capital markets. The special purpose entities
have entered into financing arrangements with three multi-seller
conduits that, in turn, issue asset-backed debt securities in
the capital markets. Two of the three conduits fund fixed-term
leases and loans, and one conduit funded revolving loans until
it initiated scheduled amortization and was consolidated in July
2009. We expect to consolidate the other two special purpose
entities in the first quarter of Fiscal 2011 in accordance with
the new FASB pronouncement on variable interest entities and
transfers of financial assets and extinguishment of financial
liabilities. As of October 30, 2009, the unpaid principal
balance of these unconsolidated securitized receivables were
$747 million, and the associated debt was
$616 million. Dells securitization transactions
generally do not result in servicing assets and liabilities as
the contractual fees are adequate compensation in relation to
the associated servicing cost.
Dells securitization programs contain standard structural
features related to the performance of the securitized
receivables. These structural features include defined credit
losses, delinquencies, average credit scores, and excess
collections above or below specified levels. In the event one or
more of these features are met and Dell is unable to restructure
the program, no further funding of receivables will be permitted
and the timing of expected retained interest cash flows will be
delayed, which would impact the valuation of the retained
interest.
Delinquency and charge-off statistics for securitized fixed-term
leases and loans held by unconsolidated special purpose entities
are:
|
|
|
|
|
As of October 30, 2009, and January 30, 2009, the
unpaid principal balance of securitized receivables were
$747 million and $680 million, respectively. As of
October 30, 2009, and January 30, 2009, securitized
financing receivables 60 days or more delinquent were
$14 million for both periods. These amounts represent 1.9%
and 2.1% of the ending securitized financing receivables
balances for the respective periods.
|
|
|
|
Net principal charge-offs for the three months ended
October 30, 2009, and October 31, 2008, were
$2 million and $5 million, respectively. These amounts
when annualized represent 0.8% and 2.7% of the average
outstanding securitized financing receivable balance for the
respective three month periods.
|
|
|
|
Net principal charge-offs for the nine months ended
October 30, 2009, and October 31, 2008, were
$10 million and $16 million, respectively. These
amounts when annualized represent 1.8% and 3.0% of the average
outstanding securitized financing receivable balance for the
respective nine month periods.
|
19
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
NOTE 6
GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill allocated to Dells business segments as of
October 30, 2009, and January 30, 2009, and changes in
the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
|
|
|
|
|
|
Small and
|
|
|
|
|
|
|
|
|
|
Enterprise
|
|
|
Public
|
|
|
Medium Business
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at January 30, 2009
|
|
$
|
677
|
|
|
$
|
411
|
|
|
$
|
354
|
|
|
$
|
295
|
|
|
$
|
1,737
|
|
Adjustments
|
|
|
6
|
|
|
|
2
|
|
|
|
-
|
|
|
|
3
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2009
|
|
$
|
683
|
|
|
$
|
413
|
|
|
$
|
354
|
|
|
$
|
298
|
|
|
$
|
1,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and indefinite lived intangibles are tested annually
during the second fiscal quarter and whenever events or
circumstances indicate impairment may have occurred. If the
carrying amount of goodwill exceeds its fair value, estimated
based on discounted cash flow analyses, an impairment charge
would be recorded. Based on the results of its annual impairment
tests during the first half of Fiscal 2010, Dell determined that
no impairment of goodwill and indefinite lived intangible assets
existed at July 31, 2009. Further, no triggering events
have transpired since July 31, 2009, that would indicate a
potential impairment of goodwill as of October 30, 2009.
Dell does not have any accumulated goodwill impairment charges
as of October 30, 2009. The goodwill adjustments are
primarily the result of contingent purchase price considerations
related to prior period acquisitions and the effects of foreign
currency fluctuations.
20
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
NOTE 7
WARRANTY LIABILITY AND RELATED DEFERRED ENHANCED SERVICES
REVENUE
Revenue from extended warranty and service contracts, including
support agreements, for which Dell is obligated to perform, is
recorded as deferred enhanced services revenue and subsequently
recognized over the term of the contract or when the service is
completed, and the costs associated with these contracts are
recognized as incurred. Deferred software related revenue is
included in accrued and other current and other non-current
liabilities on Dells Condensed Consolidated Statements of
Financial Position. Dell records warranty liabilities at the
time of sale for the estimated costs that may be incurred under
its standard limited warranty. Changes in Dells deferred
enhanced services revenue for extended warranties and service
contracts and its warranty liability for standard warranties,
which are included in accrued and other current and other
non-current liabilities on Dells Condensed Consolidated
Statements of Financial Position, are presented in the following
tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Deferred enhanced services revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred enhanced services revenue at beginning of period
|
|
$
|
5,826
|
|
|
$
|
5,689
|
|
|
$
|
5,649
|
|
|
$
|
5,260
|
|
Revenue deferred for new extended warranty and services
contracts sold
|
|
|
903
|
|
|
|
696
|
|
|
|
2,620
|
|
|
|
2,698
|
|
Revenue recognized
|
|
|
(799
|
)
|
|
|
(812
|
)
|
|
|
(2,339
|
)
|
|
|
(2,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred enhanced services revenue at end of period
|
|
$
|
5,930
|
|
|
$
|
5,573
|
|
|
$
|
5,930
|
|
|
$
|
5,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
2,876
|
|
|
$
|
2,572
|
|
|
$
|
2,876
|
|
|
$
|
2,572
|
|
Non-current portion
|
|
|
3,054
|
|
|
|
3,001
|
|
|
|
3,054
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred enhanced services revenue
|
|
$
|
5,930
|
|
|
$
|
5,573
|
|
|
$
|
5,930
|
|
|
$
|
5,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Warranty liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at beginning of period
|
|
$
|
972
|
|
|
$
|
1,078
|
|
|
$
|
1,035
|
|
|
$
|
929
|
|
Costs accrued for new warranty contracts and changes in
estimates for pre-existing
warranties(a)
|
|
|
222
|
|
|
|
227
|
|
|
|
709
|
|
|
|
910
|
|
Services obligations honored
|
|
|
(295
|
)
|
|
|
(283
|
)
|
|
|
(845
|
)
|
|
|
(817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at end of period
|
|
$
|
899
|
|
|
$
|
1,022
|
|
|
$
|
899
|
|
|
$
|
1,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
540
|
|
|
$
|
723
|
|
|
$
|
540
|
|
|
$
|
723
|
|
Non-current portion
|
|
|
359
|
|
|
|
299
|
|
|
|
359
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability
|
|
$
|
899
|
|
|
$
|
1,022
|
|
|
$
|
899
|
|
|
$
|
1,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Changes in cost estimates related
to pre-existing warranties are aggregated with accruals for new
warranty contracts. Dells warranty liability process does
not differentiate between estimates made for pre-existing
warranties and new warranty obligations.
|
21
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
NOTE 8
COMMITMENTS AND CONTINGENCIES
Severance Costs and Facility Actions
In Fiscal 2008, Dell announced a comprehensive review of costs
that is currently ongoing. Since this announcement and through
the end of the third quarter of Fiscal 2010, Dell has reduced
its headcount and closed or sold certain Dell facilities.
Results of operations for the third quarter and first nine
months of Fiscal 2010 include net pre-tax charges of
$123 million and $395 million, respectively, for these
actions, which is comprised of $22 million and
$259 million, respectively, related to headcount reduction
and $101 million and $136 million, respectively,
related to facility actions. In the third quarter and first nine
months of Fiscal 2009, costs related to severance and facility
action expenses were $17 million and $148 million,
respectively. As of October 30, 2009, and January 30,
2009, the accrual related to these cost reductions and
efficiency actions was $180 million and $98 million,
respectively, which is included in accrued and other liabilities
in the Condensed Consolidated Statements of Financial Position.
Cash paid related to these actions was $69 million and
$248 million in the third quarter and first nine months of
Fiscal 2010, respectively. Approximately $160 million of
the accrual related to these actions is expected to be paid in
the next twelve months.
Restricted Cash Pursuant to an
agreement between Dell and CIT Group Inc., Dell is required to
maintain escrow cash accounts that are held as recourse reserves
for credit losses, performance fee deposits related to
Dells private label credit card, and deferred servicing
revenue. Restricted cash in the amount of $141 million and
$213 million is included in other current assets in the
Condensed Consolidated Statements of Financial Position at
October 30, 2009, and January 30, 2009, respectively.
Legal Matters Dell is involved in
various claims, suits, assessments, investigations, and legal
proceedings that arise from
time-to-time
in the ordinary course of its business, including matters
involving consumer, antitrust, tax, intellectual property, and
other issues on a global basis. While Dell does not expect that
the ultimate outcomes in these proceedings, individually or
collectively, will have a material adverse effect on its
business, financial position, results of operations, or cash
flows, the results and timing of the ultimate resolutions of
these various proceedings are inherently unpredictable. Whether
the outcome of any claim, suit, assessment, investigation, or
legal proceeding, individually or collectively, could have a
material effect on Dells business, financial condition,
results of operations, or cash flows, will depend on a number of
variables, including the nature, timing, and amount of any
associated expenses, amounts paid in settlement, damages or
other remedies or consequences. Dell accrues a liability when it
believes that it is both probable that a liability has been
incurred and that it can reasonably estimate the amount of the
loss. Dell reviews these accruals at least quarterly and adjusts
them to reflect ongoing negotiations, settlements, rulings,
advice of legal counsel, and other relevant information. To the
extent new information is obtained and Dells views on the
probable outcomes of claims, suits, assessments, investigations,
or legal proceedings change, changes in Dells accrued
liabilities would be recorded in the period in which such
determination is made.
The following is a discussion of Dells significant
on-going legal matters and other proceedings.
Investigations and Related Litigation In
August 2005, the SEC initiated an inquiry into certain of
Dells accounting and financial reporting matters and
requested that Dell provide certain documents. The SEC expanded
that inquiry in June 2006 and entered a formal order of
investigation in October 2006. In August 2006, because of
potential issues identified in the course of responding to the
SECs requests for information, Dells Audit
Committee, on the recommendation of management and in
consultation with PricewaterhouseCoopers LLP, Dells
independent registered public accounting firm, initiated an
independent investigation, which was completed in the third
quarter of Fiscal 2008. Although the Audit Committee
investigation has been completed, the SEC investigation is
ongoing. Dell continues to cooperate with the SEC investigation.
22
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
Dell and several of its current and former directors and
officers were named as parties to the following outstanding
securities and shareholder derivative lawsuits all arising out
of the same events and facts.
|
|
|
|
|
Four putative securities class actions filed between
September 13, 2006, and January 31, 2007, in the
Western District of Texas, Austin Division, against Dell and
certain of its current and former officers were consolidated as
In re Dell Securities Litigation, and a lead plaintiff was
appointed by the court. The lead plaintiff asserted claims under
sections 10(b), 20(a), and 20A of the Securities Exchange
Act of 1934 based on alleged false and misleading disclosures or
omissions regarding Dells financial statements,
governmental investigations, internal controls, known battery
problems and business model, and based on insiders sales
of Dell securities. This action also included Dells
independent registered public accounting firm,
PricewaterhouseCoopers LLP, as a defendant. On October 6,
2008, the court dismissed all of the plaintiffs claims
with prejudice and without leave to amend. On November 3,
2008, the plaintiff appealed the dismissal of Dell and the
officer defendants to the Fifth Circuit Court of Appeals. The
appeal has been fully briefed, and oral argument on the appeal
was heard by the Fifth Circuit Court of Appeals on
September 1, 2009. On November 20, 2009, the parties
to the appeal entered into a written settlement agreement
whereby Dell would pay $40 million to the proposed class
and the plaintiff would dismiss the pending litigation. The
parties have requested that the Fifth Circuit remand the matter
to the district court to review the settlement. The settlement
is subject to certain conditions, including preliminary approval
by the district court, notice to the proposed class, opt-outs
from the proposed class not exceeding a specified percentage,
and final approval by the district court. Until these conditions
to the settlement have been satisfied, there can be no assurance
that the settlement will become final. If the settlement does
not become final, Dell will continue its defense of the appeal
before the Fifth Circuit.
|
|
|
|
In addition, seven shareholder derivative lawsuits filed between
September 29, 2006, and January 22, 2007, in three
separate jurisdictions were consolidated as In re Dell
Derivative Litigation into three actions. One of those
consolidated actions was pending in the Western District of
Texas, Austin Division, but was dismissed without prejudice by
an order filed October 9, 2007. The second consolidated
shareholder derivative action was pending in Delaware Chancery
Court. On October 16, 2008, the Delaware court granted the
parties stipulation to dismiss all of the plaintiffs
claims in the Delaware lawsuit without prejudice. The third
consolidated shareholder derivative action is pending in state
district court in Williamson County, Texas. These shareholder
derivative lawsuits named various current and former officers
and directors as defendants and Dell as a nominal defendant and
asserted various claims derivatively on behalf of Dell under
state law, including breaches of fiduciary duties. On
September 11, 2009, Dell entered into an agreement to
settle the derivative suit pending in the Western District of
Texas, Austin Division, and the previously reported shareholder
demand letter dated November 12, 2008, asserting
allegations similar to those made in these lawsuits. The
agreement has been filed with the Western District of Texas and
the court has preliminarily approved the settlement. The parties
have given notice of the settlement and a final hearing to
approve the settlement is scheduled for December 15, 2009.
The settlement, if approved, would require Dell to initiate and
maintain certain corporate governance changes and would provide
for the payment of fees to the plaintiffs counsel in the
amount of approximately $1.75 million.
|
Copyright Levies Rights holder associations
in Europe seek to impose levies on information technology
equipment such as personal computers and multifunction devices
that facilitate making private copies of copyrighted materials.
The total levies due, if imposed, would be based on the number
of products sold and the per-product amounts of the levies,
which vary, by product and country. Dell, along with other
companies
23
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
and various industry associations, are opposing unreasonable
levies and instead are advocating compensation to rights holders
through digital rights management systems.
On December 29, 2005, Zentralstelle Für private
Überspielungrechte (ZPÜ), a joint
association of various German collection societies, instituted
arbitration proceedings against Dells German subsidiary
before the Arbitration Body in Munich. ZPÜ claims a levy of
18.4 per PC that Dell sold in Germany from January 1,
2002, through December 31, 2005. On July 31, 2007, the
Arbitration Body recommended a levy of 15 on each PC sold
during that period for audio and visual copying capabilities.
Dell and ZPÜ rejected the recommendation, and on
February 21, 2008, ZPÜ filed a lawsuit in the German
Regional Court in Munich. Dell plans to continue to defend this
claim and does not expect the outcome to have a material adverse
effect on its financial position, results of operations, or cash
flows.
Other Litigation The various legal
proceedings in which Dell is involved include commercial
litigation and a variety of patent suits. In some of these
cases, Dell is the sole defendant but more often Dell is one of
a number of defendants in the electronics and technology
industries.
|
|
|
|
|
Abstrax, Inc. v. Dell On June 1,
2007, Abstrax, Inc. filed a lawsuit against Dell and Gateway,
Inc. in the Eastern District of Texas, Marshall Division,
alleging that Dell infringed claims under its U.S. Patent
No. 6,240,328 entitled Manufacturing Method for
Assembling Products by Generating and Scheduling Dynamically
Assembly Instructions. Abstrax seeks monetary damages and
injunctive relief. On July 2, 2007, Dell filed its defense
and counterclaim, asserting noninfringement, invalidity, laches,
intervening rights, inequitable conduct and patent expiration.
Dell subsequently filed an amended answer and counterclaims on
April 4, 2008. A jury trial was scheduled for
October 19, 2009, in Marshall, Texas; however, the parties
negotiated a confidential settlement prior to trial. The terms
of the settlement, including the amount paid, did not have a
material adverse effect on Dells financial position,
results of operations, or cash flows.
|
|
|
|
Active Solutions, L.L.C. and Southern Electronics Supply,
Inc. v. Dell Inc. et. al. On April 20,
2007, plaintiffs Active Solutions, L.L.C. and Southern
Electronics Supply, Inc. filed a lawsuit in Orleans Parish, New
Orleans, Louisiana. The defendants were Dell Inc., the City of
New Orleans, Mayor Ray Nagin, the former Chief Technology
Officer for New Orleans, and the former technology subcontractor
for the City and related companies. At trial, the plaintiffs
sought monetary damages for misappropriation of trade secrets,
breach of the Louisiana Unfair Trade Practices Act, conspiracy
to violate the Uniform Trade Secrets Act, breach of a
non-disclosure agreement, and promissory estoppel/detrimental
reliance. The jury returned a verdict on November 2, 2009,
and declined to award any damages on the misappropriation of
trade secrets and breach of the non-disclosure agreement claims.
The jury found Dell 35% at fault for a $10 million award
for breach of the Louisiana Unfair Trade Practices Act and the
conspiracy claim. If the other liable parties do not pay their
share of the $10 million award, Dell could be responsible
for the entire amount. The jury also awarded approximately
$3 million under the promissory estoppel/detrimental
reliance claim. Resolution of this case before the trial court
is subject to adjudication of certain post-trial motions,
including a motion filed by Dell to set aside the jurys
verdict on the claims decided adversely to Dell. Although
post-verdict and potential appellate alternatives are still
available to both parties, Dell does not expect the ultimate
resolution of this case to have a material adverse effect on
Dells financial position, results of operations, or cash
flows.
|
24
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
NOTE 9
COMPREHENSIVE INCOME
The following table summarizes comprehensive income for the
three and nine months ended October 30, 2009, and
October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
337
|
|
|
$
|
727
|
|
|
$
|
1,099
|
|
|
$
|
2,127
|
|
Change related to foreign currency hedging instruments, net
|
|
|
29
|
|
|
|
808
|
|
|
|
(448
|
)
|
|
|
791
|
|
Change related to marketable securities, net
|
|
|
1
|
|
|
|
(12
|
)
|
|
|
4
|
|
|
|
(35
|
)
|
Foreign currency translation adjustments
|
|
|
(29
|
)
|
|
|
64
|
|
|
|
(63
|
)
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
338
|
|
|
$
|
1,587
|
|
|
$
|
592
|
|
|
$
|
2,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10
INCOME AND OTHER TAXES
Dells effective income tax rate was 34.5% for the third
quarter of Fiscal 2010, as compared to 28.0% for the same
quarter in the prior year. For the first nine months of Fiscal
2010 and Fiscal 2009, the effective tax rate was 29.3% and
25.9%, respectively. The increases in the effective income tax
rate for the respective periods are primarily due to a shift of
profit mix toward higher tax jurisdictions. The Fiscal 2009
income tax rate also reflects decreases in uncertain tax
positions resulting from the favorable settlement of an
examination in a foreign jurisdiction. The differences between
the estimated effective income tax rate and the
U.S. federal statutory rate of 35% principally result from
Dells geographical distribution of taxable income and
differences between the book and tax treatment of certain items.
The income tax rate for Fiscal 2010 will be impacted by the
actual mix of jurisdictions in which income is generated.
Dell is currently under income tax audits in various
jurisdictions, including the United States. The tax periods open
to examination by the major taxing jurisdictions to which Dell
is subject include fiscal years 1997 through 2010. As a result
of these audits, Dell maintains ongoing discussions and
negotiations relating to tax matters with the taxing authorities
in these various jurisdictions. Dells U.S. Federal
income tax returns for fiscal years 2007 through 2009 are under
examination. The Internal Revenue Service (IRS) has
issued a Revenue Agents Report for fiscal years 2004
through 2006 proposing certain assessments primarily related to
transfer pricing matters, which Dell has protested in accordance
with IRS administrative procedures. Dell anticipates this audit
will take several years to resolve and believes that it has
provided adequate reserves related to the matters under audit.
However, should Dell experience an unfavorable outcome in this
matter, it could have a material impact on its results of
operations, financial position, and cash flows. Although the
timing of income tax audit resolutions and negotiations with
taxing authorities are highly uncertain, Dell does not
anticipate a significant change to the total amount of
unrecognized income tax benefits within the next 12 months.
Dell takes certain non-income tax positions in the jurisdictions
in which it operates and has received certain non-income tax
assessments from various jurisdictions. Dell is also involved in
related non-income tax litigation matters in various
jurisdictions, some of which could be material to Dell. Dell
believes its positions in these non-income tax litigation
matters are supportable, a liability is not probable, and that
it will ultimately prevail in the judicial court system.
However, significant judgment is required in determining the
ultimate outcome of these matters. In the normal course of
business, Dells positions and conclusions related to its
non-income taxes could be challenged and
25
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
assessments may be made. To the extent new information is
obtained and Dells views on its positions, probable
outcomes of assessments, or litigation change, changes in
estimates to Dells accrued liabilities would be recorded
in the period in which such determination is made.
NOTE 11
EARNINGS PER COMMON SHARE
Basic earnings per share is based on the weighted-average effect
of all common shares issued and outstanding and is calculated by
dividing net income by the weighted-average shares outstanding
during the period. Diluted earnings per share is calculated by
dividing net income by the weighted-average number of common
shares used in the basic earnings per share calculation plus the
number of common shares that would be issued assuming exercise
or conversion of all potentially dilutive common shares
outstanding. Dell excludes equity instruments from the
calculation of diluted earnings per share if the effect of
including such instruments is antidilutive. Accordingly, certain
stock-based incentive awards have been excluded from the
calculation of diluted earnings per share totaling
206 million shares and 245 million shares for the
third quarters of Fiscal 2010 and Fiscal 2009, respectively; and
228 million shares and 253 million shares during the
nine months ended October 30, 2009, and October 31,
2008, respectively.
The following table sets forth the computation of basic and
diluted earnings per share for the three and nine months ended
October 30, 2009, and October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
337
|
|
|
$
|
727
|
|
|
$
|
1,099
|
|
|
$
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,956
|
|
|
|
1,953
|
|
|
|
1,953
|
|
|
|
1,993
|
|
Effect of dilutive options, restricted stock units, restricted
stock, and other
|
|
|
10
|
|
|
|
4
|
|
|
|
6
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,966
|
|
|
|
1,957
|
|
|
|
1,959
|
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.37
|
|
|
$
|
0.56
|
|
|
$
|
1.07
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.37
|
|
|
$
|
0.56
|
|
|
$
|
1.06
|
|
NOTE 12
SEGMENT INFORMATION
During the first quarter of Fiscal 2010, Dell completed its
reorganization from geographic commercial segments (Americas
Commercial; Europe, Middle East, and Africa Commercial; and Asia
Pacific-Japan Commercial) to global business units (Large
Enterprise, Public, and Small and Medium Business), reflecting
the impact of globalization on Dells customer base.
Dells four global business segments are Large Enterprise,
Public, Small and Medium Business, and Consumer.
The business segments disclosed in the accompanying Condensed
Consolidated Financial Statements are based on this
organizational structure and information reviewed by Dells
management to evaluate the business segment results. Dells
measure of segment operating income for management reporting
purposes excludes severance and facility action expenses, broad
based long-term incentives, acquisition-related charges such as
in-process research and development, and amortization of
intangibles.
26
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(unaudited)
The following table presents net revenue by Dells
reportable global segments as well as a reconciliation of
consolidated segment operating income to Dells
consolidated operating income for the three and nine months
ended October 30, 2009, and October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large Enterprise
|
|
$
|
3,403
|
|
|
$
|
4,395
|
|
|
$
|
10,088
|
|
|
$
|
14,122
|
|
Public
|
|
|
3,695
|
|
|
|
3,960
|
|
|
|
10,664
|
|
|
|
12,051
|
|
Small and Medium Business
|
|
|
2,956
|
|
|
|
3,647
|
|
|
|
8,743
|
|
|
|
11,849
|
|
Consumer
|
|
|
2,842
|
|
|
|
3,160
|
|
|
|
8,507
|
|
|
|
9,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
12,896
|
|
|
$
|
15,162
|
|
|
$
|
38,002
|
|
|
$
|
47,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large Enterprise
|
|
$
|
174
|
|
|
$
|
254
|
|
|
$
|
538
|
|
|
$
|
899
|
|
Public
|
|
|
352
|
|
|
|
361
|
|
|
|
1,028
|
|
|
|
969
|
|
Small and Medium Business
|
|
|
282
|
|
|
|
374
|
|
|
|
758
|
|
|
|
1,034
|
|
Consumer
|
|
|
10
|
|
|
|
142
|
|
|
|
98
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income
|
|
|
818
|
|
|
|
1,131
|
|
|
|
2,422
|
|
|
|
3,161
|
|
Severance and facility action expenses
|
|
|
(123
|
)
|
|
|
(17
|
)
|
|
|
(395
|
)
|
|
|
(148
|
)
|
Broad based long-term
incentives(a)
|
|
|
(78
|
)
|
|
|
(73
|
)
|
|
|
(246
|
)
|
|
|
(201
|
)
|
In-process research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Amortization of intangible assets
|
|
|
(40
|
)
|
|
|
(26
|
)
|
|
|
(119
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
577
|
|
|
$
|
1,015
|
|
|
$
|
1,662
|
|
|
$
|
2,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Broad based long-term incentives
includes stock based compensation of $65 million and
$73 million for the three months ended October 30,
2009, and October 31, 2008, respectively; and
$211 million and $201 million for the nine months
ended October 30, 2009, and October 31, 2008,
respectively.
|
NOTE 13
SUBSEQUENT EVENTS
On November 3, 2009, Dell completed its acquisition of all
of the outstanding shares of the Class A common stock of
Perot Systems, a worldwide provider of information technology
and business solutions, for $3.9 billion in cash. This
acquisition is expected to provide customers a broader range of
smartly delivered IT services and solutions and better position
Dell for its own immediate and long-term growth and efficiency.
Perot Systems will be integrated into primarily the Large
Enterprise and Public segments for external segment reporting
purposes. Because the acquisition has recently closed, Dell has
not yet completed the purchase accounting and initial purchase
price allocation. As of September 30, 2009, Perot Systems
reported stockholders equity of $1.5 billion and
tangible assets of $1.2 billion. Dell expects to complete
the purchase accounting and initial purchase price allocation in
the fourth quarter of Fiscal 2010. Acquisition costs, including
compensation related costs, will be expensed in the fourth
quarter of Fiscal 2010.
Dell has evaluated subsequent events and updated the financial
statements for events through December 3, 2009.
27
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL NOTE: This section, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements based on
our current expectations. Actual results in future periods may
differ materially from those expressed or implied by those
forward-looking statements because of a number of risks and
uncertainties. For a discussion of risk factors affecting our
business and prospects, see Part I
Item 1A Risk Factors in our Annual Report
on
Form 10-K
for the fiscal year ended January 30, 2009 and
Part I Item 1A Risk
Factors of this Form. We disclaim any obligation to update
these forward-looking statements, except as required by
applicable law.
All percentage amounts and ratios were calculated using
the underlying data in thousands. Unless otherwise noted, all
references to industry share and total industry growth data are
for personal computers (including desktops, notebooks, and x86
servers), and are based on preliminary information provided by
IDC Worldwide Quarterly PC Tracker, October 23, 2009. Share
data is for the calendar quarter, and all our growth rates are
on a fiscal
year-over-year
basis. Unless otherwise noted, all references to time periods
refer to our fiscal periods.
OVERVIEW
Our
Company
We are a leading technology solutions provider in the IT
industry. We are the number two supplier of computer systems in
the United States, and the number three supplier worldwide. We
offer a broad range of products, including mobility products,
desktop PCs, software and peripherals, servers and networking,
and storage products. Our enhanced services offerings include
infrastructure consulting, deployment of enterprise products and
computer systems in customers environments, asset recovery
and recycling, computer-related training, IT support, client and
enterprise support, and managed service solutions. We also offer
various financing alternatives, asset management services, and
other customer financial services for business and consumer
customers.
We were founded on the core principle of a direct customer
business model, which creates direct relationships with our
customers. These relationships allow us to be on the forefront
of changing user requirements and needs while competing as one
of the industry leaders in selling the most relevant technology,
at the best value, to our customers. We continue to simplify
technology and enhance product design and features to meet our
customers needs and preferences.
Our customer facing business model includes an efficient global
supply chain, which allows low inventory levels and the
efficient use of and return on capital. We have manufacturing
locations around the world and relationships with third-party
contract manufacturers. This structure allows us to optimize our
global supply chain to best serve our global customer base. To
maintain our competitiveness, we continuously strive to improve
our products, services, technology, manufacturing, and logistics.
We are continuing to invest in initiatives that will align our
new and existing products around customers needs in order
to drive long-term sustainable growth, profitability, and
operating cash flow. We have expanded our business model to
include new distribution partners, such as retail, system
integrators, value-added resellers, and distributors, which
allow us to reach even more end-users around the world. We are
investing resources in emerging countries with an emphasis on
Brazil, Russia, India, and China (BRIC), where we
expect significant growth to occur over the next several years.
We are also creating customized products and services to meet
the preferences and requirements of our diversified global
customer base.
As part of our overall growth strategy, we have completed
strategic acquisitions to augment select areas of our business
with more products, services, and technology, including our
recent acquisition of Perot Systems Corporation (Perot
Systems) in the fourth quarter of Fiscal 2010. Our
acquisition of Perot Systems complements and expands our
services business, and is expected to provide our customers a
broader range of smartly delivered IT services and solutions,
and better position us for immediate and long-term growth and
efficiency. We expect to continue to grow our business
organically and inorganically through alliances and strategic
acquisitions.
28
During the first quarter of Fiscal 2010, we completed our
reorganization from geographic commercial segments (Americas
Commercial; Europe, Middle East, and Africa (EMEA)
Commercial; and Asia Pacific-Japan (APJ) Commercial)
to global business units (Large Enterprise, Public, and Small
and Medium Business (SMB)), reflecting the impact of
globalization on our customer base. To simplify reporting, we
aligned certain countries that represent a small percentage of
our total revenue with a single global segment, based mainly on
the countries customer base. This reorganization creates a
clear customer focus, which allows us to serve customers with
faster innovation and greater responsiveness, thus allowing us
to capitalize on competitive advantages, while strengthening
execution and synergies. We began managing and reporting in our
new business segment structure in the first quarter of Fiscal
2010. Our four global business segments are:
|
|
|
|
|
Large Enterprise Our customers include
large global and national corporate businesses. We believe that
a single large-enterprise unit will give us even greater
knowledge of our customers and thus further our advantage in
delivering globally consistent and cost-effective solutions and
services to the worlds largest IT users. We intend to
improve our global leadership and relationships with these
customers. Our execution in this space will be increasingly
focused on data center solutions, disruptive innovation,
customer segment specialization, and the value chain of design
to value, price to value, market to value, and sell to value.
|
|
|
|
Public Our customers, which include
educational institutions, government, health care, and law
enforcement agencies, operate in communities, and their missions
are aligned with their constituents needs. We intend to
further our understanding of our Public customers goals
and missions and extend our leadership in answering their urgent
IT challenges. To better meet our customers goals, we are
focusing on simplifying IT, providing faster deployment of IT
applications, expanding our enterprise and services offerings,
helping customers understand economic stimulus packages through
our Economic Stimulus Learning Center, and strengthening our
partner relations to build best of breed integrated solutions.
|
|
|
|
Small and Medium Business Our
customers include those in the small and medium business sector.
We are focused on providing small and medium businesses with the
simplest and most complete standards-based IT solutions and
services, customized for their needs. Our SMB organization will
accelerate the creation and delivery of specific solutions and
technology to small and medium-sized businesses worldwide in an
effort to help our customers improve and grow their businesses.
We are doing this through solutions such as our
ProManage-Managed Services and through extending our channel
program (PartnerDirect) to provide additional certification
paths and purchase options to our customers.
|
|
|
|
Consumer Our customers include
consumers who buy through our online store at www.dell.com, over
the phone, and through retail channels. The globalization of our
business has improved our global sales execution and coverage
through better customer alignment, targeted sales force
investments in rapidly growing countries, and improved marketing
tools. We are designing new, innovative products with faster
development cycles and competitive features. In order to reach
more consumers, we will continue to expand and transform both
our direct and retail business.
|
References to Commercial business refers to Large Enterprise,
Public, and Small and Medium Business (Commercial).
29
CONSOLIDATED
RESULTS OF OPERATIONS
The following table summarizes the results of our operations for
the three and nine months ended October 30, 2009, and
October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 30, 2009
|
|
|
|
October 31, 2008
|
|
October 30, 2009
|
|
|
|
October 31, 2008
|
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
|
(in millions, except per share amounts and percentages)
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
10,746
|
|
|
|
83.3%
|
|
|
|
(17%)
|
|
|
$
|
12,970
|
|
|
|
85.5%
|
|
|
$
|
31,601
|
|
|
|
83.2%
|
|
|
|
(23%)
|
|
|
$
|
41,073
|
|
|
|
86.2%
|
|
Services, including software related
|
|
|
2,150
|
|
|
|
16.7%
|
|
|
|
(2%)
|
|
|
|
2,192
|
|
|
|
14.5%
|
|
|
|
6,401
|
|
|
|
16.8%
|
|
|
|
(3%)
|
|
|
|
6,600
|
|
|
|
13.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
12,896
|
|
|
|
100.0%
|
|
|
|
(15%)
|
|
|
$
|
15,162
|
|
|
|
100.0%
|
|
|
$
|
38,002
|
|
|
|
100.0%
|
|
|
|
(20%)
|
|
|
$
|
47,673
|
|
|
|
100.0%
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,477
|
|
|
|
13.7%
|
|
|
|
(27%)
|
|
|
$
|
2,012
|
|
|
|
15.5%
|
|
|
$
|
4,568
|
|
|
|
14.5%
|
|
|
|
(25%)
|
|
|
$
|
6,107
|
|
|
|
14.9%
|
|
Services, including software related
|
|
|
756
|
|
|
|
35.2%
|
|
|
|
(10%)
|
|
|
|
841
|
|
|
|
38.4%
|
|
|
|
2,224
|
|
|
|
34.7%
|
|
|
|
(12%)
|
|
|
|
2,538
|
|
|
|
38.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross margin
|
|
$
|
2,233
|
|
|
|
17.3%
|
|
|
|
(22%)
|
|
|
$
|
2,853
|
|
|
|
18.8%
|
|
|
$
|
6,792
|
|
|
|
17.9%
|
|
|
|
(21%)
|
|
|
$
|
8,645
|
|
|
|
18.1%
|
|
Operating expenses
|
|
$
|
1,656
|
|
|
|
12.8%
|
|
|
|
(10%)
|
|
|
$
|
1,838
|
|
|
|
12.1%
|
|
|
$
|
5,130
|
|
|
|
13.5%
|
|
|
|
(13%)
|
|
|
$
|
5,912
|
|
|
|
12.4%
|
|
Operating income
|
|
$
|
577
|
|
|
|
4.5%
|
|
|
|
(43%)
|
|
|
$
|
1,015
|
|
|
|
6.7%
|
|
|
$
|
1,662
|
|
|
|
4.4%
|
|
|
|
(39%)
|
|
|
$
|
2,733
|
|
|
|
5.7%
|
|
Net income
|
|
$
|
337
|
|
|
|
2.6%
|
|
|
|
(54%)
|
|
|
$
|
727
|
|
|
|
4.8%
|
|
|
$
|
1,099
|
|
|
|
2.9%
|
|
|
|
(48%)
|
|
|
$
|
2,127
|
|
|
|
4.5%
|
|
Earnings per share diluted
|
|
$
|
0.17
|
|
|
|
N/A
|
|
|
|
(54%)
|
|
|
$
|
0.37
|
|
|
|
N/A
|
|
|
$
|
0.56
|
|
|
|
N/A
|
|
|
|
(47%)
|
|
|
$
|
1.06
|
|
|
|
N/A
|
|
During the third quarter of calendar year 2009, the IT industry
as a whole began to see signs of economic recovery as unit
shipments increased both
quarter-over-quarter
and
year-over-year.
Current
year-over-year
growth in the IT industry is attributable to significant
increases in consumer demand and unit shipments, whereas
commercial demand and unit shipments have declined
year-over-year
as a result of the challenging global economic conditions.
Approximately 78% of our revenue during the first nine months of
Fiscal 2010 is from our Commercial segments, and as such, our
year-over-year
unit growth did not match the overall growth experienced by the
IT industry. However, we have experienced sequential improvement
in revenue and unit shipments for two consecutive quarters
during the first nine months of Fiscal 2010, and we have seen
some indications of strengthening demand in our commercial
segments as we progressed through the third quarter of Fiscal
2010. Additionally, we continued our overall strategy of
balancing profitability with share growth.
For the fourth quarter of Fiscal 2010, we expect to see seasonal
demand improvements in our Consumer business. We anticipate
lower demand from our public customers due to seasonality, and
demand from our large commercial and small and medium business
customers will depend on the economic conditions for those
customers. Overall, we expect revenue in the fourth quarter of
Fiscal 2010 to improve relative to the third quarter. We expect
to continue to grow our business organically as well as pursue
inorganic growth through strategic acquisitions as evidenced by
our acquisition of Perot Systems on November 3, 2009.
Revenue
Product Revenue Product revenue and
unit shipments decreased
year-over-year
by 17% and 5%, respectively, for the third quarter of Fiscal
2010. For the first nine months of Fiscal 2010, product revenue
decreased
year-over-year
by 23% on unit shipment decline of 12%. Our product revenue
performance is primarily attributed to a decrease in customer
demand as a result of the challenging economic environment and a
reduction in average selling prices.
Services Revenue, including software
related Services revenue decreased
year-over-year
by 2% and 3% for the third quarter and first nine months of
Fiscal 2010, respectively. Our services revenue performance is
primarily attributed to a 9%
year-over-year
decrease in enhanced services revenue for both the third quarter
and first nine months of Fiscal 2010, partially offset by a 10%
and 7% increase in software related revenue during the same time
periods. The decrease in enhanced services revenue is a result
of unit shipment declines as enhanced services demand is
generally correlated with hardware unit sales as well as the mix
of service offerings sold.
30
Overall, our average selling price (total revenue per unit sold)
during the third quarter and first nine months of Fiscal 2010
decreased 11% and 9%
year-over-year,
respectively, due to competitive pricing pressures and a shift
in revenue mix between our Commercial and Consumer businesses.
During the third quarter and first nine months of Fiscal 2010,
Commercial accounted for approximately 78% of total revenue as
compared to 79% and 80% for the same periods of Fiscal 2009,
whereas Consumer accounted for approximately 22% of total
revenue during the third quarter and first nine months of Fiscal
2010 as compared to 21% and 20% for the respective periods of
Fiscal 2009. Selling prices in Commercial are typically higher
than Consumers selling prices; and furthermore, average
selling prices in Consumer declined 23% and 24%
year-over-year
for the third quarter and first nine months of Fiscal 2010,
respectively, as we continued to expand into retail through an
increased number of worldwide retail locations. Comparatively,
average selling prices for Commercial declined 3% and 1%
year-over-year
for the third quarter and first nine months of Fiscal 2010,
respectively. In general, our market strategy in the Commercial
business is to concentrate on solution sales with a focus on
enterprise products and services. In the Consumer business, our
market strategy is to expand our product offerings and customer
coverage, focusing on optimized products and services. We
continue to see competitive pressure, particularly for lower
priced desktops and notebooks. We expect this competitive
pricing environment will continue for the foreseeable future.
Revenue outside the U.S. represented approximately 47% and
46% of net revenue for the third quarter and first nine months
of Fiscal 2010, respectively. Outside the U.S., we experienced a
17% and 24%
year-over-year
revenue decline for the third quarter and first nine months of
Fiscal 2010, respectively, as compared to an approximate decline
of 13% and 17% in revenue for the U.S. during the same time
periods. At a consolidated level, BRIC revenue increased 5%
during the third quarter of Fiscal 2010, but had a decline of
11% for the first nine months of Fiscal 2010 as compared to the
same periods in the prior year. Revenue from BRIC has been
increasing sequentially since the fourth quarter of Fiscal 2009.
We are continuing to expand into these and other emerging
countries that represent the vast majority of the worlds
population, tailor solutions to meet specific regional needs,
and enhance relationships to provide customer choice and
flexibility.
We manage our business on a U.S. Dollar basis and we have a
comprehensive hedging program to reduce the impact of foreign
currency fluctuations on our consolidated results of operations.
Share
Position
We shipped 10 million units in the third quarter of Fiscal
2010. According to IDC, for the third quarter of calendar year
2009, we fell to the third place position in the worldwide
computer systems market with a share position of 13.0%, which is
lower than our share position of 14.0% for the second quarter of
calendar year 2009. According to IDC data, the growth in the
worldwide computer systems industry is attributable to
significant increases in consumer demand and unit shipments,
whereas demand and unit shipments for the commercial segment of
the industry have declined.
Gross
Margin
Products During the third quarter of
Fiscal 2010, products gross margin decreased in absolute dollars
by $535 million, compared to the same period in the prior
year with a corresponding decrease in gross margin percentage to
13.7% from 15.5%. For the first nine months of Fiscal 2010, our
products gross margin decreased in absolute dollars by
$1.5 billion with a corresponding decrease in gross margin
percentage to 14.5% from 14.9% as compared to the same period in
the prior year. The decline in gross margin dollars is
attributable to soft demand and lower average selling prices.
Additionally, during the third quarter and first nine months of
Fiscal 2010, gross margins were negatively impacted by component
cost pressures as these costs did not decline at recent
historical rates. In an effort to improve costs and gross
margin, we have launched a number of new cost optimized products
and will continue cost optimization efforts throughout Fiscal
2010. We continue to make progress against our other ongoing
cost improvement initiatives, and approximately 43% of our
production volume is now going through contract manufacturers.
Services, including software related
Our services (including software related) gross margin rate is
driven by our extended warranty sales, partially offset by lower
margin categories such as software, consulting, and managed
services. Our extended warranty services are more profitable
because we sell extended warranty
31
offerings directly to customers instead of selling through a
distribution channel. We also have a service support structure
that allows us to favorably manage our fixed costs.
During the third quarter of Fiscal 2010, our services gross
margin decreased in absolute dollars by $85 million
compared to the same period in the prior year with a
corresponding decrease in gross margin percentage to 35.2% from
38.4%. For the first nine months of Fiscal 2010, our services
gross margin decreased in absolute dollars by $314 million
compared to same period in the prior year with a corresponding
decrease in gross margin percentage to 34.7% from 38.5%. Our
solution services offerings face competitive margin pressures in
the current economic environment. A mix shift toward lower
margin software products further reduced our overall services
gross margin rate.
We continue to actively review all aspects of our facilities,
logistics, supply chain, and manufacturing footprints. This
review is focused on identifying efficiencies and cost reduction
opportunities while maintaining a strong customer experience.
During the third quarter of Fiscal 2010, we announced the
closure of our North Carolina desktop computer manufacturing
plant, which is expected to be completed in January 2010, and we
continue to realize costs related to other previously announced
actions, including the closure of our Limerick, Ireland
facility. During the third quarter and first nine months of
Fiscal 2010, the cost of these actions, including severance
related expenses, were $123 million and $395 million
respectively, of which approximately $102 million and
$181 million, respectively, affected gross margin.
Comparatively, for the third quarter and first nine months of
Fiscal 2009, the cost of these actions was $17 million and
$148 million, respectively, of which approximately
$8 million and $43 million, respectively, affected
gross margin. We expect to take additional facility actions
depending on a number of factors, including end-user demand,
capabilities, and our migration to a more variable cost
manufacturing model.
We continue to evaluate and optimize our global manufacturing
and distribution network, including our relationships with
contract manufacturers, to better meet customer needs and reduce
product cycle times. Our goal is to introduce the latest
relevant technology and to deliver the best value to our
customers worldwide. As we continue to evolve our inventory and
manufacturing business model to drive cost efficiencies, we
continuously negotiate with our suppliers in a variety of areas
including availability of supply, quality, and cost. These
real-time continuous supplier negotiations support our business
model, which is able to respond quickly to changing market
conditions due to our customer-facing model. Such negotiations
are focused on ultimately getting to the lowest net cost of our
various components, independent of the pricing strategies used
by our supplier base. Because of the fluid nature of these
ongoing negotiations, the timing and amount of supplier
discounts and rebates vary from time to time. These discounts
and rebates are allocated to the segments based on a variety of
factors including strategic initiatives to drive certain
programs.
In general, gross margin and margins on individual products and
services will remain under downward pressure due to a variety of
factors, including continued industry-wide global pricing
pressures, increased competition, compressed product life
cycles, potential increases in the cost and availability of raw
materials, and outside manufacturing services. For the remainder
of the fiscal year, we expect to continue to see pressure on
certain component costs, and we will continue to adjust our
pricing strategy with the goals of optimizing growth and
profitability.
32
Operating
Expenses
The following table summarizes our operating expenses for the
three and nine months ended October 30, 2009, and
October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30, 2009
|
|
|
|
|
|
October 31, 2008
|
|
|
October 30, 2009
|
|
|
|
|
|
October 31, 2008
|
|
|
|
|
|
|
% of
|
|
|
%
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
%
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Change
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Change
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except percentages)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$
|
1,501
|
|
|
|
11.6%
|
|
|
|
(10%
|
)
|
|
$
|
1,671
|
|
|
|
11.0%
|
|
|
$
|
4,685
|
|
|
|
12.3%
|
|
|
|
(14%
|
)
|
|
$
|
5,423
|
|
|
|
11.4%
|
|
In-process research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
0%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100%
|
)
|
|
|
2
|
|
|
|
0.1%
|
|
Research, development, and engineering
|
|
|
155
|
|
|
|
1.2%
|
|
|
|
(7%
|
)
|
|
|
167
|
|
|
|
1.1%
|
|
|
|
445
|
|
|
|
1.2%
|
|
|
|
(9%
|
)
|
|
|
487
|
|
|
|
0.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
1,656
|
|
|
|
12.8%
|
|
|
|
(10%
|
)
|
|
$
|
1,838
|
|
|
|
12.1%
|
|
|
$
|
5,130
|
|
|
|
13.5%
|
|
|
|
(13%
|
)
|
|
$
|
5,912
|
|
|
|
12.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and Administrative
During the third quarter of Fiscal 2010, selling, general and
administrative (SG&A) expenses decreased
year-over-year;
however, SG&A expenses as a percentage of revenue increased
during the same time period. The decrease in SG&A expenses
is driven by a net reduction in compensation-related expenses of
approximately $18 million, due to a decrease in headcount.
With the increase in retail volumes, advertising expenses
decreased approximately $35 million in the third quarter of
Fiscal 2010 compared to the same period in Fiscal 2009. In line
with the spending control measures undertaken company-wide,
there were decreases in most other categories of expenses,
including telecom, maintenance, travel and financing fees.
For the first nine months of Fiscal 2010, SG&A expenses
decreased as compared to the same period in Fiscal 2009. The
decrease in SG&A expenses is primarily due to a reduction
in compensation related expenses of approximately
$379 million, driven by a reduction in headcount that began
in the second half of Fiscal 2009 and continuing into the first
half of Fiscal 2010. With the increase in retail volumes, which
typically incurs less advertising costs, advertising expenses
decreased approximately $160 million in the first nine
months of Fiscal 2010 compared to the same period in Fiscal
2009. Due to the spending control measures undertaken
company-wide, there were large decreases in most other
categories of expenses, including outside consulting fees,
maintenance, travel and financing fees each of which declined by
over $30 million. Partially offsetting these declines were
a $109 million increase in severance and business
realignment costs and a $51 million increase in bad debt
expense in the first nine months of Fiscal 2010 compared to the
same period in the prior year.
Research, Development, and Engineering
During the third quarter and first nine months of Fiscal 2010,
research, development and engineering (RD&E)
expenses remained approximately 1% of revenue consistent with
prior periods. During the third quarter of Fiscal 2010,
RD&E expenses decreased approximately $12 million
year-over-year,
and during the first nine months of Fiscal 2010, RD&E
expenses decreased approximately $42 million
year-over-year.
The decrease was primarily driven by a decrease in compensation
costs and improved general spending controls.
Operating
Income
During the third quarter and first nine months of Fiscal 2010,
operating income decreased 43% and 39%
year-over-year,
respectively. The decrease in operating income is primarily
attributable to a
year-over-year
revenue decline of 15% and 20% during the third quarter and
first nine months of Fiscal 2010, respectively, and a
year-over-year
decline in gross margin dollars of 22% and 21% during the same
time periods. A 10% and 13%
year-over-year
reduction in operating expenses for the third quarter and first
nine months of Fiscal 2010, respectively, favorably impacted
operating income while operating expenses as a percentage of
revenue increased slightly during the same time periods. To
maximize operating margins, we continued to reduce
33
operating expenses and improve our working capital management
and will continue these actions in the fourth quarter of Fiscal
2010.
Net
Income
For the third quarter and first nine months of Fiscal 2010, net
income decreased
year-over-year
by 54% and 48%, respectively, to $337 million and
$1.1 billion, respectively. Net income was impacted by
significant declines in operating income and investment and
other income (expense), net. During the third quarter, an
increase in our effective tax rate to 34.5% from 28.0%
negatively impacted net income, and for the first nine months of
Fiscal 2010 as compared to Fiscal 2009, net income was
negatively impacted by an increase in our effective tax rate to
29.3% from 25.9%. See Income Tax section below for a discussion
on our effective tax rates.
SEGMENT
DISCUSSION
During the first quarter of Fiscal 2010, we completed the
reorganization from our geographic commercial segments (Americas
Commercial, EMEA Commercial, and APJ Commercial), to global
business units (Large Enterprise, Public, and Small and Medium
Business), reflecting the impact of globalization on our
customer base. Our four global business segments are Large
Enterprise, Public, Small and Medium Business, and Consumer.
During the reorganization to global business units, we
identified revenue activities that were managed and reported
within our Commercial business, but which had characteristics
more consistent with our Consumer business. As a result, these
activities were realigned into our Consumer segment during the
first quarter of Fiscal 2010.
The following table summarizes our revenue and operating income
by reportable global segments for the three and nine months
ended October 30, 2009, and October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 30, 2009
|
|
|
|
October 31, 2008
|
|
October 30, 2009
|
|
|
|
October 31, 2008
|
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
|
(in millions, except percentages)
|
|
Large Enterprise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,403
|
|
|
|
26%
|
|
|
|
(23%)
|
|
|
$
|
4,395
|
|
|
|
29%
|
|
|
$
|
10,088
|
|
|
|
27%
|
|
|
|
(29%)
|
|
|
$
|
14,122
|
|
|
|
30%
|
|
Operating income
|
|
$
|
174
|
|
|
|
5%
|
|
|
|
(32%)
|
|
|
$
|
254
|
|
|
|
6%
|
|
|
$
|
538
|
|
|
|
5%
|
|
|
|
(40%)
|
|
|
$
|
899
|
|
|
|
6%
|
|
Public
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
3,695
|
|
|
|
29%
|
|
|
|
(7%)
|
|
|
$
|
3,960
|
|
|
|
26%
|
|
|
$
|
10,664
|
|
|
|
28%
|
|
|
|
(12%)
|
|
|
$
|
12,051
|
|
|
|
25%
|
|
Operating income
|
|
$
|
352
|
|
|
|
10%
|
|
|
|
(2%)
|
|
|
$
|
361
|
|
|
|
9%
|
|
|
$
|
1,028
|
|
|
|
10%
|
|
|
|
6%
|
|
|
$
|
969
|
|
|
|
8%
|
|
Small and Medium Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
2,956
|
|
|
|
23%
|
|
|
|
(19%)
|
|
|
$
|
3,647
|
|
|
|
24%
|
|
|
$
|
8,743
|
|
|
|
23%
|
|
|
|
(26%)
|
|
|
$
|
11,849
|
|
|
|
25%
|
|
Operating income
|
|
$
|
282
|
|
|
|
10%
|
|
|
|
(25%)
|
|
|
$
|
374
|
|
|
|
10%
|
|
|
$
|
758
|
|
|
|
9%
|
|
|
|
(27%)
|
|
|
$
|
1,034
|
|
|
|
9%
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
2,842
|
|
|
|
22%
|
|
|
|
(10%)
|
|
|
$
|
3,160
|
|
|
|
21%
|
|
|
$
|
8,507
|
|
|
|
22%
|
|
|
|
(12%)
|
|
|
$
|
9,651
|
|
|
|
20%
|
|
Operating income
|
|
$
|
10
|
|
|
|
0%
|
|
|
|
(93%)
|
|
|
$
|
142
|
|
|
|
4%
|
|
|
$
|
98
|
|
|
|
1%
|
|
|
|
(62%)
|
|
|
$
|
259
|
|
|
|
3%
|
|
Severance and facility action expenses, broad based long-term
incentive expenses, in-process research and development, and
amortization of purchased intangible assets costs are not
allocated to the reporting segments. These costs totaled
$241 million in the third quarter of Fiscal 2010 and
$116 million in the third quarter of Fiscal 2009, and these
costs totaled $760 million and $428 million for the
first nine months of Fiscal 2010 and Fiscal 2009, respectively.
|
|
|
Large Enterprise During the third
quarter of Fiscal 2010, Large Enterprises revenue
decreased 23%
year-over-year
mainly due to a unit shipment decline of 24% while average
selling prices increased 2%
year-over-year.
During the first nine months of Fiscal 2010, Large
Enterprises revenue decreased 29%
year-over-year
due to a unit shipment decline of 31%, slightly offset by a 3%
increase in average selling prices. Large Enterprises weak
performance can generally be attributed to the current global
economy coupled with our focus on balancing profitability and
growth. Many of our customers have either delayed or canceled IT
projects as a result of the current economic slowdown that has
most pronouncedly impacted the commercial segment of the IT
industry. The increase in average selling prices for the third
quarter and first nine months of
|
34
|
|
|
Fiscal 2010 was driven by a slightly higher mix of services and
software related revenues, which improved overall product mix.
Large Enterprise experienced significant
year-over-year
declines in revenue across all product lines during the third
quarter and first nine months of Fiscal 2010, except for third
quarter servers and networking revenue, which increased
slightly. For the third quarter of Fiscal 2010, revenue from
desktop PCs, mobility products, and storage items all declined
over 30%
year-over-year,
and software and peripherals and enhanced services revenue
decreased
year-over-year
by 18% and 12%, respectively. For the first nine months of
Fiscal 2010, revenue declines across all product lines were
consistent with the declines for the third quarter, except for
servers and networking revenue, which declined 18%
year-over-year.
Revenue decreased significantly
year-over-year
across most countries due to current global economic conditions
and competitive pressures.
|
For the third quarter and first nine months of Fiscal 2010,
operating income percentage decreased 70 basis points and
110 basis points
year-over-year,
respectively. Operating income deteriorated as revenue decreased
year-over-year
during the third quarter and first nine months of Fiscal 2010
due to lower demand. Additionally, operating expenses as a
percentage of revenue increased 90 basis points and
110 basis points
year-over-year
for the third quarter and first nine months of Fiscal 2010,
respectively, even though operating expense dollars decreased
17% and 22% during the same time periods. We believe that Large
Enterprise is well positioned for better operating leverage
going forward as demand strengthens, and we will continue to
make investments in research and development
(R&D) in such areas as EqualLogic and our next
generation services.
|
|
|
Public During the third quarter and
first nine months of Fiscal 2010, Public experienced a 7% and
12%
year-over-year
decline, respectively, in both revenue and unit shipments. The
decline in unit shipments can be attributed to continued soft
demand in the current global economy. For the third quarter and
first nine months of Fiscal 2010, Publics average selling
prices increased 1% due to a higher mix of servers and
networking, services, and software related revenues, partially
offset by competitive pricing pressures. Additionally, seasonal
growth in U.S. Federal government sales contributed to the
improvement in average selling prices. During the third quarter
of Fiscal 2010, Publics revenue declined across all
product categories except for software related and services
revenue, which grew
year-over-year
by 11% and 3%, respectively. During the first nine months of
Fiscal 2010, Publics revenue declined across all product
categories except for software related revenue, which grew 3%
year-over-year.
Product revenue decline was led by desktop PCs, which decreased
year-over-year
by 21% and 24% for the third quarter and first nine months of
Fiscal 2010, respectively. From a country perspective, revenue
declined across most countries during the third quarter and
first nine months of Fiscal 2010. For the fourth quarter of
Fiscal 2010, consistent with historical patterns, we anticipate
seasonally lower demand in our Public business.
|
For the third quarter of Fiscal 2010, operating income
percentage increased 40 basis points from the same period
last year, but operating income dollars decreased 2% mainly due
to unit and revenue declines of 7%. For the first nine months of
Fiscal 2010, operating income percentage increased
160 basis points
year-over-year,
and operating income dollars increased 6%. Operating income was
positively impacted by a
year-over-year
improvement in gross margin percentage for the third quarter and
first nine months of Fiscal 2010 as we continued to optimize our
pricing and cost structure and sell higher valued solutions to
our customers. Also favorably impacting operating income was a
7% and 12%
year-over-year
decrease in operating expenses for the third quarter and first
nine months of Fiscal 2010, respectively, driven by cost savings
related to headcount reductions and improved spending controls
surrounding SG&A and R&D expenditures.
|
|
|
Small and Medium Business During the
third quarter of Fiscal 2010, SMB experienced a 19% and 10%
year-over-year
decline in revenue and unit shipments, respectively. During the
first nine months of Fiscal 2010, SMB experienced a 26% and 22%
year-over-year
decline in revenue and unit shipments, respectively. Average
selling prices declined 10% and 5% for the third quarter and
first nine months of Fiscal 2010, respectively. SMB experienced
a double digit revenue decline across all product lines, led by
a 28% and 19% decline in desktop PC and mobility revenue,
respectively, for the third quarter of Fiscal 2010 and a 35% and
27% decline in desktop PC and mobility revenue, respectively,
for the first nine months of Fiscal 2010. We limited our
participation in certain lower priced-but higher demand bands in
an effort to protect profitability. Consistent with our other
commercial segments performance, the contraction of the
global economy in the first nine months of Fiscal 2010 and
competitive pressures are significant contributors to SMBs
year-over-year
revenue,
|
35
|
|
|
unit shipment, and average selling price declines. We did see
improving unit demand trends as we progressed through the third
quarter of Fiscal 2010.
|
Operating income percentage decreased 80 basis points
year-over-year
for the third quarter of Fiscal 2010, and was flat
year-over-year
for the first nine months of Fiscal 2010. Operating income
dollars decreased 25% and 27%
year-over-year
for the third quarter and first nine months of Fiscal 2010,
respectively, as revenue and unit shipments decreased
significantly for both time periods. Also impacting operating
income was a minor
year-over-year
decline in gross margin percentage for the third quarter of
Fiscal 2010 and a slight increase for the first nine months of
Fiscal 2010. We were also able to reduce operating expenses by
16% and 22% during the third quarter and first nine months of
Fiscal 2010, respectively, as compared to the same time periods
in the prior year, mainly due to tighter spending controls
around SG&A and R&D expenses.
|
|
|
Consumer During the third quarter and
first nine months of Fiscal 2010, Consumers revenue
declined 10% and 12%
year-over-year,
respectively, on unit growth of 17% and 15%, respectively. Even
though unit shipments grew, our Consumer revenue decreased
mainly due to our growth in retail, which tends to have lower
average selling prices, combined with a shift in product mix and
competitive pricing pressures. As a result, our average selling
prices declined 23% and 24%
year-over-year
in the third quarter and first nine months of Fiscal 2010,
respectively. From a product perspective, Consumers
desktop PC revenue declined 24% for the third quarter of Fiscal
2010 as compared to the third quarter of Fiscal 2009 on a unit
shipment decline of 5%. For the first nine months of Fiscal 2010
as compared to the same period in the prior year, desktop PC
revenue declined 29% on a unit shipment decline of 13%. Mobility
revenue declined 4% and 3% for the third quarter and first nine
months of Fiscal 2010, respectively. During the same time
periods, units shipped increased
year-over-year
by 24% and 28%; however, this was offset by average selling
price per unit declines of 23% and 25%. The continued shift in
consumer preference from desktops to notebooks has contributed
to our mobility unit growth. The reduction in mobility average
selling prices is mainly attributable to our expansion into
retail coupled with a demand shift from higher to lower priced
notebooks. Software and peripheral revenue also declined 11% and
13%
year-over-year
during the third quarter and first nine months of Fiscal 2010,
respectively. At a country level, our targeted BRIC revenue grew
41% and 26%
year-over-year
for the third quarter and first nine months of Fiscal 2010,
respectively. For the fourth quarter, we expect seasonal demand
improvement in Consumer.
|
For the third quarter of Fiscal 2010, Consumers operating
income declined 93% or $132 million from the prior year,
and for the first nine months of Fiscal 2010, operating income
declined 62%
year-over-year.
Impacting Consumers operating performance includes a
year-over-year
decline in gross margin for the third quarter and first nine
months of Fiscal 2010 mainly due to the previously mentioned
revenue declines as well as component cost pressures. During
Fiscal 2010, some of our component costs have increased while
others have not declined at recent historical rates. Even though
operating expenses decreased 3%
year-over-year
for the third quarter of Fiscal 2010, operating expenses as a
percentage of revenue increased to 13.6% in the third quarter of
Fiscal 2010 as compared to 12.6% for third quarter of Fiscal
2009. For the first nine months of Fiscal 2010, operating
expenses decreased 9% due to tighter spending controls; however,
these operating cost improvements were not enough to offset
Consumers revenue declines and component cost pressures.
For the first nine months of Fiscal 2010, Consumers
revenue and operating income was favorably impacted by a second
quarter $53 million transaction, in which a vendor
purchased our contractual right to share in future revenues from
product renewals sold by the vendor. We have no continuing
obligations or performance requirements in connection with this
transaction, and amounts are non-refundable. Excluding this
transaction, Consumers operating income percentage would
have been 0.5% instead of 1.2% for the first nine months of
Fiscal 2010. We may from time to time enter into similar
agreements.
We sell desktop and notebook computers, printers, ink, toner,
displays, and accessories through retail channels. Our goal is
to have strategic relationships with a number of major retailers
in our larger geographic regions. We continue to expand our
global retail presence, and now reach over 50,000 retail
locations worldwide.
36
REVENUE
BY PRODUCT AND SERVICES CATEGORIES
We design, develop, manufacture, market, sell, and support a
wide range of products that in many cases are customized to
individual customer requirements. Our product categories include
mobility products, desktop PCs, software and peripherals,
servers and networking products, and storage products. In
addition, we offer a range of services.
In the first quarter of Fiscal 2010, we performed an analysis of
our enhanced services revenue and determined that certain items
previously classified as enhanced services revenue were more
appropriately categorized within product revenue. Also, certain
items previously categorized as mobility, desktop PC, and
servers and networking revenue were more appropriately
reclassified to storage revenue. Fiscal 2009 balances reflect
the revised revenue classifications.
The following table summarizes our net revenue by product and
service categories for the three and nine months ended
October 30, 2009, and October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 30, 2009
|
|
|
|
October 31, 2008
|
|
October 30, 2009
|
|
|
|
October 31, 2008
|
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
%
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Change
|
|
Dollars
|
|
|
Revenue
|
|
|
(in millions, except percentages)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility
|
|
$
|
4,191
|
|
|
|
32%
|
|
|
|
(14%)
|
|
|
$
|
4,861
|
|
|
|
32%
|
|
|
$
|
11,957
|
|
|
|
31%
|
|
|
|
(18%)
|
|
|
$
|
14,605
|
|
|
|
30%
|
|
Desktop PCs
|
|
|
3,020
|
|
|
|
23%
|
|
|
|
(26%)
|
|
|
|
4,091
|
|
|
|
27%
|
|
|
|
9,502
|
|
|
|
25%
|
|
|
|
(31%)
|
|
|
|
13,826
|
|
|
|
29%
|
|
Software and peripherals
|
|
|
2,394
|
|
|
|
19%
|
|
|
|
(7%)
|
|
|
|
2,585
|
|
|
|
17%
|
|
|
|
7,022
|
|
|
|
18%
|
|
|
|
(13%)
|
|
|
|
8,116
|
|
|
|
17%
|
|
Servers and networking
|
|
|
1,539
|
|
|
|
12%
|
|
|
|
(6%)
|
|
|
|
1,630
|
|
|
|
11%
|
|
|
|
4,228
|
|
|
|
12%
|
|
|
|
(17%)
|
|
|
|
5,081
|
|
|
|
11%
|
|
Enhanced services
|
|
|
1,244
|
|
|
|
10%
|
|
|
|
(9%)
|
|
|
|
1,365
|
|
|
|
9%
|
|
|
|
3,700
|
|
|
|
10%
|
|
|
|
(9%)
|
|
|
|
4,081
|
|
|
|
9%
|
|
Storage
|
|
|
508
|
|
|
|
4%
|
|
|
|
(19%)
|
|
|
|
630
|
|
|
|
4%
|
|
|
|
1,593
|
|
|
|
4%
|
|
|
|
(19%)
|
|
|
|
1,964
|
|
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
12,896
|
|
|
|
100%
|
|
|
|
(15%)
|
|
|
$
|
15,162
|
|
|
|
100%
|
|
|
$
|
38,002
|
|
|
|
100%
|
|
|
|
(20%)
|
|
|
$
|
47,673
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility During the third quarter and
first nine months of Fiscal 2010, revenue from mobility products
(which includes notebook computers and mobile workstations)
declined 14% and 18%
year-over-year,
respectively, even though unit shipments increased 5% for the
third quarter and were flat for the first nine months. The
declines in revenue were mainly driven by lower average selling
prices as they decreased 18%
year-over-year
for both the third quarter and first nine months of Fiscal 2010.
Our Consumer segment drove our consolidated unit increases and
selling price declines, with
year-over-year
unit shipment growth of 24% and 28% for the third quarter and
first nine months of Fiscal 2010, respectively, and average
selling price reductions of 23% and 25% during the same
respective time periods. The drop in selling prices more than
offset the growth in units, and as a result, Consumers
mobility revenue declined 4% and 3%
year-over-year
for the third quarter and first nine months of Fiscal 2010,
respectively. Consumers revenue, unit, and average selling
price performance is attributable to Consumers continued
expansion into retail coupled with an industry mix shift to
lower priced mobility product offerings.
|
Year-over-year,
Commercial revenue and units declined 20% and 11%, respectively,
for the third quarter of Fiscal 2010, and revenue and units
decreased 27% and 20%, respectively, for first nine months of
Fiscal 2010. The declines are generally driven by the softer
demand environment in the commercial sector of the IT industry.
Additionally, we generally were selective in participating in
lower price bands. Average selling prices in Commercial declined
10% and 8%
year-over-year
for the third quarter and first nine months of Fiscal 2010,
respectively, due to an overall industry decline in mobility
selling prices.
Our products range from the lightest ultra-portable in our
history to the most powerful mobile workstation. We believe the
on-going trend towards mobility products will continue, and we
are therefore focused on expanding our product platforms to
cover broader price bands and functionalities. During the third
quarter of Fiscal 2010, we launched mobility products such as
the
Inspirontm
Mini Nickelodeon Edition; the thin
Inspirontm
11z, 14z, and 15z laptops; the
Latitudetm
XT2 XFR the industrys first rugged tablet PC
that is designed and engineered for exceptional performance and
enhanced usability in demanding work environments; the ultra
37
thin and light
Latitudetm
Z; the Alienware M15x laptop a powerful gaming
laptop with cutting-edge technology; and several
Vostrotm
laptops, which are built exclusively for small and medium
businesses. Additionally, we recently announced plans to enter
the smart phone business with the introduction of the Dell Mini
3, which is powered by the Google
Androidtm
operating system. The Mini 3, which will initially be available
in China and Brazil, reflects Dells continued expansion
into mobile internet products and services through value-added
relationships with leading operators.
|
|
|
Desktop PCs During the third quarter
and first nine months of Fiscal 2010, revenue from desktop PCs
(which includes desktop computer systems and workstations)
decreased
year-over-year
by 26% and 31%, respectively, on unit declines of 15% and 21%,
respectively. In the marketplace, we are continuing to see
rising end-user demand for mobility products, which contributes
to further slowing demand for desktop PCs as mobility growth is
expected to continue to outpace desktop growth. The decline in
desktop PC revenue was also due to the on-going competitive
pricing pressure for lower priced desktops and a softening in
global IT end-user demand. Consequently, our average selling
price for desktops decreased 13% and 12%
year-over-year
during the third quarter and first nine months of Fiscal 2010,
respectively, as we continued to align our prices and product
offerings with the marketplace. For the third quarter and first
nine months of Fiscal 2010, desktop revenue decreased across all
segments. During the third quarter of Fiscal 2010, we introduced
the powerful and expandable
Vostrotm
430 Mini Tower; the versatile
OptiPlextm
780 desktop, which features industry leading management and
security in an energy efficient design; the high-performance
Studiotm
XPStm
8000 desktop; the
Precisiontm
T1500 workstation; and several powerful
Alienware®
desktops.
|
|
|
Software and Peripherals Revenue from
sales of software and peripherals (S&P)
consists of Dell-branded printers, monitors (not sold with
systems), projectors, and a multitude of competitively priced
third-party peripherals including LCD televisions, cameras,
standalone software sales and related support services, and
other products. S&P revenue declined 7% and 13%
year-over-year
for the third quarter and first nine months of Fiscal 2010,
respectively. S&Ps revenue decline was driven by
overall customer unit shipment declines and demand softness in
displays, imaging products, and electronics, which experienced
year-over-year
revenue decreases of 24%, 18%, and 1%, respectively, during the
third quarter and
year-over-year
revenue declines of 32%, 23%, and 13%, respectively, for the
first nine months of Fiscal 2010. We continued to see growth in
software licensing with 10% and 7% revenue improvement for the
third quarter and first nine months of Fiscal 2010,
respectively. Contributing to this growth was our acquisition of
ASAP Software (ASAP) in the fourth quarter of Fiscal
2008. With ASAP, we now offer products from over 2,600 software
publishers. We continue to believe that software licensing is a
revenue growth opportunity as customers continue to seek out
consolidated software sources. All segments experienced
year-over-year
revenue declines for the third quarter and first nine months of
Fiscal 2010, except for Public, which experienced S&P
revenue growth of 11% and 3% for the third quarter and first
nine months of Fiscal 2010, respectively.
|
Software revenue from our S&P line of business, which
includes software license fees and related post contract
customer support, is included in services revenue on the
Condensed Consolidated Statements of Income. Software and
related support services revenue represents 42% of services
revenue for both the third quarter and first nine months of
Fiscal 2010 and 38% of services revenue for both the third
quarter and first nine months of Fiscal 2009.
|
|
|
Servers and Networking During the
third quarter and first nine months of Fiscal 2010, revenue from
sales of servers and networking products (which includes rack,
blade, and tower servers) decreased 6% and 17%
year-over-year,
respectively, on a unit shipment decrease of 7% and 20%,
respectively. The decline in our server and networking revenue
is due to demand challenges across all Commercial segments and
regions. Our average selling price for servers and networking
products increased 2% and 4%
year-over-year
during the third quarter and first nine months of Fiscal 2010,
respectively. During the third quarter, we continued the rollout
of our 11th generation PowerEdge servers as a part of our
mission to help companies of all sizes simplify their IT
environments. These servers provide optimal virtualization,
system management, and usability. We also introduced our
PowerVaulttm
NX300 storage server, which is designed to simplify file sharing
and collaboration for growing small businesses.
|
38
|
|
|
Enhanced Services Enhanced services
offerings include infrastructure consulting, deployment of
enterprise products and computer systems in customers
environments, asset recovery and recycling, computer-related
training, IT support, client and enterprise support, and managed
service solutions. Enhanced services revenue decreased 9%
year-over-year
for both the third quarter and first nine months of Fiscal 2010
to $1.2 billion and $3.7 billion, respectively.
Although we continue to move towards more standalone services, a
significant portion of our portfolio is made up of support
services, which tend to correlate with hardware unit growth; our
declines in unit shipments contributed to the
year-over-year
enhanced services revenue decline. At a segment level,
Publics enhanced services revenue increased 3%
year-over-year
during the third quarter of Fiscal 2010, whereas each of our
other segments enhanced services revenue declined. For the
first nine months of Fiscal 2010, enhanced services revenue
declined for each segment as compared to the same time period in
Fiscal 2009 with Large Enterprise experiencing the largest
reduction from an absolute dollar perspective for both the third
quarter and first nine months of Fiscal 2010. Our deferred
enhanced service revenue balance increased 6%
year-over-year
to $5.9 billion at October 30, 2009, primarily due to
an increase in up-sell service offerings. We continue to view
enhanced services as a strategic growth opportunity and will
continue to invest in our offerings and resources focused on
increasing our solution sales.
|
The dynamics of our enhanced services business will change as we
integrate Perot Systems, which we acquired in the fourth quarter
of Fiscal 2010. With Perot Systems, we will extend our services
business into business process outsourcing, consulting, and
application development. We also anticipate expanding our
existing managed and modular services businesses.
|
|
|
Storage Revenue from sales of storage
products decreased 19%
year-over-year
for both the third quarter and first nine months of Fiscal 2010,
respectively. All Commercial segments contributed to the
year-over-year
decrease in storage revenue for the third quarter and first nine
months of Fiscal 2010. Dell EqualLogic performed strongly with
year-over-year
revenue growth of 31% and 45% for the third quarter and first
nine months of Fiscal 2010, respectively. We are shifting
towards more Dell-branded and co-branded storage offerings,
which generally can be sold with enhanced service solutions.
|
INVESTMENT
AND OTHER INCOME (EXPENSE), NET
The table below provides a detailed presentation of investment
and other income (expense), net for the three and nine months
ended October 30, 2009, and October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Investment and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, primarily interest
|
|
$
|
12
|
|
|
$
|
42
|
|
|
$
|
48
|
|
|
$
|
146
|
|
Gains (losses) on investments, net
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(10
|
)
|
Interest expense
|
|
|
(45
|
)
|
|
|
(28
|
)
|
|
|
(113
|
)
|
|
|
(66
|
)
|
Foreign exchange
|
|
|
(32
|
)
|
|
|
3
|
|
|
|
(58
|
)
|
|
|
113
|
|
Other
|
|
|
2
|
|
|
|
(24
|
)
|
|
|
15
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income (expense), net
|
|
$
|
(63
|
)
|
|
$
|
(6
|
)
|
|
$
|
(107
|
)
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over the past year, we have continued to shift our investments
primarily to instruments with shorter maturities. This action
combined with the decreased yields, which is averaging
30 basis points during Fiscal 2010, has resulted in a
decline in investment income. During the second quarter of
Fiscal 2009, we recorded a $10 million loss for
other-than-temporarily
impaired investments. Increased term debt during Fiscal 2010 has
resulted in increased interest expense. Included in Other, in
the table above, is primarily the fair market value adjustments
related to our deferred compensation plan investments. During
the third quarter and first nine months of Fiscal 2010, we
recognized a $4 million and $24 million increase,
respectively, in the fair market value of our deferred
compensation plan investments compared to a $21 million and
$31 million decrease during third quarter and first nine
months of Fiscal 2009, respectively.
39
The
year-over-year
decrease in foreign exchange for the third quarter of Fiscal
2010, as compared to the same period in the prior year, is
primarily due to increased costs on our hedge program, as well
as revaluation on balances in unhedged currencies as most
foreign currencies have strengthened relative to the
U.S. dollar during the first nine months of Fiscal 2010.
The first nine months of Fiscal 2009 includes a $42 million
gain related to the correction of errors in the remeasurement of
certain local currency balances to the functional currency
related to prior periods as disclosed in previous Securities and
Exchange Commission (SEC) filings.
INCOME
TAXES
Our effective income tax rate was 34.5% and 28.0% for the third
quarter of Fiscal 2010 and Fiscal 2009, respectively. For the
first nine months of Fiscal 2010 and Fiscal 2009, our effective
income tax rate was 29.3% and 25.9%, respectively. The increases
in our effective income tax rate for the third quarter of Fiscal
2010 and the first nine months of Fiscal 2010 as compared to the
same periods in the prior year are primarily due to a shift of
profit mix toward higher tax jurisdictions. The Fiscal 2009
income tax rate also reflects decreases in uncertain tax
positions resulting from the favorable settlement of an
examination in a foreign jurisdiction. The differences between
the estimated effective income tax rate and the
U.S. federal statutory rate of 35% principally result from
our geographical distribution of taxable income and differences
between the book and tax treatment of certain items. The income
tax rate for Fiscal 2010 will be impacted by the actual mix of
jurisdictions in which income is generated. See Note 10 of
Notes to Condensed Consolidated Financial Statements included in
Part I Item 1
Financial Statements for additional
information.
ACCOUNTS
RECEIVABLE
We sell products and services directly to customers and through
a variety of sales channels, including a growing retail
distribution network. At October 30, 2009, our gross
accounts receivable balance was $5.4 billion, a 12%
increase from our balance at January 30, 2009. The growth
in accounts receivable was mainly due to our growth in the
consumer retail channel as relationships with channel partners
typically result in longer payment terms, and also due to
foreign currency impacts in our EMEA and APJ regions. We
maintain an allowance for doubtful accounts to cover receivables
that may be deemed uncollectible. The allowance for losses is
based on specific identifiable customer accounts that are deemed
at risk and general historical bad debt experience. As of
October 30, 2009, and January 30, 2009, the allowance
for doubtful accounts was $128 million and
$112 million, respectively. In general, we have seen an
increase in the allowance caused by the global economic
conditions, particularly in a number of emerging economies and
regions. Based on our assessment, we believe that we are
adequately reserved for expected credit losses. We monitor the
aging of our accounts receivable and continue to take actions in
Fiscal 2010 to reduce our exposure to credit losses.
FINANCING
RECEIVABLES
At October 30, 2009, and January 30, 2009, our net
financing receivables balance was $2.6 billion and
$2.2 billion, respectively. The increase is primarily the
result of funding more customer receivables on balance sheet. We
expect growth in financing receivables to continue throughout
Fiscal 2010 as we reduce our off-balance sheet securitizations
and decrease our fundings with CIT Group Inc. (CIT).
To manage growth in financing receivables, we will continue to
balance the use of our own working capital and other sources of
liquidity. See Note 5 of Notes to Condensed Consolidated
Financial Statements included in Part I
Item 1 Financial
Statements for additional information about our financing
receivables.
We maintain an allowance to cover financing receivable credit
losses. 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 October 30, 2009, and January 30, 2009, the
allowance for financing receivable losses was $182 million
and $149 million, respectively. The increase in the
allowance is primarily due to an increase in customer
receivables. Based on our assessment of the customer financing
receivables and the associated risks, we believe that we are
adequately reserved.
The Credit Card Accountability, Responsibility, and Disclosure
Act of 2009 was signed into U.S. law on May 22, 2009,
and will affect the consumer financing provided by DFS. This Act
will impose new restrictions on credit card
40
companies in the areas of marketing, servicing, and pricing of
consumer credit accounts. Some provisions of the law are now in
effect, with the majority of provisions of the new law becoming
effective in February 2010 and August 2010. We are compliant
with the recent legislation that currently is in effect and are
evaluating future changes in regulations. Some of the future
provisions are subject to additional clarification, and we do
not expect the changes will substantially alter how consumer
credit is offered to our customers or how their accounts will be
serviced. Commercial credit is unaffected by the change in law.
CIT, formerly a joint venture partner of DFS, has a limited role
in the financing activities of DFS. Certain non-operating CIT
entities declared bankruptcy during the third quarter of Fiscal
2010. The CIT entities that filed for bankruptcy are not
involved with the financing activities of DFS. As a result, we
were not adversely impacted. We have reduced our exposure to CIT
over the past several quarters. For the three and nine months
ended October 30, 2009, CIT funded approximately 8% and
18%, respectively, of DFS financing receivables. CITs
contractual funding rights for revolving loans were fulfilled in
the third quarter of Fiscal 2010. We expect CIT to continue to
fund a small portion of fixed term leases and loans through the
second quarter of Fiscal 2011. During the nine months ended
October 30, 2009, revolving loans were offered by DFS under
private label credit financing programs underwritten by CIT
Bank. Subsequent to the third quarter of Fiscal 2010, we
replaced the existing CIT Bank arrangement with a new
arrangement with WebBank. This new arrangement with WebBank will
allow us to continue to make available revolving credit
financings to our customers. As of October 30, 2009,
balances due from CIT in connection with specified promotional
programs were less than $1 million.
OFF-BALANCE
SHEET ARRANGEMENTS
Asset
Securitization
During the third quarter of Fiscal 2010, we continued to
transfer certain customer financing receivables to
unconsolidated qualifying special purpose entities. The
qualifying special purpose entities are bankruptcy remote legal
entities with assets and liabilities separate from ours. The
purpose of the qualifying special purpose entities is to
facilitate the funding of customer receivables in the capital
markets. Our qualifying special purpose entities have entered
into financing arrangements with three multi-seller conduits
that, in turn, issue asset-backed debt securities in the capital
markets. Two of the three conduits fund fixed-term leases and
loans, and one conduit funded revolving loans until it initiated
scheduled amortization and was consolidated in July 2009. We
expect to consolidate the other two special purpose entities in
the first quarter of Fiscal 2011 in accordance with the new FASB
pronouncement on variable interest entities and transfers of
financial assets and extinguishment of financial liabilities. As
of October 30, 2009, the unpaid principal balance of these
unconsolidated securitized receivables were $747 million,
and the associated debt was $616 million. During the first
nine months of Fiscal 2010 and Fiscal 2009, $641 million
and $1.1 billion, respectively, of customer receivables
were funded via securitization through special purpose entities.
See Note 5 of Notes to Condensed Consolidated Financial
Statements included in Part I
Item 1 Financial
Statements for additional information.
Certain transfers of financial assets are accounted for as a
sale. Upon the sale of the customer receivables to qualifying
special purpose entities, we recognize a gain on the sale and
retain an interest in the assets sold. We provide credit
enhancement to the securitization in the form of
over-collateralization. Receivables transferred to the qualified
special purpose entities exceed the level of debt issued. We
retain the right to receive collections for assets securitized
exceeding the amount required to pay interest, principal, and
other fees and expenses (referred to as retained interest).
Retained interest is included in Financing Receivables on the
balance sheet. At October 30, 2009, and January 30,
2009, our retained interest in securitized receivables was
$134 million and $396 million, respectively. Our risk
of loss related to securitized receivables is limited to the
amount of our retained interest.
We service securitized receivables and earn a servicing fee. Our
securitization transactions generally do not result in servicing
assets and liabilities as the contractual fees are adequate
compensation in relation to the associated servicing cost. The
principal balance of securitized receivables reported
off-balance sheet as of October 30, 2009, and
January 30, 2009, were $747 million and
$1.4 billion, respectively.
41
LIQUIDITY
AND CAPITAL COMMITMENTS
Current
Market Conditions
We continue to see improved stability in the financial and
capital markets with volatility returning closer to historical
levels. During the third quarter of Fiscal 2010, we continued to
monitor the financial health of our supplier base, carefully
managed customer credit, continued diversifying our financial
institution exposure, and monitored the risk concentration of
our cash and cash equivalents balance. Consistent with recent
quarters, we maintained a conservative investment portfolio with
shorter duration and high quality assets, and monitored the
effectiveness as well as the counterparty credit risk of our
foreign currency hedging program. We remain focused on
maintaining spending controls across the company. We will
monitor and manage these activities depending on current and
expected market developments.
We monitor credit risk associated with our financial
counterparties using various market credit risk indicators such
as reviews and actions taken by rating agencies and changes in
credit default swap levels. We perform periodic evaluations of
our positions with these counterparties and may limit the
agreements or contracts entered into with any one counterparty
in accordance with our policies. See Part I
Item 1A
Risk Factors in our Annual
Report on
Form 10-K
for the fiscal year ended January 30, 2009, for further
discussion of risks associated with our use of counterparties.
We believe that no significant concentration of credit risk
exists for our investments. The impact on our Condensed
Consolidated Financial Statements of any credit adjustments
related to these counterparties has been immaterial.
Liquidity
Our cash balances are held in numerous locations throughout the
world, including substantial amounts held outside of the
U.S. The majority of our non-US domiciled cash and
investments are denominated in the U.S. dollar. Most of the
amounts held outside of the U.S. could be repatriated to
the U.S., but under current law, would be subject to
U.S. federal income taxes, less applicable foreign tax
credits. In some countries, repatriation of certain foreign
balances is restricted by local laws. We have provided for the
U.S. federal tax liability on these amounts for financial
statement purposes, except for foreign earnings that are
considered permanently reinvested outside of the
U.S. Repatriation could result in additional
U.S. federal income tax expense. We utilize a variety of
tax planning and financing strategies with the objective of
having our worldwide cash available in the locations where it is
needed.
We have an active working capital management team that monitors
the efficiency of our balance sheet by evaluating liquidity
under various macroeconomic and competitive scenarios. These
scenarios quantify risks to the financial statements and provide
a basis for actions necessary to ensure adequate liquidity.
During the third quarter of Fiscal 2010, we continued to monitor
and prioritize capital expenditures and other discretionary
spending. The shift to third party manufacturers and the
associated closure or sale of several of our manufacturing and
other facilities has reduced the amount of capital required for
our business, and we have not repurchased our shares since the
third quarter of Fiscal 2009. We have a $1.5 billion
commercial paper program with a supporting $1.5 billion
senior unsecured revolving credit facility that allows us to
obtain favorable short-term borrowing rates. We continue to be
active in the commercial paper market by issuing short-term
borrowings to augment our liquidity as needed.
We ended the third quarter of Fiscal 2010 with
$14.0 billion in cash, cash equivalents, and investments,
compared to $8.9 billion at the end of the third quarter of
Fiscal 2009. Since November 1, 2008, we have generated
$3.4 billion in cash flow from operations and
$1.7 billion from debt issuance. We use cash generated by
operations as our primary source of liquidity. However, over the
past year we have issued term debt and short-term borrowings to
supplement our domestic liquidity, provide for financial
flexibility, and fund our strategic initiatives.
During the first nine months of Fiscal 2010, we issued
$1.5 billion of notes, maturing in 2012, 2014, and 2019.
Due to the overall strength of our financial position, we do not
believe that the current credit conditions in the capital
markets will impede our ability to access liquidity. We
continually evaluate alternatives to access liquidity in the
capital markets including options such as term debt, structured
financing arrangements, or short-term borrowings. Due to the
cost advantages of issuing short-term debt, we expect to
increase utilization of our commercial paper program throughout
the remainder of the year.
42
Our completed acquisition of Perot Systems in the fourth quarter
of Fiscal 2010 resulted in $3.9 billion in cash outlays
funded from available cash. We expect to continue to grow our
business through strategic acquisitions, which will impact our
future cash requirements and liquidity.
The following table summarizes the results of our Condensed
Consolidated Statements of Cash Flows for the nine months ended
October 30, 2009, and October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net change in cash from:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
2,638
|
|
|
$
|
1,165
|
|
Investing activities
|
|
|
(111
|
)
|
|
|
362
|
|
Financing activities
|
|
|
1,729
|
|
|
|
(1,252
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
187
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
4,443
|
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
During the first nine months of Fiscal 2010, we were able to
improve our cash generation from operating activities as a
result of efficient management of our working capital. For
further discussion of the results of our cash conversion cycle,
see Key Performance Metrics below.
Operating Activities Cash from
operating activities was $2.6 billion during the first nine
months of Fiscal 2010, compared to $1.2 billion during the
first nine months of Fiscal 2009. During the first nine months
of Fiscal 2010, operating cash flows resulted primarily from net
income and favorable changes in our cash conversion cycle.
Comparatively, cash from operations during the first nine months
of Fiscal 2009 was primarily from net income offset by a
deterioration in our days in accounts payable as a result of a
shift away from suppliers with extended payment terms and the
timing of purchases from and payments to suppliers during the
first nine months of Fiscal 2009.
Key Performance Metrics Our direct
business model allows us to maintain an efficient cash
conversion cycle, which compares favorably with that of others
in our industry.
43
The following table presents the components of our cash
conversion cycle at October 30, 2009, and October 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Days of sales
outstanding(a)
|
|
|
40
|
|
|
|
36
|
|
Days of supply in
inventory(b)
|
|
|
8
|
|
|
|
8
|
|
Days in accounts
payable(c)
|
|
|
84
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(36
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Days of sales outstanding
(DSO) calculates the average collection period of
our accounts receivable. DSO is based on the ending net trade
receivables and the most recent quarterly total 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. DSO is calculated by
adding accounts receivable, net of allowance for doubtful
accounts, and customer shipments in transit and dividing that
sum by average net revenue per day for the current quarter
(90 days). At October 30, 2009, and October 31,
2008, DSO and days of customer shipments not yet recognized were
37 and 3 days and 33 and 3 days, respectively.
|
|
(b)
|
|
Days of supply in inventory
(DSI) measures the average number of days from
procurement to sale of our product. DSI is based on ending
inventory and most recent quarterly total cost of sales for each
period. DSI is calculated by dividing inventory by average cost
of goods sold per day for the current quarter (90 days).
|
|
(c)
|
|
Days in accounts payable
(DPO) calculates the average number of days our
payables remain outstanding before payment. DPO is based on
ending accounts payable and most recent quarterly total cost of
sales for each period. DPO is calculated by dividing accounts
payable by average cost of goods sold per day for the current
quarter (90 days).
|
Our cash conversion cycle improved eleven days at
October 30, 2009, from October 31, 2008, driven by a
fifteen day improvement in DPO offset by a four day increase in
DSO. The improvement in DPO from October 31, 2008, is
primarily attributable to our ongoing transition to contract
manufacturing, further standardization of vendor agreements, and
timing of supplier purchases and payments during the third
quarter of Fiscal 2010 as compared to the third quarter of
Fiscal 2009. The increase in DSO from October 31, 2008, is
primarily attributable to foreign currency movements due to the
U.S. dollar weakening and our growth in the consumer retail
channel, where relationships with channel partners typically
result in longer payment terms. We believe that we can generate
cash flow from operations in excess of net income over the
long-term and can operate our cash conversion cycle at negative
30 days or better.
We defer the cost of revenue associated with customer shipments
not yet recognized as revenue until they are delivered. These
deferred costs are included in our reported DSO because we
believe it presents a more accurate presentation of our DSO and
cash conversion cycle. These deferred costs are recorded in
other current assets in our Condensed Consolidated Statements of
Financial Position and totaled $469 million and
$456 million at October 30, 2009, and October 31,
2008, respectively.
Investing Activities Cash used by
investing activities for the first nine months of Fiscal 2010,
was $111 million, compared to $362 million of cash
provided by investing activities during the same period last
year. Cash generated or used in investing activities principally
consists of the net of sales and maturities and purchases of
investments; net capital expenditures for property, plant, and
equipment; and cash used to fund strategic acquisitions, which
was approximately $3 million during the first nine months
of Fiscal 2010 compared to $165 million during the first
nine months of Fiscal 2009.
Financing Activities Cash provided by
financing activities during the first nine months of Fiscal
2010, was $1.7 billion as compared to $1.3 billion
used during the same period last year. Financing activities
typically consist of debt issuance proceeds, the issuance of
common stock under employee stock plans, offset with the
repurchase of our common stock. The
year-over-year
increase in cash provided by financing activities is due
primarily to the reduction of our share repurchase program and
proceeds from the issuance of long-term debt offset by our
repayment of long-term debt. During the first nine months of
Fiscal 2010, we did not repurchase any shares compared to
approximately 134 million shares repurchased at an
aggregate cost of $2.9 billion in the first nine months of
Fiscal 2009. We issued and sold long-term notes of
$1.5 billion during the first nine months of Fiscal 2010
and $1.5 billion during the first nine months of Fiscal
2009. During the first nine months of Fiscal 2009, we also
repaid the $200 million principal amount of notes that
matured in April 2008.
44
We also have a $1.5 billion commercial paper program with a
supporting $1.5 billion senior unsecured revolving credit
facility that allows us to obtain favorable short-term borrowing
rates. We use the proceeds for general corporate purposes and to
augment our liquidity as needed. At October 30, 2009, there
was $351 million outstanding under the commercial paper
program and no advances under the supporting credit facility.
See Note 3 of Notes to Condensed Consolidated Financial
Statements included in Part I
Item 1 Financial Statements for further
discussion on our debt and commercial paper program.
Capital
Commitments
Share Repurchase Program We have a
share repurchase program that authorizes us to purchase shares
of common stock in order to increase shareholder value and
manage dilution resulting from shares issued under our equity
compensation plans. However, we do not currently have a policy
that requires the repurchase of common stock to offset
share-based compensation arrangements.
We typically repurchase shares of common stock through a
systematic program of open market purchases. We did not
repurchase any shares during the third quarter of Fiscal 2010
compared to the repurchase of approximately 22 million
shares at an aggregate cost of $420 million during the
third quarter of Fiscal 2009.
Capital Expenditures During the third
quarter and first nine months of Fiscal 2010, we spent
approximately $70 million and $249 million,
respectively, on property, plant, and equipment primarily on our
global expansion efforts and infrastructure investments in order
to support future growth. Product demand, product mix, and the
increased use of contract manufacturers, as well as ongoing
investments in operating and information technology
infrastructure, influence the level and prioritization of our
capital expenditures. Capital expenditures for Fiscal 2010,
related to our continued expansion worldwide, are currently
expected to reach approximately $350 million. These
expenditures are expected to be funded from our cash flows from
operating activities.
Restricted Cash Pursuant to an
agreement between Dell and CIT, we are required to maintain
escrow cash accounts that are held as recourse reserves for
credit losses, performance fee deposits related to our private
label credit card, and deferred servicing revenue. Restricted
cash in the amount of $141 million and $213 million is
included in other current assets at October 30, 2009, and
January 30, 2009, respectively.
RECENTLY
ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Condensed Consolidated Financial
Statements included in Part I
Item 1 Financial Statements for a
description of recently issued and adopted accounting
pronouncements, including the expected dates of adoption and
estimated effects on our results of operations, financial
position, and cash flows.
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
For a description of our market risks, see
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Market Risk in our
Annual Report on
Form 10-K
for the fiscal year ended January 30, 2009. Our exposure to
market risks has not changed materially from the description in
the Annual Report on
Form 10-K.
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ITEM 4.
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CONTROLS
AND PROCEDURES
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This Report includes the certifications of our Chief Executive
Officer and Chief Financial Officer required by
Rule 13a-14
of the Securities Exchange Act of 1934 (the Exchange
Act). See Exhibits 31.1 and 31.2. This Item 4
includes information concerning the controls and control
evaluations referred to in those certifications.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) are designed to ensure that information
required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in SEC rules and forms and
that
45
such information is accumulated and communicated to management,
including the chief executive officer and the chief financial
officer, to allow timely decisions regarding required
disclosures.
In connection with the preparation of this Report, our
management, under the supervision and with the participation of
the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of
October 30, 2009. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were effective as of
October 30, 2009.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial
reporting during the third quarter of Fiscal 2010 that
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
46
PART II
OTHER INFORMATION
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ITEM 1.
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LEGAL
PROCEEDINGS
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The information required by this item is set forth under the
caption Legal Matters in Note 8 of Notes to
Condensed Consolidated Financial Statements included in
Part I Item 1 Financial
Statements, and is incorporated by reference into this
Item 1 of Part II of this report.
Additional information on Dells commitments and
contingencies can be found in Dells Annual Report on
Form 10-K
for the fiscal year ended January 30, 2009, and in
Dells Quarterly Reports on
Form 10-Q
for the fiscal quarters ended May 1, 2009, and
July 31, 2009.
In addition to the other information set forth in this report,
the factors discussed in Part I
Item 1A Risk Factors in our Annual
Report on
Form 10-K
for the fiscal year ended January 30, 2009, could
materially affect our business, financial condition or operating
results. The risks described in our Annual Report on
Form 10-K
are not the only risks facing us. Additional risks and
uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our
business, financial condition, or operating results.
We have described below some changes from the risks described in
our Annual Report on
Form 10-K
for the fiscal year ended January 30, 2009, resulting from
our acquisition of Perot Systems on November 3, 2009. This
acquisition broadens the range of IT services Dell will offer.
We may bear the risk of cost
overruns relating to software development and implementation
services, and, as a result, cost overruns could adversely affect
our financial results. We provide services
related to the development of software applications and the
implementation of complex software packages for some of our
customers. The effort and cost associated with the completion of
these software development and implementation services are
difficult to estimate and, in some cases, may significantly
exceed the estimates made at the time we acquired the contracts
from Perot Systems. We provide these software development and
implementation services under time and materials and fixed-price
contracts. The time and materials contracts are usually based on
level-of-effort
or direct costs plus a fee. Under those arrangements, we are
able to bill our customer based on the actual cost of completing
the services, even if the ultimate cost of the services exceeds
our initial estimates. However, if the ultimate cost exceeds our
initial estimate by a significant amount, we may have difficulty
collecting the full amount that we are due under the contract,
depending upon many factors, including the reasons for the
increase in cost, our communication with the customer throughout
the project, and the customers satisfaction with the
services. As a result, we could incur losses with respect to
these software development and implementation services even when
they are priced on a time and materials basis. If we provide
these software development or implementation services under a
fixed-price contract, we bear all the risk that the ultimate
cost of the project will exceed the price to be charged to the
customer.
Some of our longer-term
services contracts permit customer terminations or pricing
changes that could reduce our revenue and profits and damage our
business reputation. Our contracts with customers
generally permit termination in the event our performance is not
consistent with service levels specified in those contracts. The
ability of our customers to terminate contracts creates an
uncertain revenue and profit stream. If customers are not
satisfied with our level of performance, our reputation in the
industry may suffer, which may also adversely affect our ability
to market our services to other customers. Furthermore, some of
our contracts contain pricing provisions that permit a customer
to request a benchmark study by a mutually acceptable
third-party benchmarker. Any resulting reduction of our rates
for the benchmarked services could negatively impact our results
of operations or cash flow. Our fixed-price contracts that have
per-unit
pricing adjustments for service volumes that exceed or fall
below a specified range of volumes generally also have a limit
on these adjustments, requiring renegotiation if volumes greatly
exceed or fall below a specified range of volumes, which could
result in reduced revenues and profits.
Exhibits See Index to Exhibits below.
47
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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DELL INC.
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Date: December 3, 2009
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/s/ THOMAS W. SWEET
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Thomas W. Sweet
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Vice President, Corporate Finance and
Chief Accounting Officer
(On behalf of the registrant and as
principal accounting officer)
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48
INDEX TO
EXHIBITS
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Exhibit
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No.
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Description of Exhibit
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2
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.1
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Agreement and Plan of Merger, dated September 20, 2009, by
and among Dell Inc., DII Holdings Inc. and Perot
Systems Corporation (incorporated by reference to
Exhibit 2.1 of Dells Current Report on
Form 8-K
filed on September 21, 2009). (Pursuant to the rules of the
U.S. Securities and Exchange Commission, the schedules and
similar attachments to the agreement have not been filed
herewith. The registrant agrees to furnish supplementally a copy
of any omitted schedule or attachment to the Commission upon
request.)
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2
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.2
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First Amendment, dated September 30, 2009, to Agreement and
Plan of Merger, dated September 20, 2009, by and among Dell
Inc., DII Holdings Inc. and Perot Systems
Corporation (incorporated by reference to Exhibit 2.1 of
Dells Current Report on
Form 8-K
filed on October 1, 2009)
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2
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.3
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Form of Tender and Voting Agreement, dated September 20,
2009, among Dell Inc., DII Holdings Inc., Perot
Systems Corporation and each of the following executive officers
and directors of Perot Systems Corporation: Peter A. Altabef,
Steven Blasnik, John S.T. Gallagher, Carl Hahn, DeSoto Jordan,
Caroline S. Matthews, Thomas Meurer, Cecil H. Moore, Jr.,
Anthony J. Principi, Anuroop Singh, John Lyon, Russell Freeman,
Thomas D. Williams, Scott Barnes, Eugene L. Carrick, Steve
Curts, John E. Harper, Anurag Jain, Chuck Lyles and Jeff Renzi
(incorporated by reference to Exhibit 2.2 of Dells
Current Report on
Form 8-K
filed on September 21, 2009)
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2
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.4
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Form of Tender and Voting Agreement, dated September 20,
2009, among Dell Inc., DII Holdings Inc., Perot
Systems Corporation and each of the following stockholders of
Perot Systems Corporation: H. Ross Perot, HWGA, Ltd., The Perot
Foundation, Petrus Financial Services Ltd., Perot Family Trust,
Perot Investment Trust I, Perot Investment Trust II,
Perot Investment Trust III, Perot Investment Trust IV,
Perot Investment Trust V (incorporated by reference to
Exhibit 2.3 of Dells Current Report on
Form 8-K
filed on September 21, 2009)
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2
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.5
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Amended and Restated Tender and Voting Agreement, dated
September 30, 2009, among Dell Inc., DII
Holdings Inc., Perot Systems Corporation and the Perot Family
Trust (incorporated by reference to Exhibit 2.2 of
Dells Current Report on
Form 8-K
filed on October 1, 2009)
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3
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.1
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Restated Certificate of Incorporation, filed February 1,
2006 (incorporated by reference to Exhibit 3.3 of
Dells Current Report on
Form 8-K
filed on February 2, 2006, Commission
File No. 0-17017)
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3
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.2
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Restated Bylaws, as amended and effective March 8, 2007
(incorporated by reference to Exhibit 3.1 of Dells
Current Report on
Form 8-K
filed on March 13, 2007, Commission File
No. 0-17017)
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4
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.1
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Indenture, dated as of April 27, 1998, between Dell
Computer Corporation and Chase Bank of Texas, National
Association (incorporated by reference to Exhibit 99.2 of
Dells Current Report on
Form 8-K
filed April 28, 1998, Commission File
No. 0-17017)
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4
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.2
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Officers Certificate pursuant to Section 301 of the
Indenture establishing the terms of Dells
7.10% Senior Debentures Due 2028 (incorporated by reference
to Exhibit 99.4 of Dells Current Report on
Form 8-K
filed April 28, 1998, Commission File
No. 0-17017)
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4
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.3
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Form of Dells 7.10% Senior Debentures Due 2028
(incorporated by reference to Exhibit 99.6 of Dells
Current Report on
Form 8-K
filed April 28, 1998, Commission File
No. 0-17017)
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4
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.4
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Indenture, dated as of April 17, 2008, between Dell Inc.
and The Bank of New York Trust Company, N.A., as trustee
(including the form of notes) (incorporated by reference to
Exhibit 4.1 of Dells Current Report on
Form 8-K
filed April 17, 2008, Commission file
No. 0-17017)
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4
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.5
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Indenture, dated April 6, 2009, between Dell Inc. and The
Bank of New York Mellon Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.1 of Dells
Current Report on
Form 8-K
filed April 6, 2009, Commission file
No. 0-17017)
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4
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.6
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First Supplemental Indenture, dated April 6, 2009, between
Dell Inc. and The Bank of New York Mellon Trust Company,
N.A., as trustee (incorporated by reference to Exhibit 4.2
of Dells Current Report on
Form 8-K
filed April 6, 2009, Commission file
No. 0-17017)
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4
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.7
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Form of 5.625% Notes due 2014 (incorporated by reference to
Exhibit 4.3 of Dells Current Report on
Form 8-K
filed April 6, 2009, Commission file
No. 0-17017)
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49
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Exhibit
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No.
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Description of Exhibit
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4
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.8
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Second Supplemental Indenture, dated as of June 15, 2009,
between Dell Inc. and The Bank of New York Mellon
Trust Company, N.A., as trustee (incorporated by reference
to Exhibit 4.1 of Dells Current Report on
Form 8-K
filed June 15, 2009, Commission file
No. 0-17017)
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4
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.9
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Form of 3.375% Notes due 2012 (incorporated by reference to
Exhibit 4.2 of Dells Current Report on
Form 8-K
filed June 15, 2009, Commission file
No. 0-17017)
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4
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.10
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Form of 5.875% Notes due 2019 (incorporated by reference to
Exhibit 4.3 of Dells Current Report on
Form 8-K
filed June 15, 2009, Commission file
No. 0-17017)
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31
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.1
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Certification of Michael S. Dell, Chairman and Chief Executive
Officer, pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
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31
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.2
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Certification of Brian T. Gladden, Senior Vice President and
Chief Financial Officer, pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
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32
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.1
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Certifications of Michael S. Dell, Chairman and Chief Executive
Officer, and Brian T. Gladden, Senior Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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101
|
.INS§
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XBRL Instance Document
|
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101
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.SCH§
|
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XBRL Taxonomy Extension Schema Document
|
|
101
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.CAL§
|
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XBRL Taxonomy Extension Calculation Linkbase Document
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101
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.LAB§
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XBRL Taxonomy Extension Label Linkbase Document
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101
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.PRE§
|
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XBRL Taxonomy Extension Presentation Linkbase Document
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101
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.DEF§
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XBRL Taxonomy Extension Definition Linkbase Document
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Filed with this report.
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Furnished with this report.
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§
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Furnished with this report. In
accordance with Rule 406T of
Regulation S-T,
the information in these exhibits shall not be deemed to be
filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise
subject to liability under that section, and shall not be
incorporated by reference into any registration statement or
other document filed under the Securities Act of 1933, as
amended, except as expressly set forth by specific reference in
such filing.
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50